UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended March 31, 1997
Commission file number 0-20742
CB BANCORP, INC.
(Name of small business issuer in its charter)
Delaware 35-1866127
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
126 E. Fourth Street, Michigan City, Indiana 46360
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (219) 873-2800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [ X ] No [ ]
Check if there is no disclosure of delinquent filers in response to
item 405 of Regulation S-B contained herein, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X ]
The issuer's revenues for its most recent fiscal year were $18,164,000.
The aggregate market value of the voting stock held by non-affiliates
of the registrant, i.e., persons other than directors and executive officers of
the registrant is $31,538,093 and is based upon the last sales price as quoted
on the NASDAQ Small-Capital Market for June 4, 1997.
The number of shares of the Common Stock of the registrant outstanding
as of March 31, 1997 was 1,161,997.
<PAGE>
INDEX
PART I
Item 1. Description of Business............................. 1
Item 2. Description of Properties........................... 26
Item 3. Legal Proceedings................................... 26
Item 4. Submission of Matters to a Vote of Security
Holders............................................. 26
PART II
Item 5. Market for Common Equity and
Related Stockholder Matters......................... 27
Item 6. Management's Discussion and Analysis or
Plan of Operation.............................. 28
Item 7. Financial Statements................................ 40
Item 8. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure.......................................... 75
PART III
Item 9. Directors and Executive Officers; Promoters
and Control Persons; Compliance with
Section 16(a) of the Exchange Act................... 75
Item 10. Executive Compensation.............................. 77
Item 11. Security Ownership of Certain Beneficial
Owners and Management.......................... 80
Item 12. Certain Relationships and Related
Transactions........................................ 81
Item 13. Exhibits and Reports on Form 8 K.................... 81
SIGNATURES....................................................... 84
<PAGE>
PART I
Item 1. Description of Business
- --------------------------------
General
CB Bancorp, Inc. (the "Company" or "CB Bancorp" or "CB") is a Delaware
corporation which was organized in 1992 by Community Bank, A Federal Savings
Bank (the "Bank" or "Community Bank") for the purpose of becoming a savings and
loan holding company. The Company owns all of the outstanding stock of the Bank
issued on December 23, 1992, in connection with the completion of its conversion
from the mutual to the stock form of organization (the "Conversion"). The
Company issued 1,284,238 shares of Common Stock at a price of $5.00 per share in
the Conversion as restated for the February 1994 100% stock dividend. All
references to the Company at or before December 23, 1992 refer to the Bank.
Currently, the Company does not transact any material business other than
through its sole subsidiary, the Bank. The Company retained approximately 50% of
the net conversion proceeds amounting to approximately $2.5 million which was
invested in short-term investment grade securities and, from time to time,
purchased mortgage loans.
The Bank was organized in 1926 as an Indiana state chartered building and loan
association and later converted to a federal charter. More recently, in May,
1991, the Bank converted to a federal mutual savings bank and changed its name
to Community Bank, A Federal Savings Bank. Pursuant to the conversion, the Bank
became a federally chartered capital stock savings bank on December 23, 1992.
The Bank is a member of the Federal Home Loan Bank ("FHLB") System, and its
deposit accounts are insured to the maximum allowable amount by the Federal
Deposit Insurance Corporation ("FDIC"). The Bank is chartered and regulated by
the Office of Thrift Supervision ("OTS"), and the OTS is the Bank's primary
federal supervisory agency. As a non-diversified savings and loan holding
company, the Company has registered with the OTS and is subject to OTS
regulations, supervision and reporting requirements. At March 31, 1997, the
Company had assets of $227.1 million, deposits of $149.8 million, and
shareholders' equity of $20.8 million or 9.18% of total assets.
The Bank is a community-oriented financial institution offering a variety of
financial services to meet the needs of the local community. Its principal
business has been and continues to be attracting retail deposits from the
general public and investing those deposits, together with funds generated from
operations and borrowings, primarily in one- to four-family residential mortgage
loans and, to a lesser extent, in commercial real estate and consumer loans,
mortgage-backed securities, U.S. Government and federal agency securities and
other marketable securities. At March 31, 1997 one- to four-family residential
mortgage loans held for investment totaled $69.6 million or 76.6% of total loans
held for investment. In addition, at March 31, 1997 the Company held
approximately $95.3 million in one- to four-family residential mortgage loans
purchased under agreements to resell under its Mortgage Loan Reverse Repurchase
Program.
The Company operates out of the Bank's main office located at 126 E. Fourth
Street, Michigan City, Indiana. The Bank also conducts business out of its two
full service branch offices located at 3710 S. Franklin Street in Michigan City
and 801 Monroe Street, LaPorte, Indiana. The Company also established a loan
production/mortgage banking office in Merrillville, Indiana located at 701 E.
83rd Avenue, Suite E, Merrillville, Indiana. The Bank's deposit-gathering base
is concentrated in the communities surrounding its offices while its lending
base extends throughout LaPorte and contiguous counties.
Lending Activities
Loan and Mortgage-Backed Securities Portfolio Compositions. The Company's loan
portfolio composition consists primarily of conventional fixed-rate and
adjustable-rate first mortgage loans secured by one- to four-family residences.
At March 31, 1997, the Company's gross mortgage loans outstanding were $81.0
million, of which $69.6 million were one- to four-family residential mortgage
loans. Of the mortgage loans outstanding at that date, 34.8% were variable-rate
loans and 65.2% were fixed-rate loans. At that same date, commercial real estate
and multi-family mortgage loans totaled $8.1 million and $2.7 million,
respectively. The remainder of the Company's mortgage loans, which totaled $0.5
million or 0.60% of total gross loans outstanding at March 31, 1997, consisted
of construction loans. The Company's construction loans automatically convert to
permanent loans upon completion of construction. Other loans held by the
Company, which primarily consist of consumer and commercial loans, totaled $9.9
million or 10.9% of total gross loans at March 31, 1997.
1
<PAGE>
At March 31, 1997, mortgage loans purchased under agreements to resell totaled
$95.3 million or 41.9% of the Company's total assets. The mortgage loans were
purchased pursuant to the Mortgage Loan Reverse Repurchase Program (the
"Program") and consisted entirely of one- to four-family residential loans.
These loans are primarily fixed-rate mortgage loans with terms of 30 years. The
loans are repurchased by the participants in the Program (for transfer to end
investors), usually within 30 days of origination. The Program is designed to
provide financing for the mortgage banking activities of the participants and to
provide the Company with a relatively high yield short-term investment vehicle
that allows the Company to increase profitability while managing its interest
rate risk. There currently are 117 approved mortgage companies in the Program
located throughout the United States. The participants sell to the Company loans
originated in their home states as well as in other states in the United States.
The Program is carried out pursuant to agreements with each participant, which
provide that the Company, at its option, will purchase whole mortgage loans,
which are then resold to the participant (for transfer to an end investor)
generally within 90 days. The Company also purchases interim construction loans
under this program with subsequent repurchase often extending six months or
longer which may expose the Company to greater risk due to possible changes in
the financial condition of the borrower or builder. At March 31, 1997,
construction loan balances accounted for 26.7% of the Company's total
outstanding investment in the program. It is the Company's policy to
purchase loans only upon receipt of specified documents evidencing that each
loan meets secondary market underwriting standards. In addition, the Company
will purchase only those loans for which a commitment has been received by an
end investor to purchase the loan upon the Company's resale of the loan to the
participant or when the Company has been provided with evidence that the
participant has a commitment from a recognized secondary market end investor to
purchase the loans that the participant sells to the Company.
The Company also invests in mortgage-backed securities. At March 31, 1997, net
mortgage-backed securities aggregated $8.5 million or 3.7% of total assets, of
which 45.9% were collateralized by ARMs and 54.1% were collateralized by
fixed-rate mortgage loans. At March 31, 1997, all of the mortgage-backed
securities in the Company's portfolio were insured or guaranteed by either the
Government National Mortgage Association ("GNMA") or the Federal Home Loan
Mortgage Corporation ("FHLMC") or the Federal National Mortgage Association's
("FNMA") or consisted of collateralized mortgage obligations ("CMOs")
collateralized by GNMA or FHLMC insured or guaranteed mortgage-backed
securities. Mortgage-backed securities and collateralized mortgage obligations
are subject to prepayment and extension risk depending on the speed at which the
underlying collateral prepays. Under a range of prepayment scenarios, management
is of the opinion that the Company's portfolio of mortgage related securities
will provide reasonable returns without subjecting the Company to excessive
prepayment or extension risk.
Source of Funds
General. The Company's primary sources of funds are deposits, repayments on
loans and securities, and, to a lesser extent, FHLB-Indianapolis advances and
federal funds.
Deposits. The Company offers a variety of deposit accounts having a range of
interest rates and terms. Deposit products principally consist of passbook, NOW,
demand, money market and certificate accounts, Keogh accounts, and individual
retirement accounts ("IRA's"). The flow of deposits is influenced significantly
by general economic conditions, the restructuring of the thrift industry,
changes in prevailing interest rates and competition. The Company's deposits,
while primarily obtained from LaPorte County, Indiana, are also gathered on a
wholesale basis as needed. The Company relies primarily on customer service and
long-standing relationships with customers to attract and retain these deposits.
The Company seeks to maintain a high level of stable core deposits by providing
extended hours of service -- both early and late -- through its branch offices
and drive-up facilities. When pricing deposits, consideration is given to local
competition, Treasury offerings and the need for funds. Management's strategy is
to price deposit rates moderately, offering neither the highest nor the lowest
rates, and to stratify the pricing system to manage the Company's interest rate
risk.
Subsidiary
Community Financial Services, Incorporated ("Community Financial") is a
wholly-owned subsidiary of the Bank, incorporated in November 1986. Community
Financial originally engaged solely in the sale of tax deferred annuities. In
May, 1991,Community Financial expanded its activities to include the preparation
of federal and state income tax returns for individuals and small businesses and
the sale of credit life, disability and other insurance products. Community
Financial has a 99% limited
2
<PAGE>
partner interest in Pedcor Investments-1994-XX, L.P. which was formed for the
construction, ownership and management of an 80 unit apartment project located
in LaPorte County. Terms of the partnership agreement allocate 99% of the
eligible tax credits and operating losses to the limited partner. At March 31,
1997, the Bank's net investment in Community Financial totaled $578,000. For the
year ended March 31, 1997, Community Financial had net income of $57,000. In
May, 1994, Community Financial directed the start-up of a securities
broker-dealer. From this, Community Brokerage Services, Incorporated was formed
as a subsidiary under the Community Financial corporate umbrella. Full
broker-dealer securities services were successfully introduced to the Company's
customers as well as the general public in November, 1994.
Competition
The LaPorte County, Indiana area has a high density of financial institutions,
many of which are significantly larger and have greater financial resources than
the Company, and all of which are competitors of the Company to varying degrees.
The Company's competition for loans comes principally from commercial banks,
credit unions, savings and loan associations, savings banks, mortgage banking
companies and insurance companies. Its most direct competition has historically
come from savings and loan associations, savings banks, commercial banks, and
credit unions. The Company faces additional competition for deposits from
short-term money market funds and other corporate and government securities
funds. The Company also faces increased competition from other financial
institutions such as brokerage firms and insurance companies for deposits.
Competition has and may continue to increase as a result of the lifting of
restrictions on the interstate operations of financial institutions.
The Company is a community-oriented financial institution serving its market
area with a wide selection of residential loans and retail financial services.
Management considers the Company's reputation for financial strength and
customer service as its major competitive advantage in attracting and retaining
customers in its market area. Management also believes it benefits from its
community orientation.
Recent Developments
On March 1, 1997 the Company announced that it had entered into a Definitive
Agreement ("Agreement") to be acquired by and merged into Pinnacle Financial
Services, Inc. ("Pinnacle") subject to regulatory and shareholder approval. The
terms of the Agreement provide for a purchase price of $35.00 per CB Bancorp,
Inc. ("CB") share payable in Pinnacle common stock. Under the Agreement, each
share of CB common stock will be exchanged for a number of shares of Pinnacle
stock determined by dividing $35.00 by Pinnacle's average stock price during the
15 day period prior to the five day period before the merger is effected.
However, if Pinnacle's average stock price exceeds $29.00, CB shareholders will
receive 1.2069 Pinnacle shares per CB share. If Pinnacle's average stock price
is less than $23.00, CB shareholders will receive 1.5217 Pinnacle shares per CB
share.
Pinnacle is the parent company of Pinnacle Bank, which is headquartered in St.
Joseph, Michigan. Pinnacle Bank presently has 28 banking centers located in
southwest Michigan and northwest Indiana. In addition, Pinnacle Financial
Services, Inc. announced in November, 1996 a pending merger between itself and
Indiana Federal Corporation, parent company of Indiana Federal Bank for Savings
of Valparaiso, Indiana. Indiana Federal Bank also has a major presence in
northwest Indiana. The merging of Indiana Federal Corporation and CB Bancorp,
Inc. into Pinnacle will result in a $2.1 billion banking company with 50
banking centers located along the southern tip of Lake Michigan.
Personnel
As of March 31, 1997, the Company had 60 full-time employees and 13 part-time
employees. The employees are not represented by a collective bargaining unit,
and the Company considers its relationship with its employees to be good.
Statistical Disclosure
The following tables set forth selected financial information regarding the
business of the Company for the periods shown.
3
<PAGE>
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
A. The following tables set forth, at March 31, for the years ended as
indicated, the condensed average balance of interest-earning assets and
interest-bearing liabilities, the interest earned or accrued on such
amounts, and the average interest rates earned or paid thereon.
<TABLE>
<CAPTION>
1997 1996
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
----------------------------------------------------------------------------------------
(Dollars In Thousands) (Dollars In Thousands)
<S> <C>
ASSETS
Interest-earning assets:
Loans, net(1)(2) $172,236 $15,125 8.78% $148,078 $13,030 8.80%
Mortgage-backed securities 9,458 632 6.68 10,356 689 6.65
Interest-bearing deposits
and federal funds sold 997 49 4.91 1,025 67 6.54
Securities 9,331 595 6.38 9,036 566 6.26
-------------------------- ---------------------------
Total interest-earning assets 192,022 16,401 8.54 168,495 14,352 8.52
Noninterest-earning assets 12,289 10,650
----------------------------------------------------------------------------------------
Total assets $204,311 $179,145
========================================================================================
LIABILITIES & SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
NOW accounts $ 14,160 $ 315 2.22% $ 13,519 $ 301 2.23%
Money market accounts 9,530 328 3.44 8,819 303 3.44
Passbook accounts 27,113 814 3.00 27,633 836 3.03
Certificate accounts 77,460 4,223 5.45 64,885 3,601 5.55
Borrowed funds 43,464 2,454 5.65 34,414 2,022 5.88
-------------------------- ---------------------------
Total interest-bearing liabilities 171,727 8,134 4.74 149,270 7,063 4.73
Other liabilities(3) 13,017 12,297
----------------------------------------------------------------------------------------
Total liabilities $184,744 $161,567
Shareholders' equity 19,567 17,578
----------------------------------------------------------------------------------------
Total liabilities &
shareholders' equity $204,311 $179,145
========================================================================================
Net interest income/
interest rate spread(4) $ 8,267 3.80% $7,289 3.79%
========================================================================================
Net interest-earning assets/
net interest margin(5) $ 20,295 4.31% $ 19,225 4.33%
========================================================================================
Ratio of interest-earning assets to
average interest-bearing liabilities 111.82% 112.88%
========================================================================================
</TABLE>
<TABLE>
<CAPTION>
1995
Average Average
Balance Interest Yield/Cost
---------------------------------------------
(Dollars In Thousands)
<S> <C>
ASSETS
Interest-earning assets:
Loans, net(1)(2) $ 96,785 $7,801 8.06%
Mortgage-backed securities 10,833 653 6.03
Interest-bearing deposits
and federal funds sold 3,995 177 4.43
Securities 10,966 568 5.18
----------------------------
Total interest-earning assets 122,579 9,199 7.50
Noninterest-earning assets 9,702
---------------------------------------------
Total assets $132,281
=============================================
LIABILITIES & SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
NOW accounts $ 11,556 $ 283 2.45%
Money market accounts 9,325 285 3.06
Passbook accounts 31,202 944 3.03
Certificate accounts 52,967 2,450 4.63
Borrowed funds 3,251 182 5.60
-------------------------------
Total interest-bearing liabilities 108,301 4,144 3.83
Other liabilities(3) 7,952
---------------------------------------------
Total liabilities $116,253
Shareholders' equity 16,028
---------------------------------------------
Total liabilities &
shareholders' equity $132,281
=============================================
Net interest income/
interest rate spread(4) $5,055 3.67%
=============================================
Net interest-earning assets/
net interest margin(5) $ 14,278 4.12%
=============================================
Ratio of interest-earning assets
to average interest-bearing
liabilities 113.18%
=============================================
</TABLE>
(1) Nonaccruing loans have been included in the average loan balance.
(2) Calculated net of deferred loan fees, loan discount, loans in process and
the allowance for loan losses.
(3) Includes noninterest-bearing demand deposit accounts.
(4) Interest rate spread represents the difference between the average rate on
interest-earning assets and the average cost of interest-bearing
liabilities.
(5) Net interest margin represents net interest income divided by average
interest-earning assets.
4
<PAGE>
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL (continued)
B. The following table presents the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest
expense during the periods indicated. Information is provided in each
category with respect to (i) changes attributable to changes in volume
(changes in volume multiplied by prior rate), (ii) changes attributable to
changes in rate (changes in rate multiplied by prior volume), and (iii) the
net change. The changes attributable to the combined impact of volume and
rate have been allocated proportionately to the changes due to volume and
the changes due to rate.
<TABLE>
<CAPTION>
(Dollars In Thousands)
Year Ended March 31, Year Ended March 31,
1997 Compared to Year 1996 Compared to Year
Ended March 31, 1996 Ended March 31, 1995
Increase (Decrease) Increase (Decrease)
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
<S> <C>
INTEREST-EARNING ASSETS
Loans, net $2,122 $ (27) $ 2,095 $ 4,458 $ 771 $ 5,229
Mortgage-backed securities (60) 3 (57) (30) 66 36
Interest-bearing deposits and
federal funds sold (2) (16) (18) (170) 60 (110)
Securities 19 10 29 (110) 108 (2)
---------------------------------------------------------------
2,079 (30) 2,049 4,148 1,005 5,153
INTEREST-BEARING LIABILITIES
---------------------------------------------------------------
NOW accounts 14 -- 14 45 (27) 18
Money market accounts 24 1 25 (16) 34 18
Passbook accounts (16) (6) (22) (108) -- (108)
Certificate accounts 687 (65) 622 610 541 1,151
Borrowed funds 514 (82) 432 1,831 9 1,840
---------------------------------------------------------------
Total 1,223 (152) 1,071 2,362 557 2,919
---------------------------------------------------------------
Change in net
interest income $ 856 $ 122 $ 978 $ 1,786 $ 448 $ 2,234
===============================================================
</TABLE>
5
<PAGE>
II. INVESTMENT PORTFOLIO
SECURITIES
A. The amortized cost and fair market value of securities as of March 31
are set forth in the table below (in thousands).
<TABLE>
<CAPTION>
1997 1996 1995
---------------------- ---------------------- ------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
(In Thousands) (In Thousands) (In Thousands)
-----------------------------------------------------------------------------------
<S> <C>
SECURITIES AVAILABLE FOR SALE:
Marketable equity securities $572 $672 $578 $621 $578 $581
===================================================================================
SECURITIES HELD-TO-MATURITY:
U.S. Government
agency securities $3,000 $2,952 $3,000 $2,970 $2,680 $2,612
U.S. Treasury
obligations 1,076 1,071
Corporate notes 2,789 2,793 2,675 2,674 2,733 2,735
Mortgage-backed 8,510 8,603 10,192 10,282 10,740 10,647
-----------------------------------------------------------------------------------
Total Securities Held-to-
Maturity $14,299 $14,348 $15,867 $15,926 $17,229 $17,065
===================================================================================
Other Securities:
Federal Home Loan Bank
Stock, net $ 2,752 $ 2,752 $ 2,702 $ 2,702 $ 2,350 $ 2,350
===================================================================================
</TABLE>
B. The maturity distribution and weighted average interest rates of
securities available for sale at March 31, 1997 are as follows:
All securities available-for-sale are equity securities.
The maturity distribution and weighted average interest rates
of securities held to maturity at, excluding mortgage-backed
securities, March 31, 1997 are set forth in the table below.
<TABLE>
<CAPTION>
After One Year
Within But Within
One Year Five Years
Amount Rate Amount Rate
------ ---- ------ ----
(In Thousands) (In Thousands)
<S> <C>
U.S. Government
agency securities $ 0 0.00% $3,000 6.01%
Corporate notes 1,778 5.81% 1,011 6.45%
---------------------------------------------------------
Total $1,778 5.81% $4,011 6.12%
=========================================================
</TABLE>
6
<PAGE>
II. INVESTMENT PORTFOLIO (continued)
C. There were no securities available-for-sale of any one issuer
which exceeded 10% of the shareholders' equity of the Company at
March 31, 1997.
Excluding those holdings of the securities portfolio in U.S.
Treasury securities and U.S. Government agency securities and
Federal Home Loan Bank Stock, there were no securities held to
maturity of any one issuer which exceeded 10% of the
shareholders' equity of the Company at March 31, 1997.
7
<PAGE>
III. LOAN PORTFOLIO
A. The following table sets forth the composition of the Company's mortgage and
other loan portfolios and mortgage-backed securities portfolios in dollar
amounts and in percentages at March 31. All dollars are in thousands.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---------------- ---------------- ---------------- ---------------- ----------------
% of % of % of % of % of
Amount Total Amount Total Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C>
Loans Receivable:
Mortgage loans:
One-to-four family $69,602 76.56% $73,413 78.87% $74,385 83.90% $73,354 92.08% $75,515 92.86%
Other mortgage loans
Commercial real estate 8,141 8.95% 8,171 8.78% 6,160 6.95% 3,457 4.34% 3,513 4.32%
Multi-family 2,710 2.98% 3,242 3.48% 1,595 1.80% 623 0.78% 692 0.85%
Land 0 0.00% 0 0.00% 0 0.00% 10 0.01% 12 0.02%
Construction 545 0.60% 591 0.63% 2,428 2.74% 748 0.94% 40 0.05%
-------------------------------------------------------------------------------------------------
Total mortgage loans $80,998 89.09% $85,417 91.76% $84,568 95.39% $78,192 98.15% $79,772 98.10%
-------------------------------------------------------------------------------------------------
Consumer & other loans:
Visa/Mastercard 0 0.00% 389 0.42% 37 0.04%
Automobile 431 0.47% 400 0.43% 362 0.41% 224 0.28% 373 0.46%
Share 188 0.21% 242 0.26% 233 0.26% 213 0.27% 303 0.37%
Home Equity and Second Mtg. 2,853 3.14% 1,789 1.92% 1,273 1.44% 784 0.98% 703 0.86%
Commercial and other 6,446 7.09% 4,846 5.21% 2,182 2.46% 253 0.32% 169 0.21%
-------------------------------------------------------------------------------------------------
Total Consumer & other Loans 9,918 10.91% 7,666 8.24% 4,087 4.61% 1,474 1.85% 1,548 1.90%
-------------------------------------------------------------------------------------------------
Gross loans receivable $90,916 100.00% $93,083 100.00% $88,655 100.00% $79,666 100.00% $81,320 100.00%
-------------------------------------------------------------------------------------------------
Less:
Loans in process 236 48 1,422 735 7
Unearned discounts, premiums
& deferred loan fees, net 365 419 443 433 377
-------------------------------------------------------------------------------------------------
Loans receivable $90,315 $92,616 $86,790 $78,498 $80,936
=================================================================================================
Mortgage loans purchased
under agreements to resell
One- to four-family $95,276 $80,031 $25,179 $34,193 $29,240
=================================================================================================
Mortgage Loans
held for sale $914 $513
=================================================================================================
Total Loans $186,505 $173,160 $111,969 $112,691 $110,176
======== ======== ======== ======== ========
Mortgage-backed securities:
FHLMC certficates $4,221 $4,892 $5,956 $4,969 $5,174
GNMA certificates 3,199 3,600 2,924 3,249 3,297
FNMA certificates 862 880 970 -- --
CMOs 239 834 904 2,041 1,514
-------------------------------------------------------------------------------------------------
Total mtg-backed securities 8,521 10,206 10,754 10,259 9,985
-------------------------------------------------------------------------------------------------
Net premiums and discounts (11) (14) (14) 16 23
-------------------------------------------------------------------------------------------------
Net mtg-backed securities $8,510 $10,192 $10,740 $10,275 $10,008
=================================================================================================
Mortgage loans:
Adjustable rate $28,175 34.78% $34,362 40.23% $35,394 41.85% $27,762 35.50% $33,505 42.00%
Fixed rate 52,823 65.22% 51,055 59.77% 49,174 58.15% 50,430 64.50% 46,267 58.00%
-------------------------------------------------------------------------------------------------
Total mortgage loans $80,998 100.00% $85,417 100.00% $84,568 100.00% $78,192 100.00% $79,772 100.00%
=================================================================================================
</TABLE>
8
<PAGE>
III. LOAN PORTFOLIO (continued)
B. LOAN MATURITY
The following table shows the maturity of the Company's loan and
mortgage-backed portfolio at March 31, 1997. Except for mortgage loans
purchased under agreements to resell and mortgage-backed securities,
loans are shown as being due in accordance with the contractual
scheduled principal repayments. Mortgage loans purchased under
agreements to resell are shown based upon contractual resale terms.
Mortgage-backed securities are shown as being due in accordance with
contractual term to maturity and do not include scheduled principal
amortization.
<TABLE>
<CAPTION>
AT MARCH 31, 1997
------------------------------------------------------------------------------------------
Mortgage
Loans Mortgage
Consumer Total Purchased Loans
and Loans Under Held Mortgage-
Mortgage Other Receivable Agreements For Backed
Loans Loans Gross To Resell Sale Securities Total
------------------------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C>
Amounts due
Within 1 year $ 3,954 $5,462 $ 9,416 $95,276 $914 $2,635 $108,241
------------------------------------------------------------------------------------------
After 1 year
1-3 years 9,832 2,171 12,003 -- -- 654 12,657
3-5 years 9,773 1,129 10,902 -- -- 852 11,754
5-10 years 20,077 987 21,064 -- -- 63 21,127
10-15 years 13,172 169 13,341 -- -- 441 13,782
Over 15 years 24,190 -- 24,190 -- -- 3,865 28,055
------------------------------------------------------------------------------------------
Total due after 1 year 77,044 4,456 81,500 -- -- 5,875 87,375
------------------------------------------------------------------------------------------
Total Amounts Due $80,998 $9,918 $90,916 $95,276 $914 $8,510 $195,616
==========================================================================================
</TABLE>
The following table sets forth, at March 31, 1997, the dollar amount of
all loans and mortgage-backed securities due after March 31, 1998, and
whether such loans and mortgage-backed securities have fixed interest
rates or adjustable interest rates.
<TABLE>
<CAPTION>
LOANS MATURING AFTER MARCH 31, 1998
------------------------------------------------
Fixed Rate Adjustable Rate
(In Thousands) Total
------------------------------------------------
<S> <C>
Mortgage loans $50,278 $26,766 $77,044
Non-mortgage loans 3,006 1,450 4,456
------------------------------------------------
Total loans receivable 53,284 28,216 81,500
Mortgage-backed securities 2,165 3,710 5,875
------------------------------------------------
Total loans receivable and
mortgage-backed securities $55,449 $31,926 $87,375
================================================
</TABLE>
9
<PAGE>
III. LOAN PORTFOLIO (continued)
C. RISK ELEMENTS
1. Non-performing Assets
The following table sets forth information regarding non-performing
assets (nonperforming loans and real estate owned) at the dates
indicated. Interest income on consumer and other loans is accrued over
the term of the loan except when serious doubt exists as to the
collectibility of a loan, in which case the accrual of interest is
discontinued. Income is subsequently recognized only to the extent that
cash payments are received until, in management's judgment, the
borrower has the ability to make contractual interest and principal
payments, in which case the loan is returned to accrual status.
Effective for fiscal 1992, the Company adopted a policy of placing all
mortgage loans delinquent 90 days or more on non-accrual status. At
that time, all accrued but uncollected interest on mortgage loans 90
days or more delinquent was reversed. Effective for fiscal 1996, the
Company adopted SFAS 114 and 118 which establish accounting guidelines
for impaired loans. A loan is considered impaired when it is probable
that all principal and interest amounts will not be collected according
to the loan contract. SFAS 118 requires that loss allowances
established on impaired loans shall be determined by using the present
value of estimated future cash flows of the loan discounted at the
loan's effective interest rate or at the fair value of the collateral
if the loan is collateral dependent.
<TABLE>
<CAPTION>
At March 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars In Thousands)
<S> <C>
Accruing mortgage loans
delinquent more than 90 days $ -- $ -- $ -- $ -- $ --
Accruing consumer and other
loans delinquent more than
90 days -- 4 -- 6 8
Non-accruing mortgage
loans delinquent more than
90 days 229 523 463 394 196
Non-accruing consumer and
other loans delinquent
more than 90 days -- -- -- -- 4
-------------------------------------------------------
Total loans delinquent
more than 90 days 229 527 463 400 208
Restructured loans 287 306 341 251 351
Impaired Loans 5,920 2,164 -- -- --
-------------------------------------------------------
Total non-performing loans 6,436 2,997 804 651 559
Total real estate owned,
net of related reserves 146 -- -- -- 44
-------------------------------------------------------
Total non-performing assets $6,582 $2,997 $804 $651 $603
=======================================================
</TABLE>
<TABLE>
<CAPTION>
At March 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars In Thousands)
<S> <C>
Accruing mortgage loans delinquent
more than 90 days to total loans 0.00% 0.00% 0.00% 0.00% 0.00%
Accruing consumer and other loans
delinquent more than 90 days to total loans 0.00 0.00 0.00 0.01 0.01
Non-accruing mortgage loans delinquent
more than 90 days to total loans 0.12 0.30 0.41 0.35 0.18
Non-accruing consumer and other loans
delinquent more than 90 days to total loans 0 0.00 0.00 0.00 0.00
Non-accrual loans to total loans 0.12 0.30 0.41 0.35 0.19
Restructured loans to total loans 0.15 0.18 0.30 0.22 0.32
Total non-performing loans to total loans 3.45 1.73 0.71 0.57 0.51
Total non-performing assets to total assets 2.90 1.46 0.56 0.45 0.44
Gross interest income that would have been
recorded if loans had been current in
accordance with original terms $509 $206 $54 $50 $36
Interest income from non-performing loans
and restructured loans included in income $304 $150 $22 $28 $18
</TABLE>
10
<PAGE>
III. LOAN PORTFOLIO (continued)
C. RISK ELEMENTS (continued)
Of the total balance of impaired loans as of March 31, 1997,
approximately $1.2 million relates to amounts associated with Bennett
Funding Group Inc. ("Bennett") and Aloha Capital Corporation ("Aloha"),
an affiliate of Bennett. The reason for the impairment classification
is that Bennett recently filed for Chapter 11 bankruptcy and Aloha was
drawn into involuntary bankruptcy. The Bank purchased numerous leases
secured by small business equipment such as copy and facsimile machines
from Bennett and Aloha. The purchases total approximately $396,000 from
Bennett and $1.3 million from Aloha. Both companies act as servicing
agents to collect lease payments for the Bank. The Company has
negotiated a settlement, and the anticipated recovery is approximately
70% of the original balance. The portion of the allowance for loan
losses allocated to the above loans is approximately $61,000 which is
based on the present value of the anticipated cash flows of these
loans. The amount deemed to be uncollectable was $433,000 and was
charged-off during the year ended March 31, 1997.
Also included in the impaired loan balance at March 31, 1997 are 65
single family construction loans, all located in the state of Indiana
with a total outstanding balance of $4.7 million and total unfunded
commitments of $2.1 million. Eighteen of these loans, totaling $1.3
million, are outstanding to one builder. The Company has allocated
$308,000 of the allowance for loan losses to these loans. Forty one of
these loans totaling $2.4 million are outstanding to two affiliated
companies, one of which is in bankruptcy. The Company has allocated
$125,000 of the allowance for loan losses to these loans. The
remaining 6 loans totaling $1.2 million are with three separate
builders and the Company has allocated $116,000 of the allowance for
loan losses to these loans. The Company has performed inspections of
all of these properties, either internal or through third parties, and
has utilized this information in determining the adequacy of its loan
loss reserves.
2. Potential Problem Loans
As of March 31, 1997, there were no loans where there are serious
doubts as to the ability of the borrower to comply with present loan
repayment terms which are not included in Section C.1 above.
Consideration was given to loans classified for regulatory purposes as
loss, doubtful, substandard, or special mention that have not been
disclosed in Section C.1 above.
3. Foreign Outstandings
None
4. Loan Concentrations
The Company grants real estate and consumer loans including education,
home improvement and other consumer loans primarily in LaPorte and
Porter counties of Indiana. Substantially all loans are secured by
consumer assets and real estate. Loans secured by real estate mortgages
make up approximately 89.1% of the loan portfolio at March 31, 1997 and
are primarily secured by residential mortgages. Loans purchased under
agreements to resell are residential mortgages secured by one-to
four-family residences located throughout the United States.
D. OTHER INTEREST-EARNING ASSETS
There are no other interest-earning assets as of March 31, 1997 which
would be required to be disclosed under Item III, Section C.1 or 2 of
Guide 3 if such assets were loans and nonperforming.
11
<PAGE>
IV. SUMMARY OF LOAN LOSS EXPERIENCE
The allowance for loan losses is established through a provision for
loan losses based on management's evaluation of the risk inherent in
its loan portfolio and the general economy. Such evaluation, which
includes a review of all loans for which full collectibility may not be
reasonably assured, considers, among other matters, the estimated net
realizable value of the underlying collateral, economic conditions,
historical loan loss experience and other factors that warrant
recognition in providing for an adequate loan loss allowance.
The following table sets forth the Company's allowance for loan losses
at or for the dates indicated.
<TABLE>
<CAPTION>
At or for the Year
Ended March 31,
1997 1996 1995 1994 1993
--------------------------------------------------------
(Dollars in Thousands)
<S> <C>
Balance at beginning
of period $1,347 $673 $595 $495 $228
Charge-offs:
Mortgage loans (26) -- -- -- (11)
Consumer and other
loans (454) (125) -- (4) (6)
Mortgage Loans purchased
under agreements to resell (501) (221) -- -- --
--------------------------------------------------------
Total charge offs (981) (346) 0 (4) (17)
Recoveries:
Mortgage loans 251 -- -- -- 5
Consumer and other
loans -- -- -- 1 1
--------------------------------------------------------
Total recoveries 251 -- -- 1 6
Net charge-offs (730) (346) 0 (3) (11)
Provision for loan losses 1,191 1,020 78 103 278
--------------------------------------------------------
Balance at end of period $1,808 $1,347 $673 $595 $495
========================================================
Ratio of allowance for
loan losses to net loans
at end of period 0.98% 0.79% 0.60% 0.53% 0.45%
Ratio of allowance for
loan losses to total
non-performing loans
at end of period 28.09 44.94 83.71 91.40 88.55
Ratio of net charge-offs
to average loans outstanding
during the period 0.42 0.23 0.00 0.00 0.01
</TABLE>
<TABLE>
<CAPTION>
March 31, (Dollars in Thousands)
---------------------------------------------------------------------
1997 1996 1995
Amount Percentage(1) Amount Percentage(1) Amount Percentage(1)
------ ------------- ------ ------------- ------ -------------
<S> <C>
Allowance at end of
period applicable to:
Mortgage Loans $ 374 44% $ 500 49% $ 300 75%
Consumer Loans and other 230 5 447 5 171 3
Mortgage Loans purchased
under agreements to resell 981 51 200 46 77 22
Unallocated 223 0 200 0.00 125 0.00
---------------------------------------------------------------------
TOTAL $1,808 100.00% $1,347 100.00% $ 673 100.00%
=====================================================================
<CAPTION>
March 31, (Dollars in Thousands)
--------------------------------------------
Allowance at end of 1994 1993
period applicable to: Amount Percentage(1) Amount Percentage(1)
------ ------------- ------ -------------
<S> <C>
Mortgage Loans 300 69% $ 240 72%
Consumer Loans and other 147 1 106 1
Mortgage Loans purchased
under agreements to resell 0 30 0 27
Unallocated 148 0 149 0.00
--------------------------------------------
TOTAL 595 100.00% $ 495 100.00%
============================================
</TABLE>
(1) Percent of type of loans in each category to total loans at the
dates indicated.
12
<PAGE>
V. DEPOSITS
The following table sets forth the distribution of the Company's deposit
accounts at the dates indicated and the weighted average nominal interest rates
on each category of deposits presented at year end. See Table I Distribution of
Assets, Liabilities and Shareholders' Equity; Interest rates and Interest
Differential for presentation of average balances and average rate paid on
deposits for the period ended March 31, 1997, 1996 and 1995. All Dollars are in
thousands.
<TABLE>
<CAPTION>
At March 31,
--------------------------------------------------------------------------------------------------------
1997 1996 1995
---- ---- ----
Weighted Weighted Weighted
Percent Average Percent Average Percent Average
of Total Nominal of Total Nominal of Total Nominal
Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate
------ -------- ---- ------ -------- ---- ------ -------- ----
<S> <C>
Demand accounts (1):
Money market $ 9,509 6.34% 3.53% $ 9,425 6.82% 3.53% $ 8,944 7.98% 3.34%
NOW and demand 23,700 15.82 1.32 32,194 23.28 1.03 20,871 18.62 1.42
--------------------- ---------------------- ---------------------
Total demand accounts 33,209 22.16 1.99 41,619 30.10 1.61 29,815 26.60 2.02
Passbook accounts 27,230 18.18 3.01 27,985 20.24 3.01 29,090 25.96 3.01
Certificate accounts:
Ninety-one days and
under 9,941 6.64 5.53 1,047 0.76 4.54 191 0.17 3.90
Six month 14,861 9.92 5.32 15,082 10.91 5.21 12,055 10.76 5.03
One year 10,993 7.33 5.29 11,154 8.07 5.06 8,873 7.92 5.20
Eighteen months 5,182 3.46 5.41 5,536 4.00 5.70 5,618 5.01 4.63
Two year 2,605 1.74 5.69 2,456 1.78 5.40 2,938 2.62 4.80
Three year 4,999 3.34 5.72 6,180 4.47 5.25 7,184 6.41 5.12
Four year 1,499 1.00 5.47 2,022 1.46 5.45 2,551 2.28 5.61
Five to ten year 4,471 2.98 5.90 4,764 3.45 5.95 3,999 3.56 5.90
IRA and Keogh accounts 7,395 4.94 5.62 7,320 5.29 5.64 6,971 6.22 5.64
Jumbo (2) 27,424 18.31 5.63 13,096 9.47 5.42 2,786 2.49 5.65
--------------------- ---------------------- ---------------------
Total certificate
accounts 89,370 59.66 5.53 68,657 49.66 5.37 53,166 47.44 5.22
--------------------- ---------------------- ---------------------
Total deposits $149,809 100.00% 4.30% $138,261 100.00% 3.78% $112,071 100.00% 3.81%
=======================================================================================================
</TABLE>
(1) At March 31, 1997, 1996 and 1995, total demand and NOW accounts included
noninterest-bearing deposits of $10.0 million, $17.9 million and $8.3
million, respectively.
(2) Deposit balances greater than $100,000.
At March 31, 1997, the Company had outstanding $36.8 million in deposit accounts
in amounts greater than $100,000 maturing as follows:
Amount
------
Maturity Period (In Thousands)
---------------
Three months or less $33,134
Over three months through six months 1,800
Over six months through 12 months 1,100
Over 12 months 740
-------
TOTAL $36,774
=======
13
<PAGE>
VI. RETURN ON EQUITY AND ASSETS
The ratio of net income to average equity and average total assets and
certain other ratios are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Dollars in Thousands)
<S> <C>
Average total assets $204,311 $179,145 $132,281
Average equity $ 19,567 $ 17,578 $ 16,028
Net income $ 2,312 $ 2,458 $ 1,660
Cash dividends declared -- $ -- $ --
Return on average total assets 1.13% 1.37% 1.25%
Return on average equity 11.82% 13.98% 10.36%
Dividend payout percentage
(Dividends declared divided by net income) 0.00% 0.00% 0.00%
Average equity to average total assets 9.58% 9.81% 12.12%
</TABLE>
VII. SHORT-TERM BORROWINGS
During the fiscal year ended March 31, 1997, the Company utilized
short-term borrowings, primarily from the Federal Home Loan Bank of
Indianapolis and overnight Federal Funds, to meet the funding
requirements of the Mortgage Loan Reverse Repurchase Program.
Information regarding short term borrowing activity is provided as
follows:
<TABLE>
<CAPTION>
At or for the Year Ended At or for the Year Ended
March 31, 1997 March 31, 1996
------------------------ ------------------------
(Dollars in Thousands) (Dollars in Thousands)
<S> <C>
FHLB advances and line of credit:
Average balance outstanding $38,964 $28,233
Maximum amount outstanding at any month-end during the period 46,284 47,230
Balance outstanding at end of period 46,284 38,124
Weighted average interest rate during the period 5.55% 5.95%
Weighted average interest rate at end of period 5.88% 5.60%
Federal funds purchased
Average balance outstanding $ 4,500 $ 5,475
Maximum amount outstanding at any month-end during the period 7,000 7,000
Balance outstanding at end of period 7,000 7,000
Weighted average interest rate during the period 5.84% 5.81%
Weighted average interest rate at end of period 6.50% 5.63%
</TABLE>
<TABLE>
<CAPTION>
At or for the Year Ended
March 31, 1995
------------------------
(Dollars in Thousands)
<S> <C>
FHLB advances and line of credit:
Average balance outstanding $2,495
Maximum amount outstanding at any month-end during the period 5,363
Balance outstanding at end of period 5,363
Weighted average interest rate during the period 5.05%
Weighted average interest rate at end of period 6.55%
Federal funds purchased
Average balance outstanding $ 752
Maximum amount outstanding at any month-end during the period 7,000
Balance outstanding at end of period 7,000
Weighted average interest rate during the period 5.94%
Weighted average interest rate at end of period 6.63%
</TABLE>
At March 31, 1997, specific mortgage loans with a carrying value of
approximately $56,180,000 and specific securities with a carrying value
of approximately $9,513,000 were pledged to the Federal Home Loan Bank
of Indianapolis to secure current and future advances from the Federal
Home loan Bank. In addition, the Bank has a line of credit approved up
to $5,000,000 with the Federal Home Loan Bank of Indianapolis. This
line is secured by the specific collateral listed above. The Bank had
borrowings of $3,784,000 against this line of credit at March 31, 1997.
At March 31, 1997, the Bank had $4,049,000 in outstanding letters of
credit issued through the Federal Home Loan Bank of ndianapolis. These
letters of credit are secured by the same collateral as the line of
credit mentioned above. The balance of these letters of credit at March
31, 1997 is $0.
14
<PAGE>
REGULATION AND SUPERVISION
General
The Company, as a savings and loan holding company, is required to file
certain reports with, and otherwise comply with the rules and regulations of the
OTS under the Home Owners' Loan Act, as amended (the "HOLA"). In addition, the
activities of savings institutions, such as the Bank, are governed by the HOLA
and the Federal Deposit Insurance Act ("FDI Act").
The Bank is subject to extensive regulation, examination and
supervision by the OTS, as its primary federal regulator, and the FDIC, as the
deposit insurer. The Bank is a member of the Federal Home Loan Bank ("FHLB")
System and its deposit accounts are insured up to applicable limits by the
Savings Association Insurance Fund ("SAIF") managed by the FDIC. The Bank must
file reports with the OTS and the FDIC concerning its activities and financial
condition in addition to obtaining regulatory approvals prior to entering into
certain transactions such as mergers with, or acquisitions of, other savings
institutions. The OTS and/or the FDIC conduct periodic examinations to test the
Bank's compliance with various regulatory requirements. This regulation and
supervision establishes a comprehensive framework of activities in which an
institution can engage and is intended primarily for the protection of the
insurance fund and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes. Any change in such regulatory
requirements and policies, whether by the OTS, the FDIC or the Congress could
have a material adverse impact on the Company, the Bank, and their operations.
Certain of the regulatory requirements applicable to the Bank and to the Company
are referred to below or elsewhere herein. The description of statutory
provisions and regulations applicable to savings institutions and their holding
companies set forth in this Form 10-KSB does not purport to be a complete
description of such statutes and regulations and their effects on the Bank and
the Company.
Holding Company Regulation
The Company is a non diversified unitary savings and loan holding
company within the meaning of the HOLA. As a unitary savings and loan holding
company, the Company generally will not be restricted under existing laws as to
the types of business activities in which it may engage, provided that the Bank
continues to be a qualified thrift lender ("QTL"). Upon any non-supervisory
acquisition by the Company of another savings institution or Bank that meets the
QTL test and is deemed to be a savings institution by the OTS, the Company would
become a multiple savings and loan holding company (if the acquired institution
is held as a separate subsidiary) and would be subject to extensive limitations
on the types of business activities in which it could engage. The HOLA limits
the activities of a multiple savings and loan holding company and its
non-insured institution subsidiaries primarily to activities permissible for
bank holding companies under Section 4(c)(8) of the Bank Holding Company Act
("BHC Act"), subject to the prior approval of the OTS, and activities authorized
by OTS regulation.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution or holding company thereof,
without prior written approval of the OTS: acquiring or retaining, with certain
exceptions, more than 5% of a nonsubsidiary
15
<PAGE>
company engaged in activities other than those permitted by the HOLA; or
acquiring or retaining control of a depository institution that is not insured
by the FDIC. In evaluating applications by holding companies to acquire savings
institutions, the OTS must consider the financial and managerial resources and
future prospects of the company and institution involved, the effect of the
acquisition on the risk to the insurance funds, the convenience and needs of the
community and competitive factors.
The OTS is prohibited from approving any acquisition that would result
in a multiple savings and loan holding company controlling savings institutions
in more than one state, subject to two exceptions: (i) the approval of
interstate supervisory acquisitions by savings and loan holding companies and
(ii) the acquisition of a savings institution in another state if the laws of
the state of the target savings institution specifically permit such
acquisitions. The states vary in the extent to which they permit interstate
savings and loan holding company acquisitions.
Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, HOLA does prescribe such restrictions on subsidiary
savings institutions, as described below. The Bank must notify the OTS 30 days
before declaring any dividend to the Company. In addition, the financial impact
of the holding company on its subsidiary institution is a matter that is
evaluated by the OTS and the agency has authority to order cessation of
activities or divestiture of subsidiaries deemed to pose a threat to the safety
and soundness of the institution.
Federal Savings Institution Regulation
Capital Requirements. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 3% leverage (core) capital ratio and an 8% risk-based capital ratio. In
addition, the prompt corrective action standards discussed below also establish,
in effect, a minimum 2% tangible capital standard, a 4% leverage (core) capital
ratio (3% for institutions receiving the highest rating on the CAMEL financial
institution rating system), and, together with the risk-based capital standard
itself, a 4% Tier I risk-based capital standard. Core capital is defined as
common stockholder's equity (including retained earnings), certain
non-cumulative perpetual preferred stock and related surplus, and minority
interests in equity accounts of consolidated subsidiaries less intangibles other
than certain purchased mortgage servicing rights and credit card relationships.
The OTS regulations also require that, in meeting the tangible, leverage (core)
and risk-based capital standards, institutions must generally deduct investments
in and loans to subsidiaries engaged in activities as principal that are not
permissible for a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier I (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of 4% and 8%, respectively.
In determining the amount of risk-weighted assets, all assets, including certain
off-balance sheet assets, are multiplied by a risk-weight of 0% to 100%, as
assigned by the OTS capital regulation based on the risks OTS believes are
inherent in the type of asset. The components of Tier I (core) capital are
equivalent to those discussed earlier. The components of supplementary capital
currently include cumulative preferred stock, long-term perpetual preferred
stock, mandatory convertible securities, subordinated debt and intermediate
preferred stock and the allowance for loan and lease losses limited to a maximum
of 1.25% of risk-weighted assets. Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core capital.
16
<PAGE>
The OTS regulatory capital requirements also incorporate an interest
rate risk component. Savings institutions with "above normal" interest rate risk
exposure are subject to a deduction from total capital for purposes of
calculating their risk-based capital requirements. A savings institution's
interest rate risk is measured by the decline in the net portfolio value of its
assets (i.e., the difference between incoming and outgoing discounted cash flows
from assets, liabilities and off-balance sheet contracts) that would result from
a hypothetical 200 basis point increase or decrease in market interest rates
divided by the estimated economic value of the institution's assets. In
calculating its total capital under the risk-based capital rule, a savings
institution whose measured interest rate risk exposure exceeds 2% must deduct an
amount equal to one-half of the difference between the institution's measured
interest rate risk and 2%, multiplied by the estimated economic value of the
institution's assets. The Director of the OTS may waive or defer a savings
institution's interest rate risk component on a case-by-case basis. A savings
institution with assets of less than $300 million and risk-based capital ratios
in excess of 12% is not subject to the interest rate risk component, unless the
OTS determines otherwise. For the present time the OTS has deferred
implementation of the interest rate risk component. At March 31, 1997, the Bank
met each of its capital requirements and it is anticipated that the Bank will
not be subject to the interest rate risk component.
The following table presents the Bank's capital position at March 31,
1997 relative to fully phased-in regulatory requirements.
Excess
Actual Required (Deficiency) Actual Required
Capital Capital Amount Percent Percent
--------------------------------------------------------
(Dollars in Millions)
Tangible $18.4 $ 3.4 $15.0 8.18% 1.50%
Core (Leverage) $18.4 $ 6.8 $11.6 8.18% 3.00%
Risk-based $20.0 $10.8 $ 9.2 14.8% 8.00%
_________________
(1) Although the OTS capital regulations require savings institutions to meet a
1.5% tangible capital ratio and a 3% leverage (core) capital ratio, the prompt
corrective action standards discussed below also establish, in effect, a minimum
2% tangible capital standard, a 4% leverage (core) capital ratio (3% for
institutions receiving the highest rating on the CAMEL financial institution
rating system), and, together with the risk-based capital standard itself, a 4%
Tier I risk-based capital standard.
17
<PAGE>
Prompt Corrective Regulatory Action. Under the OTS prompt corrective
action regulations, the OTS is required to take certain supervisory actions
against undercapitalized institutions, the severity of which depends upon the
institution's degree of undercapitalization. Generally, a savings institution is
considered "well capitalized" if its ratio of total capital to risk-weighted
assets is at least 10%, its ratio of Tier I (core) capital to risk-weighted
assets is at least 6%, its ratio of core capital to total assets is at least 5%,
and it is not subject to any order or directive by the OTS to meet a specific
capital level. A savings institution generally is considered "adequately
capitalized" if its ratio of total capital to risk-weighted assets is at least
8%, its ratio of Tier I (core) capital to risk-weighted assets is at least 4%,
and its ratio of core capital to total assets is at least 4% (3% if the
institution receives the highest CAMEL rating). A savings institution that has a
ratio of total capital to weighted assets of less than 8%, a ratio of Tier I
(core) capital to risk-weighted assets of less than 4% or a ratio of core
capital to total assets of less than 4% (3% or less for institutions with the
highest examination rating) is considered to be "undercapitalized." A savings
institution that has a total risk-based capital ratio less than 6%, a Tier 1
capital ratio of less than 3% or a leverage ratio that is less than 3% is
considered to be "significantly undercapitalized" and a savings institution that
has a tangible capital to assets ratio equal to or less than 2% is deemed to be
"critically undercapitalized." Subject to a narrow exception, the banking
regulator is required to appoint a receiver or conservator for an institution
that is "critically undercapitalized." The regulation also provides that a
capital restoration plan must be filed with the OTS within 45 days of the date a
savings institution receives notice that it is "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized." Compliance
with the plan must be guaranteed by any parent holding company. In addition,
numerous mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. The OTS could also take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.
Insurance of Deposit Accounts. Deposits of the Bank are presently
insured by the SAIF. Both the SAIF and the Bank Insurance Fund ("BIF"), the
deposit insurance fund that covers most commercial bank deposits, are
statutorily required to be recapitalized to a 1.25% of insured reserve deposits
ratio. Until recently, members of the SAIF and BIF were paying average deposit
insurance premiums of between 24 and 25 basis points. The BIF presently meets
the required reserve in 1995, whereas the SAIF was not expected to meet or
exceed the required level until 2002 at the earliest. This was situation was
primarily due to the statutory requirement that SAIF members make payments on
bonds issued in the late 1980s by the Financing Corporation ("FICO") to
recapitalize the predecessor to the SAIF.
In view of the BIF's achieving the 1.25% ratio, the FDIC ultimately
adopted a new assessment rate schedule of 0 to 27 basis points under which 92%
of BIF members paid an annual premium of only $2,000. With respect to SAIF
member institutions, the FDIC adopted a final rule retaining the previously
existing assessment rate schedule applicable to SAIF member institutions of 23
to 31 basis points. As long as the premium differential continued, it may have
had adverse consequences for SAIF members, including reduced earnings and an
impaired ability to raise funds in the capital markets. In addition, SAIF
members, such as the Bank were placed at the substantial competitive
disadvantage to BIF members with respect to pricing of loans and deposits and
the ability to achieve lower operating costs.
18
<PAGE>
On September 30, 1996, the President signed into law the Deposit
Insurance Funds Act of 1996 (the "Funds Act") which, among other things, imposed
a special one-time assessment on SAIF member institutions, including the Bank,
to recapitalize the SAIF. As required by the Funds Act, the FDIC imposed a
special assessment of 65.7 basis points on SAIF assessable deposits held as of
March 31, 1995, payable November 27, 1996 (the "SAIF Special Assessment"). The
SAIF Special Assessment was recognized by the Bank as an expense in the quarter
ended September 30, 1996 and is generally tax deductible. The SAIF Special
Assessment recorded by the Bank amounted to $723,000 on a pre-tax basis and
$437,000 on an after-tax basis.
The Funds Act also spreads the obligations for payment of the FICO
bonds across all SAIF and BIF members. Beginning on January 1, 1997, BIF
deposits will be assessed for a FICO payment of 1.3 basis points, while SAIF
deposits will pay 6.48 basis points. Full pro rata sharing of the FICO payments
between BIF and SAIF members will occur on the earlier of January 1, 2000 or the
date the BIF and SAIF are merged. The Funds Act specifies that the BIF and SAIF
will be merged on January 1, 1999, provided no savings associations remain as of
that time.
As a result of the Funds Act, the FDIC recently voted to effectively
lower SAIF assessments to 0 to 27 basis points as of January 1, 1997, a range
comparable to that of BIF members. SAIF members will also continue to make the
FICO payments described above. The FDIC also lowered the SAIF assessment
schedule for the third quarter of 1997 to 18 to 27 basis pints. Management
cannot predict the level of FDIC insurance assessments on an on-going basis,
whether the savings association charter will be eliminated or whether the BIF
and SAIF will eventually be merged.
The Bank's assessment rate for the fiscal 1997 ranged from 23 to 6.48
basis points and the premium paid for this period was $225,000. At fiscal year
end March 31, 1997, the assessment rate was 6.48 basis points. A significant
increase in SAIF insurance premiums would likely have an adverse effect on the
operating expenses and results of operations of the Bank.
Under the FDI Act, insurance of deposits may be terminated by the FDIC
upon a finding that the institution has engaged in unsafe or unsound practices,
is in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
Thrift Rechartering Legislation. The Funds Act provides that the BIF
and SAIF will merge on January 1, 1999 if there are no more savings associations
as of that date. That legislation also requires that the Department of Treasury
submit a report to Congress by March 31, 1997 that makes recommendations
regarding a common financial institutions charter, including whether the
separate charters for thrifts and banks should be abolished. Various proposals
to eliminate the federal thrift charter, create a uniform financial institutions
charter and abolish the OTS have been introduced in Congress. The bills would
require federal savings associations convert to national banks or some type of
state charter by a specified date (January 1, 1998 in one bill, June 30, 1998 in
the other) or they would automatically become national banks. Converted federal
thrifts would generally be required to conform their activities to those
permitted for the charter selected and divestiture of nonconforming assets would
be required over a two year period, subject to two possible one year extensions.
State chartered thrifts would become subject to the same federal regulation as
applies to state commercial banks. Holding companies for savings
19
<PAGE>
institutions would become subject to the same regulation as holding companies
that control commercial banks, with a limited grandfather provision for unitary
savings and loan holding company activities. The Bank is unable to predict
whether such legislation would be enacted or the extent to which the legislation
would restrict or disrupt its operations.
Loans to One Borrower. Under the HOLA, savings institutions are
generally subject to the limits on loans to one borrower applicable to national
banks. Generally, savings institutions may not make a loan or extend credit to a
single or related group of borrowers in excess of 15% of its unimpaired capital
and surplus. An additional amount may be lent, equal to 10% of unimpaired
capital and surplus, if such loan is secured by readily-marketable collateral,
which is defined to include certain financial instruments and bullion. At March
31, 1997, the Bank's limit on loans to one borrower was $3.1 million. At March
31, 1997, the Bank's largest aggregate outstanding balance of loans to one
borrower totaled $2.4 million.
QTL Test. The HOLA requires savings institutions to meet a QTL test.
Under the QTL test, a savings and loan association is required to maintain at
least 65% of its "portfolio assets" (total assets less (i) specified liquid
assets up to 20% of total assets; (ii) intangibles, including goodwill; and
(iii) the value of property used to conduct business) in certain "qualified
thrift investments" (primarily residential mortgages and related investments,
including certain mortgage-backed securities) in at least 9 months out of each
12 month period.
A savings institution that fails the QTL test is subject to certain
operating restrictions and may be required to convert to a bank charter. As of
March 31, 1997, the Bank maintained 91.6% of its portfolio assets in qualified
thrift investments and, therefore, met the QTL test. Recent legislation has
expanded the extent to which education loans, credit card loans and small
business loans may be considered "qualified thrift investments."
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution that exceeds
all fully phased-in capital requirements before and after a proposed capital
distribution ("Tier 1 Bank") and has not been advised by the OTS that it is in
need of more than normal supervision, could, after prior notice but without
obtaining approval of the OTS, make capital distributions during a calendar year
equal to the greater of (i) 100% of its net earnings to date during the calendar
year plus the amount that would reduce by one-half its "surplus capital ratio"
(the excess capital over its fully phased-in capital requirements) at the
beginning of the calendar year or (ii) 75% of its net income for the previous
four quarters. Any additional capital distributions would require prior
regulatory approval. In the event the Bank's capital fell below its regulatory
requirements or the OTS notified it that it was in need of more than normal
supervision, the Bank's ability to make capital distributions could be
restricted. In addition, the OTS could prohibit a proposed capital distribution
by any institution, which would otherwise be permitted by the regulation, if the
OTS determines that such distribution would constitute an unsafe or unsound
practice. In December 1994, the OTS proposed amendments to its capital
distribution regulation that would generally authorize the payment of capital
distributions without OTS approval provided the payment does not make the
institution undercapitalized within the meaning of the prompt corrective action
regulation. However, institutions in a holding company structure would still
have a prior notice requirement. At March 31, 1997, the Bank was a Tier 1 Bank.
20
<PAGE>
Liquidity. The Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a specified
percentage of its net withdrawable deposit accounts plus short-term borrowings.
This liquidity requirement is currently 5% but may be changed from time to time
by the OTS to any amount within the range of 4% to 10% depending upon economic
conditions and the savings flows of member institutions. OTS regulations also
require each member savings institution to maintain an average daily balance of
short-term liquid assets at a specified percentage (currently 1%) of the total
of its net withdrawable deposit accounts and borrowings payable in one year or
less. Monetary penalties may be imposed for failure to meet these liquidity
requirements. The Bank's liquidity and short-term liquidity ratios for March 31,
1997 were 5.6% and 2.7% respectively, which exceeded the then applicable
requirements. The Bank has never been subject to monetary penalties for failure
to meet its liquidity requirements.
Assessments. Savings institutions are required to pay assessments to
the OTS to fund the agency's operations. The general assessment, paid on a
semi-annual basis, is computed upon the savings institution's total assets,
including consolidated subsidiaries, as reported in the Bank's latest quarterly
thrift financial report. The assessments paid by the Bank for the fiscal year
ended March 31, 1997 totaled $59,000.
Branching. OTS regulations permit nationwide branching by federally
chartered savings institutions to the extent allowed by federal statute. This
permits federal savings institutions to establish interstate networks and to
geographically diversify their loan portfolios and lines of business. The OTS
authority preempts any state law purporting to regulate branching by federal
savings institutions.
Transactions with Related Parties. The Bank's authority to engage in
transactions with related parties or "affiliates" (e.g., any company that
controls or is under common control with an institution, including the Company
and its non-savings institution subsidiaries) is limited by Sections 23A and 23B
of the Federal Reserve Act ("FRA"). Section 23A limits the aggregate amount of
covered transactions with any individual affiliate to 10% of the capital and
surplus of the savings institution. The aggregate amount of covered transactions
with all affiliates is limited to 20% of the savings institution's capital and
surplus. Certain transactions with affiliates are required to be secured by
collateral in an amount and of a type described in Section 23A and the purchase
of low quality assets from affiliates is generally prohibited. Section 23B
generally provides that certain transactions with affiliates, including loans
and assets purchases, must be on terms and under circumstances, including credit
standards, that are substantially the same or at least as favorable to the
institution as those prevailing at the time for comparable transactions with
non-affiliated companies. In addition, savings institutions are prohibited from
lending to any affiliate that is engaged in activities that are not permissible
for bank holding companies and no savings institution may purchase the
securities of any affiliate other than a subsidiary.
The Bank's authority to extend credit to executive officers, directors
and 10% shareholders ("insiders"), as well as entities such persons control, is
governed by Sections 22(g) and 22(h) of the FRA and Regulation O thereunder.
Among other things, such loans are required to be made on terms substantially
the same as those offered to unaffiliated individuals and to not involve more
than the normal risk of repayment. Recent legislation created an exception for
loans made pursuant to a benefit or compensation program that is widely
available to all employees of the institution and does not give preference to
insiders over other employees. Regulation O also places individual and aggregate
limits on the amount of loans the Bank may make to such persons based, in part,
on the Bank's capital position and requires board approval procedures to be
followed.
21
<PAGE>
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring actions
against the institution and all institution-affiliated parties, including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors to institution of receivership, conservatorship or termination of
deposit insurance. Civil penalties cover a wide range of violations and amount
to $25,000 per day, or even $1 million per day in especially egregious cases.
Under the FDI Act, the FDIC has the authority to recommend to the Director of
the OTS enforcement action to be taken with respect to a particular savings
institution. If action is not taken by the Director, the FDIC has authority to
take such action under certain circumstances. Federal law establishes criminal
penalties for certain violations.
Standards for Safety and Soundness. The federal banking agencies have
adopted Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") and a final rule to implement safety and soundness standards
required under the FDI Act. The Guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes impaired. The
standards set forth in the Guidelines address internal controls and information
systems; internal audit system; credit underwriting; loan documentation;
interest rate risk exposure; asset growth; asset quality; earnings; and
compensation, fees and benefits. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the
Guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard, as required by the FDI
Act. The final rule establishes deadlines for the submission and review of such
safety and soundness compliance plans when such plans are required.
Federal Home Loan Bank System
The Bank is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB-Indianapolis, is required to
acquire and hold shares of capital stock in that FHLB in an amount at least
equal to 1% of the aggregate principal amount of its unpaid residential mortgage
loans and similar obligations at the beginning of each year, or 1/20 of its
advances (borrowings) from the FHLB-Indianapolis, whichever is greater. The Bank
was in compliance with this requirement, with an investment in FHLB-Indianapolis
stock at March 31, 1997 of $2,752,000. FHLB advances must be secured by
specified types of collateral and may be obtained primarily for the purpose of
providing funds for residential housing finance.
The FHLBs are required to provide funds to cover certain obligations on
bonds issued to fund the resolution of insolvent thrifts and to contribute funds
for affordable housing programs. These requirements could reduce the amount of
dividends that the FHLBs pay to their members and could also result in the FHLBs
imposing a higher rate of interest on advances to their members. For the years
ended March 31, 1997, 1996, and 1995 dividends from the FHLB-Indianapolis to the
Bank amounted to $211,000, $194,000, and $151,000. If dividends were reduced, or
interest on future FHLB advances increased, the Bank's net interest income might
also be reduced.
22
<PAGE>
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The Federal Reserve Board
regulations generally require that reserves be maintained against aggregate
transaction accounts as follows: for accounts aggregating $49.3 million or less
(subject to adjustment by the Federal Reserve Board) the reserve requirement is
3%; and for accounts aggregating greater that $49.3 million, the reserve
requirement is $1.48 million plus 10% (subject to adjustment by the Federal
Reserve Board between 8% and 14%) against that portion of total transaction
accounts in excess or $49.3 million. The first $4.4 million of otherwise
reservable balances (subject to adjustments by the Federal Reserve Board) are
exempted from the reserve requirements. The Bank is in compliance with the
foregoing requirements. The balances maintained to meet the reserve requirements
imposed by the Federal Reserve Board may be used to satisfy liquidity
requirements imposed by the OTS.
Federal and State Taxation
Federal Taxation
GENERAL The Company and the Bank report their income on a consolidated
basis using the accrual method of accounting, and are subject to federal income
taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's reserve for bad debts discussed below. The
following discussion of tax matters is intended only as a summary and does not
purport to be a comprehensive description of the tax rules applicable to the
Bank or the Company. For its 1997 taxable year, the Bank is subject to a maximum
federal income tax rate of 34%.
Bad Debt Reserves
For fiscal years beginning prior to December 31, 1995, thrift
institutions which qualified under certain definitional tests and other
conditions of the Internal Revenue code of 1986 (the "Code") were permitted to
use certain favorable provisions to calculate their deductions from taxable
income for annual additions to their bad debt reserve. A reserve could be
established for bad debts on qualifying real property loans (generally secured
by interests in real property improved or to be improved) under (i) the
Percentage of Taxable Income Method (the "PTI Method") or (ii) the Experience
Method. The reserve for nonqualifying loans was computed using the Experience
Method.
The Small Business Job Protection Act of 1996 (the "1996 Act"), which
was enacted on August 20, 1996, requires savings institutions to recapture
(i.e., take into income) certain portions of their accumulated bad debt
reserves. The 1996 Act repeals the reserve method of accounting for bad debts
effective for tax years beginning after 1995. Thrift institutions that would be
treated as small banks are allowed to utilize the Experience Method applicable
to such institutions, while thrift institutions that are treated as large banks
(those generally exceeding $500 million in assets) are required to use only the
specific charge-off method. Thus, the PTI Method of accounting for bad debts is
no longer available for any financial institution.
A thrift institution required to change its method of computing
reserves for bad debts will treat such change in method of accounting, initiated
by the taxpayer, as having been made with the consent of the IRS. Any Section
481(a) adjustment required to be taken into income
23
<PAGE>
with respect to such change generally will be taken into income ratably over a
six-taxable year period, beginning with the first taxable year beginning after
1995, subject to the residential loan requirement.
Under the residential loan requirement provision, the recapture
required by the 1996 Act will be suspended for each of two successive taxable
years, beginning with the Bank's current taxable year, in which the Bank
originates a minimum of certain residential loans based upon the average of the
principal amounts of such loans made by the Bank during its six taxable years
preceding its current taxable year.
Under the 1996 Act, for its current and future taxable years, the Bank
is not permitted to make additions to its tax bad debt reserves. In addition,
the Bank is required to recapture (i.e., take into income) over a six year
period the excess of the balance of its tax bad debt reserves as of March 31,
1996 [other than its supplemental reserve for losses on loans, if any] over the
balance of such reserves as of March 31, 1988. As a result of such recapture,
the Bank will be required to pay approximately $270,000 which is generally
expected to be taken into income beginning in 1998 over a 6 year period.
Distributions
Under the 1996 Act, if the Bank makes "non-dividend distributions" to
the Company, such distributions will be considered to have been made from the
Bank's unrecaptured tax bad debt reserves (including the balance of its reserves
as of March 31, 1988) to the extent thereof, and then from the Bank's
supplemental reserve for losses on loans, to the extent thereof, and an amount
based on the amount distributed (but not in excess of the amount of such
reserves) will be included in the Bank's taxable income. Non-dividend
distributions include distributions in excess of the Bank's current and
accumulated earnings and profits, as calculated for federal income tax purposes,
distributions in redemption of stock, and distributions in partial or complete
liquidation. Dividends paid out of the Bank's current or accumulated earnings
and profits will not be so included in the Bank's taxable income.
The amount of additional taxable income triggered by a non-dividend
distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if the Bank makes a
non-dividend distribution to the Company, approximately one and one-half times
the amount of such distribution (but not in excess of the amount of such
reserves) would be includable in income for federal income tax purposes,
assuming a 35% federal corporate income tax rate. The Bank does not intend to
pay dividends that would result in a recapture of any portion of its bad debt
reserves.
SAIF Recapitalization Assessment
The Funds Act Levied a 65.7-cent fee on every $100 of thrift deposits
held on March 31, 1995. For financial statement purposes, this assessment was
reported as an expense for the quarter ended September 30, 1996. The Funds Act
includes a provision which states that the amount of any special assessment paid
to capitalize SAIF under this legislation is deductible under Section 162 of the
Code in the year of payment.
24
<PAGE>
Corporate Alternative Minimum Tax
For taxable years beginning after December 31, 1986, the code imposes a
tax on alternative minimum taxable income ("AMTI") at a rate of 20%. The excess
of the bad debt reserve deduction using the percentage of taxable income method
over the deduction that would have been allowable under an experience method is
treated as a preference item for purposes of computing the AMTI. Only 90% of
AMTI can be offset by net operating losses. For taxable years beginning after
December 31, 1989, the adjustment to AMTI based on book income will be an amount
equal to 75% of the amount by which a corporation's adjusted current earnings
exceeds its AMTI (determined without regard to this preference and prior to
reduction for net operating losses). In addition, for taxable years beginning
after December 31, 1986, and before January 1, 1996, an environmental tax of
.12% of the excess AMTI (with certain modifications) over $2.0 million is
imposed on corporations whether or not an Alternative Minimum Tax ("AMT") is
paid. The Company was not subject to the AMT liability for the year ended March
31, 1997 or 1996.
Dividends Received Deduction
The Company may exclude from its income 100% of dividends received from
the Bank as a member of the same affiliated group of corporations. The corporate
dividends received deduction is generally 70% in the case of dividends received
from unaffiliated corporations with which the Company and the Bank will not file
a consolidated tax return, except that if the Company and the Bank own more than
20% of the stock of a corporation distributing a dividend, 80% of any dividend
received may be deducted.
State and Local Taxation
Indiana Taxation
The State of Indiana imposes an 8.5% franchise tax on the net income of
financial institutions (including thrifts), exempting them from gross income,
supplemental net income and intangible taxes. For franchise tax purposes,
"taxable income" generally means federal taxable income, subject to certain
adjustments including the addition of property taxes, income taxes and
charitable contributions, and the exclusion of actual bad debts incurred, net of
federal bad debt deduction. Other applicable Indiana taxes include sales, use
and property taxes.
Delaware Taxation
As a Delaware holding company not earning income in Delaware, the
Company is exempted from Delaware corporate income tax but is required to file
an annual report with and pay an annual fee to the State of Delaware. The
Company is also subject to an annual franchise tax imposed by the State of
Delaware.
25
<PAGE>
Item 2. Description of Properties
- ----------------------------------
The Company conducts its business through its main office and branch
facility located in Michigan City, Indiana, and a branch office in LaPorte,
Indiana, all of which are owned by the Company.
<TABLE>
<CAPTION>
Date Net Book Value at
Location Acquired March 31, 1997
-------- -------- --------------
<S> <C>
Executive & Main Office
126 E. Fourth Street, Michigan City, IN 46360 1979 (1) $1,565,055.76
Branch Offices
3710 S. Franklin Street, Michigan City, IN 46360 1974 164,171.60
801 Monroe Street, LaPorte, IN 46350 1966 (2) 822,929.55
-------------
TOTAL $2,552,156.91
=============
</TABLE>
(1) Construction completed during 1981.
(2) Renovated during 1996.
In addition, the Bank leases office space at 701 E. 83rd Avenue, Suite
E in Merrillville, Indiana for the operation of a mortgage banking/origination
office.
Item 3. Legal Proceedings
- --------------------------
The Company is involved in various legal actions arising in the normal
course of its business. In the opinion of management, the resolutions of these
legal actions are, in the aggregate, not expected to have a material adverse
effect on the Company's consolidated financial position or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
None.
Additional Item. Executive Officers of the Company
The following table sets forth certain information regarding the
executive officers of the Company who are not also Directors.
Positions Held With the Company
Name Age(1) and/or the Bank
---- ------ ---------------
Daniel R. Buresh 38 Vice President and Controller
George L. Koehm 34 Vice President, Treasurer and Chief
Financial Officer
Allen E. Jones 51 Assistant Vice President and Secretary
(1) At March 31, 1997
26
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder
- ---------------------------------------------------------
Matters.
-------
CB Bancorp, Inc., common stock is listed and traded on the National Association
of Securities Dealers Automated Quotation System ("NASDAQ") Small-Cap Market
under the symbol CBCO. Stock price quotations are published in daily newspapers
including the Wall Street Journal. As of March 31, 1997, CB Bancorp, Inc. had
approximately 264 holders of record of the Company's shares, not including those
investors holding the Company's stock in street name.
Stock Prices
The following table sets forth the common share sale prices and number of shares
traded during the 8 quarters ended March 31, 1997.
Quarter Ended High Low Number of Shares Traded
--------------------------------------------------------------------
June 30, 1995 13 1/2 12 3/4 90,493
September 30, 1995 15 3/4 12 3/4 302,837
December 31, 1995 18 1/2 15 1/2 188,720
March 31, 1996 19 3/4 17 1/4 153,347
June 30, 1996 18 1/4 16 1/4 199,525
September 30, 1996 20 3/4 17 238,300
December 31, 1996 25 1/2 19 3/4 203,878
March 31, 1997 34 1/4 23 3/4 575,888
No dividends were paid during the above stated periods.
NASDAQ Market Makers
As of March 31, 1997 the following firms were market makers in the Company's
shares:
Howe, Barnes & Johnson, Inc. Sandler O'Neill & Partners
Stifel Nicolaus & Co. Natcity Investments, Inc.
Herzog, Heine, Geduld, Inc. Sherwood Securities Corp.
The Ohio Company
27
<PAGE>
Item 6.
- -------
Management's Discussion and Analysis or Plan of Operation
- ---------------------------------------------------------
The following discussion provides information regarding CB Bancorp's financial
condition and results of operations for each of the years ended March 31, 1997,
1996 and 1995. This discussion should be read in conjunction with the
consolidated financial statements of CB Bancorp, Inc. and the notes thereto,
which appear elsewhere herein.
Overview
- --------
CB Bancorp, Inc., ("The Company") is a unitary thrift holding company
headquartered in Michigan City, Indiana. Its wholly owned subsidiary, Community
Bank, A Federal Savings Bank, ("The Bank") has been and continues to be in the
business of attracting deposits from the general public and investing these
deposits, together with funds generated from operations and borrowings,
primarily in one-to four-family residential mortgage loans and loans purchased
under agreements to resell and, to a lesser extent, commercial and consumer
loans, mortgage-backed securities, U.S. Government and agency securities and
other marketable securities.
The Bank also operates a wholly owned subsidiary, Community Financial Services,
Inc., ("Community Financial") which offers tax return preparation services to
individuals and small businesses as well as tax-deferred annuities and life
insurance products to customers of the Bank and the general public. Community
Financial has a 99% limited partner interest in Pedcor Investments-1994-XX, L.P.
which was formed for the construction, ownership and management of an 80 unit
apartment project located in LaPorte County. Terms of the partnership agreement
allocate 99% of the eligible tax credits and operating losses to the limited
partner. Community Financial is also the 100% owner of Community Brokerage
Services, Inc., a fully registered securities broker-dealer, which offers full
service brokerage services to the general public.
The Company's results are primarily based on the Bank's results. The Bank's
operating results are dependent primarily on net interest income, the difference
between interest income earned on loans, securities, mortgage-backed and related
securities and the Company's cost of funds (interest paid to its depositors and
interest paid for borrowed funds).
Operating results are also affected by the provision for loan losses,
noninterest income, and expense items. Noninterest income primarily includes
earnings of the Bank's wholly owned subsidiary, Community Financial, gains and
losses from sale of interest-earning and other assets, and fee income, including
fees earned under the Bank's Mortgage Loan Reverse Repurchase Program
("Program"). Noninterest expenses principally consist of employee compensation
and benefits, occupancy and equipment expenses, federal deposit insurance
premiums and other administrative expenses. Factors that significantly impact
operating results include general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities.
Other than those discussed in this document, management is unaware of any trends
or uncertainties that will have or that are reasonably likely to have a material
effect on the liquidity, capital resources, or operations of the Company. In
addition, management is unaware of any recommendations by regulatory authorities
which, if implemented, would have such an effect.
The Company operates out of the Bank's main office located at 126 E. Fourth
Street, Michigan City, Indiana. The Bank also conducts business out of its two
full service branch offices located at 3710 S. Franklin Street in Michigan City
and 801 Monroe Street, LaPorte, Indiana. The Bank has also established a loan
production/mortgage banking office in Merrillville, Indiana located at 701 E.
83rd Avenue, Suite E, Merrillville, Indiana. The Bank's retail deposit-gathering
base is concentrated in the communities surrounding its offices while its
lending base extends throughout LaPorte and contiguous counties. Also, through
its Program, the Bank funds and temporarily
28
<PAGE>
invests in one- to four-family mortgages originated in various states throughout
the United States by the Program's participants.
Mortgage Loan Reverse Repurchase Program
- ----------------------------------------
In the fiscal year 1991, the Company instituted the Mortgage Loan Reverse
Repurchase Program. The Company held loans that were purchased under agreements
to resell from 66 of the 117 approved mortgage companies as of March 31, 1997.
The Program is carried out pursuant to agreements with each participant which
provide for the purchase at par (less certain fees paid to the participant by
the borrower) of whole mortgage loans by the Company, at its option, and the
subsequent resale of such loans to the Participant (for transfer to an end
investor). Purchase money and refinance mortgage loans are generally held no
more than 90 days by the Company and typically are resold within 30 days.
Construction loan mortgages acquired via the Program are held for the duration
of the construction loan period, typically for six months or longer. At March
31, 1997, construction loan balances totaled $25.4 million and accounted for
26.7% of the Company's total outstanding investment in the Program. The Company
records interest income on the loans based on a stated rate of interest tied to
the prime rate (as established from time to time by a major Chicago-based
financial institution) during the funding period, and not the rates on
individual loans, plus a fee (recorded as non-interest income) collected from
the Participant for each loan when resold. It is the Company's policy to
purchase under the Program only those loans that comply with accepted secondary
market underwriting standards or Community Bank's portfolio underwriting
criteria. The Company had recently modified the agreements with mortgage
companies participating in the Program such that the guaranty of loans purchased
from the mortgage company will be a lower amount; the Company continues to
primarily look to the individual borrowers as the primary source of repayment.
Management believes that the change in these guaranty arrangements will have no
impact on the Program.
Based upon the current interest rate environment, management projects that the
Company's net interest margin will decline over the foreseeable future as the
Company's liabilities continue to reprice upwards. Management can make no
assurances with respect to the interest rate environment. The Company's Mortgage
Loan Reverse Repurchase Program has been and is a key contributor to the
Company's efforts to maintain a strong net interest margin. Management is aware
that a decline in Program activity would negatively impact the Company's
profitability.
Financial Condition
- -------------------
Total Assets at March 31,
1997 - $227.1 million 1996 - $205.4 million
(represents an increase of $21.7 million or 10.6%)
The year to year increase in total assets, was
primarily attributable to growth in the Company's
Mortgage Loan Repurchase Program.
Mortgage Loan Reverse Repurchase
Program Loans Outstanding at March 31,
1997 - $95.3 million 1996 - $80.0 million
(represents an increase of $15.3 million or 19.1%)
Increase is attributed to an increase in the number
of mortgage companies participating in the Program.
Since its inception, the Program has caused the level
of the Company's assets and liabilities to fluctuate
between periods.
29
<PAGE>
Loans Receivable at March 31,
1997 - $90.3 million 1996 - $92.6 million
(represents a decrease of $2.3 million or 2.5%)
Decrease primarily attributable to an increase in the
sales of the Company's single-family fixed rate
loans.
Securities Portfolio at March 31,
1997 - $17.7 million 1996 - $19.2 million
(represents a decrease of $1.5 million or 7.8%)
Decrease primarily attributable to the allocation of
a portion of the cash flows received from the
maturities and repayments of the securities portfolio
into the Program.
The primary objective of the Company's securities
portfolio is to contribute to profitability, by
providing a stable cash flow of dependable earnings
and available-for-sale securities which provide a
store of liquidity. The securities portfolio consists
of U.S. Government Agency Securities, short-term
investment grade corporate notes, marketable equity
securities and Federal Home Loan Bank Stock. The
Company also has investments in both variable and
fixed rate U.S. Government Agency mortgage-backed
securities.
Cash and Cash Equivalents at March 31,
1997 - $14.7 million 1996 - $6.1 million
(represents an increase of $8.6 million or 141.0%)
Increase primarily due to a substantial inflow of
funds resulting from activity in the Program. Due to
the volatile day to day funding requirements of the
Program, the Company's cash position is subject to
significant fluctuations.
Premises and Equipment at March 31,
1997 - $2.9 million 1996 - $2.4 million
(represents an increase of $0.5 million or 20.8%)
Increase primarily attributable to the major
renovation of the Company's La Porte branch office
facility.
Other Assets at March 31,
1997 - $4.3 million 1996 - $3.1 million
(represents an increase of $1.2 million or 38.7%)
Increase primarily attributable to an increase in
deferred taxes receivable, foreclosed real estate,
and increases in the cash surrender value of life
insurance policies.
30
<PAGE>
Non-performing Assets at March 31,
1997 - $6.6 million 1996 - $3.0 million
(represents an increase of $3.6 million or 120.0%)
Increase primarily attributable to a $3.7 million
increase in impaired loans from $2.2 million at
March 31, 1996 to $5.9 million at March 31, 1997.
Loan loss reserves at March 31, 1997 totaled $1.8
million, an increase of $461,000 or 34.2% over the
prior fiscal year.
At March 31, 1997, impaired assets include 65 single family construction loans,
all located in the state of Indiana with a total outstanding balance of $4.7
million and total unfunded commitments of $2.1 million. Eighteen of these loans,
totaling $1.3 million, are outstanding to one builder with the current
outstanding balance reflecting a chargeoff of $141,000 during the year ended
March 31, 1997. The Company has allocated $308,000 of the allowance for loan
losses to these loans. Forty one of these loans totaling $2.4 million are
outstanding to two affiliated companies, one of which is in bankruptcy. The
Company has allocated $125,000 of the allowance for loan losses to these loans.
The remaining 6 loans totaling $1.2 million are with three separate builders and
the Company has allocated $116,000 of the allowance for loan losses to these
loans.
Also included in impaired assets is $1.2 million in principal due the Company on
four pools of small business equipment leases that the Company acquired through
contractual relationships entered into with Bennett Funding Group, Inc. and its
affiliate Aloha Capital Corporation (f.k.a. Bennett Leasing Corporation). Per
the terms of the contractual arrangements, Bennett Funding Group, Inc. and Aloha
Capital Corporation, act as the servicing agents for the respective pools of
leases sold to the Company. Bennett Funding Group Inc. sought Chapter 11
Bankruptcy protection on March 29, 1996. Several weeks later, Aloha Capital
Corporation was placed into involuntary bankruptcy at the request of the court
appointed Bankruptcy Trustee for Bennett Funding Group, Inc. The outstanding
balance reflects a charge-off of $433,000 during the year ended March 31,1997 on
the original balance of $1.7 million. The Company has allocated $61,000 of the
allowance for loan losses to these leases. The Company has negotiated a
settlement and the anticipated recovery is approximately 70% of the original
balance.
Total Liabilities at March 31,
1997 - $206.3 million 1996 - $186.6 million
(represents an increase of $19.7 million or 10.6%)
This increase is primarily attributable to an $11.5
million or 8.4% increase in total deposits from
$138.3 million at March 31, 1996 to $149.8 million at
March 31, 1997 and $8.2 million or 18.2% increase in
borrowed funds from $45.1 million at March 31, 1996
to $53.3 million at March 31, 1997. The growth in
liabilities was primarily due to the increased
funding needs of the Program.
The increase in total deposits was concentrated in certificates of deposits.
Certificate balances increased $20.7 million or 30.2%, primarily attributable to
management's decision to utilize the public fund and institutional deposit
markets to meet the Company's funding needs. Management has found these markets
to be reliable and attractively priced funding sources and will continue to take
advantage of these funding sources as market conditions warrant. Partially
offsetting the increase in certificates of deposits was an $8.4 million or 20.2%
decrease in demand deposit accounts. More than 90% of the Company's demand
deposit balances are held by mortgage
31
<PAGE>
companies that are participating in the Company's Program. The level of balances
maintained in demand deposits, by these companies, fluctuates significantly
between periods.
Total borrowed funds at March 31, 1996, consist of $7.0 million in federal funds
purchased and $46.3 million in Federal Home Loan Bank advances, of which $45.3
million will mature in less than one year.
Comparison of Operating Results for the Years Ended March 31, 1997 and 1996
GENERAL: Net income for the year ended March 31, 1997 was $2,312,000 compared to
$2,458,000 in the prior year. This $146,000 decrease in net income is primarily
attributable to a $723,000 nonrecurring pretax charge resulting from legislation
signed into law on September 30, 1996, to recapitalize the Federal Deposit
Insurance Corporation's Savings Association Insurance Fund. Earnings were also
negatively impacted by an increase in non-interest expenses related to the start
up of a newly established mortgage banking division and to the pending merger
with Pinnacle.
Interest Income for year ended March 31,
1997 - $16.4 million 1996 - $14.4 million
(represents an increase of $2.0 million or 13.9%)
This increase is attributable to increased activity
in the Company's Mortgage Loan Reverse Repurchase
Program which was the primary factor in a $23.5
million or 13.9% increase in average interest-earning
assets outstanding from $168.5 million for the year
ending March 31, 1996 to $192.0 million for the year
ending March 31, 1997.
Interest income earned under the Program increased $2.2 million or
39.6% over the prior fiscal year. The average outstanding investment in
the Program increased from $58.3 million for the twelve months ended
March 31, 1996 to $82.1 million for the twelve months ended March 31,
1997. The increase in outstandings in the Program is attributable to an
increase in the number of mortgage companies participating in the
Program. Although management is committed to continue growing the
Program by increasing the number of participants, no assurance can be
given that the level of outstandings held under the Program for the
fiscal year March 31, 1997 will be maintained. Interest income on the
loans receivable portfolio, securities and mortgage backed securities
portfolio and other interest earning assets decreased $67,000, $28,000
and $18,000, respectively. Fewer assets were allocated to these
categories by management over the course of the year because of asset
allocations to the Program.
Interest Expense for year ended March 31,
1997 - $8.1 million 1996 - $7.1 million
(represents an increase of $1.0 million or 14.1%)
This increase is primarily attributable to a $22.5
million or 15.0% increase in average interest-bearing
liabilities over the prior fiscal year. This increase
resulted from the increased funding needs of the
Program. In the course of funding this Program
management considers the relevant costs of deposits
and borrowings and acquires the needed funds
accordingly.
32
<PAGE>
Net Interest Income for year ended March 31,
1997 - $8.3 million 1996 - $7.3 million
(represents an increase of $1.0 million or 13.7%)
Increase resulted from substantially higher
outstandings in the Company's Mortgage Loan Reverse
Repurchase Program. The Company`s net interest margin
ratio for the twelve months ended March 31, 1997 was
4.31% as compared to the prior fiscal year's ratio of
4.33%.
Provision for Loan Losses for year ended March 31,
1997 - $1.2 million 1996 - $1.0 million
(represents an increase of $200,000 or 20.0%)
The 1997 provision for loan losses resulted from
management's continued evaluation of the loan
portfolio, national and regional economic indicators,
and the determination of specific allowances for loan
loss allocations needed for impaired loans and
increases needed to replenish net charge-offs.
The Company's allowance for loan losses increased to $1.8 million at
March 31, 1997 from $1.3 million at March 31, 1996. Management's
decision to add to loan loss reserves was primarily attributable to
several factors: 1.) To replenish $730,000 of net chargeoffs against
the loan reserves recorded in fiscal 1997, 2.) To build up the level of
reserves to properly reflect the Company's increased activity in
construction lending, commercial lending and consumer lending, and 3.)
To set-up specific reserves for impaired loans. The Company will
continue to monitor its allowance for loan losses and make future loan
loss provisions in consideration of the amount and types of loans in
its portfolio and as economic conditions dictate.
Noninterest Income for year ended March 31,
1997 - $1.8 million 1996 - $1.2 million
(represents an increase of $600,000 or 50.0%)
Increase is primarily attributable to a $320,000
increase in fees related to the Mortgage Loan Reverse
Repurchase Program, a $268,000 increase in gains on
the sale of mortgage loans sold through the Company's
mortgage banking division and a $52,000 increase in
service charges, fees and late charges. These
increases were partially offset by a $11,000 decrease
in commission income received by Community Financial
Services, Inc. from the sale of tax-deferred
annuities and a $43,000 decrease in other income.
Noninterest Expense for year ended March 31,
1997 - $5.3 million 1996 - $3.6 million
(represents an increase of $1.7 million or 47.2%)
Increase is primarily attributable to an increase of
$684,000 in deposit insurance premiums resulting from
the one-time assessment cited above, increased
personnel, occupancy and promotion expense related to
the Company's newly established mortgage banking
division, and higher professional fees related to an
increase
33
<PAGE>
in legal and accounting fees related to the pending
merger with Pinnacle.
Income Tax Expense for year ended March 31,
1997 - $1.2 million 1996 - $1.4 million
(represents a decrease of $200,000 or 14.3%)
Income taxes decreased primarily as a result of an
increase of $90,000 in tax credits that the Company
recorded from its investment in the limited
partnership, Pedcor Investments- 1994-XX, L.P., in
the current fiscal year as compared to the prior
fiscal year and decreased earnings before income
taxes.
Comparison of Operating Results for the Years Ended March 31, 1996 and 1995
- ---------------------------------------------------------------------------
GENERAL: Net income for the year ended March 31, 1996 was $2,458,000
compared to $1,660,000 in the prior year. This $798,000 increase in net
income was primarily attributable to increases in net interest income
of $2,234,000 or 44.2% and noninterest income of $183,000 or 18.4%.
Interest Income for year ended March 31,
1996 - $14.4 million 1995 - $9.2 million
(represents an increase of $5.2 million or 56.5%)
This increase was attributable to increased activity
in the Company's Mortgage Loan Reverse Repurchase
Program and other lending activities which was the
primary factor in a $45.9 million or 37.5% increase
in average interest earning assets from the prior
fiscal year to $168.5 million for the year ending
March 31, 1996. In addition, interest income
generated by the Company's interest earning assets
also benefited from higher year over year yields on
these assets.
Interest income earned under the Program increased $4.1 million or
303.3% over the prior fiscal year. The average outstanding investment
in the Program increased from $16.0 million for the twelve months ended
March 31, 1995 to $58.3 million for the twelve months ended March 31,
1996. The increase in outstandings in the Program was attributable to
increased mortgage refinancing and purchase money mortgages due to
lower mortgage interest rates, increased construction lending within
the Program, and an expanded number of mortgage companies participating
in the Program.
The increase in interest income was also attributable to growth in the
Company's loans receivable portfolio. Interest income on the loans
receivable portfolio increased $1.1 million or 17.5% over the prior
fiscal year. The average outstanding investment in the loans receivable
portfolio increased from $80.8 million at March 31, 1995 to $89.8
million at March 31, 1996. Growth in the loan receivable portfolio was
attributable to the origination and purchase of multi-family,
construction, commercial mortgage and non-mortgage loans.
Interest income on interest bearing assets decreased $110,000 or 62.3%
as fewer assets were allocated to this category by management over the
course of the year because of asset allocations to loans including
loans in the Program.
34
<PAGE>
Interest Expense for year ended March 31,
1996 - $7.1 million 1995 - $4.1 million
(represents an increase of $3.0 million or 73.2%)
Increase is primarily attributable to a $41.0 million
or 37.8% increase in average interest-bearing
liabilities over the prior fiscal year. This increase
resulted from the increased funding needs of the
Program and loans receivable portfolio. In the course
of funding this Program management considered the
relevant costs of deposits and borrowings and
acquired the needed funds accordingly.
Net Interest Income for year ended March 31,
1996 - $7.3 million 1995 - $5.1 million
(represents an increase of $2.2 million or 43.1%)
Increase resulted from substantially higher
outstandings in the Company's Mortgage Loan Reverse
Repurchase Program and growth in the loans receivable
portfolio. In addition, management's efforts to
profitably increase the level of interest-earning
assets also contributed to a 21 basis point increase
in the Company's net interest margin ratio to 4.33%
for the twelve months ended March 31, 1996 from 4.12%
for the twelve months ended March 31, 1995.
Provision for Loan Losses for year ended March 31,
1996 - $1,020,000 1995 - $78,000
(represents an increase of $942,000 or 1,207.7%)
The 1996 provision for loan losses resulted from
management's continued evaluation of the loan
portfolio, national and regional economic indicators,
and the determination of specific allowances for loan
loss allocations needed for impaired loans and
increases needed to replenish net charge-offs.
The Company's allowance for loan losses increased to $1,347,000 at
March 31, 1996 from $673,000 at March 31, 1995. Management's decision
to substantially increase the level of loan loss provisions was
primarily attributable to several factors: 1.) To replenish $346,000 of
chargeoffs against the loan reserves recorded in fiscal 1996, 2.) To
build up the level of reserves to properly reflect the Company's
increased activity in construction lending, commercial lending and
consumer lending, and 3.) To set-up specific reserves for the lease
paper purchased from Bennett Funding Group and Aloha Capital Corp.
Noninterest Income for year ended March 31,
1996 - $1.2 million 1995 - $1.0 million
(represents an increase of $200,000 or 20.0%)
Increase was primarily attributable to a $205,000
increase in fees related to the Mortgage Loan Reverse
Repurchase Program and a $23,000 increase in other
income. These increases were partially offset by a
$13,000 decrease in commission income received by
Community Financial Services, Inc. from the sale of
tax-deferred annuities and a $33,000 decrease in
other service charges and fees due to the absence of
a one time consulting fee of $92,000 relative to
35
<PAGE>
an affordable housing project that the Company
recorded in the prior fiscal year.
Noninterest Expense for year ended March 31,
1996 - $3.6 million 1995 - $3.3 million
(represents an increase of $300,000 or 9.09%)
Increase was attributable to: 1.) the start up costs
of a mortgage banking division in Merrillville,
Indiana, which began operations in February of 1996,
2.) expenses incurred related to the acquisition
efforts of a mortgage banking company which were
later terminated without the consummation of a deal,
and 3.) higher legal costs than those of the prior
year.
Income Tax Expense for year ended March 31,
1996 - $1.4 million 1995 - $1.0 million
(represents an increase of $400,000 or 40.0%)
Income taxes increased primarily as a result of
increased earnings before income taxes, which was
only partially offset by a $70,000 tax credit in the
year ended March 31, 1996 related to the Company's
investment in the limited partnership, Pedcor
Investments-1994-XX-LP.
Liquidity and Capital Resources
- -------------------------------
The Company's primary sources of funds are deposits, proceeds from principal and
interest payments on loans, securities, mortgage-backed securities, advances,
and lines of credit from the Federal Home Loan Bank ("FHLB") of Indianapolis and
federal funds purchased. While maturities and scheduled amortization of loans
and mortgage-backed securities are a predictable source of funds, deposit flows
and mortgage prepayments are greatly influenced by general interest rates,
economic conditions, competition and other factors.
The Bank is required to maintain minimum levels of liquid assets as defined by
the Office of Thrift Supervision ("OTS") regulations. This requirement is based
upon a percentage of deposits and short-term borrowings, which may vary at the
direction of the OTS depending upon economic conditions and deposit flows. The
required ratio is currently 5.0%. The Bank's liquidity ratios were 5.6% and 7.7%
at March 31, 1997 and 1996, respectively. Liquidity management for the Company
is both a daily and long-term function of the Company's management strategy.
Excess funds are generally invested in short-term investments, including
deposits in financial institutions. In the event that the Company should require
funds beyond its ability to generate them internally, additional sources of
funds are available via FHLB of Indianapolis advances, lines of credit and
reverse repurchase agreements.
Management structures the liquid asset portfolio and borrowing capacity of the
Company to meet the cash flow needs of operating, investing and financing
activities. The Company's liquid assets are cash and cash equivalents, which
include investments in highly liquid, short-term investments. At March 31, 1997
and 1996, cash and cash equivalents totaled $14.7 million and $6.1 million,
respectively. In addition, the Company maintains a $5.0 million line of credit
with the FHLB of Indianapolis to meet short term liquidity needs. The line of
credit had an outstanding balance of $3.8 million at March 31, 1997.
36
<PAGE>
Cash flows resulting from operating activities consisted primarily of net
income, activity under the Program and the origination and sale of mortgage
loans held for sale. Cash flows from operating activities were ($13.0) million,
($51.5) million and $11.1 million for the years ended March 31, 1997, 1996 and
1995, respectively. The Company's primary investing activities have been the
purchase and repayment of securities; mortgage-backed securities; and the
purchase, origination, and repayment of loans. Net cash flows from investing
activities were $2.3 million, ($4.5) million and ($9.3) million for the years
ended March 31, 1997, 1996 and 1995, respectively. Net cash from financing
activities, primarily the borrowing and repayment of funds and net deposits,
were $19.3 million, $58.5 million and ($3.4) million for the years ended March
31, 1997, 1996 and 1995, respectively.
For the years ended March 31, 1997, 1996 and 1995 the Company's single family
mortgage loan purchases through the Program totaled $1,112.0 million, $795.9
million and $453.3 million, respectively. Sales of these loans over the same
respective time periods totaled $1,096.7 million, $741.0 million and $462.4
million. During the fiscal year ended March 31, 1997, the activity in the
Program increased significantly due to an increase in the number of mortgage
companies participating in the Program. Management utilized FHLB advances and
institutional and public fund deposits to meet the Company's funding needs. The
Company maintains borrowing capacity with the FHLB-Indianapolis to meet the
funding requirements of the Program as well as the general liquidity needs of
Company operations.
At March 31, 1997, the Company had outstanding commitments to originate loans
and fund unused lines of credit of $2.8 million, unused letters of credit of
$4.1 million and $12.4 million in commitments to fund the undisbursed balances
of Program construction loans. Management anticipates that sufficient funds will
be available to finance, on a timely basis, its short and long term loan
commitments. Certificates of deposit which are scheduled to mature in one year
or less at March 31, 1997, totaled $73.8 million. Management's pricing of
certificate offerings reflect the Bank's funding needs and the availability of
other sources of funds (i.e. FHLB advances, etc.).
Shareholders' equity at March 31, 1997 was $20.8 million, an increase of $2.0
million or 10.7% over March 31, 1996, which represents net income for the twelve
months ended March 31, 1997 and the effects of treasury stock transactions, ESOP
loan repayment, the amortization of Recognition and Retention Program Shares
(RRP) acquisition costs, tax benefit related to stock plans and the net change
in unrealized appreciation on securities available-for-sale, net of tax.
Under OTS capital requirements, at March 31, 1997, the Bank had:
- --- Tangible capital (shareholders' equity) of $18.4 million or 8.1% of
adjusted total assets thereby exceeding the 1.5% requirement of $3.4
million by $15.0 million.
- --- Core capital (tangible capital plus certain intangible assets) of $18.4
million or 8.1% of adjusted total assets thereby exceeding the 3.0%
requirement of $6.8 million by $11.6 million.
- --- Risk-weighted capital (core capital plus general valuation allowances)
of $20.0 million or 14.8% of risk-weighted assets thereby exceeding the
8.0% requirement of $10.8 million by $9.2 million.
At March 31, 1997, the Bank's capital exceeded all of the capital requirements
of the OTS.
37
<PAGE>
Asset/Liability Management
- --------------------------
Asset/Liability Management is a daily function of the Company's management and
is continually changing in response to interest rate fluctuations. The matching
of assets and liabilities may be analyzed by examining the extent to which such
assets and liabilities are interest rate sensitive, and by monitoring the
Company's interest rate risk ("IRR") measures produced by the Office of Thrift
Supervision from the Bank's quarterly Thrift Financial Reports. Management
regularly measures the Bank's interest rate risk by monitoring the effect a 200
basis point instantaneous increase or decrease in market interest rates would
have on its net portfolio value ("NPV").
In 1990, the regulators adopted the interest-rate sensitivity approach as one
measure of interest-rate risk. This approach measures the projected changes in
NPV that would result if interest rates were to increase; instantaneously across
the yield curve; by 100, 200, 300 and 400 basis points; or if interest rates
were to decline by 100, 200, 300 and 400 basis points. Net portfolio value is
defined as the market value of interest earning assets less the market value of
interest bearing liabilities. According to the "Interest Rate Risk Report,"
prepared by the Office of Thrift Supervision as of March 31, 1997, after an
adverse rate shock of + 200 points, the Bank's NPV of $24.1 million was
projected to decline $1.1 million or 4.5%, to $23.0 million. According to the
OTS report, only 15% of thrifts nationwide would have experienced a decline of
5.2% or less. Presented below, as of March 31, 1997, is an analysis of the
Bank's interest rate risk as measured by changes in NPV for instantaneous and
substantial parallel shifts of 100 basis points in market interest rates.
Interest Rate Sensitivity of Net Portfolio Value (NPV)
Net Portfolio Value
-------------------
Change
in Rates $ Amount $ Change % Change
-------- -------- -------- --------
+400 bp 21,502 -2,556 -11%
+300 bp 22,259 -1,799 - 7%
+200 bp 22,980 -1,078 - 4%
+100 bp 23,599 - 459 - 2%
0 bp 24,058
-100 bp 24,205 + 147 + 1%
-200 bp 23,697 - 361 - 2%
-300 bp 23,449 - 609 - 3%
-400 bp 23,544 - 514 - 2%
The Company's primary strategy for controlling interest rate risk exposure, is
to maintain a high level of the Company's asset portfolios in interest rate
sensitive assets. Management has accomplished this objective through its
investment in the Mortgage Loan Reverse Repurchase Program. Under the Program,
the Company purchases single family mortgage loans from select mortgage banking
firms on a short-term basis under agreements to resell and earns an adjustable
prime rate based return during the holding period. The Program has complemented
the Company's portfolio of adjustable rate mortgage loans held for investment
which account for 34.8% of mortgage loans receivable, excluding loans in the
Program. In addition, the Company has sought to lengthen the maturity of its
interest-bearing liabilities by emphasizing longer term certificates of deposit.
The Company also has the ability to obtain long-term advances from the FHLB of
Indianapolis if such borrowings appear favorable under a particular interest
rate environment.
38
<PAGE>
Impact of Inflation and Changing Prices
- ---------------------------------------
The consolidated financial statements and notes thereto presented herein have
been prepared in accordance with generally accepted accounting principles
("GAAP") which require the measurement of financial position and operating
results in terms of historical dollars (except for securities
available-for-sale) without considering the changes in the relative purchasing
power of money over time due to inflation. The impact of inflation is reflected
in the increased cost of the Company's operations. Unlike most industrial
companies, nearly all the assets and liabilities of the Company are monetary in
nature. As a result, interest rates have a greater impact on the Company's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the price
of goods and services.
Impact of New Accounting Standards
- ----------------------------------
Statement of Financial Accounting Standards No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," was
issued by the Financial Accounting Standards Board in 1996. It revises the
accounting for transfers of financial assets, such as loans and securities, and
for distinguishing between sales and secured borrowings. It is effective for
some transactions in 1997 and others in 1998. The anticipated effect on the
consolidated financial statements has not yet been determined.
Also, in March, 1997, the accounting requirements for calculating earnings per
share were revised. Basic earnings per share for the quarter ended December 31,
1997 and later will be calculated solely on average common shares outstanding.
Diluted earnings per share will reflect the potential dilution of stock options
and other common stock equivalents. All prior calculations will be restated to
be compatible to the new methods. As the Company has significant dilution from
stock options, the new calculation methods will increase future basic earnings
per share over what otherwise would have been reported, while there will be
little effect on diluted earnings per share.
39
<PAGE>
Item 7. Financial Statements
- -----------------------------
CB BANCORP, INC. AND SUBSIDIARY
Michigan City, Indiana
1997 CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
REPORT OF INDEPENDENT AUDITORS ............................................ 41
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS........................................... 42
CONSOLIDATED STATEMENTS OF INCOME .................................... 43
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY............................................. 44
CONSOLIDATED STATEMENTS OF CASH FLOWS................................. 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ........................... 47
40
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
CB Bancorp, Inc. and Subsidiary
Michigan City, Indiana
We have audited the accompanying consolidated balance sheets of CB Bancorp, Inc.
and Subsidiary as of March 31, 1997 and 1996 and the related consolidated
statements of income, changes in shareholders' equity and cash flows for the
years ended March 31, 1997, 1996 and 1995. These consolidated financial
statements are the responsibility of the Company'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 CB Bancorp, Inc. and
Subsidiary as of March 31, 1997 and 1996 and the results of their operations and
their cash flows for the years ended March 31, 1997, 1996 and 1995, in
conformity with generally accepted accounting principles.
As discussed in Note 1, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," as of April 1, 1994.
Crowe, Chizek and Company LLP
South Bend, Indiana
May 23, 1997
- --------------------------------------------------------------------------------
41
<PAGE>
CB BANCORP, INC. AND SUBISIDIARY
CONSOLIDATED BALANCE SHEETS
March 31, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C>
ASSETS
Cash and due from financial institutions $ 4,847,106 $ 4,754,811
Interest-bearing deposits in other financial institutions -
short term 9,882,031 1,308,112
------------ ------------
Cash and cash equivalents 14,729,137 6,062,923
------------ ------------
Securities available for sale 672,059 620,948
Securities held to maturity (Fair value: $14,348,000 - 1997;
$15,926,000 - 1996) 14,298,913 15,866,904
Federal Home Loan Bank stock at cost 2,751,700 2,702,000
Loans
Loans purchased under agreements to resell 95,275,680 80,031,250
Loans receivable 90,315,402 92,616,450
Less: Allowance for loan losses (1,807,660) (1,346,328)
------------ ------------
183,783,422 171,301,372
Mortgage loans held for sale 914,050 512,750
Accrued interest receivable 1,219,432 1,183,259
Premises and equipment, net 2,920,274 2,387,382
Investment in limited partnership 1,566,215 1,678,573
Other assets 4,280,206 3,068,825
------------ ------------
$227,135,408 $205,384,936
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Interest-bearing $139,806,192 $120,408,041
Non-interest bearing 10,003,301 17,852,856
------------ ------------
Total deposits 149,809,493 138,260,897
Borrowed funds 53,283,553 45,124,355
Obligation due to limited partnership 1,467,877 1,450,000
Accrued expenses and other liabilities 1,731,552 1,717,500
------------ ------------
206,292,475 186,552,752
Shareholders' equity
Serial preferred stock, no par value, 500,000 shares
authorized; none outstanding - -
Common stock, par value $.01 per share;
shares authorized: 1,500,000; shares issued: 1,284,238;
shares outstanding: 1997-1,161,997 and 1996-1,188,226 12,842 12,842
Additional paid-in capital 5,865,528 5,813,358
Retained earnings - substantially restricted 16,635,085 14,323,484
Less:
Treasury stock, 122,241 and 96,012 shares at cost at
March 31, 1997 and 1996, respectively (1,550,290) (1,081,744)
Unearned common stock acquired by:
Employee stock ownership plan (176,583) (240,794)
Recognition and retention plans (4,233) (20,708)
Net unrealized appreciation on securities available for sale,
net of tax of $39,738 in 1997 and $16,887 in 1996 60,584 25,746
------------ ------------
20,842,933 18,832,184
------------ ------------
$227,135,408 $205,384,936
============ ============
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
42
<PAGE>
CB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years ended March 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C>
Interest income
Loans receivable
First mortgage loans $ 6,884,405 $ 6,949,705 $6,189,013
Consumer and other loans 627,028 628,236 260,463
Loans purchased under agreements to resell 7,613,007 5,452,138 1,351,924
Securities - taxable 594,933 565,940 567,883
Mortgage-backed and related securities - taxable 632,276 689,120 653,029
Other interest-bearing assets - taxable 48,946 66,742 177,064
----------- ----------- ----------
16,400,595 14,351,881 9,199,376
Interest expense
Deposits 5,680,771 5,040,273 3,961,171
Borrowed funds 2,453,616 2,022,405 182,559
----------- ----------- ----------
8,134,387 7,062,678 4,143,730
----------- ----------- ----------
Net interest income 8,266,208 7,289,203 5,055,646
Provision for loan losses 1,191,000 1,020,000 78,000
----------- ----------- ----------
Net interest income after provision
for loan losses 7,075,208 6,269,203 4,977,646
Noninterest income
Gain (loss) on sales of mortgage loans
held for sale 269,739 1,478 -
Other 1,493,603 1,176,542 995,084
----------- ----------- ----------
1,763,342 1,178,020 995,084
Noninterest expense
Salaries and employee benefits 1,941,387 1,561,595 1,493,024
Occupancy and equipment 593,536 512,476 512,394
SAIF deposit insurance premium 947,628 263,397 261,206
Other 1,863,085 1,271,616 1,075,585
----------- ----------- ----------
5,345,636 3,609,084 3,342,209
----------- ----------- ----------
Income before income taxes 3,492,914 3,838,139 2,630,521
Income tax expense 1,181,313 1,379,929 970,274
----------- ----------- ----------
Net income $ 2,311,601 $ 2,458,210 $1,660,247
=========== =========== ==========
Primary earnings per share $ 1.86 $ 1.95 $ 1.29
Fully dilutive earnings per share 1.85 1.94 1.29
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
43
<PAGE>
CB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended March 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unearned
Common
Additional Stock
Common Paid-in Retained Treasury Acquired
Stock Capital Earnings Stock By ESOP
----- ------- -------- ----- -------
<S> <C>
Balance - April 1, 1994 $ 12,842 $ 5,862,898 $ 10,205,027 $ (522,899) $ (369,216)
Adoption of SFAS No. 115 net of tax of $63 - - - - -
Purchase of 22,000 shares of treasury stock - - - (243,875) -
Issuance of 10,916 shares of treasury stock - (41,038) - 95,618 -
Contribution to fund ESOP - - - - 64,211
Amortization of RRP contribution - - - - -
Net change in unrealized appreciation
on securities available for sale, net
of tax of $1,131 - - - - -
Net income for the year
ended March 31, 1995 - - 1,660,247 - -
----------- ------------ ------------ ------------ ------------
Balance - March 31, 1995 12,842 5,821,860 11,865,274 (671,156) (305,005)
Purchase of 38,495 shares of treasury stock - - - (557,427) -
Issuance of 13,583 shares of treasury stock - (78,923) - 146,839 -
Contribution to fund ESOP - - - - 64,211
Amortization of RRP contribution - - - - -
Tax benefit related to stock plans - 70,421 - - -
Net change in unrealized appreciation
on securities available for sale,
net of tax of $15,693 - - - - -
Net income for the year ended
March 31, 1996 - - 2,458,210 - -
----------- ------------ ------------ ------------ ------------
Balance - March 31, 1996 12,842 5,813,358 14,323,484 (1,081,744) (240,794)
Purchase of 27,873 shares of treasury stock - - - (487,572) -
Issuance of 1,644 shares of treasury stock - (10,805) - 19,026 -
Contribution to fund ESOP - - - - 64,211
Amortization of RRP contribution - - - - -
Tax benefit related to stock plans - 62,975 - - -
Net change in unrealized appreciation
on securities available for sale,
net of tax of $22,851 - - - - -
Net income for the year ended
March 31, 1997 - - 2,311,601 - -
----------- ------------ ------------ ------------ ------------
Balance - March 31, 1997 $ 12,842 $ 5,865,528 $ 16,635,085 $ (1,550,290) $ (176,583)
=========== ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Net Unrealized
Unearned Appreciation
Common on Securities
Stock Available Total
Acquired for Sale, Shareholders'
By RRP Net of Tax Equity
------ ---------- ------
<S> <C>
Balance - April 1, 1994 $ (89,675) $ - $ 15,098,977
Adoption of SFAS No. 115 net of tax of $63 - 96 96
Purchase of 22,000 shares of treasury stock - - (243,875)
Issuance of 10,916 shares of treasury stock - - 54,580
Contribution to fund ESOP - - 64,211
Amortization of RRP contribution 41,999 - 41,999
Net change in unrealized appreciation
on securities available for sale, net
of tax of $1,131 - 1,726 1,726
Net income for the year
ended March 31, 1995 - - 1,660,247
------------ ------------- --------------
Balance - March 31, 1995 (47,676) 1,822 16,677,961
Purchase of 38,495 shares of treasury stock - - (557,427)
Issuance of 13,583 shares of treasury stock - - 67,916
Contribution to fund ESOP - - 64,211
Amortization of RRP contribution 26,968 - 26,968
Tax benefit related to stock plans - - 70,421
Net change in unrealized appreciation
on securities available for sale,
net of tax of $15,693 - 23,924 23,924
Net income for the year ended
March 31, 1996 - - 2,458,210
------------ ------------- --------------
Balance - March 31, 1996 (20,708) 25,746 18,832,184
Purchase of 27,873 shares of treasury stock - - (487,572)
Issuance of 1,644 shares of treasury stock - - 8,221
Contribution to fund ESOP - - 64,211
Amortization of RRP contribution 16,475 - 16,475
Tax benefit related to stock plans - - 62,975
Net change in unrealized appreciation
on securities available for sale,
net of tax of $22,851 - 34,838 34,838
Net income for the year ended
March 31, 1997 - - 2,311,601
------------ ------------- --------------
Balance - March 31, 1997 $ (4,233) $ 60,584 $ 20,842,933
============ ============= ==============
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
44
<PAGE>
CB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended March 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C>
Cash flows from operating activities
Net income $ 2,311,601 $ 2,458,210 $ 1,660,247
Adjustments to reconcile net income to
net cash from operating activities
Depreciation and amortization 219,997 187,104 342,215
Provision for loan losses 1,191,000 1,020,000 78,000
(Gain) loss on sales of:
Mortgage loans held for sale (269,739) (1,478) -
Securities available for sale - - 650
Foreclosed real estate 755 (16,731) (16,240)
Loans purchased under agreements to resell (1,111,965,098) (795,862,263) (453,339,372)
Sale of loans purchased under agreements
to resell 1,096,720,668 741,010,220 462,353,515
Mortgage loans originated for sale (15,669,346) (585,786) -
Proceeds from sales of mortgage loans
held for sale 15,537,785 74,514 -
Amortization of RRP contribution 16,475 26,968 41,999
Change in:
Accrued interest receivable (36,173) (396,855) (138,011)
Other assets (1,024,828) (370,009) (30,532)
Accrued expenses and other liabilities 14,052 911,471 114,610
------------- ------------- ---------------
Net cash from operating activities (12,952,851) (51,544,635) 11,067,081
Cash flows from investing activities
Net change in long term interest-bearing deposits
in other financial institutions - 983,475 (885,276)
Net change in loans receivable 1,095,951 (6,223,912) (5,717,413)
Proceeds from:
Sale of securities available for sale - - 49,200
Maturities of securities held to maturity 3,420,782 9,161,482 6,300,000
Principal collected on mortgage-backed securities 2,381,737 2,311,441 3,215,365
Sale of foreclosed real estate 328,245 92,210 58,937
Purchase of:
Securities and mortgage-backed securities
available for sale - - (53,324)
Securities and mortgage-backed securities
held to maturity (4,236,862) (10,104,120) (9,424,682)
Federal Home Loan Bank stock (49,700) (351,600) -
Loans receivable - - (2,627,077)
Premises and equipment, net (743,977) (176,519) (134,506)
Investment in limited partnership 112,358 (153,573) (75,000)
------------- ------------- ---------------
Net cash from investing activities 2,308,534 (4,461,116) (9,293,776)
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
45
<PAGE>
CB BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended March 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C>
Cash flows from financing activities
Net change in deposits $ 11,548,596 $ 26,189,663 $ (2,934,877)
Proceeds from borrowed funds 326,879,583 1,709,466,300 238,718,275
Repayment of borrowed funds (318,720,385) (1,676,704,749) (239,100,610)
Net change in obligation due to limited
partnership 17,877 - -
Purchase of treasury stock (487,572) (557,427) (243,875)
Issuance of shares of treasury stock 8,221 67,916 54,580
Contribution to fund ESOP 64,211 64,211 64,211
---------------- -------------- ----------------
Net cash from financing activities 19,310,531 58,525,914 (3,442,296)
---------------- -------------- ----------------
Net change in cash and cash equivalents 8,666,214 2,520,163 (1,668,991)
Cash and cash equivalents at beginning of year 6,062,923 3,542,760 5,211,751
---------------- -------------- ----------------
Cash and cash equivalents at end of year $ 14,729,137 $ 6,062,923 $ 3,542,760
================ ============== ================
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 8,029,751 $ 6,870,582 $ 4,147,503
Income taxes 1,810,000 1,618,449 885,250
Noncash investing activities
Transfer from:
Securities held for sale to securities
available for sale $ - $ - $ 574,841
Mortgage-backed and related securities to
mortgage-backed and related securities
held to maturity - - 10,275,366
Transfer from investment securities to securities
held to maturity - - 7,170,481
Investment in/obligation due to limited
partnership (Note 16) - - 1,450,000
Real estate acquired in settlement of loans 475,429 75,479 42,697
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
46
<PAGE>
CB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The accompanying consolidated financial statements
include the accounts of CB Bancorp, Inc. and its wholly-owned subsidiary. CB
Bancorp, Inc. is a holding company located in Michigan City, Indiana and owns
all the outstanding stock of Community Bank, A Federal Savings Bank ("the Bank")
which owns all the outstanding stock of Community Financial Services Inc.
("Community Financial"), (together referred to as "the Company"). Community
Financial has a 99% limited partner interest in Pedcor Investments-1994-XX, L.P.
Community Financial also owns 100% of Community Brokerage Services, Inc.
("Community Brokerage"). All significant inter-company balances and transactions
are eliminated in consolidation.
Nature of Operations and Industry Segment Information: The Bank operates in the
single industry of banking, including granting loans (primarily real estate
loans), accepting deposits, and other banking activities. Community Financial
offers various annuity and insurance programs and tax return preparation
services to Bank customers and others. Pedcor Investments-1994-XX, L.P. was
formed for the construction, ownership, and management of an 80 unit affordable
housing project in LaPorte County, Indiana. Community Brokerage is a full
service discount brokerage firm and is a member of the National Association of
Securities Dealers. The Company operates primarily in the banking industry which
accounts for more than 90% of its revenues, operating income and assets.
Use of Estimates: To prepare consolidated financial statements in conformity
with generally accepted accounting principles, management makes estimates and
assumptions based on available information. These estimates and assumptions
affect the amounts reported in the consolidated financial statements and the
disclosures provided, and future results could differ. The collectibility of
loans, allowance for loan losses, the determination and carrying value of
impaired loans, fair values of financial instruments, securities valuations, the
carrying value of loans purchased under agreements to resell, the carrying value
of loans held for sale, the realization of deferred tax assets and status of
contingencies are particularly subject to change in the near term.
Securities: On April 1, 1994, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." The Company now classifies
securities into held to maturity, available for sale and trading categories.
Held to maturity securities are those which the Company has the positive intent
and ability to hold to maturity, and are reported at amortized cost. Available
for sale securities are those the Company may decide to sell if needed for
liquidity, asset-liability management or other reasons. Available for sale
securities are reported at fair value, with unrealized gains and losses included
as a separate component of shareholders' equity, net of tax. Trading securities
are bought principally for sale in the near term, and are reported at fair value
with unrealized gains and losses included in earnings. Securities are written
down to fair value when a decline in fair value is not temporary. Adoption of
SFAS No. 115 on April 1, 1994 increased shareholders' equity by $96, net of $63
tax effect.
- --------------------------------------------------------------------------------
(Continued)
47
<PAGE>
CB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Realized gains and losses resulting from the sale of securities are computed by
the specific identification method. Interest and dividend income, adjusted by
amortization of purchase premium or discount using the level yield method, is
included in earnings.
Loans Purchased Under Agreements to Resell: The Company purchases residential
mortgage loans from various mortgage companies prior to sale of these loans by
the mortgage companies in the secondary market. The Company held loans that were
purchased under agreements to resell from 66 of the 117 approved mortgage
companies as of March 31, 1997. The Company purchases such loans from mortgage
companies at par, net of certain fees, and later sells them back to the mortgage
companies at the same amount and without recourse provisions. As a result, no
gains and losses are recorded at the resale of loans. The Company records
interest income on the loans during the funding period and the Company records
fee income received from the mortgage company for each loan when the loan is
sold. The Company uses the stated interest rate in the agreement with each
mortgage company for interest income recognition, and not the interest rates on
individual loans. The Company does not retain servicing of the loans when they
are resold. Purchase money and refinance mortgage loans are generally held no
more than 90 days by the Company and typically are resold within 30 days.
Construction loan mortgages acquired are held for the duration of the
construction loan period, which is typically six months or longer.
Mortgage Loans Held for Sale: Mortgage loans intended for sale are carried at
the lower of cost or estimated market value in the aggregate. Net unrealized
losses are recognized in a valuation allowance by charges to income.
Interest Income on Loans: Interest on loans is accrued over the term of the
loans based upon the principal outstanding. Management reviews loans delinquent
90 days or more to determine if the interest accrual should be discontinued.
When serious doubt exists as to the collectibility of a loan, the accrual of
interest is discontinued. Under SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," as amended by SFAS No. 118, the carrying value of
impaired loans is periodically adjusted to reflect cash payments, revised
estimates of future cash flows, and increases in the present value of expected
cash flows due to the passage of time. Cash payments representing interest
income are reported as such and other cash payments are reported as reductions
in carrying value. Increases or decreases in carrying value due to changes in
estimates of future payments or the passage of time are reported as a component
of the provision for loan losses.
- --------------------------------------------------------------------------------
(Continued)
48
<PAGE>
CB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans: Loans are reported at the principal balance outstanding, net of deferred
loan fees and costs, the allowance for loan losses, and charge-offs. Interest
income is reported on the interest method and includes amortization of net
deferred loan fees and costs over the loan term.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance, increased by the provision for loan losses and decreased by
charge-offs less recoveries. Management estimates the allowance balance required
based on past loan loss experience, known and inherent risks in the portfolio,
information about specific borrower situations and estimated collateral values,
economic conditions, and other factors. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Company's allowances for losses on loans and foreclosed real estate. Such
agencies may require the Company to recognize additions to the allowances based
on their judgments of information available to them at the time of their
examination. Allocations of the allowance may be made for specific loans, but
the entire allowance is available for any loan that, in management's judgment,
should be charged-off.
SFAS No. 114 and No. 118 were adopted effective April 1, 1995 and require
recognition of loan impairment. Loans are considered impaired if full principal
or interest payments are not anticipated in accordance with the contractual loan
terms. Impaired loans are carried at the present value of expected future cash
flows discounted at the loan's effective interest rate or at the fair value of
the collateral if the loan is collateral dependent. A portion of the allowance
for loan losses is allocated to impaired loans. If these allocations cause the
allowance for loan losses to require increase, such increase is reported as a
component of the provision for loan losses. The effect of adopting these
standards was not material.
Smaller-balance homogeneous loans are evaluated for impairment in total. Such
loans include residential first mortgage loans secured by one-to-four family
residences, residential construction loans, and automobile, home equity and
second mortgage loans. Commercial loans and mortgage loans secured by other
properties are evaluated individually for impairment. When analysis of a
borrower's operating results and financial condition indicates that underlying
cash flows of the borrower's business are not adequate to meet its debt service
requirements, the loan is evaluated for impairment. Often this is associated
with a delay or shortfall in payments of 90 days or more. Commercial and
mortgage loans placed on nonaccrual are often considered for impairment.
Impaired loans, or portions thereof, are charged off when deemed uncollectible.
The nature of disclosures for impaired loans is considered generally comparable
to prior nonaccrual and renegotiated loans and non-performing and past-due asset
disclosures.
- --------------------------------------------------------------------------------
(Continued)
49
<PAGE>
CB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Premises and Equipment: Premises and equipment of the Company are stated at cost
less accumulated depreciation. Premises are depreciated using the straight-line
method with useful lives ranging from twelve to fifty years, and equipment is
depreciated using the straight-line method with useful lives ranging from four
to twelve years. Land is carried at cost. These assets are reviewed for
impairment under SFAS No. 121 when events indicate the carrying amount may not
be recoverable. Maintenance and repairs are expensed and improvements are
capitalized.
Foreclosed Real Estate: Real estate properties acquired through, or in lieu of,
loan foreclosure are initially recorded at fair value at the date of acquisition
establishing a new cost basis. Any reduction to fair value from the carrying
value of the related loan at the time of acquisition is accounted for as a loan
loss and charged against the allowance for loan losses. After acquisition, a
valuation allowance is recorded through a charge to income for the amount of
estimated selling costs. Valuations are periodically performed by management,
and valuation allowances are adjusted through a charge to income for changes in
fair value or estimated selling costs. Foreclosed real estate amounted to
approximately $146,000 and $0 at March 31, 1997 and 1996, and is included in
other assets in the consolidated balance sheets.
Servicing Rights: Prior to adopting SFAS No. 122 on April 1, 1996, servicing
right assets were recorded only for purchased rights to service mortgage loans.
Subsequent to adopting this standard, servicing rights represent both purchased
rights and the allocated value of servicing rights retained on loans originated
in-house and sold. Servicing rights are expensed in proportion to, and over the
period of, estimated net servicing revenues. Impairment is evaluated based on
the fair value of the rights, using groupings of the underlying loans as to
interest rates and then, secondarily, as to geographic and prepayment
characteristics. Any impairment of a grouping is reported as a valuation
allowance. The impact of the adoption of SFAS No. 122 was not material.
Excess servicing fees receivable is reported when a loan sale results in
servicing in excess of normal amounts, and is expensed over the life of the
servicing on the interest method.
Income Taxes: Income tax expense is the sum of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax consequences of temporary
differences between the carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized.
Stock Compensation: Expense for employee compensation under stock option plans
is based on Opinion 25, with expense reported only if options are granted below
market price at grant date. If applicable, proforma disclosures of net income
and earnings per share are provided as if the fair value method of Financial
Accounting Standard No. 123 was used for stock-based compensation.
- --------------------------------------------------------------------------------
(Continued)
50
<PAGE>
CB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair Values of Financial Instruments: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed separately. Fair value estimates involve uncertainties and matters of
significant judgment regarding interest rates, credit risk, prepayments, and
other factors, especially in the absence of broad markets for particular items.
Changes in assumptions or in market conditions could significantly affect the
estimates.
Financial Instruments With Off-Balance-Sheet Risk: The Company, in the normal
course of business, makes commitments to extend credit which are not reflected
in the consolidated financial statements. A summary of these commitments is
disclosed separately.
Statement of Cash Flows: For purposes of reporting cash flows, cash and cash
equivalents is defined as cash and due from financial institutions and federal
funds sold, as well as investments with original maturities under 90 days. Net
cash flows are reported for long-term interest bearing deposits in other
financial institutions, customer loan and deposit transactions and obligation
due to limited partnership.
Earnings Per Share and Treasury Stock: Earnings per common share is computed by
dividing net income by the weighted average number of common shares outstanding
and common share equivalents which would arise from considering dilutive stock
options. The weighted average number of shares for calculating earnings per
common share for the years ended March 31 is:
1997 1996 1995
---- ---- ----
Primary 1,242,382 1,261,062 1,289,998
Fully diluted 1,250,781 1,264,728 1,291,301
Reclassifications: Some items in the prior consolidated financial statements
have been reclassified to conform with the current presentation.
- --------------------------------------------------------------------------------
(Continued)
51
<PAGE>
CB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES
The amortized cost and fair value of securities available for sale are as
follows:
<TABLE>
<CAPTION>
-----------------------------March 31, 1997---------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C>
Marketable equity securities $ 571,737 $ 101,188 $ (866) $ 672,059
=============== ============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
-----------------------------March 31, 1996---------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C>
Marketable equity securities $ 578,315 $ 43,956 $ (1,323) $ 620,948
=============== ============== ============== ==============
</TABLE>
The amortized cost and fair value of securities held to maturity are as follows:
<TABLE>
<CAPTION>
-----------------------------March 31, 1997---------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Debt securities Cost Gains Losses Value
- --------------- ---- ----- ------ -----
<S> <C>
U.S. Government and
federal agencies $ 3,000,000 $ - $ (48,000) $ 2,952,000
Corporate notes 2,789,297 5,988 (2,285) 2,793,000
Mortgage-backed 8,509,616 102,517 (9,133) 8,603,000
--------------- ------------ -------------- ----------------
$ 14,298,913 $ 108,505 $ (59,418) $ 14,348,000
=============== ============ ============== ================
</TABLE>
<TABLE>
<CAPTION>
-----------------------------March 31, 1996---------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Debt securities Cost Gains Losses Value
- --------------- ---- ----- ------ -----
<S> <C>
U.S. Government and
federal agencies $ 3,000,000 $ - $ (30,000) $ 2,970,000
Corporate notes 2,674,726 5,296 (6,022) 2,674,000
Mortgage-backed 10,192,178 143,374 (53,552) 10,282,000
--------------- ------------ -------------- ----------------
$ 15,866,904 $ 148,670 $ (89,574) $ 15,926,000
=============== ============ ============== ================
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
52
<PAGE>
CB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
The amortized cost and fair value of debt securities by contractual maturity,
are shown below. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
---------March 31, 1997-----------
Amortized Fair
Cost Value
---- -----
Due in one year or less $ 1,778,276 $ 1,777,000
Due after one year through five years 4,011,021 3,968,000
Mortgage-backed securities 8,509,616 8,603,000
-------------- --------------
$ 14,298,913 $ 14,348,000
============== ==============
There were no sales of securities during the years ended March 31, 1997 and
1996. Sales of securities available for sale during the year ended March 31,
1995 resulted in gross proceeds of $49,200 and gross losses of $650.
NOTE 3 - LOANS
The Company has entered into agreements with mortgage companies in which the
Company purchases, at its discretion, mortgage loans from the mortgage companies
at par, net of certain fees, and later sells them back to the mortgage companies
at the same amount and without recourse provisions. The Company records interest
income on the loans during the funding period and the Company records fee income
(recorded as noninterest income) received from the mortgage company for each
loan when resold. The interest income recorded is based on a rate of interest
tied to the prime rate (as established from time to time by a major
Chicago-based financial institution) during the funding period, and not the
rates on individual loans. Such loans are reviewed, prior to purchase, for
evidence that the loans are of secondary market quality or meet the Company's
internal underwriting guidelines. An assignment of the mortgage to the Company
is required. In addition, the Company either takes possession of the original
note and forwards such note to the end investor or the Company receives a
certified copy of the note and subsequently receives acknowledgment from the end
investor of receiving the original note. A commitment to purchase from an end
investor is required prior to purchase by the Company. In the event that the end
investor would not honor this commitment and the mortgage companies would not be
able to honor their repurchase obligations, the Company would then need to sell
these loans in the secondary market at the fair value of these loans. Purchase
money and refinance loans are generally held no more than 90 days by the Company
and are typically resold within 30 days. The Company also purchases interim
construction loans under this program and holds these loans for the duration of
the construction loan period which is typically six months or longer. With
regard to the interim construction loans in the pipeline, the Company recognizes
that there may be additional credit risk due to possible change in the
borrower's financial condition during the interim construction period. The
Company had approximately $25,407,000 and $29,416,000 of interim construction
loans purchased under agreements to resell at March 31, 1997 and 1996.
- --------------------------------------------------------------------------------
(Continued)
53
<PAGE>
CB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 3 - LOANS (Continued)
The mortgage companies from which individual mortgage loans have been purchased
under agreements to resell and the related amounts of such loans outstanding are
as follows at March 31:
<TABLE>
<CAPTION>
Company 1997 1996
------- ---- ----
<S> <C>
Company A $ 5,172,843 $ 12,792,251
Company B 8,611,206 8,614,313
Company C 13,677,480 6,791,723
Company D 8,336,445 5,023,314
Company E 5,646,301 -
Company F 5,619,318 3,058,493
Companies with balances between $1,000,000 and
$5,000,000 (1997 - 16 companies; 1996 - 11 companies) 35,126,513 30,195,670
Other companies with balances less than $1,000,000 13,085,574 13,555,486
---------------- ---------------
$ 95,275,680 $ 80,031,250
================ ===============
</TABLE>
Loans receivable at March 31 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C>
First mortgage loans (principally conventional)
Principal balances
Secured by one-to-four family residences $ 69,601,991 $ 73,413,053
Secured by other properties 10,850,459 11,412,555
Construction loans 544,995 591,450
---------------- ---------------
80,997,445 85,417,058
Loans in process (236,431) (47,836)
Unearned discounts (1,966) (993)
Net deferred loan origination fees (361,912) (417,599)
---------------- ---------------
80,397,136 84,950,630
Consumer and other loans
Principal balances
VISA/Master cards - 388,685
Automobile 431,142 400,132
Home equity and second mortgage 2,852,797 1,789,185
Commercial 6,092,907 4,532,775
Other 541,420 555,043
---------------- ---------------
9,918,266 7,665,820
---------------- ---------------
$ 90,315,402 $ 92,616,450
================ ===============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
54
<PAGE>
CB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 3 - LOANS (Continued)
Activity in the allowance for loan losses for the years ended March 31 is
summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C>
Balance at beginning of year $ 1,346,328 $ 672,276 $ 594,453
Provision charged to income 1,191,000 1,020,000 78,000
Recoveries 251,906 - -
Charge-offs (981,574) (345,948) (177)
------------- ------------- --------------
Balance at end of year $ 1,807,660 $ 1,346,328 $ 672,276
============= ============= ==============
</TABLE>
Impaired loans were as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C>
Year end loans with no allowance for loan losses allocated $ - $ 500,942
Year end loans with allowance for loan losses allocated 5,920,000 1,663,477
Amount of the allowance allocated 610,000 166,348
Average of impaired loans during the year 3,459,000 333,020
Interest income recognized during impairment 289,132 144,320
Cash-basis interest income recognized 224,887 128,339
</TABLE>
Nonaccrual and renegotiated loans for which interest has been reduced totaled
approximately $804,000 at March 31, 1995. Interest income that would have been
recorded under the original terms of such loans and the interest income actually
recognized at March 31, 1995 is summarized as follows:
<TABLE>
<CAPTION>
1995
----
<S> <C>
Interest income that would have been recorded $ 54,000
Interest income recognized (22,000)
------------
Interest income forgone $ 32,000
============
</TABLE>
The Bank is not committed to lend additional funds to debtors whose loans have
been modified.
Of the total balance of impaired loans as of March 31, 1997 and 1996,
approximately $1.2 million and $1.7 million relates to amounts associated with
Bennett Funding Group Inc. ("Bennett") and Aloha Capital Corporation ("Aloha"),
an affiliate of Bennett. The outstanding balance reflects a charge-off of
$433,000 during the year ended March 31, 1997 on the original balance of $1.7
million. The reason for the impairment classification is that Bennett recently
filed for Chapter 11 bankruptcy and Aloha was drawn into involuntary bankruptcy.
The Bank purchased numerous leases secured by small business equipment such as
copy and facsimile machines from Bennett and Aloha. The purchases total
approximately $396,000 from Bennett and $1.3 million from Aloha. Both companies
act as servicing agents to collect lease payments for the Bank. The Company has
negotiated a settlement, and the anticipated recovery is approximately 70% of
the original balance. The amount deemed to be uncollectible was $433,000 and was
charged off as discussed above. The portion of the allowance for loan losses
allocated to the above loans was approximately $61,000 at March 31, 1997 and
$166,000 at March 31, 1996, which is based on the present value of the
anticipated cash flows of these loans.
- --------------------------------------------------------------------------------
(Continued)
55
<PAGE>
CB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 3 - LOANS (Continued)
Also included in the impaired loan balance at March 31, 1997 are 65 single
family construction loans, all located in the state of Indiana, with a total
outstanding balance of $4.7 million and total unfunded commitments of $2.1
million. Eighteen of these loans, totaling $1.3 million, are outstanding to one
builder. The Company has allocated $308,000 of the allowance for loan losses to
these loans. Forty-one of these loans totaling $2.4 million are outstanding to
two affiliated companies, one of which is in bankruptcy. The Company has
allocated $125,000 of the allowance for loan losses to these loans. The
remaining 6 loans totaling $1.2 million are with three separate builders and the
Company has allocated $116,000 of the allowance for loan losses to these loans.
The Company continues to monitor the remaining construction loan portfolio for
credit risk as a part of its loan classification procedures.
NOTE 4 - LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of these loans at
March 31 is summarized as follows:
1997 1996
---- ----
Mortgage loan portfolios serviced for the
Federal Home Loan Mortgage Corporation $ 1,265,900 $ 1,483,584
============= ==============
Custodial escrow balances maintained in connection with the foregoing loan
servicing were approximately $30,000 and $35,000 at March 31, 1997 and 1996.
NOTE 5 - PREMISES AND EQUIPMENT, NET
Premises and equipment are stated at cost, less accumulated depreciation, and
consist of the following at March 31:
1997 1996
---- ----
Land and land improvements $ 388,485 $ 378,897
Buildings 3,654,467 3,065,759
Furniture, fixtures, and equipment 1,501,995 1,376,963
Construction in progress 25,000 20,022
----------- -----------
5,569,947 4,841,641
Accumulated depreciation and amortization (2,649,673) (2,454,259)
----------- -----------
$ 2,920,274 $ 2,387,382
=========== ===========
- --------------------------------------------------------------------------------
(Continued)
56
<PAGE>
CB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 6 - DEPOSITS
The aggregate amount of deposits greater than $100,000 was approximately
$36,774,000 and $32,078,000 at March 31, 1997 and 1996.
At March 31, 1997, scheduled maturities of certificates of deposit are as
follows:
1998 $73,768,000
1999 8,334,000
2000 4,122,000
2001 1,917,000
2002 and thereafter 1,229,000
-----------
$89,370,000
===========
NOTE 7 - BORROWED FUNDS
Borrowed funds at March 31 are summarized as follows:
1997 1996
---- ----
Federal funds purchased $ 7,000,000 $ 7,000,000
Advances from the Federal Home Loan Bank 42,500,000 38,000,000
Line of credit with Federal Home Loan Bank 3,783,553 124,355
----------- -----------
$53,283,553 $45,124,355
=========== ===========
Fixed rate and variable rate advances from the Federal Home Loan Bank at March
31, 1997 amount to $2 million and $40.5 million.
Advances from the Federal Home Loan Bank consist of the following:
------------------March 31, 1997----------------------
Weighted Average
Maturity Interest Rate Amount
-------- ------------- ------
1998 5.85% $41,500,000
1999 5.67% 1,000,000
-----------
$42,500,000
===========
- --------------------------------------------------------------------------------
(Continued)
57
<PAGE>
CB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 7 - BORROWED FUNDS (Continued)
Federal funds purchased represent overnight purchase of federal funds from
American National Bank, Chicago, Illinois.
At March 31, 1997 specific mortgage loans with a carrying value of approximately
$56,180,000 and specific mortgage-backed securities with a carrying value of
approximately $9,513,000 were pledged to the Federal Home Loan Bank of
Indianapolis to secure current and future advances from the Federal Home Loan
Bank. In addition, the Bank has a line of credit approved up to $5,000,000 with
the Federal Home Loan Bank of Indianapolis. This line is secured by the specific
collateral listed above. The Bank had borrowings of $3,783,553 against this line
of credit at March 31, 1997. The line expires on October 31, 1997 and has a
variable rate of interest of 7.10% as of March 31, 1997.
The Federal Home Loan Bank of Indianapolis has issued four irrevocable direct
pay letters of credit on behalf of the Bank totaling approximately $4,049,000.
These letters of credit are secured by the same collateral listed above. The
balance of these letters of credit at March 31, 1997 is $0.
Interest expense on borrowed funds for the years ended March 31 is summarized as
follows:
1997 1996 1995
---- ---- ----
Advances from the FHLB $ 2,005,621 $ 1,501,121 $ 64,876
Other 447,995 521,284 117,683
-------------- ------------- -------------
$ 2,453,616 $ 2,022,405 $ 182,559
============== ============= =============
NOTE 8 - EMPLOYEE BENEFITS
Employee Pension Plan: The Bank is part of a multi-employer defined benefit
pension plan covering substantially all employees. The plan is administered by
the directors of the Financial Institutions Retirement Fund. There is no
separate actuarial valuation of plan benefits nor segregation of plan assets
specifically for the Bank. As of June 30, 1996, the latest actuarial valuation,
the total plan assets exceeded the actuarially determined value of total vested
benefits. There was no pension plan expense or contribution for the years ended
March 31, 1997, 1996 and 1995. The administrative cost of the plan is charged to
expense and amounted to $1,052, $4,815 and $3,294 for the years ended March 31,
1997, 1996 and 1995.
- --------------------------------------------------------------------------------
(Continued)
58
<PAGE>
CB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 8 - EMPLOYEE BENEFITS (Continued)
Deferred Compensation Plan: The Company implemented a deferred compensation plan
for its Board of Directors. Under the terms of the plan, directors may elect to
defer a portion of their fees which would be retained by the Company with
interest being credited to the participant's deferred balance. Upon retirement,
the participant would be entitled to receive the accumulated deferred balance,
paid over a specified number of years. The Company has purchased insurance
contracts on the lives of the participants in the deferred compensation plan and
has named the Bank as beneficiary. While no direct contract exists between the
deferred compensation plan and the life insurance contracts, it is management's
current intent that the proceeds from the insurance contracts will be used as a
funding source for the deferred compensation plan. The cash surrender value of
the life insurance was approximately $1,474,000 and $1,426,000 at March 31, 1997
and 1996, and is included in other assets. The income derived from the
investment in life insurance included in other income was approximately $48,000,
$75,000 and $68,000 for the years ended March 31, 1997, 1996 and 1995. At March
31, 1997 and 1996, the accrued liability for deferred fees was approximately
$241,000 and $152,000.
Supplemental Retirement Plan: The Bank maintains a supplemental retirement plan
for executive officers of the Bank for which the payment of benefits is
accelerated upon change of control of the Company. The Bank has purchased
insurance contracts on the lives of the participants in the supplemental
retirement plan and has named the Bank as beneficiary. While no direct contract
exists between the supplemental retirement plan and the life insurance
contracts, it is management's current intent that the proceeds from the
insurance contracts will be used as a funding source for the supplemental
retirement plan. For the years ended March 31, 1996 and 1995 the Bank recorded a
liability equal to the projected present value of the payment due at retirement
based on the projected remaining years of service using the projected unit
credit method. During the year ending March 31, 1997 the Bank funded the
liability to a secular trust. This trust is not under the Bank's control. The
cash surrender value of the life insurance was approximately $995,000 and
$938,000 at March 31, 1997 and 1996, and is included in other assets. The income
derived from the investment in life insurance included in other income was
approximately $57,000, $59,000 and $52,000 for the years ended March 31, 1997,
1996 and 1995. The cost of the plan charged to expense was approximately
$39,000, $44,000 and $40,000 for the years ended March 31, 1997, 1996 and 1995,
respectively. The accrued liability to the Bank was approximately $0 and
$203,000 at March 31, 1997 and 1996.
Stock Option Plan for Outside Directors: The Board of Directors of the Company
has adopted the CB Bancorp, Inc. 1992 Stock Option Plan for outside directors
(the "Directors' Plan") of the Company. Options for the purchase of shares of
common stock are authorized under the Directors' Plan. The option exercise price
must be at least 100% of the fair market value of the common stock on the date
of the grant, and the option term cannot exceed 10 years. Eligible directors may
exercise 100% of the options awarded to them.
- --------------------------------------------------------------------------------
(Continued)
59
<PAGE>
CB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 8 - EMPLOYEE BENEFITS (Continued)
Activity in the Directors' Plan for years ended March 31 is summarized as
follows:
Number of Options
Option -----------------
Exercise Price 1997 1996
-------------- ---- ----
Balance at beginning of year $ 5.00 19,264 26,896
Options exercised 5.00 - (7,632)
-------- --------- --------
Balance at end of year $ 5.00 19,264 19,264
======== ========= ========
Recognition and Retention Plans (RRP): The Company has established the
Recognition and Retention Plans as a method of providing directors, officers and
other key employees of the Bank with a proprietary interest in the Company in a
manner designed to encourage such persons to remain with the Bank. The terms of
each RRP will be identical, only the participants and the number of shares
awarded to each participant vary. Eligible directors, officers and other key
employees of the Company will earn (i.e., become vested in) shares of common
stock covered by the award at a rate of 20% per year. The Bank contributed funds
to the RRP to enable the Plans to acquire in the aggregate 38,528 shares of
common stock. An expense of $16,475, $26,968 and $41,999 was recorded for these
Plans for the years ended March 31, 1997, 1996 and 1995.
Employee Stock Ownership Plan (ESOP): The Bank maintains an ESOP for eligible
employees. Employees with 1,000 hours of employment with the Bank and who have
attained age 21 are eligible to participate. The ESOP borrowed funds from the
Company to purchase 89,896 shares of common stock. Collateral for the loan is
the common stock purchased by the ESOP. The loan is being repaid principally
from the Bank's discretionary contributions to the ESOP over a seven year period
ending in 1999, at a variable interest rate. The current interest rate for the
loan is 9.00%. Shares purchased by the ESOP will be held in a suspense account
for allocation among participants as the loan is repaid.
Contributions to the ESOP and shares released from the suspense account in an
amount proportional to the repayment of the ESOP loan are allocated among ESOP
participants on the basis of compensation in the year of allocation. Benefits
generally become 100% vested after five years of credited service. Prior to the
completion of five years of credited service, a participant who terminates
employment for reasons other than death, retirement (or early retirement), or
disability will not receive any benefit under the ESOP. Forfeitures will be
reallocated among remaining participating employees, in the same proportion as
contributions. Benefits may be payable in the form of stock or cash upon
termination of employment. The Bank's contributions to the ESOP are not fixed,
so benefits payable under the ESOP cannot be estimated.
- --------------------------------------------------------------------------------
(Continued)
60
<PAGE>
CB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 8 - EMPLOYEE BENEFITS (Continued)
The ESOP compensation expense was $64,211 for each of the years ended March 31,
1997, 1996 and 1995. The ESOP shares as of March 31 were as follows:
1997 1996
---- ----
Allocated shares 51,476 37,604
Shares released for allocation - 684
Unreleased shares 38,420 51,608
---------- ----------
89,896 89,896
========== ==========
On April 1, 1994, the Bank adopted AICPA's Statement of Position 93-6 ("SOP
93-6") Employers' Accounting for Employee Stock Ownership Plans. SOP 93-6
relates only to shares purchased by the ESOP after December 31, 1992. SOP 93-6
requires that the employer record compensation expense in an amount equal to the
fair value of shares committed to be released to employees from the ESOP, and
these shares become outstanding for earnings per share computations. Dividends
on allocated ESOP shares are recorded as a reduction of retained earnings;
dividends on unallocated shares are recorded as a reduction of debt and accrued
interest. SOP 93-6 did not affect the Bank's recognition of compensation expense
as all shares currently held by the Bank's ESOP were purchased prior to December
31, 1992. Therefore, for the shares currently held by the ESOP, the Bank will
continue to recognize compensation expense equal to the amount of cash
contributed to the ESOP. All shares held by the ESOP are considered outstanding
for earnings per share computations, and all dividends on ESOP shares are
recorded as a reduction of retained earnings.
Stock Option Plan: The Board of Directors of the Company adopted the CB Bancorp,
Inc. 1992 Incentive Stock Option Plan (the "Option Plan"). Options for the
purchase of shares of common stock are authorized under the Option Plan.
Officers and employees of the Company and its subsidiary are eligible to
participate in the Option Plan. The option exercise price must be at least 100%
of the fair market value of the common stock on the date of the grant, and the
option term cannot exceed 10 years. Eligible officers and employees of the
Company can exercise options awarded to them at a rate of 20% per year.
- --------------------------------------------------------------------------------
(Continued)
61
<PAGE>
CB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 8 - EMPLOYEE BENEFITS (Continued)
Activity in the Option Plan for years ended March 31 is summarized as follows:
Number of Options
Range of Option ----------------------
Exercise Price 1997 1996
-------------- ---- ----
Balance at beginning of year $5.00 - $8.50 80,473 86,424
Options exercised $5.00 (1,644) (5,951)
Options forfeited $5.00 (3,210) -
--------- --------
Balance at end of year $5.00 - $8.50 75,619 80,473
========= ========
Outside Directors' Consultation and Retirement Plan: The Board of Directors
adopted the Outside Directors' Consultation and Retirement Plan (the "Directors'
Consultation Plan"). The purpose of the Directors' Consultation Plan is to
provide possible retirement benefits to directors who are not officers or
employees of the Company to ensure that the Company will have their continued
service and assistance, if annually contracted for by the Board of Directors in
the conduct of the Company's business in the future. Effective April 1, 1996,
the Board of Directors of the Bank approved the Outside Directors' Emeritus Plan
(the "Directors' Emeritus Plan") to replace the Outside Directors' Consultation
and Retirement Plan. The purpose of the Directors' Emeritus Plan is to ensure
that the Bank may, if the Board so desires, have the continued service and
assistance of directors who are not officers or employees of the Bank in the
conduct of the Bank's business in the future. The Directors' Emeritus Plan
provides that a participant will be eligible, upon termination due to
retirement, resignation, discharge, death, disability or otherwise, to receive
an amount equal to the most recently received monthly board fee paid to the
outside director prior to his termination for a period of 48 months. Directors
eligible to participate in the Directors' Emeritus Plan consist of directors who
are not active officers or employees of the Bank, who have served as a director
for at least three consecutive years and have attained the age of 55. However,
an outside director with three years of continuous service whose termination is
due to retirement and is prior to his attaining age 55 will become eligible to
receive benefits under the Directors' Emeritus Plan when he reaches age 55. In
addition, if an outside director with three years of continuous service becomes
disabled or dies prior to reaching age 55 or prior to his electing director
emeritus status, he or his beneficiary shall receive benefits under the
Directors' Emeritus Plan. The resulting liability from the Directors' Emeritus
Plan approximates the liability accrued under the Directors' Consultation Plan.
An expense of approximately $33,000, $37,000 and $80,000 was recorded for these
plans for the years ended March 31, 1997, 1996 and 1995. The resulting liability
to the Company was approximately $244,000 and $211,000 at March 31, 1997 and
1996.
- --------------------------------------------------------------------------------
(Continued)
62
<PAGE>
CB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 8 - EMPLOYEE BENEFITS (Continued)
During the year ending March 31, 1997, the Company purchased insurance contracts
on the lives of the participants in the Directors' Emeritus Plan and has named
the Bank as beneficiary. While no direct contract exists between the Directors'
Emeritus Plan and the life insurance contracts, it is management's current
intent that the proceeds from the insurance contracts will be used as a funding
source for the Directors' Emeritus Plan. The cash surrender value of the life
insurance was approximately $250,000 at March 31, 1997, and is included in other
assets. There was no income derived from the investment in life insurance for
the year ending March 31, 1997.
NOTE 9 - INCOME TAXES
The Company files consolidated income tax returns. Prior to April 1, 1996, if
certain conditions were met in determining taxable income, the Bank was allowed
a special bad debt deduction based on a percentage of taxable income (previously
8%) or on specified experience formulas. The Bank used the
percentage-of-taxable-income method for the tax years ended March 31, 1996 and
1995. Tax legislation passed in August 1996 now requires the Company to deduct
bad debts for tax purposes based on actual loss experience and recapture the
excess bad debt reserve accumulated. The related amount of deferred tax
liability which must be recaptured is approximately $270,000 and is payable over
a six year period beginning no later than 1998.
Income tax expense for the years ended March 31 is summarized as follows:
1997 1996 1995
---- ---- ----
Federal
Current $ 977,293 $ 1,218,694 $ 754,847
Deferred (92,946) (146,818) 41
--------------- --------------- -------------
884,347 1,071,876 754,888
--------------- --------------- -------------
State
Current 302,253 363,345 236,603
Deferred (5,287) (55,292) (21,217)
--------------- --------------- -------------
296,966 308,053 215,386
--------------- --------------- -------------
$ 1,181,313 $ 1,379,929 $ 970,274
=============== =============== =============
- --------------------------------------------------------------------------------
(Continued)
63
<PAGE>
CB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 9 - INCOME TAXES (Continued)
Total income tax expense differed from the amounts computed by applying the
federal income tax rate of 34% in all periods presented to income before income
taxes as a result of the following for the years ended March 31:
1997 1996 1995
---- ---- ----
Income taxes at statutory rate $1,187,591 $1,304,967 $894,377
Tax effect of:
Non-taxable income (6,570) (8,722) (10,828)
Increase in cash surrender value of
life insurance (35,846) (45,656) (40,798)
State tax, net of federal income tax
effect 195,998 203,315 142,155
Tax credits (160,047) (70,000) -
Other items, net 187 (3,975) (14,632)
---------- ---------- --------
$1,181,313 $1,379,929 $970,274
========= ========== ========
The components of the net deferred tax asset recorded in the consolidated
balance sheets as of March 31 are as follows:
1997 1996
---- ----
Deferred tax assets
Accumulated depreciation $ 48,574 $ 41,359
Bad debts 446,952 265,804
Deferred compensation - 80,384
Deferred loan fees 124,397 147,439
Other 40,321 4,130
------------- -------------
660,244 539,116
Deferred tax liabilities
FHLB stock dividend (25,865) (25,865)
Affordable housing partnership (88,413) (48,745)
Other (39,737) (33,659)
------------- -------------
(154,015) (108,269)
Valuation allowance - -
------------- -------------
$ 506,229 $ 430,847
============= =============
- --------------------------------------------------------------------------------
(Continued)
64
<PAGE>
CB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 9 - INCOME TAXES (Continued)
Shareholders' equity at March 31, 1997 includes approximately $1,308,000 for
which no deferred federal income tax liability has been recognized. This amount
represents an allocation of income to bad debt deductions for tax purposes only.
Reduction of amounts so allocated for purposes other than tax bad debt losses or
adjustments arising from carry back of net operating losses would create income
for tax purposes only, which would be subject to the then-current corporate
income tax rate. The unrecorded deferred income tax liability on the above
amount was approximately $445,000 at March 31, 1997.
NOTE 10 - REGULATORY MATTERS
The Bank is subject to regulatory capital requirements administered by federal
regulatory agencies. Capital adequacy guidelines and prompt corrective action
regulations involve quantitative measures of assets, liabilities, and certain
off-balance-sheet items calculated under regulatory accounting practices.
Capital amounts and classifications are also subject to qualitative judgments by
regulators about components, risk weightings, and other factors, and the
regulators can lower classifications in certain cases. Failure to meet various
capital requirements can initiate regulatory action that could have a direct
material effect on the financial statements.
The prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If only adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required. The minimum
requirements are:
Capital to Risk - Tier 1 Capital To
Weighted Assets Adjusted
Total Tier 1 Total Assets
----- ------ ------------
Well capitalized 10% 6% 5%
Adequately capitalized 8% 4% 3%
Under capitalized 6% 3% 3%
- --------------------------------------------------------------------------------
(Continued)
65
<PAGE>
CB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 10 - REGULATORY MATTERS (Continued)
At March 31, the Bank's actual capital levels (in millions) and minimum required
levels were:
<TABLE>
<CAPTION>
Minimum Required
To Be Well
Minimum Required Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C>
1997
Total capital (to risk weighted assets) $ 20.0 14.8% $ 10.8 8.0% $ 13.5 10.0%
Tier 1 (core) capital (to risk weighted
assets) $ 18.4 13.6% $ 5.4 4.0% $ 8.1 6.0%
Tier 1 (core) capital (to adjusted total
assets) $ 18.4 8.1% $ 6.8 3.0% $ 11.4 5.0%
Tangible capital (to adjusted total
assets) $ 18.4 8.1% $ 3.4 1.5% N/A N/A
1996
Total capital (to risk weighted assets) $ 17.2 15.2% $ 9.0 8.0% $ 11.3 10.0%
Tier 1 (core) capital (to risk weighted
assets) $ 16.0 14.2% $ 4.5 4.0% $ 6.8 6.0%
Tier 1 (core) capital (to adjusted total
assets) $ 16.0 7.8% $ 6.1 3.0% $ 10.2 5.0%
Tangible capital (to adjusted total
assets) $ 16.0 7.8% $ 3.1 1.5% N/A N/A
</TABLE>
At March 31, 1997 and 1996 the Bank was categorized as well capitalized.
Regulations of the Office of Thrift Supervision limit the amount of dividends
and other capital distributions that may be paid by a savings institution
without prior approval of the Office of Thrift Supervision. This regulatory
restriction is based on a three-tiered system with the greatest flexibility
being afforded to well-capitalized (Tier 1) institutions. The Bank is currently
a Tier 1 institution. Accordingly, the Bank can make, without prior regulatory
approval, distributions during a calendar year up to 100% of its net income to
date during the calendar year plus an amount that would reduce by one-half its
"surplus capital ratio" (the excess over its Fully Phased-in Capital
Requirements) at the beginning of the calendar year. Accordingly, at March 31,
1997 approximately $4.8 million of the Bank's retained earnings is potentially
available for distribution.
- --------------------------------------------------------------------------------
(Continued)
66
<PAGE>
CB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 11 - OTHER NONINTEREST INCOME AND EXPENSE
Other noninterest income and expense amounts for the years ended March 31 are
summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C>
Other noninterest income
Commission income $ 104,161 $ 115,426 $ 127,968
Service charges and fees 550,535 506,034 539,137
Fees related to loans purchased
under agreements to resell 689,030 369,410 163,984
Late charges 28,530 21,510 23,126
Other 121,347 164,162 140,869
------------- ------------- -------------
$ 1,493,603 $ 1,176,542 $ 995,084
============= ============= =============
Other noninterest expense
Advertising and promotion $ 125,139 $ 97,203 $ 93,048
Data processing 244,790 247,017 243,144
Insurance 20,132 20,348 23,500
Professional fees 368,008 174,265 159,707
Telephone, postage, and supplies 262,736 204,903 183,116
Employee expenses 293,671 195,216 145,113
Other 548,609 332,664 227,957
------------- ------------- -------------
$ 1,863,085 $ 1,271,616 $ 1,075,585
============= ============= =============
</TABLE>
NOTE 12 - COMMITMENTS AND CONTINGENCIES
As of March 1, 1996, the Company leased a branch office in Merrillville,
Indiana. Rent expense for the years ended March 31, 1997 and 1996 was
approximately $35,000 and $3,000. In accordance with the terms of the lease, the
Company provides liability insurance and pays repairs and maintenance costs. As
of March 31, 1997, the future annual rental commitments under non-cancelable
leases for four years total approximately $148,000, which includes $35,000 in
1998, $36,000 in 1999, $38,000 in 2000 and $39,000 in 2001.
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet financing needs of its customers. These
financial instruments include commitments to make loans and unused lines of
credit. The Company's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to make loans and
unused lines of credit is represented by the contractual amount of those
instruments. The Company follows the same credit policy to make such commitments
as it follows for those loans recorded in the financial statements.
- --------------------------------------------------------------------------------
(Continued)
67
<PAGE>
CB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 12 - COMMITMENTS AND CONTINGENCIES (Continued)
At March 31, the Company had outstanding commitments as follows:
1997 1996
---- ----
Fixed rate loans $ 210,000 $ 137,000
Fixed rate unused lines of credit 626,000 107,000
Variable rate unused lines of credit 1,950,000 1,188,000
Unused letters of credit 4,149,000 4,074,000
Undisbursed construction loans in
repurchase program (variable rate) 12,419,000 12,412,000
Since certain commitments to make loans, lines of credit and commitments to fund
loans in process expire without being used, the amounts do not necessarily
represent future cash commitments. In addition, 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.
The Bank is required to have approximately $1,313,000 and $1,407,000 of cash on
hand or on deposit with the Federal Reserve Bank of Chicago to meet regulatory
reserve requirements at March 31, 1997 and 1996.
The Company is involved in various legal actions arising in the ordinary course
of business. In the opinion of management, the outcome of these matters will not
have material effect on the Company's consolidated financial condition or
results of operations.
Community Financial has a 99% limited partner interest in Pedcor
Investments-1994-XX, L.P. which was formed for the construction, ownership, and
management of an 80 unit apartment project located in LaPorte County, Indiana.
Financing consists of a $2,550,000 first mortgage loan funded with tax exempt
bonds. The Bank is the lead lender in the debt financing arrangement and has
guaranteed through letters of credit $1,450,000 of the debt financing, which
represents the Bank's share of the mortgage loan funded with tax exempt bonds.
The remaining portion of the debt financing with tax exempt bonds is guaranteed
by participating lenders through letters of credit in amounts proportional to
their share of the mortgage loan. The Bank and other lending institutions have
as their security a first mortgage lien and an assignment of rents and leases on
the apartment complex. As of March 31, 1997, Community Financial has invested
$1,566,215, net of recording equity in the operating loss of $182,616 for the
fiscal year ended March 31, 1997, in the limited partnership. Community
Financial contributed $298,831 in cash to the partnership, including $70,258
contributed during the fiscal year ended March 31, 1997, while the remaining
$1,450,000 was funded by short-term tax-exempt notes backed by a letter of
credit issued by the Bank. At March 31, 1997, the obligation due to limited
partnership was $1,467,877 which represents the amount of principal and accrued
interest guaranteed through letters of credit. Terms of the partnership
agreement allocate 99% of the eligible tax credits to the limited partner. For
the years ended March 31, 1997 and 1996, the limited partner received
approximately $160,000 and $70,000 in tax credits from the limited partnership.
- --------------------------------------------------------------------------------
(Continued)
68
<PAGE>
CB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 12 - COMMITMENTS AND CONTINGENCIES (Continued)
Under employment agreements with certain executive officers, certain events
leading to separation from the Company or the Bank could result in cash payments
totaling approximately $723,000 as of March 31, 1997. The agreements also
include provisions to continue to provide life, health and disability insurance
coverage for a period of two to three years.
NOTE 13 - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
The Company grants real estate, commercial and consumer loans, including home
improvement and other consumer loans, primarily in LaPorte and Porter counties
of Indiana. Substantially all loans are secured by consumer assets and real
estate. Loans secured by real estate mortgages make up approximately 89% of the
loan portfolio at March 31, 1997 and are primarily secured by residential
mortgages. Loans purchased under agreements to resell are all residential
mortgage loans secured by one-to-four family residences located throughout the
United States.
NOTE 14 - RELATED PARTY TRANSACTIONS
Certain directors and executive officers of the Company are loan customers of
the Company. A summary of the aggregate amount of related party loan activity
for those directors, executive officers and their affiliates who have loans
aggregating $60,000 or more are as follows:
Balance - April 1, 1996 $ 361,113
New loans 20,000
Repayments (15,566)
-------------
Balance - March 31, 1997 $ 365,547
=============
- --------------------------------------------------------------------------------
(Continued)
69
<PAGE>
CB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 15 - PARENT COMPANY FINANCIAL STATEMENTS
Presented below are the condensed financial statements for the Parent Company,
CB Bancorp, Inc.
CONDENSED BALANCE SHEETS
March 31, 1997 and 1996
1997 1996
---- ----
ASSETS
Cash and cash equivalents $ 1,781,930 $ 2,779,683
Securities available for sale 216,907 165,682
Investment in subsidiary 18,384,812 16,024,973
Loans purchased under agreements to resell 500,000 -
Other assets 54,605 -
--------------- ----------------
$ 20,938,254 $ 18,970,338
=============== ================
LIABILITIES $ 95,321 $ 138,154
SHAREHOLDERS' EQUITY 20,842,933 18,832,184
--------------- ----------------
$ 20,938,254 $ 18,970,338
=============== ================
CONDENSED STATEMENTS OF INCOME
Years ended March 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C>
Income
Interest income $ 86,483 $ 109,375 $ 91,677
Dividends from the Bank - 600,000 600,000
Other income - - 1,900
------------- ------------- -------------
86,483 709,375 693,577
Expenses
Compensation 31,750 29,962 28,156
Other expenses 109,496 62,478 68,771
------------- ------------- -------------
141,246 92,440 96,927
------------- ------------- -------------
Income(loss) before income tax expense (54,763) 616,935 596,650
Income tax expense (benefit) (23,276) 7,198 (1,424)
------------- ------------- -------------
Income(loss) before equity in income of Bank (31,487) 609,737 598,074
Equity in income of Bank 2,343,088 1,848,473 1,062,173
------------- ------------- -------------
Net income $ 2,311,601 $ 2,458,210 $ 1,660,247
============= ============= =============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
70
<PAGE>
CB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 15 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
Years ended March 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C>
Cash flows from operating activities
Net income $ 2,311,601 $ 2,458,210 $ 1,660,247
Adjustments to reconcile net income to net
cash from operating activities
Loans purchased under agreements to
resell (500,000) - (4,568,273)
Sale of loans purchased under agreements
to resell - - 5,123,647
Equity in income of Bank (2,343,088) (1,848,473) (1,062,173)
Change in other assets (8,293) 56,517 76,217
Change in other liabilities (42,833) 135,572 35,766
------------- ------------- -------------
Net cash from operating activities (582,613) 801,826 1,265,431
Cash flows from investing activities
Change in interest-earning deposits in
financial institutions - 390,763 (390,763)
Purchase of securities available for sale - (35,386) (125,466)
------------- ------------- -------------
Net cash from investing activities - 355,377 (516,229)
Cash flows from financing activities
Purchase of treasury stock (487,572) (557,427) (243,875)
Issuance of shares of treasury stock 8,221 67,916 54,580
Contribution to fund ESOP 64,211 64,211 64,211
------------- ------------- -------------
Net cash from financing activities (415,140) (425,300) (125,084)
------------- ------------- -------------
Net change in cash and cash equivalents (997,753) 731,903 624,118
Cash and cash equivalents at beginning of period 2,779,683 2,047,780 1,423,662
------------- ------------- -------------
Cash and cash equivalents at end of period $ 1,781,930 $ 2,779,683 $ 2,047,780
============= ============= =============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
71
<PAGE>
CB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 16 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following table shows the estimated fair values and the related carrying
amounts of the Company's financial instruments at March 31, 1997 and 1996. Items
which are not financial instruments are not included.
<TABLE>
<CAPTION>
1997 1996
----------------------------- -----------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
<S> <C>
Financial Assets
Cash and equivalents $ 14,729,000 $ 14,729,000 $ 6,063,000 $ 6,063,000
Securities available for sale 672,000 672,000 621,000 621,000
Securities held to maturity 14,299,000 14,348,000 15,867,000 15,926,000
Federal Home Loan Bank stock 2,752,000 2,752,000 2,702,000 2,702,000
Loans, net of allowance for loan
losses 183,783,000 184,245,000 171,301,000 171,967,000
Mortgage loans held for sale 914,000 914,000 513,000 513,000
Accrued interest receivable 1,219,000 1,219,000 1,183,000 1,183,000
Cash surrender value of life
insurance 2,719,000 2,719,000 2,364,000 2,364,000
Financial Liabilities
Demand and savings deposits (60,439,000) (60,439,000) (69,604,000) (69,604,000)
Time deposits (89,370,000) (89,188,000) (68,657,000) (68,804,000)
Borrowed funds (53,284,000) (53,270,000) (45,124,000) (45,114,000)
</TABLE>
For purposes of the above disclosures of estimated fair value, the following
assumptions were used as of March 31, 1997 and 1996. The estimated fair value
for cash and cash equivalents, Federal Home Loan Bank stock and accrued interest
receivable is considered to approximate cost. The estimated fair value for
securities is based on quoted market values for the individual securities or for
equivalent securities. The estimated fair value for loans and mortgage loans
held for sale is based on estimates of the rate the Company would charge for
similar such loans at March 31, 1997 and 1996, applied for the same time period
until estimated payment. The estimated fair value of cash surrender value of
life insurance is based on the proceeds that would be received upon redemption
of the policies at March 31, 1997 and 1996. The estimated fair value for demand
and savings deposits is based on their carrying value. The estimated fair value
for time deposits is based on estimates of the rate the Company would pay on
such deposits at March 31, 1997 and 1996, applied for the same time period until
maturity. The estimated fair value of borrowed funds is based on estimates of
the rate the Company would be charged for similar borrowings at March 31, 1997
and 1996, applied for the same payment schedule. The estimated fair value of
accrued interest payable and other financial instruments and off-balance-sheet
loan commitments approximate cost and are not considered significant for this
presentation.
While these estimates of fair value are based on management's judgment of the
most appropriate factors, there is no assurance that were the Company to have
disposed of such items at March 31, 1997 and 1996, the estimated fair values
would necessarily have been achieved at these dates, since market values may
differ depending on various circumstances. The estimated fair values at March
31, 1997 and 1996 should not necessarily be considered to apply at subsequent
dates.
- --------------------------------------------------------------------------------
(Continued)
72
<PAGE>
CB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 16 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
In addition, other assets and liabilities of the Company that are not defined as
financial instruments are not included in the above disclosures, such as
property and equipment. Also, non-financial instruments typically not recognized
in financial statements nevertheless may have value but are not included in the
above disclosures. These include, among other items, the estimated earnings
power of core deposit accounts, the earnings potential of loan servicing rights,
the trained work force, customer goodwill, and similar items.
NOTE 17 - SAIF DEPOSIT INSURANCE PREMIUM
The deposits of the Bank are insured by the Savings Association Insurance Fund
("SAIF"). A recapitalization plan signed into law on September 30, 1996 provided
for a one-time assessment of 65.7 basis points applied to all SAIF deposits as
of March 31, 1995. Based on the Bank's deposits as of this date, a one-time
assessment of approximately $723,000 was paid and recorded as SAIF deposit
insurance premium expense for the fiscal year ended March 31, 1997.
NOTE 18 - IMPACT OF NEW ACCOUNTING STANDARDS
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities," was issued by the Financial Accounting Standards
Board in 1996. It revises the accounting for transfers of financial assets, such
as loans and securities, and for distinguishing between sales and secured
borrowings. It is effective for some transactions in 1997 and others in 1998.
The anticipated effect on the consolidated financial statements has not yet been
determined.
Also, in March 1997, the accounting requirements for calculating earnings per
share were revised. Basic earnings per share for the quarter ending December 31,
1997 and later will be calculated solely on average common shares outstanding.
Diluted earnings per share will reflect the potential dilution of stock options
and other common stock equivalents. All prior calculations will be restated to
be compatible to the new methods. As the Company has significant dilution from
stock options, the new calculation methods will increase future basic earnings
per share over what otherwise would have been reported, while there will be
little effect on diluted earnings per share.
NOTE 19 - PROPOSED MERGER
Pursuant to the Agreement and Plan of Merger dated March 1, 1997 between the
Company and Pinnacle Financial Services, Inc. ("Pinnacle"), a Michigan
Corporation headquartered in St. Joseph, Michigan, the Company is to merge with
and into Pinnacle. The transaction is subject to the approval of the Company's
and Pinnacle's shareholders and various regulatory agencies.
- --------------------------------------------------------------------------------
73
<PAGE>
CB BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 19 - PROPOSED MERGER (Continued)
The terms of the agreement provide for a purchase price of $35.00 per CB
Bancorp, Inc. ("Company") share, payable in Pinnacle common stock. If Pinnacle's
average stock price exceeds $29.00, the Company's shareholders will receive
1.20690 Pinnacle shares per Company share. If Pinnacle's average stock price is
less than $23.00, the Company's shareholders will receive 1.52174 Pinnacle
shares per Company share. The agreement also provides that each option granted
by the Company to purchase shares of the Company's stock (including any options
that have been awarded, but have not yet been vested) which is outstanding and
unexercised immediately prior thereto shall be converted automatically into the
right to receive shares of Pinnacle common stock in an amount determined by
dividing the difference between the exchange value and the exercise price of
such option by the average price. At consummation, stock held by the Company in
treasury will be canceled. The agreement also provides that the shares of
Pinnacle common stock to be received by "affiliates" of the Company in the
Merger shall not be sold, pledged, transferred or, otherwise, disposed of for a
period commencing thirty days prior to the Merger and ending at the time of
publication of financial results covering at least thirty days of combined
operations of Pinnacle and the Company. The Agreement also limits the Company
from entering into agreements or operating in a manner other than in the
ordinary course of business.
- --------------------------------------------------------------------------------
74
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
- --------------------------------------------------------------------------------
Financial Disclosure
--------------------
None.
Part III
Item 9. Directors and Executive Officers; Promoters and Control Persons;
- --------------------------------------------------------------------------------
Compliance with Section 16 (a) of the Exchange Act
--------------------------------------------------
CERTAIN INFORMATION REGARDING CB
Directors of CB
The Board of Directors of CB presently consists of seven directors.
Each of the seven members of the Board of Directors of CB also presently serves
as a director of CB. Directors are elected for staggered terms of three years
each, with a term of office of only one of the three classes of directors
expiring each year. Directors serve until their successors are elected and
qualified.
The following table sets forth, as of the date of this Joint Proxy
Statement/Prospectus, the names of the directors of CB, their ages, a brief
description of their recent business experience, including present occupations
and employment, certain directorships held by each, the year in which each
became a director of Community Bank and the year in which their terms (or, in
the case of nominees, their proposed terms) as director of CB expire and the
amount of CB Common Stock and the percent thereof beneficially owned by each and
all directors and executive officers as a group.
<TABLE>
<CAPTION>
Shares of Ownership
Expiration CB Common Stock as
Name and Principal Occupation at Present Director of Term As Beneficially Percent
and for the Past Five Years Age Since(1) Director Owned(2)(3) of Class
- --------------------------- --- -------- -------- ----------- --------
<S> <C>
Joseph F. Heffernan 61 1989 1999 60,587(4)(5)(6) 5.14%
Chairman of the Board, President and CEO of CB; served
as President of Community Bank since 1989.
Robert V. Ott 69 1973 1999 12,408(7) 1.07
Realtor and Real Estate Appraiser and Owner of Ott
Realty and Appraisal Co., LaPorte, Indiana
James J. Broad 57 1992 1999 10,300 *
President and Chairman of the Board of Imperial Steel
Tank Company, Chicago, Illinois. Part Owner of Vessel
Services, LLC, Highland, Indiana and Pal's Ford-Mercury,
Inc., Knox, Indiana.
Marvin L. Kominiarek, Jr. 59 1971 1998 27,921(4)(5)(6) 2.38%
Divisional President-Financial Services, Incorporated.
Prior to joining Financial Services, Incorporated,
Mr. Kominiarek was part owner of Kominiarek and Greing
Insurance, an insurance brokerage firm in Michigan City,
Indiana.
Jon R. Bausback 57 1979 1998 20,040(7)(8) 1.71
Optometrist practicing in Michigan City, Indiana.
Ken O. Fryar 72 1969 1997 12,081(7) 1.04
Architect and owner of Ken Fryar Associates,
an architectural firm and Ken Fryar Builders, Inc.,
a construction firm in Michigan City, Indiana.
J. Patrick Smith 65 1974 1997 12,040(7)(8) 1.03
Attorney in private practice in LaPorte, Indiana
All Directors and executive officers as a group 207,965(9) 16.92%
(10 persons)
- ---------------------------------------------------------------
</TABLE>
75
<PAGE>
*Less than 1.0% of CB's voting stock.
(1) Includes years of service as a director of Community Bank.
(2) Each person effectively exercises sole (or shares with spouse or other
immediate family member) voting or dispositive power as to shares reported.
(3) All shares and percentage amounts reflect a two-for-one stock split
effected in the form of a stock dividend in February 1994.
(4) Includes 1,926 and 963 shares awarded to Messrs. Heffernan and Kominiarek,
respectively, under the Community Bank, A Federal Savings Bank Recognition
and Retention Plans and Trusts for Officers and Employees ("MRPs"), which
vest at an annual rate of 20% of the original number of shares awarded
commencing on December 23, 1993, as to which voting may be directed by
Messrs. Heffernan and Kominiarek.
(5) Includes 16,438, 8,733 and 2,568 shares, which may be acquired through the
exercise of stock options granted to Messrs Heffernan and Kominiarek and to
Mr. Kominiarek's wife, respectively, under the CB Bancorp, Inc. 1992
Incentive Stock Option Plan ("CB Option Plan"), which are currently
exercisable. Does not include 4,110 and 2,183 and 642 shares awarded to
Messrs Heffernan and Kominiarek and to Mr Kominiarek's wife, respectively,
under the CB Option Plan, which are not presently exercisable and vest at
an annual rate of 20% of the original amount granted beginning December 23,
1993.
(6) Includes 6,919 and 1,368 shares allocated under the CB ESOP to the accounts
of Messrs. Heffernan and Kominiarek, respectively.
(7) Includes 481 shares granted to each outside director of CB with a minimum
of ten years of service as a director of Community Bank under the Community
Bank, A Federal Savings Bank Recognition and Retention Plans and Trusts for
Outside Directors ("DRPs") which vest at an annual rate of 20% of the
original number granted commencing on the date of grant (December 23,
1992), as to which each participant presently has voting power.
(8) Includes 9,632 shares subject to options granted to Messrs. Smith and
Bausback under the CB Bancorp, Inc. 1992 Stock Option Plan for Outside
Directors ("CB Directors' Option Plan"), which are currently exercisable.
(9) Includes 8,665 shares (including 4,813 shares set forth in footnotes 4 and
7 above) subject to Awards under the MRPs and DRPs and as to which voting
may be directed; 67,294 shares subject to options under the CB Option Plan
and CB Directors Option Plan which are currently exercisable (including
47,003 shares set forth in footnotes 5 and 8 above); and 19,421 shares held
for executive officers in the aggregate under the CB ESOP.
76
<PAGE>
Compliance with Section 16 (a)
- ------------------------------
Section 16 (a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than 10% of a registered class of
the Company's equity securities, to file with the SEC reports of ownership and
reports of changes in ownership of common stock and other equity securities of
the Company. Officers, directors and greater than 10% stockholders are required
by SEC regulation to furnish the Company with copies of all Section 16 (a) forms
they file.
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and written representations that no other
reports were required during the fiscal year ended March 31, 1997 all Section 16
(a) filing requirements applicable to its officers, directors and greater than
10 percent beneficial owners were complied with.
Item 10. Executive Compensation.
- ---------------------------------
Director Compensation
Each Director of the Company receives $250 per quarter in Fees. Each
Director of the Bank receives $1,000 a month in fees and each Director who is
also a member of the Bank's executive committee receives an additional $375 per
month.
The Company has a Deferred Compensation Plan for its Board of Directors. Under
the terms of the plan, Directors may elect to defer a portion of their fees
which is retained by the Company with interest being credited to the
participant's deferred balance. Interest is credited at a rate equal to a three
year moving average of the Company's return on equity ratio. Upon retirement,
the participant will be entitled to receive the accumulated deferred balance
over a specified number of years.
The Company also has a Director Emeritus Plan for its outside Directors. Under
this plan, each outside Director, upon retirement will be eligible to receive
Directors fees for a period of four years commencing at the date of retirement.
Executive Compensation
Summary Compensation Table. The following table shows, for the fiscal
years ended March 31, 1997, 1996 and 1995, the cash compensation paid by
Community Bank, as well as certain other compensation paid or accrued for those
years, to the Chief Executive Officer (the "Named Executive Officer"). No other
executive officer of CB or Community Bank received an amount in salary and bonus
in excess of $100,000 in fiscal 1997. Other than certain directors' fees, CB did
not pay any cash compensation to any individual during fiscal 1997.
77
<PAGE>
<TABLE>
<CAPTION>
Long Term
Compensation
------------
Annual Compensation Awards Payouts
------------------------------------------- ------ -------
Securities
Underlying
Restricted Exercised
Other Annual Stock Options/ All LTIP Other
Name and Fiscal Salary Bonus Compensation Award(s) SARs Payouts Compensation
Principal Position Year ($)(1) ($)(2) ($)(3) ($)(4) (#)(5) ($) ($)(6)
- ------------------ ------ ------ ------ --- ------- ------ ----------- -------- ------------
<S> <C>
Joseph F. Heffernan 1997 138,850 -- -- -- -- -- 305,358
Chairman of the
Board, President and
CEO
1996 131,401 -- -- -- -- -- 33,705
1995 121,684 -- -- -- -- -- 21,669
- ------------------------------------------
</TABLE>
(1) Includes director's fees for CB and Community Bank.
(2) No bonus was paid or accrued in fiscal 1997, 1996 or 1995.
(3) For fiscal years ended March 31, 1997, 1996 and 1995, there were no (a)
perquisites over the lesser of $50,000 or 10% of the individual's total
salary and bonus for the years; (b) payments of earnings with respect to
long term incentive plans prior to settlement or maturation; (c) tax
payment reimbursements; or (d) preferential discounts on stock.
(4) The dollar value of shares awarded to Mr. Heffernan pursuant to the
Community Bank, A Federal Savings Bank Recognition and Retention Plans and
Trusts for Officers and Employees ("MRP") is based on the initial public
offering price of the common stock of 5.00 per share (as adjusted for the
2-for-1 stock split). Such awards vest in equal installments at a rate of
20% per year commencing on December 23, 1993. When shares become vested and
are distributed, the recipient will also receive an amount equal to
accumulated dividends and earnings thereon (if any). 7,704 shares granted
under the MRP to Mr. Heffernan have vested.
(5) The Company maintains the CB Option Plan for the benefit of officers and
key employees. Options granted pursuant to the CB Option Plan vest at a
rate of 20% per year beginning one year from the date of grant (December
23, 1992). At the Record Date, 16,438 options granted to Mr. Heffernan
under the CB Option Plan had vested. Options granted include limited
rights.
(6) Includes $259,672 placed in a secular trust fund established in connection
with Mr. Heffernan's Restated Supplemental Executive Retirement Agreement;
$206,315 of which represents cumulative accruals recorded in prior years
under terms of the Agreement, the remaining $53,357 represents the fiscal
1997 contributions to the trust as required by the Agreement. Also included
in this figure is the $45,586 market value of the Community Bank Employee
Stock Ownership Plan allocated to Mr. Heffernan's account therein on
December 31, 1996.
78
<PAGE>
Employment Agreements. CB and Community Bank have entered into
employment agreements with Mr. Heffernan, who is sometimes referred to herein as
the "executive." These employment agreements are intended to ensure that CB and
Community Bank will be able to maintain a stable and competent management base.
The employment agreements with CB and Community Bank provide for a three-year
term. Commencing on the first anniversary date and continuing each anniversary
date thereafter, the respective Boards of Directors may extend the agreements
for an additional year so that the remaining terms shall be three years. The
agreements provide that the executive's base salary will be reviewed annually.
In addition to the base salary, the agreements provide for, among other things,
disability pay, participation in stock benefit plans and other fringe benefits
applicable to executive personnel. The agreements provide for termination by CB
and Community Bank for cause at any time. In the event CB and Community Bank
choose to terminate the executive's employment for reasons other than for cause,
or in the event of the executive's resignation from CB and Community Bank upon
(i) a material change in the executive's functions, duties or responsibilities,
or relocation of his principal place of employment, (ii) liquidation or
dissolution of CB and Community Bank, or (iii) a breach of the agreement by CB
and Community Bank, the executive, or in the event of death, his beneficiary,
would be entitled to severance pay or liquidated damages in an amount equal to
the salary to which he would be entitled for the remaining term of the
agreement. The agreements provide that the failure to re-elect the executive to
his current offices or to nominate the executive to the board of directors shall
constitute an event of termination.
If termination as described above follows a change in control of CB and
Community Bank, the executive or, in the event of death prior to payment, his
beneficiary, would be entitled to a severance payment equal to three times his
average annual compensation over the past three years of employment with CB and
Community Bank. CB and Community Bank would also continue the executive's life,
health and disability coverage for the remaining unexpired term of the
agreements. Payments to the executive under Community Bank's agreement are
guaranteed by the Company in the event that payments or benefits are not paid by
Community Bank.
For purposes of the employment and change in control agreements and the
stock option plans described herein, a "change in control" generally means the
acquisition by any person or group of persons of 25% or more of CB's or
Community Bank's outstanding securities, a change in the incumbent boards of
directors such that incumbent members (which includes members approved by
incumbent members) cease to constitute a majority of the respective boards, or a
transaction in which Community Bank or CB is not the surviving institution.
Stock Option Plan. The Company maintains the CB Bancorp, Inc. 1992
Incentive Stock Option Plan (the "CB Option Plan"). There were no grants to the
Named Executive Officer under the Option Plan during the fiscal year ended March
31, 1997.
Restated Supplemental Executive Retirement Agreement. The Restated
Supplemental Executive Retirement Agreement entered into between Joseph
Heffernan and the Company on April 1,1996, amends and restates the amended
Supplemental Executive Retirement Agreement entered into on March 17, 1992.
Upon the establishment of the Restated Agreement, the Company's accrued
liability under the prior agreement was funded into a trust to be held for
the benefit of the executive. This trust is not under the Company's control.
The Restated Agreement provides for annual contributions to be made to the
trust until the executive reaches retirement age, upon which time the executive
will be paid an annual benefit payments of $33,838 for fifteen years.
79
<PAGE>
The following table provides certain information with respect to the
number of shares of CB Common Stock represented by outstanding stock options
held by the Named Executive Officer as of March 31, 1997. Also reported are the
values for "in-the-money" options which represent the positive spread between
the exercise price of existing stock options and the fiscal year-end price of CB
Common Stock. No options were exercised by the Named Executive Officer during
fiscal 1997.
FISCAL YEAR-END OPTION/SAR VALUES
---------------------------------
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Options/SARs at in-the-Money
Fiscal Year-End (#)(1) Options/SARs at Fiscal Year-End($)(2)
Name Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ------------------------- -------------------------
<S> <C>
Joseph F. Heffernan 16,438/4,110 $472,593/$118,163
</TABLE>
- -----------------------------------------------
(1) Based upon $ 33.75, the last quoted sales price of CB Common Stock as
reported on the NASDAQ Small-Cap Market for the fiscal year end March
31, 1997. The exercise price of the options is $5.00.
(2) Options are subject to limited rights (SARs) pursuant to which the
options, to the extent outstanding for at least six months, may be
exercised in the event of a change in control of CB or Community Bank.
Upon the exercise of limited rights, the optionee would receive cash
payments equal to the difference between the exercise price of the
related option on the date of grant and the fair market value of the
underlying shares of CB Common Stock on the date the limited rights is
exercised.
Item 11. Security Ownership of Certain Beneficial Owners and Management
- --------------------------------------------------------------------------------
Beneficial Ownership of CB Bancorp Common Stock
-----------------------------------------------
The following table sets forth information provided by the persons
indicated with respect to the beneficial ownership (as defined under applicable
rules of the Commission) of shares of CB Common Stock as of April 1, 1997 by (i)
each person known by CB who is the owner of more than 5% of the outstanding
shares of CB Common Stock, (ii) each person who is a director or an executive
officer of CB, and (iii) all persons who are directors or executive officers of
CB as a group.
<TABLE>
<CAPTION>
Name and Address Amount and Nature of
of Beneficial Owner Beneficial Ownership Percent of Class
- ------------------- -------------------- ----------------
<S> <C>
Community Bank, A Federal Savings Bank, Employee
Stock Ownership Plan and Trust 89,896(1) 7.74%
126 E. Fourth Street
Michigan City, Indiana 46360
First Manhattan Co. 93,500(2) 8.05
437 Madison Avenue
New York, New York 10022
John Hancock Advisers, Inc. 107,870(3) 9.28%
c/o John Hancock Mutual Life
Insurance Company
P.O. Box 111
Boston, MA 02117
</TABLE>
80
<PAGE>
- ---------------------
(1) The CB ESOP holds 89,896 shares, of which 51,476 shares have been
allocated to employees with the remaining shares unallocated. Directors
administer the CB ESOP as a committee (the "CB ESOP Committee"). Craig
Braje, Esq., an unaffiliated person, has been appointed as the trustee
for the CB ESOP ("CB ESOP Trustee"). The CB ESOP Trustee, subject to
his fiduciary duty, must vote all allocated shares held in the ESOP in
accordance with the instructions of the participating employees. Under
the CB ESOP, unallocated shares held in the suspense account will be
voted by the CB ESOP Trustee in a manner calculated to most accurately
reflect the instructions received from participants so long as such
vote is in accordance with the provisions of Employee Retirement Income
Security Act of 1974.
(2) Information is based on the February 5, 1997 Schedule 13G filed by
First Manhattan Co.
(3) Information is based on the February 3, 1997 Schedule 13G filed by John
Hancock Advisors, Inc.
Item 12. Certain Relationship and Related Transactions.
- --------------------------------------------------------
Indebtedness of Management
The FIRREA requires that all loans or extensions of credit to executive
officers and directors must be made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with the general public and must not involve more than the normal
risk of repayment or present other unfavorable features. In addition, loans made
to a director or executive officer in excess of the greater of $25,000 or 5% of
Community Bank's capital or surplus (up to a maximum of $500,000) must be
approved in advance by a majority of the disinterested members of the Board of
Directors. Community Bank's policy regarding loans to directors and executive
officers is in accordance with the requirements of the FIRREA. At March 31,
1997, all outstanding loans made by Community Bank to directors and executive
officers and members of their immediate families had been made in the ordinary
course of business, on substantially the same terms, including interest rates
and collateral, as those prevailing at the time for comparable transactions with
other persons and did not involve more than the normal risk of collectibility or
present other unfavorable features.
Item 13. Exhibits and Reports on Form 8-K
- ------------------------------------------
(a) The following documents are filed as a part of this report:
(1) Financial Statements: The following Consolidated Financial
Statements are filed under Item 7 hereof:
Report of Independent Auditors
Consolidated Balance Sheets as of March 31, 1997 and 1996
Consolidated Statements of Income for the years ended March 31, 1997, 1996 and
1995
81
<PAGE>
Consolidated Statements of Changes in Shareholders' Equity for the years ended
March 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended March 31, 1997, 1996
and 1995.
Notes to Consolidated Financial Statements
(2) Financial Statements: All schedules are omitted because they are
not required or applicable, or the required information is shown in the
consolidated financial statements or the notes thereto.
(3) Exhibits
(a) The following exhibits are filed as part of this report:
3.1 Certificate of incorporation *
3.2 Bylaws *
10.1 Form of Amended Employment Agreement between the Bank and Executive****
10.2 Form of Change in Control Agreement between the Company and the Bank
and Executive*
10.3 Community Bank, A Federal Savings Bank Employee Stock Ownership Plan
and Trust *
10.5 Community Bank, A Federal Savings Bank Recognition and Retention Plan
and Trust for Outside Directors **
10.6 Community Bank, A Federal Savings Bank Recognition Plan and Trust for
Officers and Employees **
10.7 Form of Employment 1992 Stock Option Plan **
10.8 Form of CB Bancorp, Inc. 1992 Stock Option Plan for Outside Directors**
10.9 Community Bank, A Federal Savings Bank Employee Retirement Plan *
10.10 Form of Community Bank, A Federal Savings Bank Outside Directors'
Consultation and Retirement Plan *
10.11 CB Bancorp, Inc. Directors' Deferred Compensation Plan ***
11.0 Statement re: Computation of per share earnings (See Note 1 of Notes to
Consolidated Financial Statements)
21.0 Subsidiary information is incorporated herein by reference to "Part I -
Subsidiary"
27.0 Financial Data Schedule
82
<PAGE>
(b) Reports on Form 8-K
Form 8-K filed on March 12, 1997 announcing merger agreement
with Pinnacle Financial Services, Inc.
- ----------------------------------------
* Incorporated herein by reference into this document from the Exhibits
to Form S-1, Registration Statement and any amendments thereto filed on
September 17, 1992, Registration No. 33-51882.
** Incorporated herein by reference into this document from the Proxy
Statement for the Annual Meeting of Shareholders held on July 28, 1993,
and filed in definitive form on June 17, 1993.
*** Incorporated into Fiscal 1994 10-KSB filed on June 27, 1994.
**** Incorporated herein by reference into this document from the Form
10-QSB filed with the SEC on February 14, 1997.
83
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CB BANCORP, INC.
By: /s/ Joseph F. Heffernan
------------------------
Joseph F. Heffernan
Chief Executive Officer
President and Director
DATED: 6/10/97
Pursuant to the requirement of the Securities and Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated.
/s/ Joseph F. Heffernan Chief Executive Officer, 6/10/97
- --------------------------- President and Director -------
Joseph F. Heffernan
/s/ Jon R. Bausback Director 6/10/97
- --------------------------- -------
Jon R. Bausback
/s/ Ken O. Fryar Director 6/10/97
- --------------------------- -------
Ken O. Fryar
/s/ Marvin Kominiarek, Jr. Director 6/10/97
- --------------------------- -------
Marvin Kominiarek, Jr.
/s/ Robert Ott Director 6/10/97
- --------------------------- -------
Robert Ott
/s/ J. Patrick Smith Director 6/10/97
- --------------------------- -------
J. Patrick Smith
/s/ James Broad Director 6/10/97
- --------------------------- -------
James Broad
/s/ Allen Jones Secretary 6/10/97
- --------------------------- -------
Allen Jones
84
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CB BANCORP, INC.
By: _____________________________
Joseph F. Heffernan
Chief Executive Officer
President and Director
DATED: 6/10/97
-------
Pursuant to the requirement of the Securities and Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated.
Chief Executive Officer,
- ------------------------ President and Director --------
Joseph F. Heffernan
Director
- ------------------------ --------
Jon Bausback
Director
- ------------------------ --------
Ken O. Fryar
Director
- ------------------------ --------
Marvin Kominiarek, Jr.
Director
- ------------------------ --------
Robert Ott
Director
- ------------------------ --------
J. Patrick Smith
Director
- ------------------------ --------
James Broad
Secretary
- ------------------------ --------
Allen Jones
85
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 4,847,106
<INT-BEARING-DEPOSITS> 9,882,031
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 672,059
<INVESTMENTS-CARRYING> 17,050,613
<INVESTMENTS-MARKET> 17,100,000
<LOANS> 186,505,132
<ALLOWANCE> 1,807,660
<TOTAL-ASSETS> 227,135,408
<DEPOSITS> 149,809,493
<SHORT-TERM> 52,283,553
<LIABILITIES-OTHER> 1,731,552
<LONG-TERM> 2,467,877
0
0
<COMMON> 5,878,370
<OTHER-SE> 14,964,563
<TOTAL-LIABILITIES-AND-EQUITY> 227,135,508
<INTEREST-LOAN> 15,124,440
<INTEREST-INVEST> 1,227,209
<INTEREST-OTHER> 48,946
<INTEREST-TOTAL> 16,400,595
<INTEREST-DEPOSIT> 5,680,771
<INTEREST-EXPENSE> 2,453,616
<INTEREST-INCOME-NET> 8,266,208
<LOAN-LOSSES> 1,191,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,345,636
<INCOME-PRETAX> 3,492,914
<INCOME-PRE-EXTRAORDINARY> 3,492,914
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,311,601
<EPS-PRIMARY> 1.86
<EPS-DILUTED> 1.85
<YIELD-ACTUAL> 4.31
<LOANS-NON> 229,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 287,000
<LOANS-PROBLEM> 5,920,000
<ALLOWANCE-OPEN> 1,346,328
<CHARGE-OFFS> 981,574
<RECOVERIES> 251,906
<ALLOWANCE-CLOSE> 1,807,660
<ALLOWANCE-DOMESTIC> 1,584,660
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 223,000
</TABLE>
