CONVERSION VALUATION APPRAISAL REPORT
Prepared for:
Clay County Savings and Loan Association
and
CCSB Financial Corp.
As Of:
August 23, 2002
Prepared By:
Keller & Company, Inc.
555 Metro Place North
Suite 524
Dublin, Ohio 43017
(614) 766-1426
KELLER & COMPANY
CONVERSION VALUATION APPRAISAL REPORT
Prepared for:
Clay County Savings and Loan Association
and
CCSB Financial Corp.
As Of:
August 23, 2002
KELLER & COMPANY, INC.
FINANCIAL INSTITUTION CONSULTANTS
555 METRO PLACE NORTH
SUITE 524
DUBLIN, OHIO 43017
(614) 766-1426
(614) 766-1459 FAX
September 11, 2002
Board of Directors
Clay County Savings and Loan Association
1178 West 152 Highway
Liberty, Missouri 64068
To the Board:
We hereby submit an independent appraisal of the pro forma market value of the
to-be-issued stock of CCSB Financial Corp. ("Corporation"), which is the newly
formed holding company of Clay County Savings and Loan Association, Liberty,
Missouri ("Clay County Savings" or the "Association"), a federally-chartered
mutual savings association. Such stock is to be issued in connection with the
Association's application to convert to a stock institution and simultaneously
form a unitary savings and loan holding company. This appraisal was prepared and
provided to the Association in accordance with the appraisal requirements and
regulations of the Office of Thrift Supervision of the United States Department
of the Treasury.
Keller & Company, Inc. is an independent, financial institution consulting firm
that serves both thrift institutions and banks. The firm is a full-service
consulting organization, as described in more detail in Exhibit A, specializing
in market studies, business and strategic plans, stock valuations, conversion
and reorganization appraisals, and fairness opinions for thrift institutions and
banks. The firm has affirmed its independence in this transaction with the
preparation of its Affidavit of Independence, a copy of which is included as
Exhibit C.
Our appraisal is based on the assumption that the data provided to us by Clay
County Savings and the material provided by the independent auditor, Michael
Trokey & Company, P.C., St. Louis, Missouri, are both accurate and complete. We
did not verify the financial statements provided to us, nor did we conduct
independent valuations of the Association's assets and liabilities. We have also
used information from other public sources, but we cannot assure the accuracy of
such material.
In the preparation of this appraisal, we held discussions with the management of
Clay County Savings, with the law firm of Luse Goreman Pomerenk & Schick, P.C.,
Washington, D.C., the Association's conversion counsel, and with Michael Trokey
& Company, P.C. Further, we viewed the Association's local economy and primary
market area.
Board of Directors
Clay County Savings and Loan Association
September 11, 2002
Page 2
This valuation must not be considered to be a recommendation as to the purchase
of stock in the Corporation, and we can provide no guarantee or assurance that
any person who purchases shares of the Corporation's stock in this
reorganization and public offering will be able to later sell such shares at a
price equivalent to the price designated in this appraisal.
Our valuation will be updated as required and will give consideration to any new
developments in the Association's operation that have an impact on operations or
financial condition. Further, we will give consideration to any changes in
general market conditions and to specific changes in the market for
publicly-traded thrift institutions. Based on the material impact of any such
changes on the pro forma market value of the Corporation as determined by this
firm, we will make necessary adjustments to the Corporation's appraised value in
such appraisal update.
It is our opinion that as of August 23, 2002, the pro forma market value or
appraised value of the Corporation is $7,400,000 at the midpoint, representing
740,000 shares at $10.00 per share. The pro forma valuation range of the
Corporation is from a minimum of $6,290,000 to a maximum of $8,510,000, with a
maximum, as adjusted, of $9,786,500, representing 629,000 shares, 740,000
shares, 851,000 shares and 978,650 shares at $10.00 per share at the minimum,
midpoint, maximum and maximum, as adjusted, respectively.
The pro forma appraised value of CCSB Financial Corp. as of August 23, 2002, is
$7,400,000 at the midpoint.
Very truly yours,
KELLER & COMPANY, INC.
TABLE OF CONTENTS
PAGE
INTRODUCTION 1
I. Description of Clay County Savings and Loan Association
General 4
Performance Overview 8
Income and Expense 10
Yields and Costs 15
Interest Rate Sensitivity 17
Lending Activities 19
Nonperforming Assets 24
Investments 26
Deposit Activities 26
Borrowings 28
Subsidiaries 28
Office Properties 28
Management 28
II. Description of Primary Market Area 30
III. Comparable Group Selection
Introduction 37
General Parameters
Merger/Acquisition 38
Mutual Holding Companies 39
Trading Exchange 40
IPO Date 40
Geographic Location 40
Asset Size 41
Balance Sheet Parameters
Introduction 42
Cash and Investments to Assets 43
Mortgage-Backed Securities to Assets 43
One- to Four-Family Loans to Assets 44
Total Net Loans to Assets 44
Total Net Loans and Mortgage-Backed Securities to Assets 45
Borrowed Funds to Assets 45
Equity to Assets 46
Performance Parameters
Introduction 46
TABLE OF CONTENTS (cont.)
PAGE
III. Comparable Group Selection (cont.)
Performance Parameters (cont.)
Return on Average Assets 47
Return on Average Equity 47
Net Interest Margin 48
Operating Expenses to Assets 48
Noninterest Income to Assets 49
Asset Quality Parameters
Introduction 49
Nonperforming Assets to Assets 49
Repossessed Assets to Assets 50
Loan Loss Reserve to Assets 50
The Comparable Group 51
IV. Analysis of Financial Performance 52
V. Market Value Adjustments
Earnings Performance 55
Market Area 59
Financial Condition 61
Dividend Payments 63
Subscription Interest 64
Liquidity of Stock 65
Management 65
Marketing of the Issue 66
VI. Valuation Methods 68
Price to Book Value Method 69
Price to Core Earnings Method 70
Price to Assets Method 71
Valuation Conclusion 73
LIST OF EXHIBITS
NUMERICAL PAGE
EXHIBITS
1 Consolidated Statements of Financial Condition -
At June 30, 2002, and September 30, 2001 74
2 Consolidated Statements of Financial Condition -
At September 30, 1997 through 2000 75
3 Consolidated Statements of Income - Nine months ended
June 30, 2001 and 2002, and
Year Ended September 30, 2001 76
4 Consolidated Statements of Income - Years ended
September 30, 1997 through 2000 77
5 Selected Financial Information 78
6 Income and Expense Trends 79
7 Normalized Earnings Trend 80
8 Performance Indicators 81
9 Volume/Rate Analysis 82
10 Yield and Cost Trends 83
11 Net Portfolio Value 84
12 Loan Portfolio Composition 85
13 Loan Maturity Schedule 86
14 Loan Originations and Purchases 87
15 Delinquent Loans 88
16 Nonperforming Assets 89
17 Classified Assets 90
18 Allowance for Loan Losses 91
19 Investment Portfolio Composition 92
20 Mix of Deposits 93
21 Certificates by Maturity 94
22 Deposit Activity 95
23 Borrowed Funds Activity 96
24 Offices of Clay County Savings and Loan Association 97
25 Management of the Association 98
26 Key Demographic Data and Trends 99
27 Key Housing Data 100
28 Major Sources of Employment 101
29 Unemployment Rates 102
30 Market Share of Deposits 103
31 National Interest Rates by Quarter 104
32 Thrift Stock Prices and Pricing Ratios 105
33 Key Financial Data and Ratios 115
34 Recently Converted Thrift Institutions 124
35 Acquisitions and Pending Acquisitions 125
LIST OF EXHIBITS (cont.)
NUMERICAL PAGE
EXHIBITS
36 Thrift Stock Prices and Pricing Ratios -
Mutual Holding Companies 126
37 Key Financial Data and Ratios -
Mutual Holding Companies 128
38 Balance Sheets Parameters -
Comparable Group Selection 130
39 Operating Performance and Asset Quality Parameters -
Comparable Group Selection 133
40 Balance Sheet Ratios -
Final Comparable Group 137
41 Operating Performance and Asset Quality Ratios
Final Comparable Group 138
42 Balance Sheet Totals - Final Comparable Group 139
43 Balance Sheet - Asset Composition
Most Recent Quarter 140
44 Balance Sheet - Liability and Equity
Most Recent Quarter 141
45 Income and Expense Comparison
Trailing Four Quarters 142
46 Income and Expense Comparison as a Percent of
Average Assets - Trailing Four Quarters 143
47 Yields, Costs and Earnings Ratios
Trailing Four Quarters 144
48 Dividends, Reserves and Supplemental Data 145
49 Valuation Analysis and Conclusions 146
50 Market Pricings and Financial Ratios - Stock Prices
Comparable Group 147
51 Pro Forma Minimum Valuation 148
52 Pro Forma Mid-Point Valuation 149
53 Pro Forma Maximum Valuation 150
54 Pro Forma Superrange Valuation 151
55 Summary of Valuation Premium or Discount 152
ALPHABETICAL EXHIBITS PAGE
A Background and Qualifications 153
B RB 20 Certification 157
C Affidavit of Independence 158
INTRODUCTION
Keller & Company, Inc. is an independent appraisal firm for financial
institutions and has prepared this Conversion Valuation Appraisal Report
("Report") to provide the pro forma market value of the to-be-issued common
stock of CCSB Financial Corp. (the "Corporation"), a Delaware corporation,
formed as a holding company to own all of the to-be-issued shares of common
stock of Clay County Savings Bank, Liberty, Missouri, which is the proposed new
name of Clay County Savings and Loan Association. As part of the mutual to stock
conversion, Clay County Savings and Loan Association will change its name to
Clay County Savings Bank. The appraisal will continue to refer to Clay County
Savings and Loan Association as "Clay County Savings" or the "Association."
The stock is to be issued in connection with the Association's
Application for Approval of Conversion from a federally chartered mutual savings
bank to a federally chartered stock savings bank. The Application is being filed
with the Office of Thrift Supervision ("OTS") of the Department of the Treasury
and the Securities and Exchange Commission ("SEC"). In accordance with the
Association's conversion, there will be a simultaneous issuance of all the
Association's stock to the Corporation, which will be formed by the Association.
Such Application for Conversion has been reviewed by us, including the
Prospectus and related documents, and discussed with the Association's
management and the Association's conversion counsel, Luse Gorman Pomerenk &
Schick, P.C., Washington, D.C.
This conversion appraisal was prepared based on the guidelines provided
by OTS entitled "Guidelines for Appraisal Reports for the Valuation of Savings
Institutions Converting from the Mutual to Stock Form of Organization," in
accordance with the OTS application requirements of Regulation (S)563b and the
OTS's Revised Guidelines for Appraisal Reports, and represents a full appraisal
report. The Report provides detailed exhibits based on the Revised Guidelines
and a discussion on each of the fourteen factors that need to be considered. Our
valuation will be updated in accordance with the Revised Guidelines and will
consider any changes in market conditions for thrift institutions.
1
Introduction (cont.)
The pro forma market value is defined as the price at which the stock
of the Corporation after conversion would change hands between a typical willing
buyer and a typical willing seller when the former is not under any compulsion
to buy and the latter is not under any compulsion to sell, and with both parties
having reasonable knowledge of relevant facts in an arms-length transaction. The
appraisal assumes the Association is a going concern and that the shares issued
by the Corporation in the conversion are sold in non-control blocks.
In preparing this conversion appraisal, we have reviewed the financial
statements for the five fiscal years ended September 30, 1997 through 2001, as
well as the financial statements for the nine months ended June 30, 2001 and
2002, and discussed them with Clay County Savings' management and with Clay
County Savings' independent auditors, Michael Trokey & Company, P.C., St. Louis,
Missouri. We have also discussed and reviewed with management other financial
matters and have reviewed internal projections. We have reviewed the
Corporation's preliminary Form S-1 and the Association's preliminary Form AC and
discussed them with management and with the Association's conversion counsel.
We have visited Clay County Savings' home office and three branch
offices and have traveled the surrounding area. We have studied the economic and
demographic characteristics of the primary market area of Clay and Platte
Counties and analyzed the Association's primary market area relative to Missouri
and the United States. We have also examined the competitive market within which
Clay County Savings operates, giving consideration to the area's numerous
financial institution offices, mortgage banking offices, and credit union
offices and other key characteristics, both positive and negative.
We have given consideration to the current market conditions for
securities in general and for publicly-traded thrift stocks in particular. We
have examined the performance of selected publicly-traded thrift institutions
and compared the performance of Clay County
2
Savings to those selected institutions.
Introduction (cont.)
Our valuation is not intended to represent and must not be interpreted
to be a recommendation of any kind as to the desirability of purchasing the
to-be-outstanding shares of common stock of the Corporation. Giving
consideration to the fact that this appraisal is based on numerous factors that
can change over time, we can provide no assurance that any person who purchases
the stock of the Corporation in this mutual-to-stock conversion will
subsequently be able to sell such shares at prices similar to the pro forma
market value of the Corporation as determined in this conversion appraisal.
3
I. DESCRIPTION OF CLAY COUNTY SAVINGS AND LOAN ASSOCIATION
GENERAL
Clay County Savings and Loan Association was organized in 1922 as a
state-chartered mutual savings and loan association with the name Clay County
Building and Loan Association and then changed its name to Clay County Savings
and Loan Association in 1967. In 1995, Clay County Savings became a
federally-chartered mutual savings and loan association. Clay County Savings
conducts its business from its main office in Liberty, Missouri and its three
branch offices in Liberty, Kearney and Smithville. The Association serves its
customers from these four offices. The Association's primary market area is
focused on Clay County, where all its offices are located.; however, the market
area actually includes Clay and Platte Counties.
Clay County Savings' deposits are insured up to applicable limits by the
Federal Deposit Insurance Corporation ("FDIC") in the Savings Association
Insurance Fund ("SAIF"). The Association is also subject to certain reserve
requirements of the Board of Governors of the Federal Reserve Bank (the "FRB").
Clay County Savings is a member of the Federal Home Loan Bank (the "FHLB") of
Des Moines and is regulated by the OTS and by the FDIC. As of June 30, 2002,
Clay County Savings had assets of $77,872,000, deposits of $63,669,000 and
equity of $6,526,000.
Clay County Savings is a community oriented institution which has been
principally engaged in the business of serving the financial needs of the public
in its local communities and throughout its primary market area. Clay County
Savings has been involved in the origination of residential mortgage loans
secured by one- to four-family dwellings, excluding construction loans, which
represented 46.1 percent of its loan originations during the fiscal year ended
September 30, 2001, and a greater 63.1 percent of its loan originations during
the nine months ended June 30, 2002. Construction loan originations represented
a strong 16.6 percent and 37.8 percent of total originations for the same
respective time periods. At June 30, 2002, 76.9 percent of its gross loans
consisted of residential real estate loans on one-to
4
four-family dwellings, compared to a lesser 74.8 percent at September 30, 2000,
with the
General (cont.)
primary sources of funds being retail deposits from residents in its local
communities and FHLB advances. The Association is also an originator of
multi-family loans, commercial real estate loans, construction loans, consumer
loans and commercial business loans. Consumer loans include home equity loans
and lines of credit, automobile loans, loans on savings accounts and other
secured and unsecured personal loans.
The Association had $17.1 million, or a moderate 22.0 percent of its
assets in cash and investments excluding FHLB stock which totaled $529,100 or
0.5 percent of assets. The Association had $1.9 million or 2.4 percent of its
assets in mortgage-backed and related securities. Deposits, FHLB advances and
equity have been the primary sources of funds for the Association's lending and
investment activities.
The Association's gross amount of stock to be sold in the subscription
and community offering will be $7,400,000 or 740,000 shares at $10 per share
based on the midpoint of the appraised value of $7.4 million, with net
conversion proceeds of $6,875,000 reflecting conversion expenses of
approximately $525,000. The actual cash proceeds to the Association will be
$3.44 million representing fifty percent of the net conversion proceeds. The
ESOP will represent 8.0 percent of the gross shares issued or 59,200 shares at
$10 per share, representing $592,000. The Association's net proceeds will be
invested in adjustable-rate mortgage loans, construction loans and commercial
real estate loans over time and initially invested in short term investments.
The Association may also use the proceeds to expand services, expand operations
or acquire other financial service organizations, diversification into other
businesses, or for any other purposes authorized by law. The Corporation will
use its fifty percent of the proceeds to fund the ESOP and to invest in
short-and intermediate-term securities or deposits.
Clay County Savings has seen a minimal deposit increase over the past
five fiscal years with deposits increasing 0.4 percent from September 30, 1997
to September 30, 2001,
5
or an average of 0.1 percent per year. From September 30, 2001, to June 30,
2002, deposits
General (cont.)
increased by 9.6 percent or 12.8 percent, annualized, compared to a 9.6 percent
growth rate in fiscal 2000. The Association has focused on increasing its
residential real estate loan and commercial loan activity during the past three
years, monitoring its net interest margin and earnings and maintaining its
equity to assets ratio. Equity to assets decreased slightly from 8.35 percent of
assets at September 30, 1997, to 8.33 percent at September 30, 2001, and then
increased slightly to 8.38 percent at June 30, 2002, due primarily to a decrease
in assets.
Clay County Savings' primary lending strategy has been to focus on the
origination of adjustable-rate and fixed-rate one-to four-family loans, the
origination of construction loans, the origination of nonresidential mortgage
loans, and the origination of consumer loans, primarily home equity loans.
Clay County Savings' share of one- to four-family mortgage loans has
increased modestly, from 74.8 percent of gross loans at September 30, 2000, to
76.9 percent as of June 30, 2002. Commercial real estate loans increased from
3.8 percent to 6.9 percent from September 30, 2000, to June 30, 2002, while
construction loans decreased from 16.1 percent to 9.3 percent during the same
time period. All types of mortgage loans as a group decreased slightly from 96.2
percent of gross loans at September 30, 2000, to 94.6 percent at June 30, 2002.
The decrease in mortgage loans was offset by the Association's increase in
consumer loans and commercial business loans. The Association's share of
consumer loans witnessed an increase in their share of loans from 3.6 percent at
September 30, 2000, to 4.7 percent at June 30, 2002, and the dollar level of
consumer loans increased from $2.5 million to $2.6 million due primarily to
growth in home equity lines of credit.
Management's internal strategy has also included continued emphasis on
maintaining an adequate and appropriate allowance for loan losses relative to
nonperforming assets in recognition of the more stringent requirements within
the industry to establish and maintain a higher level of general valuation
allowances and also in recognition of the Association's
6
rising level of higher risk loans. At September 30, 2000, Clay County Savings
had $176,000
General (cont.)
in its loan loss allowance or 0.26 percent of gross loans and 31.4 percent of
nonperforming assets, which increased to $193,000 and represented a higher 0.35
percent of gross loans and 201.0 percent of nonperforming assets at June 30,
2002.
Interest income from loans and investments has been the basis of
earnings with the net interest margin being the key determinant of net earnings.
With a dependence on net interest margin for earnings, current management will
focus on continuing to strengthen the Association's net interest margin without
undertaking excessive credit risk combined with maintaining the Association's
interest risk position.
7
PERFORMANCE OVERVIEW
Clay County Savings' financial position at year end September 30, 1997
through September 30, 2001, and at June 30, 2002, is shown in Exhibits 1 through
4. Exhibit 5 provides selected financial data at September 30, 1997 through 2001
and at June 30, 2002. Clay County Savings has focused on maintaining its asset
base and equity level, increasing its interest-earning deposits and investment
securities, and increasing retail deposits. The impact of these trends has been
a rise in net interest rate spread from 2.76 percent at September 30, 2000, to
2.92 percent at June 30, 2002. Clay County Savings has experienced a modest
increase in assets from September 30, 1997 to June 30, 2002, with a similar
increase in deposits, a moderate decrease in FHLB advances and modest change in
equity over the past five periods.
Clay County Savings witnessed a total increase in assets of $6.5
million or 9.2 percent for the period of September 30, 1997, to September 30,
2001, representing an average annual increase in assets of 2.3 percent. For the
year ended September 30, 2001, assets decreased $116,300 or 0.2 percent. For the
nine months ended June 30, 2002, the Association's assets increased $223,800 or
0.3 percent. Over the past four fiscal periods, the Association experienced its
largest dollar rise in assets of $7.2 million in fiscal year 2000, which
represented a strong 10.3 percent increase in assets funded by a rise in FHLB
advances of $9.0 million. This increase in assets was succeeded by a $116,000 or
0.1 percent decrease in assets in fiscal year 2001 and then a $224,000 increase
or 0.3 percent from September 30, 2001, to June 30, 2002. The strongest rise in
assets was $7.2 million or 10.3 percent for the fiscal year ended September 30,
2000.
The Association's net loan portfolio, including mortgage loans and
non-mortgage loans, increased from $62.8 million at September 30, 1997, to $53.1
million at June 30, 2002, and represented a total decrease of $9.7 million, or
15.4 percent. The average annual decrease during that period was 3.25 percent.
That decrease was primarily the result of higher levels of loan payoffs in
fiscal 2001 and the nine months ended June 30, 2002. For the year ended
September 30, 1999, loans increased $8.4 million or 12.0 percent. For the
8
nine months ended
Performance Overview (cont.)
June 30, 2002, net loans decreased $6.2 million or 8.0 percent representing 10.7
percent, annualized.
Clay County Savings has pursued obtaining funds through deposits and
FHLB advances in accordance with the demand for loans and secondary market
activity. The Association's competitive rates for savings in its local market in
conjunction with its focus on service and a larger network of offices have been
the sources for attracting retail deposits. Deposits increased 0.4 percent from
1997 to 2001, with an average annual rate of increase of 0.1 percent from
September 30, 1997, to September 30, 2001. For the nine months ended June 30,
2002, deposits increased by $5.6 million or 9.6 percent, annualized to 12.8
percent. The Association's only fiscal year deposit growth was in 2001, when
deposits increased $5.1 million or a relatively strong 9.6 percent. Deposits
decreased in 1998, 1999 and 2000. The Association's FHLB advances increased from
$6.2 million at September 30, 1997, to $11.9 million at September 30, 2001, and
then decreased to $6.9 million at June 30, 2002.
Clay County Savings has been able to increase its equity level each
fiscal year from 1997 through 2001 and in the nine months ended June 30, 2002.
At September 30, 1997, the Association had equity of $5.9 million representing
an 8.35 percent equity to assets ratio and then increasing to $6.5 million at
September 30, 2001, but representing a lower 8.33 percent equity to assets ratio
due to the Association's growth in assets. At June 30, 2002, equity was a
similar $6.5 million but a higher 8.38 percent of assets due to the
Association's minimal growth. The overall decrease in the equity to assets ratio
from 1997 to 2001 is the result of the Association's modest earnings performance
impacted by the Association's growth in assets. The dollar level of equity
increased 8.8 percent from September 30, 1997, to September 30, 2001,
representing an average annual increase of 2.2 percent and increased 0.9 percent
for the nine months ended June 30, 2002, or 1.3 percent, annually.
9
10
INCOME AND EXPENSE
Exhibit 6 presents selected operating data for Clay County Savings,
reflecting the Association's income and expense trends. This table provides key
income and expense figures in dollars for the fiscal years of 1997 through 2001
and for the nine months ended June 30, 2002.
Clay County Savings witnessed an overall increase in its dollar level
of interest income from September 30, 1997, to September 30, 2001, and then a
decrease for the nine months ended June 30, 2002, due to the Association's
decrease in loans as well as the decrease in interest rates overall. Interest
income was $4.7 million in 1997 and a higher $5.6 million in 2001. This trend
was a rising trend that continued from 1999. For the nine months ended June 30,
2002, interest income was $3.5 million, compared to a higher $4.2 million for
the nine months ended June 30, 2001.
The Association's interest expense experienced a similar trend with an
overall increase from fiscal year 1997 to 2001. Interest expense increased
$178,000 or 6.3 percent, from 1999 to 2000, compared to a smaller dollar
increase in interest income of $118,000 and a smaller 2.4 percent increase, for
the same time period. Interest expense then increased $609,000 or 20.1 percent
from 2000 to 2001, compared to an increase in interest income of $465,000 or 9.1
percent. Such increase in interest income in 2001, notwithstanding the increase
in interest expense, resulted in a modest dollar decrease in annual net interest
income of $144,000 or 6.9 percent for the fiscal year ended September 30, 2001,
and a moderate decrease in net interest margin. Net interest income decreased
from $2,137,000 in 1999, to $2,077,000 in 2000 and to $1,933,000 in 2001. For
the nine months ended June 30, 2002, Clay County Savings' actual net interest
income was $1,660,000 or $2.2 million, annualized, which was modestly higher
than the $1,430,000 for the nine months ended June 30, 2001, or $1.9 million,
annualized.
11
Income and Expense (cont.)
The Association has made provisions for loan losses in each of the past
five fiscal years of 1997 through 2001 and also in the nine months ended June
30, 2002. The amounts of those provisions were determined in recognition of the
Association's levels of nonperforming assets, charge-offs, repossessed assets,
the Association's rise in lending activity, and industry norms. The loan loss
provisions were $14,000 in 1997, $11,000 in 1998, $12,000 in 1999 and 2000,
$22,000 in 2001 and $3,000 in the nine months ended June 30, 2002. The impact of
these loan loss provisions has been to provide Clay County Savings with a
general valuation allowance of $193,000 at June 30, 2002, or 0.35 percent of
gross loans and 201.0 percent of nonperforming assets.
Total other income or noninterest income indicated a rising trend from
fiscal year 1997 through 2001. The higher level of noninterest income was in
fiscal year 2001 at $256,000 or 0.33 percent of assets including $112,000 in
gains on the sale of loans. The lower level of $113,000 was in 1997,
representing 0.16 percent of assets with no gains on the sale of loans. The
average noninterest income level for the past five fiscal years was $159,200 or
0.22 percent of average assets. In the nine months ended June 30, 2002,
noninterest income was $211,000 or 0.36 percent of assets on an annualized
basis. Noninterest income consists primarily of service charges and fees, other
income and gains on the sale of loans.
The Association's general and administrative expenses or noninterest
expenses increased from $1,526,000 for the fiscal year of 1997 to $2,337,000 for
the fiscal year ended September 30, 2001. The largest dollar increase in
noninterest expenses was $282,000 from 2000 to 2001. This larger increase in
other expenses was due primarily to the Association's opening of a new home
office in 2000 and the addition of new staffing combined with the normal rise in
overhead expenses. On a percent of average assets basis, operating expenses
increased from 2.33 percent of average assets for the fiscal year ended
September 30, 1997, to 3.01 percent for the fiscal year ended September 30,
2001. For the nine months ended June
12
Income and Expense (cont.)
30, 2002, Clay County Savings' ratio of operating expenses to average assets was
a slightly lower 2.99 percent.
The net earnings position of Clay County Savings has indicated
decreasing earnings from 1997 to 2000, then a loss in the fiscal year ended
September 30, 2001, and then profitable performance in the nine months ended
June 30, 2002. The annual net income figures for the fiscal years of 1997 to
2000 were $243,000, $218,000, $221,000 and $108,000, respectively, compared to a
loss of $112,000 for the fiscal year ended September 30, 2001, representing
returns on average assets of 0.37 percent, 0.31 percent, 0.31 percent, 0.15
percent and negative 0.14 percent for fiscal years 1997 through 2001,
respectively. For the nine months ended June 30, 2002, net earnings were
$81,000, representing an annualized return on average assets of 0.14 percent.
Exhibit 7 provides the Association's normalized earnings or core
earnings for the twelve months ended June 30, 2002. The Association's normalized
earnings eliminate any nonrecurring income and expense items. There was one
adjustment to income to reduce the Association's level of noninterest income due
to a one-time gain on the sale of premises of $69,000 before taxes. There were
no expense adjustments.
The key performance indicators comprised of selected performance
ratios, asset quality ratios and capital ratios are shown in Exhibit 8 to
reflect the results of performance. The Association's return on assets decreased
from 0.37 percent in 1997 to 0.15 percent in fiscal year 2000 and then to a loss
of 0.14 percent in fiscal year 2001. It was a higher but still low level for the
nine months ended June 30, 2002, of 0.14 percent, annualized, due primarily to
the Association's increase in its net interest margin.
The Association's average net interest rate spread increased from 2.36
percent in 1997
13
to 2.79 percent in 1999 and then decreased to 2.56 percent in fiscal year 2001.
For the nine months ended June 30, 2002, net interest spread increased to 2.92
percent, annualized. Income and Expense (cont.)
The Association's net interest margin indicated a similar overall trend,
increasing from 2.75 percent in 1997 to 3.11 percent in 1999 and then decreasing
to 2.64 percent in fiscal year 2001, and then increasing to 3.01 percent for the
nine months ended June 30, 2002, annualized. Clay County Savings' average net
interest rate spread increased 43 basis points from 1997 to 1999 to 2.79 percent
from 2.36 percent in 1997, and then decreased 23 basis points to 2.56 percent in
2001. The Association's net interest margin followed a similar trend, increasing
36 basis points to 3.11 percent in 1999 from 2.75 percent in 1997 and then
decreased 47 basis points to 2.64 percent in 2001. For the nine months ended
June 30, 2002, Clay County Savings' annualized net interest spread increased 36
basis points to 2.92 percent, and its net interest margin increased 37 basis
points to 3.01 percent.
The Association's return on average equity decreased from 1997 to 2001.
The return on average equity decreased from 4.19 percent in 1997 to a negative
1.73 percent in fiscal year 2001. For the nine months ended June 30, 2002,
return on average equity was a minimal 1.67 percent, annualized, due to the
Association's higher noninterest expenses, resulting in lower earnings.
Clay County Savings' ratio of interest-earning assets to
interest-bearing liabilities decreased moderately from 108.70 percent at
September 30, 1997, to 101.53 percent at September 30, 2001, and then increased
to 102.62 percent at June 30, 2002. The Association's lower ratio of
interest-earning assets to interest-bearing liabilities is primarily the result
of the Association's higher level of fixed assets.
The Association's ratio of noninterest expenses to average assets
increased from 2.33 percent in fiscal year 1997 to a higher 3.01 percent in
fiscal year 2001, due to increases in normal overhead and the impact of opening
a new main office in late 2000. For the nine months ended June 30, 2002,
noninterest expenses to assets decreased to 2.99 percent.
14
Another key noninterest expense ratio reflecting efficiency of operation is the
ratio of noninterest expenses to noninterest income plus net interest income
referred to as the "efficiency ratio." The industry norm is 60.0 percent with
the lower the ratio indicating higher
Income and Expense (cont.)
efficiency. The Association has been characterized with a lower level of
efficiency historically reflected in its higher efficiency ratio, which
increased from 80.3 percent in 1997 to 106.8 percent in 2001. The ratio then
decreased to 93.2 percent for the nine months ended June 30, 2002.
Earnings performance can be affected by an institution's asset quality
position. The ratio of nonperforming assets to total assets is a key indicator
of asset quality. Clay County Savings witnessed a decrease in its nonperforming
asset ratio from 2000 to 2001, and the ratio decreased from higher than the
industry norm to below the industry norm. Nonperforming assets consist of loans
delinquent 90 days or more, nonaccruing loans, real estate owned and repossessed
assets. Clay County Savings' nonperforming assets consisted of just nonaccruing
loans at June 30, 2002 and included repossessed assets at September 30, 1997
through 2001. The ratio of nonperforming assets to total assets was 0.41 percent
at September 30, 1997, then rising to 0.72 percent at September 30, 2000, and
decreased to 0.18 percent at September 30, 2001. At June 30, 2002, Clay County
Savings' ratio of nonperforming assets to total assets decreased further to 0.12
percent of assets.
The Association's allowance for loan losses was 0.25 percent of loans
at September 30, 1997, and increased to 0.31 percent at September 30, 2001, and
then increased to 0.35 percent of loans at June 30, 2002, with the increase due
partially to the Association's decrease in loans. As a percentage of
nonperforming assets, Clay County Savings' allowance for loan losses was 31.4
percent in 2000 and 135.7 percent in 2001. At June 30, 2002, the ratio increased
to 201.0 percent, reflective of a decrease in nonperforming assets.
Exhibit 9 provides the changes in net interest income due to rate and
volume changes
15
for the fiscal year of 2001 and for the nine months ended June 30, 2002. In
fiscal year 2001, net interest income decreased $144,000, due to an increase in
interest income of $465,000 reduced by a $609,000 increase in interest expense.
The increase in interest income was due to an increase due to volume of
$266,000, accented by an increase due to rate of $191,000 and
Income and Expense (cont.)
an increase due to a combination of rate and volume of $8,000. The increase in
interest expense was due to an increase due to volume of $350,000 accented by an
increase due to a change in rate of $244,000 and an increase due to a
combination of rate and volume of $15,000.
For the nine months ended June 30, 2002, compared to the nine months
ended June 30, 2001, net interest income increased $231,000 due to a $676,000
decrease in interest income offset by a $907,000 decrease in interest expense.
The decrease in interest income was due to a $233,000 decrease due to volume
accented by a $358,000 decrease due to rate and an $85,000 decrease due to a
combination of rate and volume. The decline in interest expense was the result
of a decrease due to volume of $156,000 accented by a decrease due to rate of
$679,000 and a decrease to a combination of rate and volume of $72,000.
YIELDS AND COSTS
The overview of yield and cost trends for the years ended September 30,
2000 and 2001, for the nine months ended June 30, 2001 and 2002, and at June 30,
2002, can be seen in Exhibit 10, which offers a summary of key yields on
interest-earning assets and costs of interest-bearing liabilities.
Clay County Savings' weighted average yield on its loan portfolio
increased 30 basis points from fiscal year 2000 to 2001, from 7.65 percent to
7.95 percent, and then decreased 48 basis point to 7.47 percent for the nine
months ended June 30, 2002, compared to a higher
16
7.98 percent for the nine months ended June 30, 2001. The yield on securities
increased 29 basis points from 6.13 percent in 2000 to 6.42 percent in fiscal
year 2001 and then decreased 156 basis points to 4.86 percent for the nine
months ended June 30, 2002, compared to a higher 6.12 percent for the nine
months ended June 30, 2001. The yield on mortgage-backed securities decreased 20
basis points from 6.48 percent in 2000 to 6.28 percent 2001 and then
Yields and Costs (cont.)
decreased 89 basis points to 5.39 percent for the nine months ended June 30,
2002, compared to 6.42 percent for the nine months ended June 30, 2001. The
yield on other interest-earning assets decreased 8 basis points from fiscal year
2000 to 2001, from 3.38 percent to 3.30 percent and then decreased another 221
basis points to 1.09 percent for the nine months ended June 30, 2002, compared
to a higher 3.37 percent for the nine months ended June 30, 2001. The combined
weighted average yield on all interest-earning assets increased 19 basis points
to 7.59 percent from fiscal year 2000 to 2001, reflecting the Association's
higher yield on loans. The yield on interest-earning assets for the nine months
ended June 30, 2002, was a lower 6.41 percent, compared to a higher 7.62 percent
for the nine months ended June 30, 2001.
Clay County Savings' weighted average cost of interest-bearing
liabilities increased 39 basis points to 5.03 percent from fiscal year 2000 to
2001, which was greater than the Association's 19 basis point increase in yield,
resulting in a decrease in the Association's interest rate spread of 20 basis
points from 2.76 percent to 2.56 percent from 2000 to 2001. For the nine months
ended June 30, 2002, the Association's cost of funds decreased 172 basis points
to 3.49 percent, compared to a 121 basis point decrease in yield on
interest-earning assets, resulting in a higher net interest rate spread by 51
basis points to 2.92 percent compared to 2.41 percent for the nine months ended
June 30, 2001. The Association's net interest margin decreased from 3.01 percent
in fiscal year 2000 to 2.64 percent in fiscal year 2001. The Association's net
interest margin for the nine months ended June 30, 2002, increased to 3.01
percent compared to a lower 2.58 percent for the nine months ended June 30,
2001. The Association's yield on earning assets decreased 48 basis points to
5.93 percent at June 30, 2002, compared to 6.41 percent for the nine months
ended June 30, 2002. The
17
Association's cost of funds decreased 106 basis points to 2.43 percent at June
30, 2002, compared to 3.49 percent for the nine months ended June 30, 2002. The
resultant net interest rate spread increased 58 basis points to 3.50 percent at
June 30, 2002, compared to 2.92 percent for the nine months ended June 30, 2002.
INTEREST RATE SENSITIVITY
Clay County Savings has closely monitored its interest rate sensitivity
position and focused on maintaining a reasonable level of rate sensitive assets.
Clay County Savings has recognized the thrift industry's historically higher
interest rate risk exposure, which caused a negative impact on earnings and net
portfolio value ("NPV") as a result of significant fluctuations in interest
rates, specifically rising rates. Such exposure was due to the disparate rate of
maturity and/or repricing of assets relative liabilities commonly referred to as
an institution's "gap." The larger an institution's gap, the greater the risk
(interest rate risk) of earnings loss due to a decrease in net interest margin
and a decrease in NPV or portfolio loss. In response to the potential impact of
interest rate volatility and negative earnings impact, many institutions have
taken steps during the late 1990's and early 2000's to reduce their gap
position. This frequently results in a decline in the institution's net interest
margin and overall earnings performance. Clay County Savings has responded to
the interest rate sensitivity issue by originating and retaining adjustable-rate
mortgage loans, short term consumer loans and, more recently, maintaining a
higher available-for-sale investment portfolio.
The Association measures its interest rate risk through the use of the
calculation of its NPV of the expected cash flows from interest-earning assets
and interest-bearing liabilities and any off-balance sheet contracts. The NPV
for the Association is calculated on a quarterly basis, by the OTS, as well as
the change in the NPV for the Association under rising and falling interest
rates. Such changes in NPV under changing rates is reflective of the
Association's interest rate risk exposure.
There are numerous factors which have a measurable influence on
interest rate
18
sensitivity in addition to changing interest rates. Such key factors to consider
when analyzing interest rate sensitivity include the loan payoff schedule,
accelerated principal payments, deposit maturities, interest rate caps on
adjustable-rate mortgage loans and deposit withdrawals.
Exhibit 11 provides the Association's NPV as of June 30, 2002, and the
change in the Association's NPV under rising and declining interest rates. Such
calculations are provided by
Interest Rate Sensitivity (cont.)
the OTS, and the focus of this exposure table is a 200 basis points change in
interest rates either up or down to reflect the Association's post shock NPV
ratio as defined by OTS, which is a 200 basis point rise in rates for Clay
County Savings.
The Association's change in its NPV at June 30, 2002, based on a rise
in interest rates of 200 basis points was an 8.0 percent decrease, representing
a dollar decrease in equity value of $800,000. In contrast, based on a decline
in interest rates of 200 basis points, the Association's NPV was not measurable
due to currently low interest rates.
The Association's change in its NPV decreases to a 3.0 percent decrease
under a 100 basis point instantaneous rise in rates, and the NPV is estimated to
show no change, based on a 100 basis point decrease in rates.
The Association's post shock NPV ratio is 11.30 percent based on a 200
basis point rise in rates and is not measurable based on a 200 basis point
decrease in rates. The Association's sensitivity measure is a negative 77 basis
points based on a 200 basis point instantaneous increase in rates. The
Association's interest rate risk level is a minimal risk position due primarily
to the Association's predominance of adjustable-rate residential mortgage loans.
Due to Clay County Savings' recognition of the need to control its
interest rate exposure, the Association will continue to focus on the
origination and retention of
19
adjustable-rate residential and nonresidential mortgage loans and will continue
the sale of its fixed-rate mortgage loans.
20
LENDING ACTIVITIES
Clay County Savings has focused its lending activity on the origination
of conventional mortgage loans secured by one- to four-family dwellings,
nonresidential mortgage loans, construction loans and consumer loans. Exhibit 12
provides a summary of Clay County Savings' loan portfolio, by loan type, at
September 30, 2000 and 2001, and at June 30, 2002.
Residential loans secured by one- to four-family dwellings was the
primary loan type representing 76.9 percent of the Association's gross loans as
of June 30, 2002. This share has seen a modest decrease from 74.8 percent at
September 30, 2000. The second largest real estate loan type as of June 30,
2002, was construction and development loans, which comprised a moderate 9.3
percent of gross loans compared to 16.1 percent as of September 30, 2000. The
third key real estate loan type was commercial real estate loans, which
represented 6.9 percent of gross loans as of June 30, 2002, compared to a lower
3.8 percent at September 30, 2000. These three real estate loan categories
represented a strong 93.1 percent of gross loans at June 30, 2002, compared to a
larger 94.7 percent of gross loans at September 30, 2000.
Commercial business loans represent a modest loan category for Clay
County Savings. Commercial business loans totaled $382,000 and represented 0.7
percent of gross loans at June 30, 2002, compared to a lesser 0.2 at September
30, 2000. The Association has been more involved in providing business lines of
credit in 2002.
The consumer loan category was the remaining loan type at June 30,
2002, and represented a modest 4.7 percent of gross loans compared to 3.6
percent at September 30, 2000. Consumer loans were the fourth largest overall
loan type, at June 30, 2002, and also at September 30, 2000. The Association
originates home equity loans including home equity lines of credit, automobile
loans, savings account loans and secured and unsecured personal loans. The
overall mix of loans has witnessed modest changes from fiscal year-end 2000 to
June 30, 2002, with the Association having decreased its share of construction
loans to
21
offset its increases in one- to four-family loans, commercial real estate loans
and consumer loans, primarily comprised of home equity loans.
Lending Activities (cont.)
The emphasis of Clay County Savings' lending activity is the
origination of conventional mortgage loans secured by one- to four-family
residences. Such residences are located in Clay County Savings' primary market
area, which includes Clay and Platte Counties. The Association's lending market
also extends into the surrounding counties. At June 30, 2002, 76.9 percent of
Clay County Savings' gross loans consisted of loans secured by one- to
four-family residential properties.
The Association offers several types of adjustable-rate mortgage loans,
("ARMs") with adjustment periods of one year, three years and seven years. The
interest rates on ARMs are generally indexed to the one-year Treasury constant
maturity index. ARMs have a maximum rate adjustment of 2.0 percent at each
adjustment period and 5.0 percent for the life of the loan. Rate adjustments are
computed by adding a stated margin to the index. The Association retains all
ARMs which it originates. The majority of ARMs have terms of 15 to 25 years with
a maximum term of 30 years.
The Association currently offers adjustable-rate mortgage loans with
discounted or teaser rates at rates below those which would prevail under normal
computations based upon a determination of market factors and competitive rates
in the market. On such discounted loans, the borrower is qualified at both the
initial rate and the fully-indexed rate. The Association's adjustable-rate
mortgage loans are normally originated in conformity with Freddie Mac
guidelines, even though such loans are retained in the portfolio.
The Association's one-to four-family mortgage loans remain outstanding
for shorter periods than their contractual terms, because borrowers have the
right to refinance or prepay. These mortgage loans contain "due on sale" clauses
which permit the Association to accelerate the indebtedness of the loan upon
transfer of ownership of the mortgage property.
22
The Association's other key mortgage loan product is a fixed-rate
mortgage loan with most of Clay County Savings' new fixed-rate mortgage loans
being sold in the secondary
Lending Activities (cont.)
market. The Association has historically retained most of its fixed-rate
mortgage loans. Fixed-rate mortgage loans have a maximum term of 30 years. The
Association's fixed-rate mortgage loans conform to Freddie Mac underwriting
standards.
The normal loan-to-value ratio for conventional mortgage loans to
purchase or refinance one-to four-family dwellings generally does not exceed 85
percent at Clay County Savings, even though the Association is permitted to make
loans up to a 95 percent loan-to-value ratio if the loan amount is $275,000 or
less and 90 percent if the loan amount is $350,000 or less. The Association does
make loans up to 95 percent of loan-to-value but does require credit life
insurance for the amount in excess of the 85.0 percent loan-to-value ratio.
Mortgage loans originated by the Association include due-on-sale clauses
enabling the Association to adjust rates on fixed-rate loans in the event the
borrower transfers ownership.
Clay County Savings has also been an originator of commercial real
estate loans and multi-family loans in the past. The Association will continue
to make multi-family and commercial real estate loans. The Association had a
total of $4.6 million in commercial real estate and multi-family loans at June
30, 2002, or 8.4 percent of gross loans, compared to $3.6 million or 5.3 percent
of gross loans at September 30, 2000. The major portion of commercial real
estate loans are secured by small retail establishments, warehouses, local
churches, small office buildings, and other commercial properties. Most of the
multi-family and commercial real estate loans are fully amortizing with a term
of up to 25 years. The maximum loan-to-value ratio is normally 80 percent except
for cash out refinancings, which are limited to 75.0 percent of the appraised
value.
The Association also originates construction loans to area home
builders or individuals for the construction of single-family homes. The
Association originates speculative construction loans as well as custom
construction loans for homes in contract.
23
The Association had $5.1 million or 9.3 percent of gross loans in construction
loans secured by one- to four-family residences. Construction loans normally
have a term of twelve months
Lending Activities (cont.)
with a fixed interest rate for the term of the loan and a loan-to-value ratio of
no more than 85.0 percent. The Association will originate construction loans for
a loan-to-value ratio of up to 89.0 percent. The Association also originates
land development loans to area homebuilders secured by improved or unimproved
building lots. Land loans normally have prime-based variable interest rates with
terms of up to two years. The maximum loan-to-value ratio is 70.0 percent. The
Association had no land development loans at June 30, 2002.
Clay County Savings has also been involved in consumer lending.
Consumer loans originated consist primarily of home equity loans and lines of
credit, which represented a total of $1.6 million or 61.6 percent of consumer
loans at June 30, 2002, up from $1.1 million or 43.6 percent of consumer loans
at September 30, 2000. Total consumer loans were $2.6 million or 4.7 percent of
gross loans at June 30, 2002, and a lesser $2.5 million or 3.6 percent of gross
loans at September 30, 2000. Clay County Savings began to make home equity lines
of credit in February 2002. Clay County Savings offers home equity loans and
lines of credit up to $150,000 with a maximum loan-to-value ratio of 89.0
percent. These loans have a term of five years with rates generally tied to the
current prime rate.
Exhibit 13 provides a loan maturity schedule and breakdown and summary
of Clay County Savings' fixed- and adjustable-rate loans, indicating a majority
of adjustable-rate loans. At June 30, 2002, 53.8 percent of the Association's
loans due after June 30, 2003, were adjustable-rate and 46.2 percent were
fixed-rate. The Association has a higher 40.2 percent of its loans at June 30,
2002, due in one year or less with another 26.5 percent due in one to three
years.
24
As indicated in Exhibit 14, Clay County Savings experienced a minimal
change in its one-to four-family loan originations and total loan originations
from fiscal year 2000 to 2001. Total loan originations in fiscal year 2001 were
$25.9 million compared to $28.9 million in fiscal year 2000, reflective of a
lower level of construction loans partially offset by a higher level of one- to
four-family loans. The decrease in construction loan originations from 2000 to
2001 of $3.6 million constituted 120.0 percent of the $3.0 million aggregate
decrease in total loan originations from 2000 to 2001, with one- to four-family
loans increasing $1.2
Lending Activities (cont.)
million and commercial real estate loans decreasing $864,000. Consumer and
commercial business loans combined increased $521,000 from 2000 to 2001. Loan
originations for the nine months ended June 30, 2002, were $32.0 million,
representing a stronger $42.7 million on an annualized basis, indicating a
strong rise in loan origination activity. Loan originations on one- to
four-family residences represented 37.1 percent of total loan originations in
fiscal year 2000, and 46.1 percent in fiscal year 2001. One- to four-family loan
originations increased to 63.1 percent of total loan originations for the nine
months ended June 30, 2002, with the sale of one- to four-family loans also
increasing. Consumer loans represented 8.6 percent of total loan originations in
2000 and a larger 10.2 percent in 2001. For the nine months ended June 30, 2002,
these loans represented a similar 9.3 percent of total originations.
Construction loans represented a strong 46.3 percent of total loan originations
in 2000 and a lesser 37.8 percent in 2001. For the nine months ended June 30,
2002, construction loans represented a smaller 16.6 percent of total loan
originations.
Overall, loan originations exceeded principal payments, loans sales,
loan repayments and other deductions in fiscal 2000 by $6.9 million and then
fell short of reductions by $4.8 million in 2001. For the nine months ended June
30, 2002, loan originations were less than total reductions by $6.2 million with
total loan sales representing $7.3 million.
25
NONPERFORMING ASSETS
Clay County Savings understands asset quality risk and the direct
relationship of such risk to delinquent loans and nonperforming assets,
including real estate owned. The quality of assets has been a key concern to
financial institutions throughout many regions of the country. A number of
financial institutions have been confronted with rapid increases in their levels
of nonperforming assets and have been forced to recognize significant losses,
setting aside major valuation allowances. A sharp increase in nonperforming
assets has often been related to specific regions of the country and has
frequently been associated with higher risk loans, including purchased
commercial real estate loans and multi-family loans. Clay County Savings has not
been faced with such problems in the past and has made a concerted effort to
control its nonperforming assets, recognizing the depressed nature of its local
economy, and has been successful.
Exhibit 15 provides a summary of Clay County Savings' delinquent loans
at September 30, 2000 and 2001, and at June 30, 2002, indicating a decrease in
delinquent loans since September 30, 2000. The Association had $96,000 or 0.16
percent of gross loans delinquent 90 days or more at June 30, 2002, with all of
them single family loans. Loans delinquent 60 to 89 days totaled only $13,000 at
June 30, 2002, or 0.02 percent of gross loans with all of them consumer loans.
At June 30, 2002, delinquent loans of 60 days or more totaled $109,000 or 0.18
percent of gross loans compared to a much higher $436,000 or 0.68 percent of
gross loans at September 30, 2000.
Clay County Savings' board reviews most loans delinquent 30 days or
more on a monthly basis, to assess their collectibility and to initiate any
direct contact with borrowers. When a loan is delinquent 15 days, the
Association sends the borrower a late payment notice. The Association then
initiates both written and oral communication with the borrower if the loan
remains delinquent and sends additional notices after 30 days and 60 days of
delinquency. When the loan becomes delinquent at least 90 days, the Association
will normally commence foreclosure proceedings. The Association does not
normally accrue interest on loans past due 90 days or more unless the loan is
adequately collateralized
26
and in the process of collection. Nonperforming Assets (cont.)
Most loans delinquent 90 days or more are placed on a nonaccrual status, and at
that point in time the Association pursues foreclosure procedures.
Exhibit 16 provides a summary of Clay County Savings' nonperforming
assets at June 30, 2002, and at September 30, 2000 and 2001. Nonperforming
assets normally consist of loans 90 days or more past due, nonaccruing loans and
repossessed assets. The Association had no loans 90 days or more past due and no
repossessed assets at June 30, 2002. The Association has recently carried a
modest level of nonperforming assets. Clay County Savings' level of
nonperforming assets ranged from a high dollar amount of $561,000 or 0.72
percent of total assets at September 30, 2000, to a low dollar amount of $96,000
or 0.12 percent of assets at June 30, 2002. The Association's nonperforming
assets totaled $140,000 at September 30, 2001, representing 0.18 percent of
assets.
Clay County Savings' level of nonperforming assets was similar to its
level of classified assets. The Association's level of classified assets was
$98,000 or 0.13 percent of assets at June 30, 2002 (reference Exhibit 17). The
Association's classified assets consisted of $98,000 in substandard assets, with
none classified as doubtful or loss.
Exhibit 18 shows Clay County Savings' allowance for loan losses at June
30, 2002, and for fiscal years ended 2000 and 2001, indicating the activity and
the resultant balances. Clay County Savings has witnessed a modest increase in
its balance of allowance for loan losses from $176,000 at September 30, 2000 to
$190,000 at September 30, 2001. The balance in allowance for loan losses then
increased further to $193,000 at June 30, 2002, with provisions of $12,000 in
2000, $21,000 in fiscal 2001, and $3,000 in the first nine months ended June 30,
2002. The Association had net charge-offs of $29,000 in fiscal 2000, $7,000 in
fiscal 2001, and zero for the nine months ended June 30, 2002. The Association's
ratio of allowance for loan losses to gross loans was 0.26 percent at September
30, 2000, and a slightly higher 0.30 percent at September 30, 2001, due to a
decrease in gross loans. The
27
allowance for loan losses to gross loans increased to 0.35 percent of loans at
June 30, 2002, due primarily to the Association's continued decrease in loans.
Allowance for loan losses to nonperforming assets
Nonperforming Assets (cont.)
was 31.4 percent at September 30, 2000, and a higher 201.0 percent at June 30,
2002, reflecting the decrease in nonperforming assets.
INVESTMENTS
The investment and securities portfolio, excluding interest-bearing
deposits, has been comprised of federal agency obligations, municipal securities
and equity securities. Exhibit 19 provides a summary of Clay County Savings'
investment portfolio at September 30, 2000 and 2001, and at June 30, 2002,
including FHLB stock. The exhibit also provides a summary of the Association's
mortgage-backed securities, all of which are available-for-sale. Investment
securities totaled $8.1 million at June 30, 2002, compared to $7.4 million at
September 30, 2001, and $5.2 million at September 30, 2000, with all of the
securities available-for-sale, except $16,000 in municipal securities. The
primary component of investment securities at June 30, 2002, was federal agency
obligations, representing 75.7 percent of investments, including FHLB stock
compared to 83.0 percent at September 30, 2000. The Association also had
interest-bearing deposits totaling $9.2 million at June 30, 2002, and a lesser
$1.3 million at September 30, 2000. The Association had $963,000 in FHLB stock
at June 30, 2002, and a lesser $860,000 at September 30, 2000. The Association
had $1.9 million in mortgage-backed securities at June 30, 2002, and a lesser
$1.5 million at September 30, 2000. The weighted average yield on investment
securities was 4.80 percent at June 30, 2002.
28
DEPOSIT ACTIVITIES
The change in the mix of deposits and certificates by rate from
September 30, 2000, to June 30, 2002, is provided in Exhibit 20. There has been
a moderate change in both total deposits and in the deposit mix during this
period. Total average deposits have increased from $53.0 million at September
30, 2000, to $62.9 million at June 30, 2002, representing an
Deposit Activity (cont.)
increase of $9.9 million or 18.7 percent. Certificates of deposit have increased
from $36.0 million at September 30, 2000, to $38.0 million at June 30, 2002,
representing an increase of $2.0 million, while savings, NOW, MMDA and
noninterest-bearing accounts have increased $7.8 million from $17.1 million at
September 30, 2000, to $24.9 million at June 30, 2002.
Certificates of deposit witnessed a decrease in their share of average
deposits, declining from a higher 67.8 percent of deposits at September 30,
2000, to a lower but more normal 60.4 percent of deposits at June 30, 2002. The
major component of certificates at June 30, 2002, had rates between 2.01 percent
and 3.00 percent and represented 34.5 percent of certificates. At September 30,
2000, the major component of certificates was the 5.01 percent to 6.00 percent
category with a much stronger 73.7 percent of certificates. The category
witnessing the strongest growth from September 30, 2000, to June 30, 2002, was
certificates with rates between 2.01 percent and 3.0 percent, which increased
$12.6 million during this time period. The category witnessing the largest
decrease from September 30, 2000, to June 30, 2002, was certificates with rates
between 5.01 percent and 6.00 percent, which declined $21.4 million.
Exhibit 21 provides a breakdown of certificates by maturity as of June
30, 2002. A strong 78.4 percent of the Association's certificates of deposit
mature in one year or less. The largest category of certificates based on
interest rate was certificates with rates from 2.01 percent to 3.0 percent,
totaling $12.6 million, representing 34.7 percent of certificates.
29
Exhibit 22 shows the Association's deposit activity for the two years
ended September 30, 2000 and 2001, and for the nine months ended June 30, 2001
and 2002. Excluding interest credited, Clay County Savings experienced net
increases in deposits in fiscal year 2001 and for the nine months ended June 30,
2001 and 2002. In fiscal year 2000, there was a net decrease in deposits of $3.8
million. Including interest credited, there was a net increase in deposits in
each of the periods except fiscal year 2000. In fiscal year 2000, a net decrease
in deposits of $1.8 million resulted in a 3.2 percent decrease in deposits,
including interest
Deposit Activity (cont.)
credited; and in 2001, there was a net increase in deposits of $5.1 million or
9.6 percent. For the nine months ended June 30, 2002, a net increase in deposits
of $5.6 million produced a net rise of 9.6 percent, or 12.9 percent, annualized.
BORROWINGS
Clay County Savings has made regular use of FHLB advances from
September 30, 1997 to June 30, 2002. The Association had $6.9 million in FHLB
advances at June 30, 2002, with an average rate of 5.97 percent compared to a
larger $17.2 million at September 30, 2000, with an average rate of 6.66
percent. FHLB advances represented 8.9 percent of assets at June 30, 2002,
compared to a much higher 22.1 percent at September 30, 2000 (reference Exhibit
23).
SUBSIDIARIES
Clay County Savings had no wholly-owned subsidiary at June 30, 2002.
30
OFFICE PROPERTIES
Clay County Savings had four full service offices at June 30, 2002,
located in Liberty, Kearney and Smithville (reference Exhibit 24). The
Association has two offices in Liberty, its home office and a branch office.
Clay County Savings owns all of its offices. The Association's net investment in
its office premises totaled $3.9 million or 5.0 percent of assets at June 30,
2002, and the Association's investment in fixed assets was $4.4 million or 5.6
percent of assets at June 30, 2002.
MANAGEMENT
The President, Chief Executive Officer, and Managing Officer of Clay
County Savings is John R. Davis, who is also a director. Mr. Davis joined the
Association in 1981, serving the Association in various capacities. He served
the Association as a loan officer from 1973 to December 1985. He became
President and Chief Executive Officer of the Association in 1986 and was
appointed a director in 1992. Mario Usera is Executive Vice President, Chief
Financial Officer and a director. He joined the Association in 1997 as Vice
President and became Executive Vice President in 1999. He was appointed a
director in 2002. Deborah A. Jones is Senior Vice President, Secretary and
Treasurer. She joined the Association in 1979 and became Vice President and
Treasurer in 1989. She became Secretary in 1999 and became Senior Vice President
in 2001. Debra S. Coltman has been employed at the Association since 1974. She
became Vice President/Lending in 1978 and became Senior Vice President and Chief
Lending Officer in 2001 (reference Exhibit 25).
31
II. DESCRIPTION OF PRIMARY MARKET AREA
Clay County Savings' retail market area encompasses all of Clay County and
Platte County, Missouri ("market area") where the Association's offices are
located. The Association has four offices, all in Clay County, with two located
in Liberty and one each in Smithville and Kearney.
Exhibit 26 provides a summary of key demographic data and trends for the
market area, Liberty City, Clay and Platte Counties, Missouri and the United
States. Overall, from 1990 to 2000, population increased in all areas. The
population increased by 22.0 percent in the market area, by 28.8 percent in
Liberty City, 19.9 percent in Clay County, 27.5 percent in Platte County, 9.3
percent in Missouri and 13.2 percent in the United States. Future population
projections indicate that population will continue to increase in all areas from
2000 through the year 2006. The market area's population is projected to
increase by 12.3 percent with the populations of Liberty City, Clay County,
Platte County, Missouri and the United States projected to increase by 13.4
percent, 11.5 percent, 14.3 percent, 4.8 percent and 7.4 percent, respectively.
Consistent with its modestly rising trend in population, the market area
witnessed an increase in households (families) of 25.5 percent from 1990 to
2000. During that same time period, the number of households increased in
Liberty City by 32.9 percent, in Clay County by 23.0 percent, in Platte County
by 32.4 percent, in Missouri by 11.9 percent and in the United States by 14.7
percent. From 2000 through the year 2006, the market area's households are
projected to continue to increase by 13.8 percent, while the number of
households are expected to increase by 15.9 percent in Liberty City, 12.8
percent in Clay County, 16.3 percent in Platte County, 6.3 percent in Missouri
and by 7.8 percent in the United States.
In 1990, the per capita income in the market area, Liberty City and Clay
and Platte Counties was higher than the per capita income in Missouri and the
United States. The market area had a 1990 per capita income of $15,744, Liberty
City, Clay County, Platte
32
County, Missouri and the United States had 1990 per capita income levels of
$15,873, $15,369,
Description of Primary Market Area (cont.)
$16,737, $12,989 and $14,420, respectively. From 1990 to 2000, per capita income
increased in all areas, with Platte County having the greatest percent increase
to the highest level of per capita income. The market area's per capita income
increased from 1990 to 2000 by 52.6 percent to $24,024. Per capita income
increased by 47.5 percent in Liberty City to $23,415, by 50.6 percent in Clay
County to $23,144, by 57.5 percent in Platte County to $26,356, by 53.5 percent
in Missouri to $19,936 and by 49.7 percent to $21,587 in the United States.
The 1990 median household income of $35,412 in the market area was
higher than the median household income in Missouri at $26,362 and the United
States at $30,056. Liberty City had a 1990 median household income of $36,388,
which was higher than Clay County's median household income of $34,370, but
lower than Platte County's median household income of $38,173. Missouri's median
household income was $26,362 and the United States' median household income was
$30,056. From 1990 to 2000, median household income increased in all areas, with
Platte County indicating the highest rate of increase and the United States the
lowest. Median household income increased by 42.3 percent to $50,403 in the
market area, by 45.0 percent to $52,745 in Liberty City, by 40.7 percent to
$48,347 in Clay County, by 46.3 percent to $55,849 in Platte County, compared to
a 43.9 percent increase to $37,934 in Missouri and a 39.7 percent increase to
$41,994 in the United States. From 2000 to 2006, median household income is
projected to increase by 17.1 percent in the market area, by 21.2 percent in
Liberty City, by 17.3 percent in Clay County, by 16.8 percent in Platte County,
while increasing by 17.8 percent in Missouri and 11.6 percent in the United
States. Based on those rates of increase, by 2006, median household income is
expected to be $59,026 in the market area, $63,912 in Liberty City, $56,691 in
Clay County, $65,214 in Platte County, $44,678 in Missouri, and $46,870 in the
United States.
33
Exhibit 27 provides a summary of key housing data for the market area,
Liberty City, Clay and Platte Counties, Missouri and the United States. In 1990,
the market area had a rate of owner-occupancy of 66.8 percent, lower than
Missouri at 68.8 percent but higher than the United States at 64.2 percent, with
Liberty City at 68.6 percent, Clay County at 67.5 percent
Description of Primary Market Area (cont.)
and Platte County at 65.1 percent. As a result, the market area supported a rate
of renter-occupied housing of 33.2 percent, while renter-occupied housing was
31.4 percent in Liberty City, 32.5 percent in Clay County and 34.9 percent in
Platte County, compared to 31.2 percent for Missouri and 35.8 percent for the
United States. In 2000, owner-occupied housing increased in all the areas to
69.7 percent, 73.5 percent, 70.7 percent, 67.5 percent, 70.3 percent and 66.2
percent in the market area, Liberty City, Clay County, Platte County, Missouri
and the United States, respectively. Conversely, the renter-occupied rates
decreased in all areas to levels of 30.3 percent, 26.5 percent, 29.3 percent,
32.5 percent, 29.7 percent and 33.8 percent in the market area, Liberty City,
Clay County, Platte County, Missouri and the United States, respectively.
The market area's 1990 median housing value of $68,652 was based on
$68,200 in Clay County and $80,800 in Platte County, with all but Platte County
being lower than the United States' median housing value of $79,098. Liberty
City's 1990 median housing value was $76,600 and Missouri's median housing value
was $59,300. The 1990 average median rent of the market area was $432 which
surpasses the median rent of all but Platte County at $443. Liberty City had
median rent of $418, while Clay County, Missouri and the United States had
median rent levels of $429, $368 and $374, respectively. In 2000, median housing
values had risen, with Platte County having the highest level of $126,700 and
Missouri having the lowest at $89,900. The market area had a 2000 median housing
value of $110,873 with Liberty City at $121,600, Clay County at $104,900 and the
United States at a higher $119,600. Median rent levels had also risen, with
Platte County continuing to have the highest level. The 2000 median rent levels
were $593, $551, $576, $640 $484 and
34
$602 in the market area, Liberty City, Clay County, Platte County, Missouri and
the United States, respectively.
In 1990, the major source of employment for the market area by industry
group, based on number of employees, was the services industry at 32.5 percent.
The services industry was responsible for 38.9 percent of jobs in Liberty City,
32.3 percent in Clay County, 33.1 percent
Description of Primary Market Area (cont.)
in Platte County, 35.9 percent in Missouri and 34.0 percent in the United States
(reference Exhibit 28). The wholesale/retail trade group was the second major
employer in the market area at 23.3 percent and also the second leading employer
at 20.8 percent in Liberty City, in Clay County at 24.1 percent, and in Platte
County at 21.0 percent. In Missouri and the United States, the wholesale/retail
trade group was also the second major employer with 21.7 percent and 27.5
percent, respectively. The manufacturing group was the third major overall
employer in the market area at 16.2 percent and represented 17.5 percent of
employment in Liberty City, and 17.2 percent in Clay County. In Platte County,
the transportation/utilities group was the third largest employer at 16.8
percent. In Missouri and the United States, the manufacturing group was also the
third major employer, responsible for 18.6 percent and 19.2 percent,
respectively. The construction group, finance, insurance and real estate group,
transportation/utilities group, and the agriculture/mining groups combined to
provide 28.1 percent of employment in the market area, 22.8 percent of
employment in Liberty City, 26.4 percent of employment in Clay County, 23.8
percent of employment in Missouri and 19.3 percent in the United States. In
Platte County, the agriculture/mining, construction, manufacturing, and finance,
insurance/ real estate group provided 29.1 percent of employment.
In 2000, the services industry, wholesale/retail trade industry and
manufacturing industry provided the first, second and third highest levels of
employment, respectively, for all but Platte County, where the services
industry, wholesale/retail trade and transportation/utilities industries
provided first, second and third highest levels of
35
employment. The services industry accounted for 42.9 percent, 46.6 percent, 42.9
percent, 43.0 percent, 45.3 percent and 46.7 percent in the market area, Liberty
City, Clay County, Platte County, Missouri and the United States, respectively.
The wholesale/retail trade industry provided for 17.2 percent, 16.0 percent,
17.4 percent, 16.1 percent, 15.6 percent and 15.3 percent in the same respective
areas. Manufacturing provided 11.7 percent, 11.0 percent, 12.0 percent, 14.8
percent and 14.1 percent of employment in the market area, Liberty City, Clay
County, Missouri and the United States, respectively. The
transportation/utilities trade industry provided 10.3 percent, or the third
highest level of employment in 2000 in Platte County.
Description of Primary Market Area (cont.)
The market area's major employers were mostly in the services sector.
The two largest employers in the market area are the Hallmark Distribution
Center and Liberty Hospital.
Employer Employees Product/Service
-------- --------- ---------------
Hallmark Distribution
Center 1,486 Cards/gifts/misc.
Liberty Hospital 1,403 Health care
Liberty School District 760 Education
Clay County 482 Government
William Jewell College 425 Education
Banta Publications 410 Publishing
Price Chopper 405 Retail
The unemployment rate is another key economic indicator. Exhibit 29
shows the unemployment rates in the market area, Clay and Platte Counties,
Missouri and the United States in 1997 through June 2002. The market area and
both its counties have been characterized by lower unemployment rates than both
Missouri and the United States. In 1997, Clay County had an unemployment rate of
2.9 percent, and Platte County had a lower unemployment rate of 2.6 percent
compared to unemployment rates of 4.2 percent in Missouri and 4.5 percent in the
United States. The market area's unemployment rate decreased in 1998 to 2.6
percent. Platte County's rate decreased to 2.5 percent, Clay
36
County's decreased to 2.7 percent, compared to 4.2 percent again in Missouri and
a lower 4.2 percent in the United States. In 1999, the market area again
decreased its rate of unemployment to 2.2 percent, as Clay County's unemployment
decreased to 2.4 percent and Platte County's unemployment decreased to 2.0
percent. Missouri decreased to 3.4 percent, and the United States decreased to
4.0 percent. In 2001, all areas had increases in their unemployment rates. Clay
and Platte Counties' unemployment rates increased to 3.1 percent and 2.8
percent, respectively, and the unemployment rates in Missouri and the United
States increased to 4.7 percent and 4.8 percent, respectively. By June 2002, the
unemployment rate increased to 4.0 percent in the market area, Clay and Platte
Counties, increased to 5.4 percent in Missouri and increased to 6.0 percent in
the United States.
Description of Primary Market Area (cont.)
The market area is characterized by a higher than average level of
income when compared to Missouri and the United States and a level of housing
value higher than Missouri but lower than the United States. In addition,
unemployment rates in Clay and Platte Counties have been consistently lower than
Missouri and national unemployment rates. Both Clay and Platte Counties'
unemployment rates have decreased until recent, when all unemployment rates have
increased. Both the market area counties' unemployment rates have been lower
than Missouri's unemployment rates. In both the 1990 and the 2000 Census, the
market area's strongest employment categories were the services industry, the
wholesale/retail trade industry and the manufacturing industry.
Exhibit 30 provides deposit data for banks and thrifts in the market
area. Clay County Savings' deposit base in the market area was $60.0 million or
an 11.6 percent share of the $500.0 million total thrift deposits but only a 2.1
percent share of the total deposits, which were $2.7 billion as of June 30,
2001. It is evident from the size of the thrift deposits and bank deposits that
the market area has a moderate deposit base, with Clay County Savings having a
modest level of market penetration for thrift deposits and a small share of
market penetration of total deposits.
37
Exhibit 31 provides interest rate data for each quarter for the years
1999 through 2001 and for the first two quarters of 2002. The interest rates
tracked are the Prime Rate, as well as 90-Day, One-Year and Thirty-Year Treasury
Bills. Short term interest rates experienced a rising trend in 1999 and 2000 and
then a rapidly decreasing trend in 2001. This decreasing trend continued into
the second quarter of 2002 with prime now at 4.75 percent, its lowest level
during the past four years.
Description of Primary Market Area (cont.)
SUMMARY
To summarize, the market area represents an area with rising population
and household trends during the 1990s and early 2000s. Such growth is projected
to continue through 2006. The market area displayed a slightly higher per capita
income and median household income than both Missouri and the United States. In
1990, the median rent level of the market area was higher than Missouri's median
rent and the United States. By 2000, the median rent level of the market area
was still higher than Missouri's median rent but less than the United States. In
1990, the market area's median housing value was higher than Missouri's but
lower than in the United States, and in 2000, the market area's median housing
value was again higher than Missouri's median housing value but below the United
States. The market area has had a modestly lower unemployment rate when compared
to both Missouri and the United States. Finally, the market area is a very
competitive financial institution market dominated by banks, with a moderate
presence of thrifts, and a total market deposit base for banks and thrifts in
the market area that is $2.7 billion in deposits.
38
III. COMPARABLE GROUP SELECTION
Introduction
Integral to the valuation of the Corporation is the selection of an
appropriate group of publicly-traded thrift institutions, hereinafter referred
to as the "comparable group." This section identifies the comparable group and
describes each parameter used in the selection of each institution in the group,
resulting in a comparable group based on such specific and detailed parameters,
current financials and recent trading prices. The various characteristics of the
selected comparable group provide the primary basis for making the necessary
adjustments to the Corporation's pro forma value relative to the comparable
group. There is also a recognition and consideration of financial comparisons
with all publicly-traded, FDIC-insured thrifts in the United States and all
publicly-traded, FDIC-insured thrifts in the Midwest region and in Missouri.
Exhibits 31 and 32 present Thrift Stock Prices and Pricing Ratios and
Key Financial Data and Ratios, respectively, both individually and in aggregate,
for the universe of 272 publicly-traded, FDIC-insured thrifts in the United
States ("all thrifts"), excluding mutual holding companies, used in the
selection of the comparable group and other financial comparisons. Exhibits 31
and 32 also subclassify all thrifts by region, including the 107 publicly-traded
Midwest thrifts ("Midwest thrifts") and the 8 publicly-traded thrifts in
Missouri ("Missouri thrifts"), and by trading exchange. Exhibit 33 presents
prices, pricing ratios and price trends for all FDIC-insured thrifts completing
their conversions between June 30, 2001, and August 23, 2002.
The selection of the comparable group was based on the establishment of
both general and specific parameters using financial, operating and asset
quality characteristics of Clay County Savings as determinants for defining
those parameters. The determination of parameters was also based on the
uniqueness of each parameter as a normal indicator of a thrift
39
Introduction (cont.)
institution's operating philosophy and perspective. The parameters established
and defined are considered to be both reasonable and reflective of Clay County
Savings' basic operation.
Inasmuch as the comparable group must consist of at least ten
institutions, the parameters relating to asset size and geographic location have
been expanded as necessary in order to fulfill this requirement.
GENERAL PARAMETERS
Merger/Acquisition
The comparable group will not include any institution that is in the
process of a merger or acquisition due to the price impact of such a pending
transaction. The following thrift institutions were potential comparable group
candidates but had to be eliminated due to their involvement in a
merger/acquisition.
Institution State
----------- -----
PFSB Bancorp. Missouri
Prestige Bancorp Pennsylvania
USABancshares.com, Inc. Pennsylvania
There is are no pending merger/acquisition transaction involving thrift
institutions in Clay County Savings' city, county or market area, as indicated
in Exhibit 35.
40
Mutual Holding Companies
The comparable group will not include any mutual holding companies. The
percentage of public ownership of individual mutual holding companies indicates
a wide range from minimal to 49.0 percent, the largest permissible percentage,
causing them to demonstrate certain varying individual characteristics different
among themselves and from conventional, publicly-traded companies. A further
reason for the elimination of mutual holding companies as potential comparable
group candidates relates to the presence of a mid-tier, publicly-traded holding
company in some, but not all, mutual holding company structures. The presence of
mid-tier holding companies can also result in inconsistent and unreliable
comparisons among the relatively small universe of 43 publicly-traded mutual
holding companies as well as between those 43 entities and the larger universe
of conventional, publicly-traded thrift institutions. As a result of the
foregoing and other factors, mutual holding companies typically demonstrate
higher pricing ratios that relate to their minority ownership structure and are
inconsistent in their derivation with those calculated for conventionally
structured, publicly-traded institutions. In our opinion, it is appropriate to
limit individual comparisons to institutions that are 100 percent publicly
owned. Exhibit 35 presents pricing ratios and Exhibit 36 presents key financial
data and ratios for the 43 publicly-traded, FDIC-insured mutual holding
companies in the United States. The following thrift institutions were potential
comparable group candidates, but were not considered due to their mutual holding
company form:
Institution State
----------- -----
Mid-Southern Savings Bank (MHC) Indiana
Webster City Fed. Bancorp, MHC Iowa
Jacksonville Savings Bank, MHC Missouri
Liberty Savings Bank (MHC) Missouri
Wayne Savings Bancshares, MHC Ohio
Eureka Bank (MHC) Pennsylvania
Skibo Financial Corp. Pennsylvania
Jefferson FSLA (MHC) Tennessee
41
Trading Exchange
It is necessary that each institution in the comparable group be listed
on one of the three major stock exchanges, the New York Stock Exchange, the
American Stock Exchange, or the National Association of Securities Dealers
Automated Quotation System (NASDAQ), or on the OTC Bulletin Board or in the Pink
Sheets. Such a listing indicates that an institution's stock has demonstrated
trading activity and is responsive to normal market conditions, which are
requirements for listing. Of the 315 publicly-traded, FDIC-insured institutions,
including 43 mutual holding companies, 15 are traded on the New York Stock
Exchange, 22 are traded on the American Stock Exchange, 216 are traded on
NASDAQ, 56 are listed on the OTC Bulletin Board and 6 are listed in the Pink
Sheets.
IPO Date
Another general parameter for the selection of the comparable group is
the initial public offering ("IPO") date, which must be at least four quarterly
periods prior to the trading date of August 23, 2002, used in this report, in
order to insure at least four consecutive quarters of reported data as a
publicly-traded institution. The resulting parameter is a required IPO date
prior to June 30, 2001.
Geographic Location
The geographic location of an institution is a key parameter due to the
impact of various economic and thrift industry conditions on the performance and
trading prices of thrift institution stocks. Although geographic location and
asset size are the two parameters that have been developed incrementally to
fulfill the comparable group requirements, the geographic location parameter has
nevertheless eliminated regions of the United States distant to Clay County
Savings, including the New England, western, southwestern and southeastern
states.
42
Geographic Location (cont.)
The geographic location parameter consists of Missouri and its
surrounding states of Iowa, Illinois, Kentucky, Tennessee, Arkansas, Oklahoma,
Kansas and Nebraska, as well as the states of Indiana, Ohio and Wisconsin, for a
total of eleven states. To extend the geographic parameter beyond those states
could result in the selection of similar thrift institutions with regard to
financial conditions and operating characteristics, but with different pricing
ratios due to their geographic regions. The result could then be an
unrepresentative comparable group with regard to price relative to the
parameters and, therefore, an inaccurate value.
Asset Size
Asset size was another key parameter used in the selection of the
comparable group. The range of total assets for any potential comparable group
institution was $300 million or less, due to the general similarity of asset mix
and operating strategies of institutions in this asset range, compared to Clay
County Savings, with assets of approximately $77.9 million. Such an asset size
parameter was necessary to obtain an appropriate comparable group of at least
ten institutions.
In connection with asset size, we did not consider the number of
offices or branches in selecting or eliminating candidates, since that
characteristic is directly related to operating expenses, which are recognized
as an operating performance parameter.
SUMMARY
Exhibits 37 and 38 show the 55 institutions considered as comparable
group candidates after applying the general parameters, with the shaded lines
denoting the institutions ultimately selected for the comparable group using the
balance sheet, performance and asset quality
43
Summary (cont.)
parameters established in this section. It should be noted that the comparable
group candidates may be members of either the Bank Insurance Fund (BIF) or the
Savings Association Insurance Fund (SAIF), since many members of each fund hold
significant balances of deposits insured by the other fund and, following the
recapitalization of the SAIF in 1996, deposit insurance premiums assessed by the
two funds are now similar.
BALANCE SHEET PARAMETERS
Introduction
The balance sheet parameters focused on seven balance sheet ratios as
determinants for selecting a comparable group, as presented in Exhibit 37. The
balance sheet ratios consist of the following:
1. Cash and Investments/Assets
2. Mortgage-Backed Securities/Assets
3. One- to Four-Family Loans/Assets
4. Total Net Loans/Assets
5. Total Net Loans and Mortgage-Backed Securities/Assets
6. Borrowed Funds/Assets
7. Equity/Assets
The parameters enable the identification and elimination of thrift
institutions that are distinctly and functionally different from Clay County
Savings with regard to asset mix. The balance sheet parameters also distinguish
institutions with a significantly different capital position from Clay County
Savings. The ratio of deposits to assets was not used as a parameter as it is
directly related to and affected by an institution's equity and borrowed funds
ratios, which are separate parameters.
44
Cash and Investments to Assets
Clay County Savings' ratio of cash and investments to assets was 22.0
percent at June 30, 2002, excluding FHLB stock, and reflects a share of
investments somewhat higher than national and regional averages. The
Association's investments consist primarily of federal agency and municipal
securities, FHLB and other interest-bearing deposits and equity securities. For
its most recent five fiscal years, Clay County Savings' average ratio of cash
and investments to assets was a considerably lower 11.0 percent, from a high of
13.5 percent at September 30, 1998, to a low of 7.8 percent at September 30,
1997, indicating fairly constant ratios through the end of fiscal 2001, with
deposit growth in 2002 deployed primarily to investments rather than loans. It
should be noted that, for the purposes of comparable group selection, Clay
County Savings' $963,000 balance of Federal Home Loan Bank stock at June 30,
2002, is included in the other assets category, rather than in cash and
investments, in order to be consistent with reporting requirements and sources
of statistical and comparative analysis related to the universe of comparable
group candidates and the final comparable group.
The parameter range for cash and investments relates to the
Association's historically volatile ratio as well as overall industry volatility
of this parameter as institutions exercise varying liquidity options and
approaches, including the purchase of mortgage-backed and mortgage derivative
securities. The range has been defined as 35.0 or less of assets, with a
midpoint of 17.5 percent.
Mortgage-Backed Securities to Assets
Clay County Savings had a small balance mortgage-backed securities
representing 2.4 percent of assets at June 30, 2002, and a similar five fiscal
year average of 1.7 percent, compared to the current regional average of 8.1
percent of assets and the national average of 12.0 percent of assets for
publicly-traded thrifts. Inasmuch as many institutions purchase mortgage-backed
securities as an alternative to both lending, relative to cyclical loan demand
45
Mortgage-Backed Securities to Assets (cont.)
and prevailing interest rates, and other investment vehicles, this parameter is
relatively broad at 20.0 percent or less of assets and a midpoint of 10.0
percent.
One-to Four-Family Loans to Assets
Clay County Savings' lending activity is focused on the origination of
permanent residential mortgage loans secured by one- to four-family dwellings.
Such one- to four-family loans, including construction loans, represented 58.5
percent of the Association's assets at June 30, 2002, which is moderately higher
than both the national average of 44.2 percent and the 44.0 percent average for
savings institutions in the Midwest. Consistent with its larger than average
share of one- to four family loans, the Association had smaller than average
shares of multi-family, nonresidential and nonmortgage loans.
The parameter for this characteristic requires any comparable group
institution to have from 25.0 percent to 75.0 percent of its assets in one- to
four-family loans with a midpoint of 50.0 percent.
Total Net Loans to Assets
At June 30, 2002, Clay County Savings had a 68.1 percent ratio of total
net loans to assets, which is identical to the current national average and
similar to the regional average of 71.8 percent, and a higher five fiscal year
average of 81.9 percent. The parameter for the selection of the comparable group
is from 45.0 percent to 90.0 percent with a midpoint of 67.5 percent. The
broadness of the range recognizes the Association's historical ratios and the
fact that, as the referenced national and regional averages indicate, many
larger institutions purchase a greater volume of investment securities and/or
mortgage-backed securities as cyclical alternatives to lending, but may
otherwise be similar to Clay County Savings.
46
Total Net Loans and Mortgage-Backed Securities to Assets
As discussed previously, Clay County Savings had a 68.1 percent ratio
of total net loans to assets and had mortgage-backed securities equal to 2.4
percent of assets at June 30, 2002, for a combined share of 70.5 percent of
assets. Recognizing the industry and regional ratios of 12.0 percent and 8.1
percent, respectively, of mortgage-backed securities to assets, the parameter
range for the comparable group in this category is 60.0 percent to 90.0 percent,
with a midpoint of 75.0 percent.
Borrowed Funds to Assets
Clay County Savings had a $6.9 million balance of borrowed funds at
June 30, 2002, consisting of FHLB advances, representing 8.8 percent of assets.
At September 30, 2001, the Association's borrowed funds were $11.9 million or a
larger 15.4 percent of assets, and its five fiscal year average was 13.7 percent
with a decreasing share since September 30, 2000, as the Association made
greater use of deposits to fund its asset growth. The institutional demand for
borrowed funds increased from1997 through 2001, due to the difficulty in
competing for deposits, resulting in an increase in borrowed funds by many
institutions as an alternative to higher cost and/or shorter term certificates.
The use of borrowed funds by some thrift institutions indicates an alternative
to retail deposits and may provide a source of term funds for lending. The
federal insurance premium on deposits has also increased the attractiveness of
borrowed funds. The ratio of borrowed funds to assets, therefore, does not
typically indicate higher risk or more aggressive lending, but primarily an
alternative to retail deposits.
The parameter range of borrowed funds to assets is 30.0 percent or less
with a midpoint of 15.0 percent, lower than the national averages of 34.0
percent for publicly-traded thrifts and 26.9 percent for all FDIC-insured
savings institutions.
47
Equity to Assets
Clay County Savings' equity to assets ratio as of June 30, 2002, was
8.4 percent. After conversion, based on the midpoint value and public offering
of $7.4 million, with 50.0 percent of the net proceeds of the public offering
going to the Association, Clay County Savings' equity to assets ratio is
projected to stabilize in the range of 12.0 percent to 13.0 percent. The
consolidated pro forma equity to assets ratio for the Corporation is projected
to be 14.8 percent following conversion at the midpoint of the valuation range
established in this appraisal. Based on those equity ratios, we have defined the
equity ratio parameter to be from 6.0 percent to 16.0 percent with a midpoint
ratio of 11.0 percent.
PERFORMANCE PARAMETERS
Introduction
Exhibit 38 presents five parameters identified as key indicators of
Clay County Savings' earnings performance and the basis for such performance
both historically and during the four quarters ended June 30, 2002. The primary
performance indicator is the Association's return on average assets (ROAA). The
second performance indicator is the Association's return on average equity
(ROAE). To measure the Association's ability to generate net interest income, we
have used net interest margin. The supplemental source of income for the
Association is noninterest income, and the parameter used to measure this factor
is the ratio of noninterest income to assets. The final performance indicator is
the Association's ratio of operating expenses or noninterest expenses to assets,
a key factor in distinguishing different types of operations, particularly
institutions that are aggressive in secondary market activities, which often
results in much higher operating costs and overhead ratios.
48
Return on Average Assets
The key performance parameter is the ROAA. For the twelve months ended
June 30, 2002, Clay County Savings' ROAA was 0.12 percent based on net earnings
after taxes and 0.07 percent based on core or normalized earnings after taxes,
as detailed in Item I of this report and presented in Exhibit 7. The
Association's ROAA over its prior five fiscal years, based on net earnings, has
ranged from a low of (0.14) percent in 2001 to a high of 0.37 percent in 1997,
with an average ROAA of 0.20 percent. The consolidated ROAA for the Association
and the Corporation on a pro forma basis at the time of conversion is projected
to be 0.07 percent based on core income at the midpoint valuation.
For consistency and in recognition of the differences between net and
core income for many institutions, we have elected to base our ROAA analysis and
comparison on core or normalized income for both Clay County Savings and the
comparable group. Considering the historical, current and projected earnings
performance of Clay County Savings, the range for the ROAA parameter based on
core income has been defined as 0.70 percent or lower, with a midpoint of 0.35
percent.
Return on Average Equity
The ROAE has been used as a secondary parameter to eliminate any
institutions with an unusually high or low ROAE that is inconsistent with the
Association's position. This parameter does not provide as much meaning for a
newly converted thrift institution as it does for established stock
institutions, due to the unseasoned nature of the capital structure of the newly
converted thrift and the inability to accurately reflect a mature ROAE for the
newly converted thrift relative to other stock institutions.
The consolidated ROAE for the Association and the Corporation on a pro
forma basis at the time of conversion will be 0.49 percent based on core income
at the midpoint valuation. Prior to conversion, the Association's ROAE for the
twelve months ended June 30, 2002, was
49
Return on Average Equity (cont.)
1.55 percent based on net income and 0.83 percent based on core income, with a
five fiscal year average net ROAE of 2.25 percent. The parameter range for the
comparable group, based on core income, is 10.0 percent or lower, with a
midpoint of 5.0 percent.
Net Interest Margin
Clay County Savings had a net interest margin of 2.88 percent for the
twelve months ended June 30, 2002, representing net interest income as a
percentage of average interest-earning assets. The Association's range of net
interest margin for the five previous fiscal years has been generally constant,
from a low of 2.64 percent in 2001 to a high of 3.20 percent in 1999 with a five
year average of 2.88 percent and a fairly stable trend.
The parameter range for the selection of the comparable group is from a
low of 2.00 percent to a high of 4.00 percent with a midpoint of 3.00 percent.
Operating Expenses to Assets
For the twelve months ended June 30, 2002, Clay County Savings had a
significantly higher than average 2.92 percent ratio of operating expense to
average assets. The Association's operating expenses indicated a marked and
consistent increase beginning in 1999, resulting from new office expansion and
expansion of services and staffing, with their ratio to average assets
fluctuating from a low of 2.33 percent in 1997 to a high of 3.01 percent in
2001, for a five fiscal year average of 2.64 percent.
The operating expense to assets parameter for the selection of the
comparable group is from a low of 2.00 percent to a high of 4.00 percent with a
midpoint of 3.00 percent.
50
Noninterest Income to Assets
Including significant gains on the sale of loans during its last four
fiscal years and the twelve months ended June 30, 2002, Clay County Savings has
consistently experienced a lower than average dependence on noninterest income
as a source of additional income compared to publicly-traded savings
institutions. The Association's ratio of noninterest income to average assets
was 0.42 percent for the twelve months ended June 30, 2002, including a $90,000
gain on the sale of loans. Clay County Savings' average annual ratio of
noninterest income for the past four fiscal years has been 0.22 percent of
average assets since fiscal year 1996, with annual ratios ranging from 0.17
percent in both 1995 and 2000 to 0.33 percent in 2001.
The range for this parameter for the selection of the comparable group
is 0.90 percent or less of average assets, with a midpoint of 0.45 percent.
ASSET QUALITY PARAMETERS
Introduction
The final set of financial parameters used in the selection of the
comparable group are asset quality parameters, also shown in Exhibit 38. The
purpose of these parameters is to insure that any thrift institution in the
comparable group has an asset quality position similar to that of Clay County
Savings. The three defined asset quality parameters are the ratios of
nonperforming assets to total assets, repossessed assets to total assets and
loan loss reserves to total assets at the end of the most recent period.
Nonperforming Assets to Assets
Clay County Savings' ratio of nonperforming assets to assets was 0.12
percent at June
51
Nonperforming Assets to Assets (cont.)
30, 2002, which is considerably lower than both the national average of 0.76
percent for publicly-traded thrifts and the Midwest regional average of 1.04
percent, and slightly lower than its 0.18 percent ratio at September 30, 2001.
For the five fiscal years ended September 30, 1997 to 2001, the Association's
ratio fluctuated from a low of 0.18 percent at September 30, 2001, to a high of
0.72 percent at September 30, 2000, with a five year average of 0.36 percent.
The parameter range for nonperforming assets to assets has been defined
as 1.00 percent of assets or less with a midpoint of 0.50 percent.
Repossessed Assets to Assets
Clay County Savings was absent repossessed assets at June 30, 2002, but
had repossessed assets of $133,000 or 0.17 percent of assets and $193,000 or
0.25 percent of assets at September 30, 2001 and 2000, respectively. For its
fiscal years ended September 30, 1997, 1998 and 1999, the Association was absent
repossessed assets. National and regional averages were 0.11 percent and 0.16
percent, respectively, for publicly-traded savings institutions and 0.08 for all
FDIC-insured savings institutions at the end of their most recent quarters.
The range for the repossessed assets to total assets parameter is 0.50
percent of assets or less with a midpoint of 0.25 percent.
Loans Loss Reserves to Assets
Clay County Savings had an allowance for loan losses of $193,000,
representing a loan loss allowance to total assets ratio of 0.25 percent at June
30, 2002, which is nominally higher than its 0.24 percent ratio at September 30,
2001, and its ratio of 0.23 percent at September 30,
52
Loans Loss Reserves to Assets (cont.)
2000. For its previous four fiscal years, the Association's loan loss reserve
averaged 0.25 percent of assets from a low of 0.23 percent in 2000 to a high of
0.27 percent in 1999, indicating a constant ratio, significantly lower than the
industry average.
The loan loss allowance to assets parameter range used for the
selection of the comparable group required a minimum ratio of 0.20 percent of
assets.
THE COMPARABLE GROUP
With the application of the parameters previously identified and
applied, the final comparable group represents ten institutions identified in
Exhibits 39, 40 and 41. The comparable group institutions range in size from
$68.9 million to $299.7 million with an average asset size of $154.5 million and
have an average of 3 offices per institution. One of the comparable group
institutions was converted in 1991, two in 1993, one in 1995, four in 1996, one
in 1997 and one in 1998. Seven of the comparable group institutions are traded
on NASDAQ, two are traded over the counter and one is listed in the Pink Sheets.
All ten institutions are SAIF members. The comparable group institutions as a
unit have an 11.01 percent ratio of equity to assets, which is higher than the
7.84 percent for all publicly-traded thrift institutions in the United States
and the 10.50 percent for the publicly-traded thrift institutions in Missouri;
and for the most recent four quarters indicated a core return on average assets
of 0.53 percent, lower than all publicly-traded thrifts at 1.08 percent and
publicly-traded Missouri thrifts at 1.10 percent.
53
IV. ANALYSIS OF FINANCIAL PERFORMANCE
This section reviews and compares the financial performance of Clay
County Savings to all publicly-traded thrifts, to publicly-traded thrifts in the
Midwest region and to Missouri thrifts, as well as to the ten institutions
constituting Clay County Savings' comparable group, as selected and described in
the previous section. The comparative analysis focuses on financial condition,
earning performance and pertinent ratios as presented in Exhibits 42 through 47.
As presented in Exhibits 42 and 43, at June 30, 2002, Clay County
Savings' total equity of 8.38 percent of assets was lower than the 11.01 percent
for the comparable group, the 8.61percent for Midwest thrifts and the 10.50
percent for Missouri thrifts, but modestly higher than the 7.84 percent for all
thrifts. The Association had a 68.13 percent share of net loans in its asset
mix, similar to the comparable group at 67.23 percent and all thrifts at 68.13
percent, but lower than Midwest thrifts at 71.76 percent and Missouri thrifts at
75.32 percent. Clay County Savings' share of net loans, lower than industry
averages, is primarily the result of its higher 21.96 percent share of cash and
investments and lower 2.41 percent share of mortgage-backed securities. The
comparable group had a similar 21.03 percent share of cash and investments and a
higher 8.39 percent share of mortgage-backed securities. All thrifts had 11.95
percent of assets in mortgage-backed securities and 15.92 percent in cash and
investments. Clay County Savings' 81.76 percent share of deposits was moderately
higher than the comparable group and significantly higher than the three
geographic categories, reflecting the Association's lower 8.84 percent ratio of
borrowed funds to assets. The comparable group had deposits of 72.56 percent and
borrowings of 14.64 percent. All thrifts averaged a 55.40 percent share of
deposits and 34.00 percent of borrowed funds, while Midwest thrifts had a 63.32
percent share of deposits and a 25.44 percent share of borrowed funds. The eight
Missouri thrifts averaged a 65.73 percent share of deposits and a 22.77 percent
share of borrowed funds. Clay County Savings had intangible assets in the form
of mortgage servicing rights equal to 0.01 percent of total assets at June 30,
2002, compared to 0.10 percent for the comparable group, 0.45 percent for all
thrifts, 0.31 percent for Midwest thrifts and 0.28 percent for Missouri thrifts.
54
Analysis of Financial Performance (cont.)
Operating performance indicators are summarized in Exhibits 44 and 45
and provide a synopsis of key sources of income and key expense items for Clay
County Savings in comparison to the comparable group, all thrifts, and regional
thrifts for the trailing four quarters.
As shown in Exhibit 46, for the twelve months ended June 30, 2002, Clay
County Savings had a yield on average interest-earning assets lower than the
comparable group, all thrifts, Midwest thrifts and the eight Missouri thrifts.
The Association's yield on interest-earning assets was 6.50 percent compared to
the comparable group at 6.72 percent, all thrifts at 6.69 percent, Midwest
thrifts at 6.94 percent and Missouri thrifts at 7.31 percent.
The Association's cost of funds for the twelve months ended June 30,
2002, was lower than the comparable group, Midwest thrifts and Missouri thrifts,
but higher than the national average for publicly-traded thrifts. Clay County
Savings had an average cost of interest-bearing liabilities of 3.73 percent
compared to 4.04 percent for the comparable group, 3.43 percent for all thrifts,
4.10 percent for Midwest thrifts and 4.20 percent for Missouri thrifts. The
Association's lower yield on interest-earning assets in conjunction with its
generally lower average cost of interest-bearing liabilities, resulted in net
interest income of 2.69 percent of average total assets, which was lower than
the comparable group at 2.83 percent, all thrifts at 3.11 percent, Midwest
thrifts at 2.78 percent and Missouri thrifts at 3.38 percent. Clay County
Savings generated a net interest margin of 2.88 percent for the twelve months
ended June 30, 2002, based on its ratio of net interest income to average
interest-earning assets, which was lower than the comparable group ratio of 3.05
percent. All thrifts averaged a higher 3.37 percent net interest margin for the
trailing four quarters, with Midwest thrifts at 2.99 percent. Missouri thrifts
were considerably higher at 3.52 percent.
Clay County Savings' major source of income is interest earnings, as is
evidenced by the operations ratios presented in Exhibit 45. The Association took
a $3,000 provision for loan losses during the twelve months ended June 30, 2002,
representing less than 0.01 percent of
55
Analysis of Financial Performance (cont.)
average assets and reflecting the Association's low balance of nonperforming
assets and lower ratio of reserves for loan losses to nonperforming assets. The
comparable group indicated a provision representing 0.08 percent of assets, with
all thrifts at 0.22 percent, Midwest thrifts at 0.23 percent and Missouri
thrifts at 0.15 percent.
The Association's non-interest income was $341,000 or 0.42 percent of
average assets for the twelve months ended June 30, 2002, including its $90,000
gain on the sale of loans. Such non-interest income ratio was similar to the
comparable group at 0.41 percent, but considerably lower than all thrifts at
0.91 percent, Midwest thrifts at 1.07 percent and Missouri thrifts at 0.90
percent. For the twelve months ended June 30, 2002, Clay County Savings'
operating expense ratio was 2.92 percent of average assets, which was higher
than the comparable group at 2.48 percent, all thrifts at 2.08 percent, Midwest
thrifts at 2.30 percent and Missouri thrifts at 2.38 percent.
The overall impact of Clay County Savings' income and expense ratios is
reflected in the Association's net income and return on assets. For the twelve
months ended June 30, 2002, the Association had an ROAA of 0.12 percent based on
net income and a lower ROAA of 0.07 percent based on core income, as indicated
in Exhibit 7. For its most recent four quarters, the comparable group had a
higher net ROAA of 0.60 percent and a higher core ROAA of 0.53 percent. All
publicly-traded thrifts averaged a higher 1.08 percent core ROAA, as did Midwest
thrifts at 0.85 percent and Missouri thrifts at 1.10 percent.
56
V. MARKET VALUE ADJUSTMENTS
This is a conclusive section where adjustments are made to determine the
pro forma market value or appraised value of the Corporation based on a
comparison of Clay County Savings with the comparable group. These adjustments
will take into consideration such key items as earnings performance, primary
market area, financial condition, asset and deposit growth, dividend payments,
subscription interest, liquidity of the stock to be issued, management, and
market conditions or marketing of the issue. It must be noted that all of the
institutions in the comparable group have their differences among themselves and
relative to the Association, and, as a result, such adjustments become
necessary.
EARNINGS PERFORMANCE
In analyzing earnings performance, consideration was given to net
interest income, the amount and volatility of interest income and interest
expense relative to changes in market area conditions and to changes in overall
interest rates, the quality of assets as it relates to the presence of problem
assets which may result in adjustments to earnings, due to chargeoffs, the level
of current and historical classified assets and real estate owned, the balance
of valuation allowances to support any problem assets or nonperforming assets,
the amount and volatility of noninterest income, and the amount and ratio of
noninterest expenses.
As discussed earlier, the Association's historical business philosophy
has focused on increasing its net interest income and noninterest income,
maintaining its lower ratio of nonperforming assets, reducing its higher level
of noninterest expenses and its higher efficiency ratio, and maintaining an
adequate allowance for loan losses to reduce the impact of any unforeseen
losses. Following conversion, the Association's objectives will continue to
focus on increasing its net interest spread and net interest margin, increasing
its net income, return on assets and return on equity and noninterest income.
57
Earnings Performance (cont.)
Earnings are often related to an institution's ability to generate
loans. The Association was an active originator of both mortgage and
non-mortgage loans in fiscal years 2000 and 2001 and during the nine months
ended June 30, 2002, with a strong increase in one- to four-family mortgage
loans to date in 2002. Nevertheless, the declining interest rate environment in
2001 and 2002 generated a high level of refinancing, resulting in an $11.0
million decrease in the Association's net loans in the 21 months from September
30, 2000, to June 30, 2002. For the nine months ended June 30, 2002, annualized,
total loan originations were considerably greater than in fiscal 2001, with most
of the increase occurring in the category of one- to four-family mortgage loans,
with additional increases in multi-family and commercial real estate loans and
consumer loans. During fiscal years 2000 and 2001, total loan originations were
similar at $28.9 million and $25.9 million, respectively, increasing to $32.0
million or $42.7 million annualized, during the nine months ended June 30, 2002.
One- to four-family mortgage loan originations increased by $20.2 million or
$27.0 million annualized during the nine months ended June 30, 2002, compared
originations in that category of $11.9 million and $10.7 million in fiscal years
2001 and 2000, respectively. On an annualized basis, originations of
multi-family and commercial real estate loans increased by 344.2 percent and
300.8 percent during the nine months ended June 30, 2002, compared to fiscal
year 2001, while annualized consumer loan originations increased 48.8 percent
during like comparative periods.
For the nine months ended June 30, 2002, one- to four-family loans,
multi-family loans, commercial real estate loans, construction loans, consumer
loans and commercial business loans represented 63.1 percent, 2.5 percent, 7.2
percent, 16.6 percent, 9.3 percent and 1.3 percent, respectively, of total loan
originations. In comparison, during fiscal year 2001, one- to four-family loans,
multi-family loans, commercial real estate loans, construction loans, consumer
loans and commercial business loans represented 46.1 percent, 0.9 percent, 3.0
percent, 37.8 percent, 10.2 percent and 2.0 percent, respectively, of total loan
originations.
58
Earnings Performance (cont.)
Total mortgage and non-mortgage loan originations were $32.0 million in
the nine months ended June 30, 2002, reduced by repayments, loan sales and other
adjustments of $38.2 million, resulted in a decrease of $6.2 million in gross
loans receivable to 53.1 million at June 30, 2002, compared to September 30,
2001. In fiscal year 2001, total loan originations of $25.9 million, reduced by
repayments, loan sales and other adjustments of $30.7 million, resulted in a
decrease of $4.8 million in gross loans receivable to $59.3 million at September
30, 2001, compared to $64.1 million at September 30, 2000.
The impact of Clay County Savings' primary lending efforts has been to
generate a yield on average interest-earning assets of 6.50 percent for the
twelve months ended June 30, 2002, compared to a higher 6.72 percent for the
comparable group, 6.69 percent for all thrifts and 6.94 percent for Midwest
thrifts. The Association's ratio of interest income to average assets was a
lower 6.08 percent for the twelve months ended June 30, 2002, which was also
lower than the comparable group at 6.33 percent, all thrifts at 6.18 percent and
Midwest thrifts at 6.46 percent, reflecting the Association's lower level of
nonearning and nonperforming assets and larger shares of lower yielding one- to
four-family mortgage loans and investments.
Clay County Savings' 3.73 percent cost of interest-bearing liabilities
for the twelve months ended June 30, 2002, was lower than the comparable group
at 4.04 percent, Midwest thrifts at 4.10 percent and Missouri thrifts at 4.20
percent, but higher than all thrifts at 3.43 percent. The Association's
resulting net interest spread of 2.76 percent for the twelve months ended June
30, 2002, was very modestly higher than the comparable group at 2.68 percent,
but lower than all thrifts at 3.26 percent and Midwest thrifts at 2.84. The
Association's net interest margin of 2.88 percent, based on average
interest-earning assets for the twelve months ended June 30, 2002, was modestly
lower than the comparable group at 3.05 percent and Midwest thrifts at 2.99
percent, but more significantly lower than all thrifts at 3.37 percent.
The Association's ratio of noninterest income to assets was 0.42
percent, including gains, for the twelve months ended June 30, 2002, virtually
identical to the comparable group
59
Earnings Performance (cont.)
at 0.41 percent, but much lower than all thrifts at 0.91 percent and Midwest
thrifts at 1.07 percent. A significant 46.6 percent of the Association's
noninterest income is comprised of gains on the sale of loans sold in the
secondary market and gains on the sale of premises.
The Association's operating expenses were significantly higher than the
comparable group, all thrifts and Midwest thrifts. For the twelve months ended
June 30, 2002, Clay County Savings had an operating expenses to assets ratio of
2.92 percent compared to 2.48 percent for the comparable group, 2.08 percent for
all thrifts and 2.30 percent for Midwest thrifts.
For the twelve months ended June 30, 2002, Clay County Savings
generated similar noninterest income, higher noninterest expenses and a lower
net interest margin relative to its comparable group. The Association's
provision for loan losses was less than 0.01 percent compared to 0.08 percent
for the comparable group, 0.22 percent for all thrifts and 0.23 percent for
Midwest thrifts. The Association's lower provision for loan losses has been
typical and is due to the Association's lower risk loan portfolio and lower
chargeoffs. As a result, the Association's net income and core income were much
lower than the comparable group for the twelve months ended June 30, 2002. Based
on net earnings, the Association had a return on average assets of 0.37 percent,
0.31 percent, 0.31 percent, 0.15 percent and (0.14) percent in fiscal years
1997, 1998, 1999, 2000 and 2001, respectively, and 0.12 percent for the twelve
months ended June 30, 2002. For the trailing twelve months, the comparable group
had a higher net ROAA of 0.60 percent, while all thrifts indicated a still
higher ROAA of 1.11 percent. The Association's core or normalized earnings, as
shown in Exhibit 7, were lower than its net earnings and resulted in a 0.07
percent core return on assets for the twelve months ended June 30, 2002. That
core ROAA was also lower than the comparable group at 0.53 percent, and lower
than all thrifts at 1.08 percent and Midwest thrifts at 0.85 percent.
Clay County Savings' earnings stream will continue to be dependent on a
combination of the overall trends in interest rates, the consistency,
reliability and variation of its noninterest
60
Earnings Performance (cont.)
income and overhead expenses, its provisions for loan losses and any charge-offs
that may be required. Net of nonrecurring gains, noninterest income has remained
generally flat from 1997 through June 30, 2002, while overhead expenses indicate
an increasing trend in their ratio to average assets since 1998, influenced by
the Association's new home office. The Association's net interest margin, lower
than the comparable group, has been the result of its lower yield on assets and
generally average cost of funds. The impact of this trend has been a generally
stable net interest margin with moderate fluctuation during the last five fiscal
years and the nine months ended June 30, 2002. The Association's balance of
nonperforming assets indicates a decreasing trend from fiscal 1998, with the
exception of 2000, when a foreclosure resulted in an increase in repossessed
real estate and the eventual charge-off of $29,000. The Association had no
charge-offs in fiscal 1997, 1998 or 1999, with net charge-offs of $29,000 in
fiscal 2000 and none in fiscal 2001. Clay County Savings' net charge offs were
$10,000 during the nine months ended June 30, 2002.
It has also been recognized that Clay County Savings' current core
ROAA, in addition to being much lower than that of its comparable group, has
decreased consistently since September 30, 1999, although its net interest
margin and net interest spread have remained generally stable.
In recognition of the foregoing earnings related factors, with
consideration to Clay County Savings' current performance measures, a maximum
downward adjustment has been made to Clay County Savings' pro forma market value
for earnings performance.
MARKET AREA
Clay County Savings' primary market area for both retail deposits and
lending consists of Clay and Platte Counties, Missouri. As discussed in Section
II, from 1990 to 2000, this
61
primary market area experienced an increase in population and households. That
population
Market Area (cont.)
and household growth, accompanied by higher per capita income and household
income, was moderately higher than Missouri and the United States, but only
modestly higher than the comparable group markets. Between 2000 and 2006, the
population and median household income of Clay County Savings' market area are
projected to increase at a considerably slower rate than during the previous
decade. In both 1990 and 2000, the median housing value in the Association's
market area was lower than in Missouri and the United States and similar to the
comparable group markets. The average unemployment rate in the Association's
primary market area was 2.8 percent in 1997, compared to 4.2 percent in Missouri
and 4.5 percent in the United States. By June, 2000, the primary market area's
unemployment rate increased to 4.0 percent, while Missouri's unemployment rate
increased to 5.4 percent and the rate in the United States increased to 6.0
percent. In June, 2000, the average of the comparable group markets was similar
to the Association's market area.
Clay County Savings' primary market area is characterized by both
growing suburban Kansas City residential communities and smaller, stagnant
agricultural and rural areas. In the Association's primary market area, the
services sector represented the primary source of employment in 2000, followed
by the manufacturing and the wholesale/retail sectors, generally consistent with
both state and national proportions. The agriculture and manufacturing sectors
decreased modestly from 1990 to 2000, as residential development increased.
The financial competition in Clay County Savings' primary market area,
based on total deposits, is moderate, although competition is intense, with
commercial banks holding a strong 81.5 percent majority of deposits. A large
number of competing financial institution branches of varying sizes and
characteristics operate in and around Clay County Savings' four offices. Since
September 30, 1997, the Association's deposits have grown by only 1.3 percent,
with deposits shrinking from $57.8 million in fiscal year 1997 to $53.0 million
in fiscal year 2000, before rebounding to $63.7 million at June 30, 2002. The
Association's recent growth in deposits has been primarily due to the opening of
its new main office in 2000.
62
Market Area (cont.)
In recognition of the foregoing factors, we believe that no adjustment
is warranted for the Association's primary market area relative to the
comparable group.
FINANCIAL CONDITION
The financial condition of Clay County Savings is discussed in Section
I and shown in Exhibits 1, 2, 5, 15, 16 and 17, and is compared to the
comparable group in Exhibits 41, 42 and 43. The Association's ratio of total
equity to total assets was 8.38 percent at June 30, 2002, which was lower than
the comparable group at 11.01 percent and Midwest thrifts at 8.61 percent, but
higher than all thrifts at 7.84. With a conversion at the midpoint, the
Corporation's pro forma equity to assets ratio will increase to approximately
14.76 percent, and the Association's pro forma equity to assets ratio will
increase to approximately 12.9 percent.
The Association's mix of assets and liabilities indicates some areas of
variation from its comparable group, but also many similarities. Clay County
Savings had a similar 68.1 percent ratio of net loans to total assets at June
30, 2002, compared to the comparable group at 67.2 percent and all thrifts at
68.1 percent. The Association's 22.0 percent share of cash and investments was
also similar to the comparable group at 21.0 percent, while all thrifts were at
15.9 percent and Midwest thrifts were at 16.2 percent. Clay County Savings' 2.4
percent ratio of mortgage-backed securities to total assets was lower than the
comparable group at 8.4 percent and more significantly lower than all thrifts at
12.0 percent. The Association's 81.8 percent ratio of deposits to total assets
was higher than the comparable group at 72.6 percent, all thrifts at 55.4
percent and Midwest thrifts at 63.3 percent. Clay County Savings' 8.8 percent
ratio of borrowed funds to assets was lower than the comparable group at 14.6
percent and much lower than all thrifts at 34.0 percent and Midwest thrifts at
25.4 percent.
Clay County Savings had intangible assets of less than 0.01 percent of
assets, consisting
63
of a small balance of mortgage servicing rights, and was absent real estate
owned, compared
Financial Condition (cont.)
to ratios of 0.10 percent and 0.11 percent of intangible assets and real estate
owned, respectively, for the comparable group. All thrifts had intangible assets
of 0.45 percent and real estate owned of 0.11 percent. The financial condition
of Clay County Savings is enhanced by its low balance of nonperforming assets of
$96,000 or 0.12 percent of assets at June 30, 2002, compared to a higher 0.48
percent for the comparable group, 0.76 percent for all thrifts and 1.04 percent
for Midwest thrifts. Historically, with the exception of fiscal year end 2000,
the Association's dollar balance of nonperforming assets and its ratio of
nonperforming assets to total assets have been lower than industry averages and
have fluctuated moderately since September 30, 1997. The Association's ratio of
nonperforming assets to total assets was 0.36 percent, 0.45 percent, 0.11
percent, 0.72 percent and 0.18 percent at September 30, 1997, 1998, 1999, 2000
and 2001, respectively.
The Association had a lower 5.18 percent share of high risk real estate
loans, compared to 14.12 percent for the comparable group and 17.97 percent for
all thrifts. The regulatory definition of high risk real estate loans is all
mortgage loans other than those secured by one- to four-family residential
properties.
At June 30, 2002, Clay County Savings had $193,000 of allowances for
loan losses, which represented 0.25 percent of assets and 0.36 percent of total
loans. The comparable group indicated allowances equal to 0.32 percent of assets
and a larger 0.48 percent of total loans. More significant, however, is an
institution's ratio of allowances for loan losses to nonperforming assets, since
a portion of nonperforming assets might eventually be charged off. Clay County
Savings' $193,000 of allowances for loan losses, represented 201.04 percent of
nonperforming assets at June 30, 2002, compared to the comparable group's lower
91.44 percent, with all thrifts at 161.47 percent and Midwest thrifts at 110.41
percent. Clay County Savings' ratio of net charge-offs to average total loans,
moreover, was also a lower 0.01 percent for the twelve months ended June 30,
2002, higher than the 0.10 percent for the
64
comparable group, 0.22 percent for all thrifts and 0.21 percent for Midwest
thrifts. This ratio reflects the Association's maintenance of a lower average
ratio of reserves to loans, but a
Financial Condition (cont.)
higher ratio of reserves to nonperforming loans due to the Association's lower
share of higher risk loans and lower chargeoffs.
Clay County Savings has a minimal level of interest rate risk,
evidenced by the modest decrease in its net portfolio value to assets ratio
under conditions of rising interest rates. The Association's net portfolio value
ratio is projected to decrease only 8.0 percent if interest rates increase 200
basis points. Additionally, the Association's Post Shock NPV Ratio at a 200
basis point increase in rates is 11.30 percent, which, together with its
Sensitivity Measure of 77 basis points, results in a minimal risk position, due,
primarily, to the predominance of adjustable-rate mortgage loans in its
portfolio.
Compared to the comparable group, we believe that no adjustment is
warranted for Clay County Savings' current financial condition.
DIVIDEND PAYMENTS
The Corporation does not intend to pay an initial cash dividend on its
common stock. The future payment of cash dividends will depend upon such factors
as earnings performance, financial condition, capital position, growth, asset
quality and regulatory limitations. All of the ten institutions in the
comparable group pay cash dividends for an average dividend yield of 2.79
percent. The average dividend yield is 2.27 percent for Missouri thrifts and
2.09 percent for all thrifts.
In our opinion, no adjustment to the pro forma market value is
warranted at this time related to dividend payments.
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SUBSCRIPTION INTEREST
In general, the reaction of potential thrift IPO investors appears to
be related to a number of factors, including the financial performance and
condition of the converting thrift institution, the strength of the local
economy, general market conditions, the regulatory environment, aftermarket
price trends and the future of merger/acquisition activity in the thrift
industry.
In the first half of 2002, subscription interest in new thrift issues
was generally strong, likely related primarily to a smaller number of offerings
attracting both local and professional investors. The five completed conversions
in the first half of 2002 was the lowest number for any first half of a year in
the history of conversion activity. As of mid-August, 2002, however, there were
thirteen conversions, either announced, filed or pending, including both
standard and second stage transactions. In our opinion, that increasing number
of transactions, together with the overall volatility and uncertainty in the
stock market, might result in more diffuse and restrained subscription activity
during the next six to nine months.
Clay County Savings will direct its offering primarily to depositors
and residents in its primary market area. The board of directors and officers
anticipate purchasing approximately $1,700,000 or 23.0 percent of the stock
offered to the public based on the appraised midpoint valuation. The Association
will form an ESOP, which plans to purchase 8.0 percent of the total shares
issued in the conversion. Additionally, the Prospectus restricts to 10,000
shares, based on the $10.00 per share purchase price, the total number of shares
in the conversion that may be purchased by a single person or by persons and
associates acting in concert as part of either the subscription offering or a
direct community offering.
The Association has secured the services of Trident Securities, a
Division of McDonald Investments, Inc. ("Trident") to assist in the marketing
and sale of the conversion stock.
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Based on the size of the offering, current market conditions, local
market interest and the terms of the offering, we believe that no adjustment is
warranted for the Association's anticipated subscription interest.
LIQUIDITY OF THE STOCK
The Corporation will offer its shares through a subscription offering
and, if required, a subsequent community offering with the assistance of
Trident. The Association will pursue at least two market makers for the stock of
the Corporation. The Association's total offering is considerably smaller in
size to the average market value of the comparable group. The comparable group
has an average market value of $14,580,000 for the stock outstanding compared to
a midpoint value of $7,400,000 for the Corporation, less the ESOP and the
estimated 140,000 shares to be purchased by officers and directors.
Additionally, the stock of the Corporation will trade on the over-the-counter
market and will be listed on the OTC Bulletin Board. The relatively small size
of the offering and its being traded over-the-counter will, therefore, limit the
secondary market liquidity of the stock. Of the ten institutions in the
comparable group, seven trade on NASDAQ, with those seven institutions
indicating average daily trading volume of 890 shares during the last four
quarters, compared to an average daily trading volume of 21 shares for the two
institutions trading over-the-counter.
We have concluded, therefore, that a downward adjustment to the pro
forma market value is warranted relative to the anticipated liquidity of the
Corporation's stock.
MANAGEMENT
The President, Chief Executive Officer, and Managing Officer of Clay
County Savings is John R. Davis, who is also a director. Mr. Davis joined the
Association in 1981, serving the Association in various capacities. He served
the Association as a loan officer from 1973 to December 1985. He became
President and Chief Executive Officer of the Association in 1986
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Management (cont.)
and was appointed a director in 1992. Mario Usera is Executive Vice President,
Chief Financial Officer and a director. He joined the Association in 1997 as
Vice President and became Executive Vice President in 1999. He was appointed a
director in 2002. Deborah A. Jones is Senior Vice President, Secretary and
Treasurer. She joined the Association in 1979 and became Vice President and
Treasurer in 1989. She became Secretary in 1999 and became Senior Vice President
in 2001. Debra S. Coltman has been employed at the Association since 1974. She
became Vice President/Lending in 1978 and became Senior Vice President and Chief
Lending Officer in 2001.
During the past five years, Clay County Savings has been able to
increase its deposit base and total equity, maintain a stable net interest
margin, control nonperforming assets, classified loans and charge-offs, maintain
a minimal interest rate risk position, and maintain its market share in spite of
intense competition. Although the Association's earnings and return on assets
have been below comparable group and industry averages, management is confident
that its branch network is well positioned for moderate growth and enhanced
profitability.
Overall, we believe the Association to be professionally and
knowledgeably managed, as are the comparable group institutions. It is our
opinion that no adjustment to the pro forma market value of the Corporation is
warranted for management.
MARKETING OF THE ISSUE
The necessity to build a new issue discount into the stock price of a
converting thrift institution continues to prevail in recognition of uncertainty
among investors as a result of the thrift industry's dependence on interest rate
trends, recent volatility in the stock market, the general stagnancy of market
prices for financial institutions over the past year, the decrease in merger and
acquisition activity in the financial institution industry, the decrease in
pricing
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Marketing of the Issue (cont.)
ratios and the presence of new competitors in the financial institution industry
such as investment firms, insurance companies and mortgage companies, resulting
in increased pressure to attract retail deposits at normal rates rather than
premium rates. As previously discussed, although subscription interest was
strong for the few transactions closing to date in 2002, the larger number of
current conversions in conjunction with increasing stock market volatility and
economic uncertainty are likely to have a depressing effect on issues closing in
late 2002 and early to mid 2003.
We believe that a new issue discount applied to the price to book value
approach continues and is considered to be reasonable and necessary in the
pricing of the Corporation. We have made a downward adjustment to the
Corporation's pro forma market value in recognition of such a new issue
discount.
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VI. VALUATION METHODS
Historically, the most frequently used method for determining the pro
forma market value of common stock for thrift institutions by appraisal firms
has been the price to book value ratio method, as a result of the volatility of
earnings in the thrift industry in the early to mid-1990s and the continued rise
in volatility in earnings more recently. As earnings in the thrift industry
improved in the last few years, additional emphasis has been placed on the price
to earnings method in analyzing stock valuations.
Inasmuch, however, as the Association did not generated positive
earnings during its most recent fiscal year ended September 30, 2001, and its
earnings for its most recent three fiscal years and for the nine months ended
June 30, 2002, have indicated considerable fluctuation and volatility, in our
judgment the price to earnings approach is not meaningful in determining the pro
forma value of the CCSB Financial Corp. Consequently, primary emphasis has been
placed on the price to book value method, with the price to earnings
calculations providing limited informational, analytical and correlative
perspective with respect to comparable group and industry trends and averages.
In recognition of the volatility and variance in earnings due to
fluctuations in interest rates, the continued differences in asset and liability
repricing and the frequent disparity in value between the price to book approach
and the price to earnings approach, a third valuation method, the price to net
assets method, has also been used. The price to assets method is used less often
for valuing ongoing institutions, but becomes more useful in valuing converting
institutions when the equity position and earnings performance of the
institutions under consideration are different.
In addition to the pro forma market value, we have defined a valuation
range with the minimum of the range being 85.0 percent of the pro forma market
value, the maximum of the range being 115.0 percent of the pro forma market
value, and a maximum, as adjusted, being 115.0 percent of the maximum.
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Valuation Methods (cont.)
In applying each of the valuation methods, consideration was given to
the adjustments to the Association's pro forma market value discussed in Section
V. Downward adjustments were made for the Association's earnings performance,
the liquidity of the Corporation's stock and the marketing of the issue. No
adjustments were made for the Association's market area, financial condition,
dividend payments, subscription interest and management.
PRICE TO BOOK VALUE METHOD
In the valuation of thrift institutions, the price to book value method
focuses on an institution's financial condition, and does not give as much
consideration to the institution's long term performance and value as measured
by earnings. Due to the earnings volatility of many thrift stocks, the price to
book value method is frequently used by investors who rely on an institution's
financial condition rather than earnings performance. This method, therefore, is
sometimes considered more meaningful for institutions such as Clay County
Savings, which has experienced weak and volatile earnings. It should be noted
that the prescribed formulary computation of value using the pro forma price to
book value method returns a price to book value ratio below market value.
Exhibit 49 shows the average and median price to book value ratios for
the comparable group which were 88.12 percent and 80.55 percent, respectively.
The total comparable group indicated a moderately wide range, from a low of
67.10 percent (Harrodsburg First Financial Bancorp) to a high of 131.95 percent
(Hemlock Federal Financial Corp.). The comparable group had a slightly higher
average price to tangible book value ratio of 89.46 percent and an identical
median of 80.55 percent with the same two institutions at either end of the
range. Excluding the low and the high in the group, the price to book value
range narrowed to a low of 69.83 percent and a high of 113.36 percent, and the
range of price to tangible book value ratio narrowed in a like manner.
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Price to Book Value Method (cont.)
Taking into consideration all of the previously mentioned items in
conjunction with the adjustments made in Section V, we have determined a pro
forma price to book value ratio of 59.23 percent and a price to tangible book
value ratio of 59.52 percent at the midpoint. The price to book value ratio
increases from 54.43 percent at the minimum to 67.17 percent at the maximum, as
adjusted, while the price to tangible book value ratio increases from 54.80
percent at the minimum to 67.54 percent at the maximum, as adjusted.
The Corporation's pro forma price to book value and price to tangible
book value ratios of 59.23 percent and 59.52 percent, respectively, are strongly
influenced by the Association's financial condition and earnings, as well as the
limited liquidity of the new stock, the absence of potential merger/acquisition
activity in the future and current market conditions. Based on the price to book
value ratio and the Association's total equity of $6,526,000 at June 30, 2002,
the indicated pro forma market value of the Association using this approach is
$7,427,300 at the midpoint (reference Exhibit 48).
PRICE TO CORE EARNINGS METHOD
In general, the objective of this method is the determination of the
earnings base to be used and secondly, the determination of an appropriate price
to earnings multiple. The recent core earnings position of Clay County Savings
is presented in Exhibit 7, which indicates modest positive after tax core
earnings of $54,000 for the twelve months ended June 30, 2002, compared to net
earnings of $100,000 for the same period. Considering such earnings bases and
trends, we have concluded that the price to net and core earnings methods are
not meaningful, although we have presented a pro forma price to core earnings
multiple that corresponds to the other two valuation methods.
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Price to Core Earnings Method (cont.)
The average price to core earnings multiple for the comparable group
was 21.22, while the median was 16.29. The average price to net earnings
multiple was 16.82, and the median multiple was 13.54 The comparable group's
price to core earnings multiple was higher than the 16.31 average for all
publicly-traded, FDIC-insured thrifts and also higher than their median of
13.56. The range in the price to core earnings multiple for the comparable group
was from a low of 9.13 (Midland Capital Holdings Corp.) to a high of 50.76 (Home
City Financial Corp.). The primary range in the price to core earnings multiple
for the comparable group, excluding the high and low values, was from a low
multiple of 10.25 to a high of 29.80 times core earnings for eight of the ten
institutions in the group.
Based on the correlated value determined using the price to book value
method and the price to assets method, the corresponding pro forma price to core
earnings multiple for Clay County Savings is calculated at 120.43 at the
midpoint, increasing to 134.57 at the maximum and 149.88 at the maximum, as
adjusted.
PRICE TO ASSETS METHOD
The final valuation method is the price to assets method. This method
is not frequently used due to the fact that it does not incorporate an
institution's equity position or earnings performance. Additionally, the
prescribed formulary computation of value using the pro forma price to net
assets method does not recognize the runoff of deposits concurrently allocated
to the purchase of conversion stock, returning a pro forma price to net assets
ratio below its true level following conversion. Exhibit 49 indicates that the
average price to assets ratio for the comparable group was 9.52 percent and the
median was 9.97 percent. The range in the price to assets ratios for the
comparable group varied from a low of 5.21 percent (Midland Capital Holdings
Corp.) to a high of 15.10 percent (Grand Central Financial Corp.). The range
narrows modestly with the elimination of the two extremes in the group to a low
of 5.72
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percent and a high of 11.25 percent.
Price to Assets Method (cont.)
Based on the adjustments made previously for Clay County Savings, it is
our opinion that an appropriate price to assets ratio for the Corporation is
8.74 percent at the midpoint, which ranges from a low of 7.52 percent at the
minimum to 11.24 percent at the maximum, as adjusted.
Based on the Association's June 30, 2002, asset base of $77,872,000,
the indicated pro forma market value of the Corporation using the price to
assets method is $7,408,353 at the midpoint (reference Exhibit 48).
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VALUATION CONCLUSION
Exhibit 54 provides a summary of the valuation premium or discount for
each of the valuation ranges when compared to the comparable group based on each
of the relevant valuation approaches. At the midpoint value, the price to book
value ratio of 59.23 percent for the Corporation represents a discount of 32.79
percent relative to the comparable group and decreases to 23.77 percent at the
super maximum. The price to core earnings multiple of 120.43 for the Corporation
at the midpoint value, presented for informational purposes only, indicates a
premium of 467.58 percent, increasing to a premium of 606.36 percent at the
maximum, as adjusted, but those ratios and discounts were not relevant to the
valuation process. The price to assets ratio at the midpoint represents a
discount of 8.21 percent, changing to a premium of 18.00 percent at the maximum,
as adjusted.
It is our opinion that as of August 23, 2002, the pro forma market
value of the Corporation was $7,400,000 at the midpoint, representing 740,000
shares at $10.00 per share. The pro forma valuation range of the Corporation is
from a minimum of $6,290,000 or 629,000 shares at $10.00 per share to a maximum
of $8,510,000 or 851,000 shares at $10.00 per share, with such range being
defined as 15 percent below the appraised value to 15 percent above the
appraised value. The maximum, as adjusted, is $9,786,500 or 978,650 shares at
$10.00 per share (reference Exhibits 48 to 53).
The appraised value of the Corporation as of August 23, 2002, was
$7,400,000 at the midpoint.
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