As filed with the Securities and Exchange Commission on May 14, 2003
Registration No. 333-104226
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
PRE-EFFECTIVE AMENDMENT NO. 2 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
COMMUNITY FIRST BANCORP, INC.
-----------------------------
(Name of Small Business Issuer in its charter)
Maryland 6035 36-4526348
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(State or other jurisdiction (Primary standard (I.R.S. employer
of incorporation or organization) industrial identification
classification number)
code number)
240 South Main Street
Madisonville, Kentucky 42431
(270) 821-7211
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(Address and telephone number of principal executive offices
and principal place of business)
William M. Tandy, President
and Chief Executive Officer
Community First Bancorp, Inc.
240 South Main Street
Madisonville, Kentucky 42431
(270) 821-7211
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(Name, address and telephone number of agent for service)
Copies to:
James C. Stewart, Esquire Cynthia A. Shafer, Esquire
Malizia Spidi & Fisch, PC Vorys, Sater, Seymour and Pease LLP
1100 New York Avenue, N.W. 221 East Fourth Street
Suite 340 West Suite 2000
Washington, D.C. 20005 Cincinnati, Ohio 45202
(202) 434-4671 (513) 723-4009
Approximate date of proposed sale to the public: As soon as practicable
after this registration statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
-------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
--------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
---------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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Title of Each Class Dollar Proposed Maximum Proposed Maximum
of Securities To Be Amount To Offering Price Aggregate Amount Of
Registered Be Registered Per Share Offering Price Registration Fee
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Common Stock, $0.01 $2,777,250 $10.00 $2,777,250(1) $224.68(2)
par value
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(d).
(2) A fee of $187.21 was previously paid.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
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PROSPECTUS
Up to 277,725 Shares of Common Stock
COMMUNITY FIRST BANCORP, INC.
(Holding Company for Community First Bank)
240 South Main Street
Madisonville, Kentucky 42431
(270) 821-7211
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Community First Bank is converting from a federally chartered mutual
savings bank to a federally chartered stock savings bank. As part of the
conversion, Community First Bank will become a wholly owned subsidiary of
Community First Bancorp, Inc., which was formed by the Bank in 2003 for this
purpose. The common stock of the Company is being offered to the public in
accordance with a plan of conversion. The plan of conversion must be approved by
the Office of Thrift Supervision and by a majority of the votes eligible to be
cast by the current members of Community First Bank. The offering will not go
forward if Community First Bank does not receive these approvals.
The shares of common stock are first being offered pursuant to
nontransferable subscription rights in a Subscription Offering. Depositors as of
certain eligibility dates will receive subscription rights. Shares of common
stock not subscribed for in the Subscription Offering may be offered for sale in
a community offering with preference given to residents of Hopkins County,
Kentucky. Unsold shares may be offered to the general public through a syndicate
of broker-dealers formed and managed by Keefe, Bruyette & Woods, Inc. Keefe,
Bruyette & Woods, Inc. is not required to sell any specific number or dollar
amount of shares but will use their best efforts to sell the shares offered.
The deadline for ordering stock is 12:00 noon, central time, on June __,
2003, and may be extended to __________ __, 2003. The minimum purchase is 25
shares (minimum investment of $250). All funds submitted shall be placed in a
segregated deposit account at Community First Bank until the shares are issued
or the funds are returned. No stock will be sold if the Company does not receive
orders for at least 178,500 shares.
There is currently no public market for the stock. Community First Bancorp,
Inc. anticipates that the stock will be quoted on the OTC Bulletin Board and, if
so, will request the trading symbol "CFBI."
TERMS OF OFFERING
An independent appraiser has estimated the market value of the converted
Community First Bank to be between $1,785,000 and $2,415,000, which establishes
the number of shares to be offered at a price of $10 per share. Subject to
Office of Thrift Supervision approval, up to 277,725 shares, an additional 15%
above the maximum number of shares, may be offered. Based on these estimates, we
are making the following offering of shares of common stock:
o Price Per Share: $10.00
o Number of Shares Minimum/Maximum, as adjusted: 178,500 to 277,725
o Offering Expenses: $285,000
o Net Proceeds to the Company Minimum/Maximum,
as adjusted: $1,500,000 to $2,492,250
o Net Proceeds Per Share Minimum/Maximum,
as adjusted: $8.40 to $8.97
Please refer to Risk Factors beginning on page 1 of this document.
These securities are not deposits or accounts and are not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.
Neither the Securities and Exchange Commission, the Office of Thrift
Supervision, nor any state securities commission has approved or disapproved of
these securities or determined if this prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
For information on how to subscribe, call the Stock Information Center at (___)
___-____.
KEEFE, BRUYETTE & WOODS, INC.
The date of this Prospectus is May __, 2003
TABLE OF CONTENTS
Page
----
Questions and Answers About the Conversion Stock Offering.................................................... (i)
Summary...................................................................................................... (iv)
Selected Financial and Other Data............................................................................(viii)
Risk Factors................................................................................................. 1
Recent Developments........................................................................................... 7
Forward Looking Statements.................................................................................... 10
Proposed Purchases by Directors and Executive Officers........................................................ 11
Community First Bancorp, Inc.................................................................................. 12
Community First Bank.......................................................................................... 12
Use of Proceeds............................................................................................... 13
Dividends..................................................................................................... 14
Market for the Common Stock................................................................................... 15
Capitalization................................................................................................ 16
Historical and Pro Forma Capital Compliance................................................................... 17
Pro Forma Data................................................................................................ 18
The Conversion................................................................................................ 21
Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................................................ 36
Business of Community First Bancorp, Inc. .................................................................... 47
Business of Community First Bank.............................................................................. 48
Regulation.................................................................................................... 69
Taxation...................................................................................................... 76
Management of Community First Bancorp, Inc.................................................................... 77
Management of Community First Bank............................................................................ 78
Restrictions on Acquisitions of Community First Bancorp, Inc.................................................. 84
Description of Capital Stock.................................................................................. 90
Legal and Tax Matters......................................................................................... 92
Experts....................................................................................................... 92
Where You Can Find Additional Information..................................................................... 92
Index to Financial Statements................................................................................... 94
Glossary....................................................................................................... A-1
[MAP TO BE INSERTED HERE]
QUESTIONS AND ANSWERS ABOUT THE CONVERSION
STOCK OFFERING
Q: What is a mutual to stock conversion?
A: The conversion is a change in the Bank's form of organization. Currently,
we operate as a federally chartered mutual savings bank with no
stockholders. As a result of the conversion, the Bank will become a
federally chartered stock savings bank and wholly owned subsidiary of the
Company. As part of our conversion, the Company is offering for sale shares
of its common stock.
Q: What is the purpose of the conversion and the offering?
A: As a stock savings bank operating through a holding company structure, we
will have the ability to plan and develop long-term growth and improve our
future access to the capital markets. The stock offering will increase our
capital and the amount of funds available to the Bank for lending and
investment activities. This will give us greater flexibility to diversify
operations and expand our branch network if we choose to do so. If the
Company's earnings are sufficient in the future, you might also receive
dividends and benefit from the long-term appreciation of our stock price.
Q: How many shares of stock will be sold?
A: Between 178,500 and 241,500 shares of common stock will be sold. The number
of shares to be sold may be increased to 277,725 shares without further
notice to you, subject to receipt of approval of the Office of Thrift
Supervision, if market or financial conditions change prior to completion
of the conversion.
Q: At what price will the shares be sold?
A: The shares will be sold at $10.00 per share. This price was determined by
our Board of Directors and is the price most commonly used in stock
offerings involving conversions of mutual savings institutions. In
addition, the Board believed that the price was such that many of our
depositors and borrowers would be able to participate in the Offering.
Q: How do I purchase the stock?
A: You must complete and return the Stock Order and Certification Form to us
together with your payment or your authorization for withdrawal of the
payment amount from an account you have with us, on or before noon on June
__, 2003. See pages __ to __.
i
Q: How much stock may I purchase?
A: The minimum purchase is 25 shares (or $250).
Subject to the maximum purchase limit of the lesser of 10,000 shares
($100,000) or 5% of the total number of shares sold, each depositor as of
the Eligibility Record Date (December 31, 2001) or the Supplemental
Eligibility Record Date (March 31, 2003) will have the right to subscribe
for up to the number of shares equal to the greater of the following:
o 5,000 shares ($50,000); or
o a percentage of the shares offered equal to 15 times the percentage of
total qualifying deposits the depositor held on the Eligibility Record
Date or Supplemental Eligibility Record Date, as the case may be.
Under this formula, depositors with large balances may be entitled to
purchase more than 5,000 shares. If you are interested in purchasing more
than 5,000 shares and had more than $32,000 on deposit with the Bank on the
Eligibility Record Date or Supplemental Eligibility Record Date, please
contact the Stock Information Center. No person or group of persons will be
permitted to purchase more than 10,000 shares.
See pages __ to __.
If shares are sold in a Community Offering, the maximum number of shares
that may be purchased by any party in the Community Offering, when combined
with the number of shares purchased by other parties with whom your shares
may be aggregated is 5,000 shares ($50,000). See pages __ to __.
In certain instances, your purchase might be grouped together with
purchases by persons with other accounts with whom you are affiliated or
related. In that event the aggregate purchases may not exceed the lesser of
10,000 shares ($100,000) or 5% of the total number of shares sold. See
pages __ to __.
Q: What happens if there are not enough shares to fill all orders?
A: You might not receive any or all of the shares you want to purchase. If we
receive offers for more shares than we have available to sell, the stock
will be offered on a priority basis to the following persons:
o Eligible Account Holders - Persons who had a deposit account with the
Bank on December 31, 2001 with a balance of at least $50.00. Any
remaining shares will be offered to:
ii
o Supplemental Eligible Account Holders - Persons who had a deposit
account with the Bank on March 31, 2003 with a balance of at least
$50.00. Any remaining shares will be offered to:
o Other Members - Other depositors of the Bank, as of May __, 2003.
If the above persons do not subscribe for all of the shares, the remaining
shares will be offered to certain members of the general public with
preference given to people who live in Hopkins County, Kentucky. See pages
__ to __.
Q: What particular factors should I consider when deciding whether or not to
buy the stock?
A: We have experienced losses for the past several years and cannot give you
any assurance that we will become profitable after the conversion. Because
of the small size of the Offering, there is not likely to be an active
market for the shares, which may make it difficult to resell any shares you
may own. Before you decide to purchase stock, you should also read the Risk
Factors section beginning on page 1 of this document.
Q: As a depositor member of Community First Bank, what will happen if I do not
purchase any stock?
A: You presently have voting rights while we are in the mutual form; however,
once we convert to the stock form you will lose your voting rights unless
you purchase stock. You are not required to purchase stock. Your deposit
account, certificate accounts and any loans you may have with us will be
not be affected. See pages __ to __.
Q: Who can help answer any other questions I may have about the stock
offering?
A: In order to make an informed investment decision, you should read this
entire document. In addition, you should contact:
Stock Information Center
Community First Bancorp, Inc.
240 South Main Street
Madisonville, Kentucky
(270) ___________
iii
SUMMARY
This summary highlights selected information from this document and may not
contain all the information that is important to you. To understand the stock
offering fully, you should read carefully this entire document, including the
financial statements and the notes to the financial statements of Community
First Bank.
Community First Bancorp, Inc.
Community First Bancorp, Inc. was formed in March 2003 as a Maryland
corporation to become the holding company for Community First Bank. The Company
is not an operating company and has not engaged in any significant business to
date. The holding company structure will provide greater flexibility in terms of
operations, expansion and diversification. See page __.
Community First Bank
Community First Bank is a community and customer-oriented federal mutual
savings bank with one office located in Madisonville, Kentucky. We were
originally founded in 1923 as a Kentucky-chartered building and loan association
and converted to a federally chartered savings bank in 2002. Our primary market
area consists of the City of Madisonville and Hopkins County.
The Bank has historically followed a traditional thrift business strategy
using local deposits to fund residential first mortgages in its immediate market
area. Beginning in 1998, our net interest income became inadequate to cover our
expenses and we started incurring operating losses. We attribute these losses to
our declining share of the local mortgage market, the low yield on our other
earning assets and our high cost of deposits. In late 2001, the Bank hired a new
president and chief executive officer with experience in bank turn-arounds.
Under our new president, we have worked to expand our products and services and
improve our market presence and portfolio yield. In order to restore the Bank to
ongoing profitability, however, the Board of Directors believes that it is
essential to increase the Bank's capital. With the additional capital raised in
this offering, the Bank will be in a position to increase its earning assets and
expand its business operations.
At December 31, 2002, we had total assets of $30.0 million, deposits of
$28.1 million, and total equity of $1.7 million. See page __.
The Stock Offering
The Company is offering between 178,500 and 241,500 shares of common stock
at $10.00 per share. Subject to approval by the Office of Thrift Supervision,
the number of shares to be sold may be increased to 277,725 shares without
further notice to you if market or financial conditions change prior to
completion of the conversion.
iv
Stock Purchases
The Company is first offering its shares of common stock in a Subscription
Offering to depositor members as of certain eligibility dates. The shares of
common stock will be offered on the basis of priorities. Any remaining shares
may be offered in a Community Offering or in a Syndicated Community Offering.
See pages __ to __.
Subscription Rights
You may not sell or assign your subscription rights. Any transfer of
subscription rights is prohibited by law. All persons exercising their
subscription rights will be required to certify that they are purchasing shares
solely for their own account and that they have no agreement or understanding
regarding the sale or transfer of the shares they are purchasing. We intend to
pursue any and all remedies in the event that we become aware of the transfer of
any subscription rights. We will reject orders that we determine to involve the
transfer of such rights.
The Offering Range and Determination of the Price Per Share
The offering range is based on an independent appraisal of the pro forma
market value of the common stock by Feldman Financial Advisors, Inc. ("Feldman
Financial"), an appraisal firm experienced in appraisals of savings
institutions. The pro forma market value of the shares is our market value after
giving effect to the sale of shares in this offering. Feldman Financial has
estimated that in its opinion as of May 5, 2003, such value ranged between
$1.785 million and $2.415 million (with a midpoint of $2.1 million) (the
"Estimated Valuation Range"). The appraisal was based in part upon our financial
condition and operations and the effect of the additional capital raised by the
sale of common stock in this offering. The $10.00 price per share was determined
by our Board of Directors and is the price most commonly used in stock offerings
involving conversions of mutual savings institutions. At the maximum of the
offering range, the price per share represents 63.38% of pro forma book value
per share compared to a median price to book value ratio of 87.8% for the
thrifts in the peer group selected by Feldman Financial for its appraisal report
and a median of 121.6% for all publicly traded Kentucky thrifts.
The appraisal will be updated prior to the consummation of the conversion.
If the updated pro forma market value of the common stock is either below $1.785
million or above $2.777 million, we will notify you and you will have the
opportunity to modify or cancel your order. See pages __ to __.
v
Deadline for Submitting Stock Orders
The Subscription Offering will terminate at 12:00 p.m., Central Time, on
___________, 2003. The Community Offering, if any, may terminate at any time
without notice but no later than 45 days after the completion of the
Subscription Offering (___________, 2003 assuming no extension of the
Subscription Offering) without approval by the OTS.
Benefits to Management from the Offering or Within One Year Thereafter
In order to tie our employees' and directors' interests closer to our
stockholders' interests, we intend to establish certain benefit plans that use
our stock as compensation. Officers, directors, and employees will not be
required to pay cash in exchange for restricted shares but will be required to
pay the exercise price to exercise options.
The following table presents information regarding the participants in each
plan, total amount, the percentage, and the dollar value of the stock that we
intend to set aside for our stock- based incentive plans. The stock-based
incentive plans may not be adopted for at least six months after the offering
and must be approved by a majority vote of the stockholders. The table below
assumes the sale of 210,000 shares in the offering. It is assumed that the value
of the stock in the table is $10 per share. Options are given no value because
their exercise price will be equal to the fair market value of the stock on the
day the options are granted. As a result, anyone who receives an option will
only benefit from the option if the price of the stock rises above the exercise
price. See pages __ to __ for more information, including regulatory
restrictions on the maximum amount of benefits participants may receive and the
rate at which benefits may be earned under the incentive plans.
Estimated Percentage of
Value Number Total Shares Sold
Participants of Shares of Shares in the Offering
------------ --------- --------- -----------------
Stock Awards...... Officers and
Directors $84,000 8,400 4.0%
Stock Options..... Officers,
Directors and
Employees -- 21,000 10.0
------- ------ ----
Total.......... $84,000 29,400 14.0%
======= ====== ====
As a public company, it is important for us to reassure our management of
our commitment to their employment with Community First Bank. With this in mind,
we have entered into an employment agreement with our President and some of our
employees may receive severance/change-in-control agreements. The agreements
provide that if Community First Bancorp, Inc. or Community First Bank is
acquired and the employee is terminated, the employee will receive a cash
payment. If a payment had been made under these agreements as of December 31,
2002, the aggregate payment would have equaled approximately $534,000.
vi
Participants in our stock-based benefit plans may also receive benefits if the
Company or the Bank is acquired.
Use of the Proceeds from the Sale of Common Stock
The Company will use all but 5% the net proceeds to purchase all the
capital stock to be issued by the Bank in the conversion. The Company will
retain the balance of the funds as its initial capitalization. These funds will
serve as a source of funds for the payment of ongoing expenses, and for general
corporate purposes. The Bank will use the funds it receives in its ongoing
banking business. See pages __ to __.
Dividends
The Board of Directors plans to retain future earnings for the future
growth of the Bank. Accordingly, the Board of Directors does not anticipate
paying cash dividends for the immediate future following the conversion. The
Board may review periodically the possible adoption of a dividend policy. We
cannot assure you, however, when, or if, we will ultimately decide to establish
a cash dividend policy. See page __.
Market for the Common Stock
The Company anticipates that the common stock will be traded in the
over-the-counter market and quotations will be available on the OTC Bulletin
Board. The Company has requested that Keefe, Bruyette & Woods, Inc. agree to
match offers to buy and sell the common stock. Keefe, Bruyette & Woods, Inc. has
no obligation to match offers to buy and sell and may cease doing so at any
time. Since the size of the offering is small, it is unlikely that an active and
liquid trading market for the shares will develop and be maintained. Investors
should therefore have a long-term investment intent. Persons purchasing shares
may not be able to sell their shares when they desire or to sell them at a price
equal to or above $10.00. See page __.
Important Risks in Owning the Company's Common Stock
Before you decide to purchase stock in the offering, you should read the
"Risk Factors" section beginning on page one of this document.
vii
SELECTED FINANCIAL AND OTHER DATA
The selected data presented below under the captions "Selected Financial
Condition Data" and "Selected Operations Data" as of and for the periods ending
December 31, 2002 and 2001, are derived from the audited financial statements of
Community First Bank. The financial statements as of December 31, 2002 and 2001
and for the years then ended are included elsewhere in this Prospectus.
Selected Financial Condition Data
The following table sets forth certain information concerning our financial
position at the dates indicated.
At December 31,
-------------------------
2002 2001
-------- --------
(In thousands)
Assets......................................... $29,968 $29,530
Loans receivable, net.......................... 25,710 22,158
Cash and cash equivalents...................... 758 2,307
Investment securities:
Available-for-sale........................ -- 754
Held-to-maturity.......................... 1,902 3,070
Deposits....................................... 28,128 26,611
Advances from Federal Home Loan Bank........... -- 1,000
Total equity................................... 1,749 1,838
Regulatory Capital:
Tangible capital.......................... 1,749 1,838
Core capital.............................. 1,749 1,838
Total risk-based capital.................. 1,855 1,948
Number of offices.............................. 1 1
Selected Operations Data
The following table sets forth certain information concerning our results
of operations for the periods shown.
Year Ended December 31,
-----------------------
2002 2001
------ ------
(In thousands)
Interest income.................................... $1,941 $2,018
Interest expense................................... 961 1,234
Net interest income........................... 980 784
Provision for loan losses.......................... 18 94
Net interest income after provision
for loan losses............................. 962 690
Other income....................................... 73 130
Other expenses..................................... 1,109 978
Loss before federal income tax
expense (benefit)........................... (74) (158)
Federal income tax expense (benefit)............... 10 (33)
Net loss...................................... $ (84) $ (125)
viii
Selected Financial Ratios and Other Data
The table below sets forth certain performance ratios for us for the
periods indicated.
At or for the
Year Ended December 31,
-----------------------
2002 2001
-------- --------
Performance Ratios:
Return on average assets (net loss divided by average total assets) ............ (0.28)% (0.43)%
Return on average equity (net loss divided by average equity) .................. (4.50) (6.41)
Interest rate spread (combined weighted average interest rate earned
less combined weighted average interest rate cost) ......................... 3.44 2.73
Net interest margin (net interest income divided by average interest-earning
assets) .................................................................... 3.54 2.94
Ratio of average interest-earning assets to average interest-bearing liabilities 102.59 104.49
Ratio of noninterest expense to average total assets ........................... 3.66 3.40
Asset Quality Ratios:
Nonperforming assets to total assets at end of period .......................... 0.29 0.22
Nonperforming loans to total loans at end of period ............................ 0.33 0.21
Allowance for loan losses to total loans at end of period ...................... 0.41 0.47
Allowance for loan losses to nonperforming loans at end of period .............. 123.26 223.40
Net charge-offs to average loans outstanding ................................... 0.07 0.24
Capital Ratios:
Equity to total assets at end of period ........................................ 5.84 6.22
Average equity to average assets ............................................... 6.16 6.78
Tangible capital ............................................................... 5.83 6.21
Core capital ................................................................... 5.83 6.21
Total risk-based capital ....................................................... 11.12 13.90
ix
RISK FACTORS
In addition to the other information in this document, you should consider
carefully the following risk factors in deciding whether to invest in the common
stock.
We have not been profitable during the past several years and there is no
assurance that we will be profitable following the conversion.
The Bank has incurred net losses for the past several years, including
losses of $125,000 and $84,000 in the years ended December 31, 2001 and 2002. We
attribute these losses to our declining share of the local mortgage market, the
low yield on our other earning assets and our high cost of deposits. In November
2001, the Bank hired a new chief executive officer, William M. Tandy, who has
experience in bank turnarounds. The Bank has sought to improve its profitability
by increasing the yield on its loan portfolio, moving funds from lower yielding
investment securities to higher yielding loans and reducing deposit costs. The
Bank has reduced its losses but has not yet become consistently profitable. As a
public company following the conversion, the Company is likely to incur
additional reporting and other costs and may incur additional compensation
expenses related to its stock benefit plans. There can be no assurance the Bank
will achieve profitability after the conversion or that it will not incur losses
in future periods.
Our planned new branch is likely to reduce our near-term profitability.
The Bank recently acquired property for a new branch location in
Madisonville. The proposed location would allow us to serve the most rapidly
developing area of Madisonville and will make us much more convenient to
potential customers. We do not believe that we can adequately serve this area
from our current office and believe that the new branch is needed if we are to
be a viable competitor in our market. The purchase price for the new location
was $360,000 and we anticipate that we will invest an additional $500,000 in
remodeling and equipping the existing structure to serve as a branch. In
addition, we anticipate that it will take at least a year after the branch opens
before we generate sufficient additional income to offset the additional expense
related to staffing and operating the new branch. Until that time, the new
branch will reduce earnings.
We could incur unanticipated costs in our planned system conversion.
We have entered into an agreement to convert to a new data processing
system that will provide management with more timely and useful information at a
lower cost than our current provider. Our current data processor requested a
termination fee in excess of $400,000 in addition to fees for any services
related to the system conversion. We do not believe that the current data
processor is entitled to such a fee and are continuing to negotiate. Until a
satisfactory resolution is reached, we will delay our system conversion date or
seek other arrangements with the new data processor. There could be still
significant costs associated with the system conversion. During the transition,
we may also be required to pay both data processors for a period of time. A
system conversion will generally require a significant time commitment from our
senior management which may distract them from their other duties. In addition,
the transition to a new system may
- 1 -
involve delays and other difficulties that may cause problems with customers and
could affect our business. Accordingly, we could incur unanticipated costs in
our system conversion.
The small amount of stock being offered makes it unlikely that an active and
liquid trading market will develop, and the liquidity and price of the stock may
be adversely affected by the limited trading market.
Due to the small size of our conversion stock offering, it is highly
unlikely that an active trading market will develop and be maintained. If an
active market does not develop, you may not be able to sell your shares promptly
or perhaps at all, or sell your shares at a price equal to or above the price
you paid for the shares. The common stock may not be appropriate as a short-
term investment. See "Market for the Common Stock."
It is unlikely that we will pay dividends for the foreseeable future.
Since the Company will rely on dividends received from the Bank to pay
dividends to stockholders, we will not be able to pay dividends until the Bank
is profitable and may pay dividends to the Company. Even after the Bank becomes
profitable, however, the Board of Directors expects for the foreseeable future
to retain as much of the Bank's earnings as possible for reinvestment in the
Bank's business operations and to support future growth. Accordingly, it is
unlikely that we will pay dividends to stockholders for the foreseeable future.
There are increased risks associated with nonresidential lending.
Although our primary lending activity is the origination of one- to
four-family first mortgage loans, approximately $3.6 million, or 13.9%, of our
gross loan portfolio at December-31, 2002 consisted of loans other than one- to
four-family first mortgage loans. Such loans included $1.5 million in consumer
loans, $582,000 in second mortgage loans, $207,000 in construction loans and
$102,000 in commercial loans. Our portfolio also includes $1.2 million in
mortgages on multi-family and commercial properties. During the past year, we
have begun to more actively seek opportunities to finance multi-family and
commercial real estate and expect to continue to seek this business. Although
these loans generally provide for higher interest rates than one- to four-family
residential real estate loans, these loans generally are larger than one- to
four-family first mortgages and have a higher degree of credit and other risks.
Consumer loans also entail greater risk than one- to four-family residential
loans, particularly in the case of consumer loans which are unsecured or secured
by rapidly depreciable assets, such as automobiles. In such cases, any
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment of the outstanding loan balance as a result of the greater
likelihood of damage, loss or depreciation. Commercial business loans involve a
greater degree of risk than other types of lending as payments on such loans are
often dependent on the successful operation of the business involved, which may
be subject, to a greater extent, to adverse conditions in the economy.
- 2 -
If our allowance for loan losses is not sufficient to cover actual loan losses,
our earnings could decrease.
Our loan customers may not repay their loans according to the terms of the
loans, and the collateral securing the payment of these loans may be
insufficient to pay any remaining loan balance. We may experience significant
loan losses, which could have a material adverse effect on our operating
results. We make various assumptions and judgments about the collectibility of
our loan portfolio, including the creditworthiness of our borrowers and the
value of the real estate and other assets serving as collateral for the
repayment of many of our loans. In determining the amount of the allowance for
loan losses, we rely on our loan quality reviews, our experience and our
evaluation of economic conditions, among other factors. If our assumptions prove
to be incorrect, our allowance for loan losses may not be sufficient to cover
losses inherent in our loan portfolio, resulting in additions to our allowance.
Material additions to our allowance would materially decrease our net income.
Our emphasis on continued diversification of our loan portfolio through the
origination of commercial real estate and multi-family loans is one of the more
significant factors we will take into account in evaluating our allowance for
loan losses and provision for loan losses. As we further increase the amount of
such types of loans in our portfolio, we may determine to make additional or
increased provisions for loan losses, which could adversely affect our earnings.
In addition, bank regulators periodically review our allowance for loan
losses and may require us to increase our provision for loan losses or recognize
further loan charge-offs. Any increase in our allowance for loan losses or loan
charge-offs as required by these regulatory authorities could have a material
adverse effect on our results of operations and financial condition.
Changes in interest rates could adversely affect our results of operations and
financial condition.
Our ability to make a profit, like that of most financial institutions, is
substantially dependent on our net interest income. Net interest income is the
difference between the interest income we earn on our interest-earning assets
(such as mortgage loans and investments) and the interest expense we pay on our
interest-bearing liabilities (such as deposits). Because a portion of our loans
have fixed rates of interest for a period of time and have longer effective
maturities than our interest-bearing liabilities, the yield on our
interest-earning assets may adjust more slowly to changes in interest rates than
the cost of our interest-bearing liabilities. As a result, our net interest
income could be adversely affected by material and prolonged increases in
interest rates since our interest expense would increase at a faster rate than
our interest income. Our earnings may also be adversely affected by rising
interest rates due to decreased customer demand. Although we attempt to reduce
this risk by primarily originating adjustable-rate loans ("ARMs"), the rates on
such loans are fixed for set periods of time (e.g., one year). In addition, the
terms of such loans do not permit us to increase the rate more than 2.0% at each
rate adjustment or above a fixed "ceiling rate." We may also experience an
increase in delinquencies on our ARMs when interest rates rise since the
payments that borrowers are then required to pay will increase.
- 3 -
The average life of loans and mortgage-backed securities can also be
affected by changes in interest rates. As interest rates decline, borrowers tend
to refinance higher-rate, fixed-rate loans at lower rates. We also experience an
increase in prepayments on mortgage-backed securities as the loans underlying
such securities are prepaid. Since rates will have declined, we will not be able
to reinvest such prepayments in assets earning interest rates as high as the
rates on the prepaid loans or mortgage-backed securities. As a result our
interest income could decline.
Our future growth and profitability may be limited by competition and economic
conditions in our market area.
Our primary market area consists of Madisonville and surrounding areas of
Hopkins County, Kentucky. While the City of Madisonville has experienced steady
population growth, population growth in Hopkins County has historically been
below that of the Commonwealth of Kentucky and the United States as a whole and
its population is projected to decline slightly over the next decade. Our
ability to make new loans in our market area may be limited to the extent that
the rate of population growth is flat or declines. Further, the Hopkins County
unemployment rate is higher and median household income ($28,586) is lower than
for Kentucky as a whole ($35,927) and the United States ($47,065). Within our
market area, we compete for loans and deposits with several other financial
institutions. Most competing institutions may have resources substantially
greater than ours and may therefore be able to offer a greater variety of loan
and deposit accounts which could give them a competitive advantage over us. Such
competition could adversely affect us in the future. See "Business of Community
First Bank --Competition."
The loss of our chief executive officer could hurt our operations.
Our successful operations depend to a considerable degree on our President
and Chief Executive Officer, William M. Tandy. The loss of his services could
adversely affect us. We have attempted to provide for his continued employment
with us by entering into a three-year employment agreement with Mr. Tandy. Mr.
Tandy, however, could terminate his employment at any time. We do not maintain
key man life insurance on Mr. Tandy. See "Management of Community First Bank"
and " --Executive Compensation -- Employment and Severance Agreements."
Our articles of incorporation and bylaws include anti-takeover provisions which,
together with statutory anti-takeover provisions to which we are subject, could
discourage hostile acquisitions of control.
Provisions in the Company's articles of incorporation and bylaws, the
General Corporation Law of the State of Maryland, and certain federal
regulations may make it difficult, and expensive, to pursue a tender offer,
change in control or takeover attempt which we oppose. As a result, stockholders
who might desire to participate in such a transaction may not have an
opportunity to do so. Such provisions will also render the removal of the
current Board of Directors or management of the Company more difficult. In
addition, these provisions may reduce the trading price of our stock. These
provisions include: restrictions on the acquisition of the Company's equity
securities and limitations on voting rights; staggered terms for members of the
Board of
- 4 -
Directors; removal of directors only for cause and by an 80% vote; certain
provisions relating to meetings of stockholders; denial of cumulative voting by
stockholders in the election of directors; the issuance of preferred stock and
additional shares of common stock without shareholder approval; and
super-majority provisions for the approval of certain business combinations. The
OTS has recently indicated that it will strictly enforce regulations that
prohibit any person from acquiring or offering to acquire 10% or more of our
stock during the three years following the conversion without OTS permission.
See "Restrictions on Acquisitions of the Company."
We intend to remain independent after the conversion and you should not expect a
takeover premium for our common stock in the near future.
We have operated as an independent, community-oriented savings institution
since 1923. It is our intention to continue to operate as an independent
community oriented financial institution following the Conversion. Accordingly,
you are urged not to subscribe for shares of our common stock if you are
anticipating a rapid sale by us to a third party. See "Business of Community
Bancorp, Inc."
Also due to our intention to remain independent, we have included certain
provisions in our articles of incorporation and bylaws which will assist us in
maintaining our status as an independent, publicly owned corporation. These
provisions as well as the Maryland General Corporation Law and certain federal
regulations may have certain anti-takeover effects which include: restrictions
on the acquisition of the Company's equity securities and limitations on voting
rights of 10% or greater holders; the classification of the terms of the members
of the Board of Directors; certain provisions relating to meetings of
stockholders; denial of cumulative voting by stockholders in the election of
directors; the issuance of preferred stock and additional shares of common stock
without stockholder approval; and super-majority provisions for the approval of
certain business combinations. The Company has also elected to be subject to
certain provisions of Maryland law which allow publicly held companies to
restrict the rights of stockholders to call special meetings and fill vacancies
on the Board. The OTS has recently indicated that it will strictly enforce
regulatory restrictions on the acquisition of 10% or more of a savings
association's stock during the first three years following conversion. See
"Restrictions on Acquisitions of the Company." As a result, stockholders who
might wish to participate in a change of control transaction may not have an
opportunity to do so.
Expected voting control by management and employees could enable insiders to
prevent a merger that might otherwise provide stockholders a premium for their
shares.
The proposed purchases of the common stock by our directors and executive
officers (estimated to be approximately 37,600 shares, or 15.57% of the shares
to be outstanding assuming 241,500 shares are sold), as well as the potential
acquisition of common stock through the Option Plan and MRP, could make it
difficult to obtain majority support for stockholder proposals which are opposed
by our directors, officers and employees. In addition, the voting of those
shares could enable us to block the approval of transactions (i.e., business
combinations and amendment to our articles of incorporation and bylaws)
requiring the approval of 80% of the stockholders under the Company's articles
of incorporation. See "Management of Community First Bank -- Executive
- 5 -
Compensation -- Future Stock Benefit Plans -- Stock Option Plan," " --
Management Recognition Plan," "Description of Capital Stock," and "Restrictions
on Acquisitions of the Company."
The implementation of stock-based benefit plans may dilute your ownership
interest.
If the conversion is completed and stockholders subsequently approve the
MRP and Option Plan, we will issue stock to our officers and directors through
these plans. If the shares for the MRP and Option Plan are issued from our
authorized but unissued stock, your ownership percentage could be diluted by up
to approximately 12.3% and the trading price of our stock may be reduced. See
"Pro Forma Data," "Management of Community First Bank -- Future Stock Benefit
Plans -- Stock Option Plan," and " -- Management Recognition Plan."
Your subscriptions for common stock cannot be modified or canceled except in
limited circumstances.
The offering is being conducted as a minimum/maximum best efforts offering.
Therefore, once investors have submitted their subscription orders, such orders
may not be modified or canceled without our consent, unless the conversion is
not completed by __________, 2003 (or 45 days after the completion of the
Subscription Offering if the Subscription Offering is extended to a date no
later than __________, 2003). See "The Conversion -- Payment for Shares."
We have broad discretion in allocating the net proceeds of the offering.
While there are certain limits under federal law regarding the allocation
of the net proceeds, management has broad discretion in determining the manner
of use of the net proceeds retained by the Company. Such proceeds will initially
be invested in a deposit with the Bank or other short-term investments and will
be available for a variety of corporate purposes, including acquisitions of
stock for our stock benefit plans, other future acquisitions and diversification
of business, additional capital contributions and dividends to stockholders to
the extent permitted by applicable regulations. However, there can be no
assurance that in the future management will apply the net proceeds to these
purposes.
There may be adverse tax consequences as a result of your receipt of the
subscription rights.
We have received the opinion of Feldman Financial that the subscription
rights granted to eligible members in connection with the conversion have no
value. This opinion is not binding on the Internal Revenue Service ("IRS"),
however. Should the IRS determine that the subscription rights do have
ascertainable value, you could be taxed as a result of your exercise of such
rights in an amount equal to such value.
- 6 -
RECENT DEVELOPMENTS
The tables below set forth certain selected financial data for the Bank at
the dates and for the periods indicated. The data as of March 31, 2003, and for
the three months ended March 31, 2003 and 2002 is unaudited, but in the opinion
of management reflects all adjustments, consisting of normal recurring accruals,
considered necessary for a fair presentation. Certain ratio data has been
annualized. The financial condition data at December 31, 2002 is derived in part
from, and is qualified in its entirety by reference to, the audited Financial
Statements and Notes thereto included elsewhere herein. The financial data for
the three months ended March 31, 2003 is not necessarily indicative of the
operating results to be expected for the entire fiscal year.
At March 31, At December 31,
2003 2002
------------ ---------------
(In thousands)
Financial Condition Data:
Assets ............................................................. $ 32,534 $ 29,968
Loans receivable, net .............................................. 27,742 25,710
Cash and cash equivalents .......................................... 1,290 758
Investment securities:
Available-for-sale ............................................. -- --
Held-to-maturity ............................................... 1,890 1,902
Deposits ........................................................... 30,634 28,128
Advances from Federal Home Loan Bank ............................... -- --
Total equity ....................................................... 1,807 1,749
Three Months Ended March 31,
----------------------------
2003 2002
------------ -------------
(In thousands)
Operations Data:
Interest income .................................................... $ 519 $ 451
Interest expense ................................................... 197 251
Net interest income ............................................ 322 200
Provision for loan losses .......................................... 19 6
Net interest income after provision for loan losses ............ 303 194
Other income ....................................................... 43 42
Other expenses ..................................................... 288 250
Income (loss) before federal income tax
expense (benefit) .......................................... 58 (14)
Federal income tax expense (benefit) ............................... -- --
Net income (loss) .............................................. $ 58 $ (14)
- 7 -
At or for the
Three Months Ended March 31,
----------------------------
2003 2002
-------- --------
Performance Ratios:
Return on average assets (net income (loss) divided by
average total assets)........................................ 0.72% (0.18)%
Return on average equity (net income (loss) divided by
average equity).............................................. 13.09 (3.00)
Interest rate spread (combined weighted average
rate earned less combined weighted average
interest rate cost).......................................... 4.23 3.43
Net interest margin (net interest income divided by
average interest-earning assets)............................. 4.24 2.76
Ratio of average interest-earning assets to average
interest-bearing liabilities................................. 103.80 108.84
Ratio of noninterest expense to average total assets............. 3.55 3.32
Asset Quality Ratios:
Nonperforming assets to total assets at end of period............ 0.09 0.51
Nonperforming loans to total loans at end of period.............. 0.10 0.70
Allowance for loan losses to total loans at end of period........ 0.45 0.47
Allowance for loan losses to nonperforming loans at
end of period................................................ 427.59 67.31
Net charge-offs to average loans outstanding..................... 0.004 0.018
Capital Ratios:
Equity to total assets at end of period.......................... 5.55 5.97
Average equity to average assets................................. 5.49 6.18
Tangible capital................................................. 5.55 5.97
Core capital..................................................... 5.55 5.97
Total risk-based capital......................................... 10.53 13.20
- 8 -
Results of Operations
The Bank earned net income of $58,000 for the three months ended March 31,
2003 as compared to a net loss of $14,000 for the three-month period ended March
31, 2002. The Bank's net income for the first three months of fiscal year 2003
reflects management's ongoing efforts to restore the Bank to profitability. The
Bank reported increased net interest income as the Bank continued to shift
assets from investment securities to higher yielding loans. Net interest income
for the three months ended March 31, 2003 increased by $122,000 as compared to
the same period in 2002. During the three months ended March 31, 2003, net loans
averaged $27.6 million for the period as compared to $22.1 million during the
first three months of fiscal year 2002. While interest rates decreased during
this period, interest income increased by $68,000 primarily due to higher
outstanding loan balances. Net interest income also benefitted from reduced
deposit costs in the lower interest rate environment as higher costing
certificates of deposit matured. Accordingly, interest expense decreased by
$54,000. Also contributing to the Bank's improved operating results was a $1,000
increase in other income as the Bank continued to enhance fee income. The
improvements in net interest income and other income were partially offset by an
increase in other expense attributable to higher occupancy and compensation
expense.
Financial Condition
The Bank's total assets as of March 31, 2003 were $32.5 million, an
increase of $2.6 million from December 31, 2002's level of $30.0 million. The
increase was due to growth in the loan portfolio. Net loans receivable increased
by $2.0 million, or 7.8%, which reflected our continued marketing efforts.
Liabilities increased by $2.5 million, or 8.89%, to $30.7 million due primarily
to a $2.5 million, or 8.9%, increase in deposits as the Bank continued to
attract deposits locally at favorable rates. The $58,000 increase in equity
reflected our earnings for the period. At March 31, 2003, the Bank was in
compliance with all applicable regulatory capital requirements with tangible and
core capital equal to 5.55% of adjusted total assets and total risk-based
capital equal to 10.53% of risk-weighted assets.
This document contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward- looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors" beginning on page 1 of this document.
Please see the Glossary beginning on page A-1 for the meaning of
capitalized terms that are not defined in this document.
- 9 -
FORWARD LOOKING STATEMENTS
This prospectus contains forward-looking statements, which can be
identified by the use of such words as "estimate," "project," "believe,"
"intend," "anticipate," "plan," "seek," "expect" and similar expressions. These
forward-looking statements include:
o statements of our goals, intentions and expectations;
o statements regarding our business plans and prospects and growth and
operating strategies;
o statements regarding the asset quality of our loan and investment
portfolios; and
o estimates of our risks and future costs and benefits.
These forward looking statements are subject to significant risks,
assumptions and uncertainties, including, among other things, the following
important factors that could affect the actual outcome of future events:
o significantly increased competition among depository and other
financial institutions;
o inflation and changes in the interest rate environment that reduce our
margins or reduce the fair value of financial instruments;
o general economic conditions, either nationally or in our market area,
that are worse than expected;
o adverse changes in the securities markets;
o legislative or regulatory changes that adversely affect our business;
o our ability to enter new markets successfully and capitalize on growth
opportunities;
o changes in consumer spending, borrowing and savings habits;
o changes in accounting policies and practices, including those that may
be adopted by the bank regulatory agencies and the Financial
Accounting Standards Board; and
o changes in our organization, compensation and benefit plans.
Because of these and other uncertainties, our actual future results may be
materially different from the results indicated by these forward-looking
statements. We discuss these and other uncertainties in "Risk Factors" beginning
on page 1.
- 10 -
PROPOSED PURCHASES BY DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the approximate purchases of common stock by
each director and executive officer and their associates in the conversion. All
such shares will be acquired for investment purposes and not for resale. The
table assumes that 241,500 shares (the maximum of the Estimated Valuation Range)
of the common stock will be sold at $10.00 per share and that sufficient shares
will be available to satisfy their subscriptions.
Aggregate Percent
Total Price of of Shares
Shares to be Shares to be
Name Position Purchased Purchased Purchased
- ---- -------- --------- --------- ---------
William M. Tandy Chairman of the Board, 1,000 $ 10,000 0.41%
President, Chief Executive
Officer and Director
Ralph T. Teague Vice Chairman of the Board 5,000 50,000 2.07%
and Director
Michael D. Wortham Vice President, Secretary, 100 1,000 0.04%
Treasurer and Director
Marilyn A. Locke Vice President 1,000 10,000 0.41%
Paul W. Arison Director 2,500 25,000 1.04%
Charlotte E. Baldwin Director 2,500 25,000 1.04%
Steven E. Carson Director 5,000 50,000 2.07%
Charles G. Ramsey Director 6,500 65,000 2.69%
J. Craig Riddle Director 10,000 100,000 4.14%
Charles B. Vaughn Director 4,000 40,000 1.66%
All directors and executive 37,600 $376,000 15.57%
officers as a group (10
persons)
- 11 -
COMMUNITY FIRST BANCORP, INC.
The Company was formed as a Maryland corporation in March 2003 at the
Bank's our direction for the purpose of serving as its holding company after the
conversion. Prior to the conversion, the Company has not engaged and is not
expected to engage in any material operations. The Company has received the
approval of the OTS to acquire control of us upon completion of the conversion.
Upon consummation of the conversion, the only assets the Company is expected to
own are the capital stock the Bank will issue in the conversion and any proceeds
from the offering it retains.
As a holding company, the Company will have greater flexibility than the
Bank would have to diversify its business activities through the formation of
subsidiaries or through acquisition. The Company will be classified as a unitary
savings and loan holding company after the conversion and will be required to
comply with OTS regulations and be subject to examination.
The Company's offices are located at 240 South Main Street, Madisonville,
Kentucky, and its main telephone number is (270) 821-7211.
COMMUNITY FIRST BANK
The Bank is a federal mutual savings bank operating through one office in
Madisonville, Kentucky. It was founded in 1923 as the Madisonville Building and
Loan Association. The Bank converted to a federal mutual savings bank charter in
2002 and adopted its current name. The Bank is a member of the Federal Home Loan
Bank ("FHLB") System. Its deposits are insured up to applicable limits by the
Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance
Corporation ("FDIC"). At December 31, 2002, the Bank had total assets of $30.0
million, total deposits of $28.1 million and total equity of $1.7 million.
The Bank's principal business consists of attracting deposits from the
general public and originating residential mortgage loans. The Bank also offers
commercial and multi-family loans, various types of consumer loans and a limited
number of commercial business loans.
The Bank's executive offices are located at 240 South Main Street,
Madisonville, Kentucky and our main telephone number is (270) 821-7211. The Bank
also maintains a website at www.cfbky.com. You should not consider information
on the Bank's website to be part of this prospectus.
- 12 -
USE OF PROCEEDS
The Company will retain 5% of the net proceeds from the offering. The
balance will be used to purchase all of the capital stock the Bank will issue in
connection with the conversion. The net proceeds retained by the Company will be
used to pay its ongoing expenses and will be invested in a deposit account at
the Bank.
The funds the Bank receives from the sale of its capital stock to the
Company will be added to the Bank's general funds and be used for general
corporate purposes including funding loan commitments, investment in mortgages
and other loans and purchasing U.S. Government and federal agency securities.
After completion of the Conversion, the Bank expects to use a portion of the
proceeds to fund a trust to purchase up to a number of shares equal to 4.0% of
the shares sold in the offering to fund the MRP. However, initially, we intend
to invest the proceeds in short-term investments until the Bank can deploy the
proceeds into higher yielding loans. The funds added to the Bank's capital will
further strengthen its capital position.
Set forth below is our estimate of the net proceeds from the offering along
with our estimate of the portion of the net proceeds to be retained by the
Company. The net proceeds may vary because the total expenses of the conversion
may be more or less than those estimated. We expect our estimated expenses to be
$285,000.
Maximum,
Minimum as adjusted
of 178,500 of 277,725
shares at shares at
$10.00 per share $10.00 per share
---------------- ----------------
Gross offering proceeds................ $1,785,000 $2,777,250
Less estimated offering expenses....... 285,000 285,000
Net offering proceeds............. $1,500,000 $2,492,250
Minimum Maximum, as adjusted
--------------------- ------------------------
Amount Percent Amount Percent
------ ------- ------ -------
Allocation of Net Proceeds:
Purchase of Bank common stock by Company............. $1,425,000 95.0% $2,367,637 95.0%
Proceeds retained by Company......................... 75,000 5.0 124,613 5.0
The net proceeds will also vary if the number of shares to be issued in the
conversion is adjusted to reflect a change in our estimated pro forma market
value. Payments for shares made through withdrawals from existing deposit
accounts with the Bank will not result in the receipt of new funds for
investment but will result in a reduction of liabilities and interest expense as
funds are transferred from interest-bearing certificates or accounts.
For a period of at least one year following the completion of the
conversion, we will not pay any dividends that would be construed as a return of
capital nor take any actions to pursue or propose such dividends.
- 13 -
DIVIDENDS
We do not anticipate paying cash dividends following the conversion. The
Board of Directors believes that it is preferable for the Bank to retain future
earnings to as great a degree as possible to finance future growth and expansion
of its business. We will periodically review the possible adoption of a dividend
policy but do not anticipate paying dividends for the foreseeable future.
Because the Company will only retain a small amount of net proceeds from the
Offering, it will be unable to pay dividends unless the Bank is able to pay
dividends. The Bank must obtain OTS approval to pay a dividend in excess of its
year-to-date earnings plus its retained earnings for the prior two years. The
Bank is further prohibited from paying a dividend that would cause it to be
undercapitalized or would reduce its regulatory capital below the amount
required for its liquidation account. See "Historical and Pro Forma Capital
Compliance," "The Conversion -- Effects of Conversion to Stock Form on
Depositors and Borrowers of Community First Bank -- Liquidation Account" and
"Regulation -- Dividend and Other Capital Distribution Limitations."
In addition to the foregoing, the portion of our earnings which have been
appropriated for bad debt reserves and deducted for federal income tax purposes
cannot be used to pay cash dividends to the Company without the payment of
federal income taxes by us at the then current income tax rate on the amount
deemed distributed, which would include the amount of any federal income taxes
attributable to the distribution. See "Taxation -- Federal Taxation" and Note 9
to the Financial Statements. The Company does not contemplate any distribution
by the Bank that would result in a recapture of the bad debt reserve or
otherwise create federal tax liabilities.
Although the Company is not subject to OTS regulatory restrictions on the
payment of dividends to its stockholders, the Company is subject to the
requirements of the Maryland corporation law. Under the Maryland corporation
law, the Company may not declare or pay dividends or make other distributions of
money or property on its outstanding shares, if after giving effect to the
distribution, the Company would not be able to pay its indebtedness as it
becomes due in the usual course of business or the Company's assets would be
less than the sum of its total liabilities plus the amount that would be needed
to satisfy the preferential rights upon dissolution of stockholders whose
preferential rights on dissolution are superior to those receiving the
distribution.
- 14 -
MARKET FOR THE COMMON STOCK
We do not expect an active trading market to develop for the Company's
common stock. Since the Company has never issued common stock to the public,
there is no current established market for the common stock. Following
completion of the Offering, the Company anticipates that its stock will trade in
the over-the-counter market under the symbol "CFBI" with price and quotation
information available on the OTC Bulletin Board. The Company intends to request
that Keefe, Bruyette & Woods, Inc. undertake to match offers to buy and offers
to sell the common stock. Keefe, Bruyette & Woods, Inc. has no obligation to
match offers to buy and offers to sell and may cease doing so at any time. In
addition, the existence of a public trading market will depend upon the presence
in the market of both willing buyers and willing sellers at any given time. The
presence of a sufficient number of buyers and sellers at any given time is a
factor over which neither the Company nor any broker or dealer has control. Due
to the relatively small number of shares of common stock being offered in the
conversion and the concentration of ownership, it is unlikely that an active or
liquid trading market will develop or be maintained. The absence of an active
and liquid trading market may make it difficult for you to sell your common
stock and may have an adverse effect on the price of the common stock.
Purchasers should consider the potentially illiquid and long term nature of
their investment in the shares offered hereby.
The aggregate price of the common stock is based upon an independent
appraisal of the pro forma market value of the common stock. However, there can
be no assurance that you will be able to sell the common stock you purchase in
the conversion at or above the price you paid for your shares.
- 15 -
CAPITALIZATION
The following table presents our historical capitalization as of December
31, 2002 and the pro forma consolidated capitalization of the Company after
giving effect to the conversion, based upon the sale of the number of shares
shown below and the other assumptions set forth under "Pro Forma Data." The
Common Stock is being sold on a best efforts basis. The offering will not close
unless the minimum number of shares are sold.
Capitalization Pro Forma Consolidated Capitalization of
of the the Company at December 31, 2002 Based on the Sale of:(1)
----------------------------------------------------------------
Bank at 178,500 Shares 210,000 Shares 241,500 Shares 277,725 Shares
December 31, at $10.00 at $10.00 at $10.00 at $10.00
2002 per share per share per share per share
------------ -------------- ------------- -------------- ---------------
(In thousands)
Deposits(1)...................................... $28,128 $28,128 $28,128 $28,128 $28,128
FHLB advances.................................... -- -- -- -- --
Other borrowings................................. -- -- -- -- --
------- ------- ------- ------- -------
Total deposits and borrowed funds........... $28,128 $28,128 $28,128 $28,128 $28,128
======= ======= ======= ======= =======
Capital stock
Preferred stock, $0.01 par value per share:
authorized - 1,000,000 shares;
assumed outstanding - none $ -- $ -- $ -- $ -- $ --
Common stock, $0.01 par value per share
authorized - 5,000,000 shares;
shares to be outstanding - as shown.......... -- 2 2 2 3
Paid-in capital(2)............................... -- 1,498 1,813 2,128 2,489
Less: Common stock acquired by MRP(3)........... -- (71) (84) (97) (111)
Retained earnings -- substantially restricted.... 1,749 1,749 1,749 1,749 1,749
------- ------- ------- ------- -------
Total stockholders' equity.................. $ 1,749 $ 3,178 $ 3,480 $ 3,782 $ 4,130
======= ======= ======= ======= =======
- -----------------
(1) Withdrawals from savings accounts for the purchase of stock have not been
reflected in these adjustments. Any withdrawals will reduce pro forma
capitalization by the amount of such withdrawals.
(2) Based upon the estimated net proceeds from the sale of capital stock less
the par value of shares sold.
(3) See footnote 1 to the table in "Pro Forma Data."
- 16 -
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
The following table shows the Bank's historical capital position relative
to its regulatory capital requirements as of December 31, 2002 and on a pro
forma basis after giving effect to the conversion and based upon the sale of the
number of shares shown below and the other assumptions set forth under "Pro
Forma Data." The definitions of the terms used in the table are those provided
in the capital regulations issued by the OTS. For a discussion of the capital
standards applicable to us, see "Regulation -- Regulation of the Bank --
Regulatory Capital Requirements."
Pro Forma at December 31, 2002 Based on Sale of:(1)
-----------------------------------------------------------------------------
277,725 Shares
178,500 Shares 210,000 Shares 241,500 Shares at Adjusted
Historical at Minimum of at Midpoint of at Maximum of Maximum of
December 31, 2002 Offering Ranges Offering Ranges Offering Ranges Offering Ranges
----------------- ----------------- ----------------- ----------------- ------------------
Percent of Percent of Percent of Percent of Percent of
Amount Assets(2) Amount Assets(2) Amount Assets(2) Amount Assets(2) Amount Assets(2)
------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
(In thousands)
Capital under generally accepted
accounting principles ...... $1,749 5.83% $3,103 9.90% $3,389 10.72% $3,676 11.52% $4,005 12.42%
Tangible capital ............... $1,749 5.83% $3,103 9.90% $3,389 10.72% $3,676 11.52% $4,005 12.42%
Tangible capital requirement ... 450 1.50 470 1.50 474 1.50 479 1.50 484 1.50
Excess ..................... $1,299 4.33% $2,633 8.40% $2,915 9.22% $3,197 10.02% $3,522 10.92%
Core capital ................... $1,749 5.83% $3,103 9.90% $3,389 10.72% $3,676 11.52% $4,005 12.42%
Core capital requirement ....... 1,199 4.00 1,254 4.00 1,265 4.00 1,276 4.00 1,290 4.00
Excess ..................... $ 550 1.83% $1,849 5.90% $2,124 6.72% $2,399 7.52% $2,716 8.42%
Risk-based capital ............. $1,855 11.12% $3,209 18.41% $3,495 19.87% $3,782 21.30% $4,111 22.92%
Risk-based capital requirement . 1,335 8.00 1,395 8.00 1,408 8.00 1,420 8.00 1,435 8.00
Excess ..................... $ 520 3.12% $1,814 10.41% $2,088 11.87% $2,361 13.30% $2,676 14.92%
- ------------------
(1) Assumes that 95% of net proceeds are invested in the Bank and the Bank
invests those funds in short-term securities that have a risk-weighting
equal to the Bank's ratio of risk-weighted assets to total assets at
December 31, 2002. Assumes that the MRP Trust to be funded by the Bank
purchases a number of shares equal to 4.0% of the shares sold at $10.00 per
share and that capital is reduced by this amount. If the MRP is required to
pay a higher price to acquire the shares, capital would be further reduced.
(2) Based on our total assets determined under generally accepted accounting
principles for equity purposes and adjusted total assets for the purposes
of the tangible and core capital requirements ($30.0 million, $31.3
million, $31.6 million, $31.9 million, and $32.2 million, respectively, at
December 31, 2002 and on a pro forma basis at the minimum, midpoint,
maximum and maximum, as adjusted, of the Estimated Valuation Range) and
risk-weighted assets for the purpose of the risk-based capital requirement
($16.7 million, $17.4 million, $17.6 million, $17.8 million and $17.9
million, respectively, at December 31, 2002 and on a pro forma basis at the
minimum, midpoint, maximum and maximum, as adjusted, of the Estimated
Valuation Range).
- 17 -
PRO FORMA DATA
The actual net proceeds from the sale of the common stock cannot be
determined until the conversion is completed. However, net proceeds are
currently estimated to be between $1,785,000 and $2,777,250 at the minimum and
maximum, as adjusted, of the Estimated Valuation Range, based upon the following
assumptions: (i) all of the shares will be sold in the Subscription or Community
Offering; and (ii) expenses, including the marketing and success fee of $70,000
to be paid to Keefe, Bruyette & Woods, Inc., printing costs, legal and
accounting fees, appraisal fees and other miscellaneous expenses will amount to
$285,000. Actual conversion expenses may vary from this assumption. The shares
are being sold on a best efforts basis. The offering will not close unless the
minimum number of shares is sold.
The following table shows our historical net earnings and stockholders'
equity prior to the conversion and the pro forma consolidated net income and
stockholders' equity of the Company following the conversion. Pro forma
consolidated net income and stockholders' equity have been calculated as if the
common stock to be issued in the conversion had been sold at the beginning of
the year and the estimated net proceeds had been invested at 1.32%, which was
approximately equal to the one-year U.S. Treasury bill rate at December 31,
2002. The one-year U.S. Treasury bill rate, rather than an arithmetic average of
the average yield on interest-earning assets and average rate paid on deposits,
has been used to estimate income on net proceeds because it is believed that it
is a more accurate estimate of the rate that would be obtained on an investment
of net proceeds from the offering. In calculating pro forma income, an effective
state and federal income tax rate of 37% has been assumed, resulting in an after
tax yield of 0.86%. Withdrawals from deposit accounts for the purchase of shares
are not reflected in the pro forma adjustments. As discussed under "Use of
Proceeds," the Company expects to retain 5.0% of the net conversion proceeds.
The Pro Forma Data assumes that the Bank will fund a trust that will purchase a
number of shares equal to 4.0% of the shares issued in the conversion in the
open market for the MRP. No effect has been given in the pro forma stockholders'
equity calculation for the assumed earnings on the net proceeds. Historical and
pro forma per share amounts have been calculated by dividing historical and pro
forma amounts by the indicated number of shares.
The stockholders' equity information is not intended to represent the fair
market value of the common stock, or the current value of our assets or
liabilities, or the amounts, if any, that would be available for distribution to
stockholders in the event of liquidation. For additional information regarding
the liquidation account, see "The Conversion -- Effects of Conversion to Stock
Form on Depositors and Borrowers of Community First Bank -- Liquidation
Account." The pro forma income derived from the assumptions set forth above
should not be considered indicative of the actual results of our operations for
any period. Such pro forma data may be materially affected by a change in the
price per share or number of shares to be issued in the conversion and by other
factors.
- 18 -
At or For the Year Ended December 31, 2002
--------------------------------------------------------
Maximum, as
Minimum of Midpoint of Maximum of Adjusted, of
178,500 210,000 241,500 277,725
Shares Shares Shares Shares
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share
--------- --------- --------- ---------
(Dollars in thousands, except per share amounts)
Gross proceeds ................................. $ 1,785 $ 2,100 $ 2,415 $ 2,777
Less: Estimated offering expenses .............. (285) (285) (285) (285)
--------- --------- --------- ---------
Estimated net conversion proceeds ........... $ 1,500 $ 1,815 $ 2,130 $ 2,492
========= ========= ========= =========
Less: Common stock acquired by MRP ............. $ (71) $ (84) $ (97) $ (111)
--------- --------- --------- ---------
Estimated investable net proceeds ........... $ 1,429 $ 1,731 $ 2,033 $ 2,381
========= ========= ========= =========
Net Income:
Historical net income ....................... $ (84) $ (84) $ (84) $ (84)
Pro forma adjustments:
Net income on net proceeds ................ 12 14 17 20
MRP(1) .................................... (9) (11) (12) (14)
--------- --------- --------- ---------
Pro forma net income ................... $ (81) $ (81) $ (79) $ (78)
========= ========= ========= =========
Net income per share:(2)
Historical net income ....................... $ (0.47) $ (0.40) $ (0.35) $ (0.30)
Pro forma adjustments:
Net income on net proceeds ................ 0.07 0.07 0.07 0.07
MRP(1) .................................... (0.05) (0.05) (0.05) (0.05)
--------- --------- --------- ---------
Pro forma net income per share ......... $ (0.45) $ (0.38) $ (0.33) $ (0.28)
Number of shares ............................... 178,500 210,000 241,500 277,725
========= ========= ========= =========
Stockholders' equity (book value):(2)
Historical .................................. $ 1,749 $ 1,749 $ 1,749 $ 1,749
Estimated net conversion proceeds ........... 1,500 1,815 2,130 2,492
LessCommon Stock acquired by MRP(1) ....... (71) (84) (97) (111)
--------- --------- --------- ---------
Pro forma stockholders' equity ......... $ 3,178 $ 3,480 $ 3,782 $ 4,130
========= ========= ========= =========
Stockholders' equity per share:(2)
Historical .................................. $ 9.80 $ 8.33 $ 7.24 $ 6.30
Estimated net conversion proceeds ........... 8.40 8.64 8.82 8.97
LessCommon stock acquired by MRP(1) ....... (0.40) (0.40) (0.40) (0.40)
--------- --------- --------- ---------
Pro forma stockholders' equity per share $ 17.80 $ 16.57 $ 15.66 $ 14.87
========= ========= ========= =========
Price to pro forma earnings multiple ........... NA NA NA NA
========= ========= ========= =========
Price to pro forma book value per share(2) ..... 56.18% 60.35% 63.86% 67.25%
========= ========= ========= =========
(Footnotes on next page)
- 19 -
(footnotes continued from previous page)
------------------ (1) Assumes the Company issues 4.0% of the shares sold
in the offering to the MRP and the purchase price for the shares purchased by
the MRP was equal to the purchase price of $10 per share and 20% of the amount
contributed was an amortized expense during such period. As we accrue
compensation expense to reflect the five-year vesting period of such shares
pursuant to the MRP, the charge against capital will be reduced accordingly. In
calculating the pro forma effect of the MRP, an effective state and federal
income tax rate of 37% has been assumed. Implementation of the MRP within one
year of conversion would require regulatory and stockholder approval at a
meeting of our stockholders to be held no earlier than six months after the
conversion. For purposes of this table, it is assumed that the MRP will be
adopted by the Board of Directors, reviewed by the OTS, and approved by the
stockholders, and that the MRP will purchase the shares in the open market
within the year following the conversion using funds contributed to the MRP by
the Bank. If the shares to be purchased by the MRP are assumed at January 1,
2002, to be newly issued shares purchased from the Company at the minimum,
midpoint, maximum and maximum, as adjusted, of the Estimated Valuation Range,
pro forma stockholders' equity per share would have been $17.11, $15.93, $15.06,
and $14.30 at December 31, 2002, respectively. As a result of the MRP,
stockholders' interests will be diluted by approximately 3.9%. See "Management
of Community First Bank -- Future Stock Benefit Plans -- Management Recognition
Plan." (2) Consolidated stockholders' equity represents the excess of the
carrying value of the assets over its liabilities. The calculations are based
upon the number of shares issued in the conversion, without giving effect to SOP
93-6. The amounts shown do not reflect the federal income tax consequences of
the potential restoration to income of the tax bad debt reserves for income tax
purposes, which would be required in the event of liquidation. The amounts shown
also do not reflect the amounts required to be distributed in the event of
liquidation to eligible depositors from the liquidation account which will be
established upon the consummation of the conversion. Pro forma stockholders'
equity information is not intended to represent the fair market value of the
shares, the current value of our assets or liabilities or the amounts, if any,
that would be available for distribution to stockholders in the event of
liquidation. Such pro forma data may be materially affected by a change in the
number of shares to be sold in the conversion and by other factors.
- 20 -
THE CONVERSION
The OTS has approved the Plan subject to the Plan's approval by the Bank's
members at a special meeting of members, and subject to the satisfaction of
certain other conditions imposed by the OTS in its approval. OTS approval,
however, does not constitute a recommendation or endorsement of the Plan by the
OTS.
General
On March 13, 2003, the Bank's Board of Directors adopted a plan of
conversion, pursuant to which the Bank will convert from a federally chartered
mutual savings bank to a federally chartered stock savings bank and become a
wholly owned subsidiary of the Company. The conversion will include adoption of
the proposed Federal Stock Charter and Bylaws which will authorize the issuance
of capital stock by the Bank. Under the Plan, the Bank's capital stock is being
sold to the Company and the common stock of the Company is being offered to our
customers and then to the public.
The OTS has approved the Company's application to become a savings and loan
holding company and to acquire all of the Bank's capital stock to be issued in
the conversion. Pursuant to such OTS approval, the Company plans to retain a
portion of the net proceeds from the sale of shares of common stock and to use
the remainder to purchase all of the capital stock the Bank will issue in the
conversion.
The shares are first being offered in a Subscription Offering to holders of
subscription rights. To the extent shares of common stock remain available after
the Subscription Offering, we may offer shares of common stock in a Community
Offering. The Community Offering, if any, may begin anytime subsequent to the
beginning of the Subscription Offering. Shares not subscribed for in the
Subscription and Community Offerings may be offered for sale by the Company in a
Syndicated Community Offering. We have the right, in our sole discretion, to
accept or reject, in whole or in part, any orders to purchase shares of common
stock received in the Community and Syndicated Community Offering. See " --
Community Offering" and " -- Syndicated Community Offering."
We must sell common stock in an amount equal to our pro forma market value
as a stock savings institution in order for the conversion to become effective.
The Subscription Offering is scheduled to end on June __, 2003 but may be
extended in the discretion of management to _________, 2003. We must complete
the Community Offering within 45 days after the last day of the Subscription
Offering (__________, 2003 or ___________, 2003 if the Subscription Offering is
extended to _________, 2003), unless we extend such period and obtain the
approval of the OTS to do so. If the Company sells any shares of stock in a
Syndicated Community Offering, that offering must be completed by __________,
2003 (or ___________, 2003 if the Subscription Offering is extended to
_________, 2003), unless we extend such period and obtain the approval of the
OTS to do so. The Plan provides that the conversion must be completed within 24
months after the date of the approval of the Plan by our members.
- 21 -
In the event that we are unable to complete the sale of common stock and
effect the conversion within 45 days after the end of the Subscription Offering,
we may request an extension of the period by the OTS. We cannot assure you that
the extension would be granted if requested, nor can we assure you that our
valuation would not substantially change during any such extension. If the
Estimated Valuation Range of the shares must be amended, we cannot assure that
the OTS would approve such amended Estimated Valuation Range. Therefore, it is
possible that if the conversion cannot be completed within the requisite period
of time, we may not be permitted to complete the conversion. A substantial delay
caused by an extension of the period may also significantly increase the expense
of the conversion. We cannot sell any shares of common stock unless the Plan is
approved by our members.
The completion of the offering is subject to market conditions and other
factors beyond our control. We cannot give you any assurances as to the length
of time following approval of the Plan at the meeting of our members that will
be required to complete the Community Offering or other sale of the shares being
offered in the conversion. If we experience delays, our estimated pro forma
market value upon conversion could change significantly, together with
corresponding changes in the offering price and the net proceeds to be realized
by us from the sale of the shares. In the event we terminate the conversion, we
would be required to charge all conversion expenses against current income and
promptly return any funds collected by us in the offering to each potential
investor, plus interest at the passbook rate.
Effects of Conversion to Stock Form on Depositors and Borrowers of Community
First Bank
Voting Rights. Currently in its mutual form, the Bank's depositors have
voting rights and may vote for the election of directors. Following the
conversion, depositors will cease to have voting rights.
Deposit Accounts and Loans. The conversion will not affect the balances,
terms and FDIC insurance coverage of deposit accounts, nor will the amounts and
terms of loans and obligations of the borrowers under their individual
contractual arrangements with us be affected.
Tax Effects. We have received an opinion from our counsel, Malizia Spidi &
Fisch, PC, on the federal tax consequences of the conversion. The opinion has
been filed as an exhibit to the registration statement of which this prospectus
is a part and covers those federal tax matters that are material to the
transaction. The opinion provides that:
o the conversion will qualify as a reorganization under Section
368(a)(1)(F) of the Code, and no gain or loss will be recognized by us
by reason of the proposed conversion;
o no gain or loss will be recognized by us upon the receipt of money
from Community First Bancorp, Inc. for our stock, and no gain or loss
will be recognized by Community First Bancorp, Inc. upon the receipt
of money for the shares;
- 22 -
o no gain or loss will be recognized by the Eligible Account Holders,
Supplemental Eligible Account Holders, and Other Members upon the
issuance to them of withdrawable savings accounts in us in the stock
form in the same dollar amount as their savings accounts in us in the
mutual form plus an interest in the liquidation account of us in the
stock form in exchange for their savings accounts in us in the mutual
form; and
o no gain or loss will be recognized by Eligible Account Holders,
Supplemental Eligible Account Holders, and Other Members upon the
distribution to them of the nontransferable subscription rights to
purchase shares of common stock.
The fourth opinion described above is predicated on representations from
Community First Bank and Community First Bancorp, Inc. that no person shall
receive any payment, whether in money or property, in lieu of the issuance of
subscription rights. That opinion is based on the position that the subscription
rights to purchase shares of common stock received by Eligible Account Holders,
Supplemental Eligible Account Holders, and Other Members have a fair market
value of zero. In reaching their second opinion described above, Malizia Spidi &
Fisch, PC has noted that the subscription rights will be granted at no cost to
the recipients, will be legally non- transferable and of short duration, and
will provide the recipients with the right only to purchase shares of common
stock at the same price to be paid by members of the general public in any
community offering. Malizia Spidi & Fisch, PC believes that it is more likely
than not that the fair market value of the subscription rights to purchase
common stock is zero.
If the non-transferable subscription rights to purchase common stock are
subsequently found to have a fair market value, income may be recognized by
various recipients of the subscription rights (in certain cases, whether or not
the rights are exercised), and we may be taxed on the distribution of the
subscription rights.
We are also subject to Kentucky income taxes and have received an opinion
from EKW & Associates, llp that the conversion will be treated for Kentucky
state tax purposes similar to the treatment of the conversion for federal tax
purposes.
Unlike a private letter ruling from the IRS, the opinions of Malizia Spidi
& Fisch, PC have no binding effect or official status, and no assurance can be
given that the conclusions reached in any of those opinions would be sustained
by a court if contested by the IRS or the Kentucky tax authorities. Eligible
Account Holders, Supplemental Eligible Account Holders, and Other Members are
encouraged to consult with a tax advisor as to their own personal tax situation.
Liquidation Account. In the unlikely event of the Bank's complete
liquidation in its present mutual form, each depositor is entitled to equal
distribution of any of the Bank's assets, pro rata to the value of his accounts,
remaining after payment of claims of all creditors (including the claims of all
depositors to the withdrawal value of their accounts). Each depositor's pro rata
share of such remaining assets would be in the same proportion as the value of
his deposit accounts was to the total value of all deposit accounts in the Bank
at the time of liquidation.
- 23 -
Upon a complete liquidation after the conversion, each depositor would have
a claim, as a creditor, of the same general priority as the claims of all other
general creditors of ours. Therefore, except as described below, a depositor's
claim would be solely in the amount of the balance in his deposit account plus
accrued interest. A depositor would not have an interest in the residual value
of our assets above that amount if any.
The Plan provides for the establishment, upon the completion of the
conversion, of a special "liquidation account" for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders in an amount equal to
the Bank's net worth as reflected in the latest statement of financial condition
in the Prospectus. Each Eligible Account Holder and Supplemental Eligible
Account Holder, if he continues to maintain his deposit account with the Bank,
would be entitled on a complete liquidation of the Bank after conversion, to an
interest in the liquidation account prior to any payment to stockholders. Each
Eligible Account Holder would have an initial interest in such liquidation
account for each deposit account held in the Bank on the qualifying date,
December 31, 2001. Each Supplemental Eligible Account Holder would have a
similar interest as of the qualifying date, March 31, 2003. The interest as to
each deposit account would be in the same proportion of the total liquidation
account as the balance of the deposit account on the qualifying dates was to the
aggregate balance in all the deposit accounts of Eligible Account Holders and
Supplemental Eligible Account Holders on such qualifying dates. However, if the
amount in the deposit account on any annual closing date is less than the amount
in such account on the respective qualifying dates, then the interest in this
special liquidation account would be reduced from time to time by an amount
proportionate to any such reduction, and the interest would cease to exist if
such deposit account were closed. The interest in the special liquidation
account will never be increased despite any increase in the related deposit
account after the respective qualifying dates.
A merger, consolidation, or similar combination or transaction with another
depository institution is not considered a liquidation. In such transactions,
the liquidation account must be assumed by the surviving institution.
Subscription Rights and the Subscription Offering
In accordance with OTS regulations, non-transferable subscription rights to
purchase shares of the common stock have been granted to all persons and
entities entitled to purchase shares in the Subscription Offering under the
Plan. The number of shares which these parties may purchase will be determined,
in part, by the total number of shares to be issued and by the availability of
the shares for purchase under the categories set forth in the Plan. If the
Community Offering, as described below, extends beyond 45 days following the
completion of the Subscription Offering, we will resolicit subscribers and
permit them to increase, decrease or rescind their orders. In the event of such
a resolicitation, subscriptions will be refunded unless the subscriber
affirmatively elects to continue his or her subscription. Subscription
priorities have been established for the allocation of stock to the extent that
shares are available after satisfaction of all subscriptions of all persons
having prior rights and subject to the maximum and minimum purchase limitations
set forth in the Plan and as described below under " -- Limitations on Purchases
of Shares." The following priorities have been established:
- 24 -
Category 1: Eligible Account Holders at December 31, 2001. Each Eligible
Account Holder (which collectively encompasses all names on a joint account)
will receive non-transferable subscription rights on a priority basis to
purchase up to the greater of 5,000 shares ($50,000) or a percentage of the
shares sold equal to 15 times the percentage of qualifying deposits held by the
Eligible Account Holder on the Eligibility Record Date. A minimum of 25 shares
must be subscribed for by any subscriber. If there are insufficient shares to
satisfy the orders of all Eligible Account Holders, shares shall be allocated
among subscribing Eligible Account Holders so as to permit each such account
holder, to the extent possible, to purchase the lesser of 100 shares or the
total amount of his subscription. Any shares remaining shall be allocated among
the subscribing Eligible Account Holders on an equitable basis, related to the
amounts of their respective qualifying deposits as compared to the total
qualifying deposits of all subscribing Eligible Account Holders. Subscription
rights received by persons who were officers and directors for the one-year
period preceding December 31, 2001 (other than Mr. Tandy), in this category
based on their increased deposits in us during that period, are subordinated to
the subscription rights of other Eligible Account Holders. See " -- Limitations
on Purchases and Transfer of Shares."
Category 2: Tax Qualified Employee Stock Ownership Plans. Our Plan reserves
subscription rights to purchase up to 10% of the total shares issued in the
conversion to all Tax Qualified Employee Stock Ownership Plans. However, we do
not currently intend to implement any Tax-Qualified Employee Stock Ownership
Plans in the conversion.
Category 3: Supplemental Eligible Account Holders at March 31, 2003. Each
Supplemental Eligible Account Holder (which collectively encompasses all names
on a joint account) who is not an Eligible Account Holder will receive
non-transferable subscription rights to purchase up to the greater of 5,000
shares ($50,000) or a percentage of the shares sold equal to 15 times the
percentage of qualifying deposits held by the Supplemental Eligible Account
Holder on the Supplemental Eligibility Record Date. A minimum of 25 shares must
be subscribed for by any subscriber. If the allocation made in this paragraph
results in an over-subscription, shares shall be allocated among subscribing
Supplemental Eligible Account Holders so as to permit each such account holder,
to the extent possible, to purchase the lesser of 100 shares or the total amount
of his subscription. Any shares not so allocated shall be allocated among the
subscribing Supplemental Eligible Account Holders on an equitable basis, related
to the amounts of their respective qualifying deposits as compared to the total
qualifying deposits of all subscribing Supplemental Eligible Account Holders.
See " -- Limitations on Purchases and Transfer of Shares."
The right of Supplemental Eligible Account Holders to subscribe for shares
is subordinate to the rights of the Eligible Account Holders and Tax Qualified
Employee Stock Ownership Plans to subscribe for shares.
Category 4: Other Members at May __, 2003. Each Other Member (which
collectively encompasses all names on a joint account) who is not an Eligible
Account Holder or Supplemental Eligible Account Holder, will receive
non-transferable subscription rights to purchase up to 5,000 shares ($50,000) to
the extent such shares are available following subscriptions by Eligible
- 25 -
Account Holders and Supplemental Eligible Account Holders. A minimum of 25
shares must be subscribed for by any subscriber. In the event there are not
enough shares to fill the orders of the Other Members, the subscriptions of the
Other Members will be allocated so that each subscribing Other Member will be
entitled to purchase the lesser of 100 shares or the number of shares ordered.
Any remaining shares will be allocated among Other Members whose subscriptions
remain unsatisfied on a reasonable basis. See " -- Limitations on Purchases and
Transfer of Shares."
Members in Non-Qualified States. We will make reasonable efforts to comply
with the securities laws of all states in the United States in which persons
entitled to subscribe for the shares pursuant to the Plan reside. However, no
person will be offered or allowed to purchase any shares under the Plan if he
resides in a foreign country or in a state with respect to which any of the
following apply: (i) a small number of persons otherwise eligible to subscribe
for shares under the Plan reside in that state or foreign country; (ii) the
granting of subscription rights or offer or sale of shares of common stock to
those persons would require either us or our employees to register, under the
securities laws of that state or foreign country, as a broker or dealer or to
register or otherwise qualify our securities for sale in that state or foreign
country; or (iii) such registration or qualification would be impracticable for
reasons of cost or otherwise. We will not make any payment in lieu of the
granting of subscription rights to any person.
Restrictions on Transfer of Subscription Rights and Shares. Persons are
prohibited from transferring or entering into any agreement or understanding to
transfer the legal or beneficial ownership of their subscription rights. Only
the person to whom they are granted may exercise subscription rights and only
for his account. Each person subscribing for shares will be required to certify
that he is purchasing shares solely for his own account and has not entered into
an agreement or understanding regarding the sale or transfer of those shares.
The regulations also prohibit any person from offering or making an announcement
of an offer or intent to make an offer to purchase subscription rights or shares
of common stock prior to the completion of the conversion.
We will pursue any and all legal and equitable remedies in the event we
become aware of the transfer of subscription rights and will not honor orders
believed by us to involve the transfer of subscription rights.
Expiration Date. The Subscription Offering will expire at 12:00 p.m.,
Central Time, on June __, 2003 unless extended in the discretion of management
to no later than ____________, 2003. Subscription rights will become void if not
exercised prior to the Expiration Date (or the date to which it may be
extended).
Community Offering
To the extent that shares remain available for purchase after filling all
orders received in the Subscription Offering, we may offer shares of common
stock to certain members of the general public residing in Kentucky and certain
other states with a preference to natural persons and trusts of natural persons
residing in Hopkins County, Kentucky under such terms and conditions as may
- 26 -
be established by the Board of Directors. In the Community Offering, the minimum
purchase is 25 shares, and no person, together with associates of and persons
acting in concert with such persons, may purchase more than 5,000 shares
($50,000).
We may begin the Community Offering at any time after the Subscription
Offering has begun. The Community Offering may expire at any time without notice
but no later than 12:00 p.m., Central Time, on ___________, 2003, unless we
extend it with the permission of the OTS to a date not later than __________,
2003 (or ___________, 2003 if the Subscription Offering is extended to
_________, 2003). Purchases of shares in the Community Offering are subject to
our right in our sole discretion, to accept or reject such purchases in whole or
in part either at the time and receipt of an order, or as soon as practicable
following the completion of the Community Offering.
In the event Community Offering orders are not filled, we will promptly
refund funds received by us with interest at our passbook rate. In the event an
insufficient number of shares are available to fill all orders in the Community
Offering, the available shares will be allocated on an equitable basis
determined by the Board of Directors, provided however that a preference will be
given to natural persons residing in Hopkins County, Kentucky. If regulatory
approval is received to extend the Community Offering beyond 45 days following
the completion of the Subscription Offering, subscribers will be affirmatively
resolicited. Shares sold in the Community Offering will be sold at $10.00 per
share.
Syndicated Community Offering
The Plan provides that, if necessary, we may offer shares of common stock
not purchased in the Subscription and Community Offerings for sale to the
general public in a Syndicated Community Offering through a syndicate of
selected dealers to be formed and managed by Keefe, Bruyette & Woods, Inc. No
individual purchaser together with any associate or group of persons acting in
concert may purchase more than 5,000 shares ($50,000) in the Syndicated
Community Offering. Neither Keefe, Bruyette & Woods, Inc. nor any registered
broker-dealer will be obligated to take or purchase any shares in the Syndicated
Community Offering, although Keefe, Bruyette & Woods, Inc. has agreed to use its
best efforts in the sales of shares in any Syndicated Community Offering. Shares
sold in the Syndicated Community Offering will be sold at the Purchase Price.
See " -- Stock Pricing."
The Syndicated Community Offering, if any, will terminate no more than 45
days following completion of the Subscription Offering, unless the OTS approves
an extension for up to an additional 90 days. In the event of such an extension,
subscribers will be resolicited.
Limitations on Purchases and Transfer of Shares
The Plan provides for certain additional limitations to be placed upon the
purchase of the shares in the conversion.
o The minimum purchase is 25 shares.
- 27 -
o The maximum number of shares of common stock which may be purchased in
the Community Offering by any person shall not exceed 5,000 shares, or
$50,000.
o The maximum number of shares of common stock which may be subscribed
for or purchased in all categories in the offering by any person (or
persons through a single account) together with any associate or group
of persons acting in concert shall not exceed the lesser of 10,000
shares (or $100,000) or 5% of the total number of shares issued).
o Officers and directors and their associates may not purchase, in the
aggregate, more than 35% of the shares issued pursuant to the
conversion.
If the number of shares of common stock otherwise allocable to any person
or that person's associates would be in excess of the maximum number of shares
permitted as set forth above, the number of shares of common stock allocated to
that person shall be reduced to the lowest limitation applicable to that person,
and then the number of shares allocated to each group consisting of a person and
that person's associates shall be reduced so that the aggregate allocation to
that person and his associates complies with the above maximums, and the maximum
number of shares shall be reallocated among that person and his associates in
proportion to the shares subscribed by each (after first applying the maximums
applicable to each person, separately).
Depending on market conditions and the results of the offering, the Board
of Directors may increase or decrease any of the purchase limitations without
the approval of our members and without resoliciting subscribers. The Plan
permits the Board to increase the maximum purchase limitations in the
Subscription and/or Community Offering up to 9.9% of the shares of common stock
sold in the offering. The total number of orders for shares exceeding 5% of the
shares may not exceed, in the aggregate, 10% of the shares to be sold in the
Offering. If the maximum purchase limitation is increased, persons who ordered
the maximum amount will be given the first opportunity to increase their orders.
In doing so, the preference categories in the offerings will be followed.
In the event of an increase in the total number of shares offered in the
conversion due to an increase in the Estimated Valuation Range of up to 15% (the
"Adjusted Maximum"), the additional shares will be allocated in the following
order of priority: (i) in the event that there is an over-subscription by
Eligible Account Holders, to fill unfulfilled subscriptions of Eligible Account
Holders exclusive of the Adjusted Maximum; (ii) in the event that there is an
over- subscription by Supplemental Eligible Account Holders, to fill unfulfilled
subscriptions to Supplemental Eligible Account Holders exclusive of the Adjusted
Maximum; (iii) in the event that there is an over-subscription by Other Members,
to fill unfulfilled subscriptions of Other Members exclusive of the Adjusted
Maximum; and (iv) to fill unfulfilled subscriptions in the Community Offering to
the extent possible, exclusive of the Adjusted Maximum.
- 28 -
The term "acting in concert" means
(i) knowing participation in a joint activity or interdependent conscious
parallel action towards a common goal whether or not pursuant to an
express agreement; or
(ii) a combination or pooling of voting or other interests in the
securities of an issuer for a common purpose pursuant to any contract,
understanding, relationship, agreement or other arrangement, whether
written or otherwise.
We may presume that certain persons are acting in concert based upon, among
other things, joint account relationships, common account and/or addresses and
the fact that such persons have filed joint Schedule 13Ds with the SEC with
respect to other companies.
The term "associate" of a person means
o any corporation or organization (other than us or a majority-owned
subsidiary of ours) of which such person is an officer or partner or
is, directly or indirectly, the beneficial owner of 10% or more of any
class of equity securities,
o any trust or other estate in which such person has a substantial
beneficial interest or as to which such person serves as director or
in a similar fiduciary capacity (excluding tax-qualified employee
stock benefit plans and non tax-qualified employee stock benefit
plans), and
o any relative or spouse of such person or any relative of such spouse,
who has the same home as such person or who is a director or officer
of us, or any of our subsidiaries.
For example, a corporation of which a person serves as an officer would be
an associate of that person, and therefore all shares purchased by that
corporation would be included with the number of shares which that person
individually could purchase under the above limitations.
The term "officer" may include our chairman of the board, president, vice
presidents in charge of principal business functions, and any other person
performing similar functions. All references herein to an officer have the same
meaning as used for an officer in the Plan.
The term "residing," as used in relation to the preference afforded natural
persons in Hopkins County, Kentucky, means any natural person who occupies a
dwelling within Hopkins County, has an intention to remain within Hopkins County
(manifested by establishing a physical, on-going, non-transitory presence within
Hopkins County), and continues to reside in Hopkins County at the time of the
offering. We may utilize deposit or loan records or such other evidence provided
to us to make the determination whether a person is residing in Hopkins County.
Such determination will be in our sole discretion.
To order shares in the conversion, persons must certify that their purchase
does not conflict with the purchase limitations. In the event that the purchase
limitations are violated
- 29 -
by any person (including any associate or group of persons affiliated or
otherwise acting in concert with such persons), we will have the right to
purchase from that person at $10.00 per share all shares acquired by that person
in excess of the purchase limitations. If the excess shares have been sold by
that person, we may recover the profit from the sale of the shares by that
person. We may assign our right either to purchase the excess shares or to
recover the profits from their sale.
Shares of common stock purchased pursuant to the conversion will be freely
transferable, except for shares purchased by our directors and officers. For
certain restrictions on the shares purchased by directors and officers, see " --
Restrictions on Sales and Purchases of Shares by Directors and Officers." In
addition, under guidelines of the NASD, members of the NASD and their associates
are subject to certain restrictions on the transfer of securities purchased in
accordance with subscription rights and to certain reporting requirements upon
purchase of such securities.
Ordering and Receiving Shares
Use of Order Forms. Subscription rights to subscribe may only be exercised
by completion of an original order form. Facsimiles of order forms will not be
accepted. Persons ordering shares in the Subscription Offering must deliver by
mail or in person a properly completed and executed original order form to us
prior to the Expiration Date. Order forms must be accompanied by full payment
for all shares ordered. See " -- Payment for Shares." No wire transfers will be
accepted. Subscription rights under the Plan will expire on the Expiration Date,
whether or not we have been able to locate each person entitled to subscription
rights. Once submitted, subscription orders cannot be revoked without our
consent unless the conversion is not completed within 45 days of the Expiration
Date.
Persons and entities not purchasing shares in the Subscription Offering
may, subject to availability, purchase shares in the Community Offering by
returning to us a completed and properly executed order form along with full
payment for the shares ordered.
In the event an order form:
o is not delivered and is returned to us by the United States Postal
Service or we are unable to locate the addressee;
o is not received or is received after the Expiration Date;
o is defectively completed or executed; or
o is not accompanied by full payment for the shares subscribed for
(including instances where a savings account or certificate balance
from which withdrawal is authorized is insufficient to fund the amount
of such required payment),
the subscription rights for the person to whom such rights have been
granted will lapse as though that person failed to return the completed order
form within the time period specified. We
- 30 -
may, but will not be required to, waive any irregularity on any order form or
require the submission of corrected order forms or the remittance of full
payment for subscribed shares by such date as we specify. The waiver of an
irregularity on an order form in no way obligates us to waive any other
irregularity on that, or any irregularity on any other, order form. Waivers will
be considered on a case by case basis. Photocopies of order forms, payments from
private third parties, or electronic transfers of funds will not be accepted.
Our interpretation of the terms and conditions of the Plan and of the
acceptability of the order forms will be final. We have the right to investigate
any irregularity on any order form.
As part of the order form you will be required to execute a certification
stating that you are aware that the common stock is not a deposit and is not
federally insured or guaranteed. You will also be required to certify that you
have received this prospectus and you are aware that there are risks associated
with the purchase of common stock. We are required by federal regulation to
obtain this certification and we may not sell any shares to you if you are not
able or willing to execute this certification. You will not be waiving any
rights under the federal Securities Act by executing this certification.
To ensure that each purchaser receives a prospectus at least 48 hours
before the Expiration Date in accordance with Rule 15c2-8 of the Exchange Act,
no prospectus will be mailed any later than five days prior to such date or hand
delivered any later than two days prior to such date. Execution of the order
form will confirm receipt or delivery in accordance with Rule 15c2-8. Order
forms will only be distributed with a prospectus.
Payment for Shares. Payment for shares of common stock may be made:
o in cash, if delivered in person;
o by check or money order;
o by authorization of withdrawal from savings accounts (including time
certificates) maintained with us; or
o by an IRA not held by us.
Appropriate means by which such withdrawals may be authorized are provided
in the order form. Once such a withdrawal has been authorized, none of the
designated withdrawal amount may be used by the subscriber for any purpose other
than to purchase the shares. Where payment has been authorized to be made
through withdrawal from a savings account, the sum authorized for withdrawal
will continue to earn interest at the contract rate until the conversion has
been completed or terminated. Interest penalties for early withdrawal applicable
to certificate accounts will not apply to withdrawals authorized for the
purchase of shares; however, if a partial withdrawal results in a certificate
account with a balance less than the applicable minimum balance requirement, the
certificate evidencing the remaining balance will earn interest at the passbook
savings account rate subsequent to the withdrawal. Payments made in cash or by
check or money order will be placed in a segregated savings account and interest
will be paid by us at our passbook savings account rate from the date payment is
received until the conversion is completed or
- 31 -
terminated. An executed order form, once received by us, may not be modified,
amended, or rescinded without our consent, unless the conversion is not
completed within 45 days after the conclusion of the Subscription Offering, in
which case subscribers may be given an opportunity to increase, decrease, or
rescind their order. In the event that the conversion is not consummated, all
funds submitted pursuant to the offering will be refunded promptly with
interest.
Owners of self-directed IRAs may use the assets of such IRAs to purchase
shares in the offering, provided that such IRAs are not maintained on deposit
with us. Persons with IRAs maintained with us must have their accounts
transferred to an unaffiliated institution or broker to purchase shares in the
offering. The Stock Information Center can assist you in transferring your self
directed IRA. Because of the paperwork involved, persons owning IRAs with us who
wish to use their IRA account to purchase stock in the Offering must contact the
Stock Information Center no later than __________, 2003.
Delivery of Stock Certificates. Certificates representing shares of common
stock issued in the conversion will be mailed to the person(s) at the address
noted on the order form as soon as practicable following consummation of the
conversion. Any certificates returned as undeliverable will be held until
properly claimed or otherwise disposed. Persons ordering shares might not be
able to sell their shares until they receive their stock certificates.
Federal regulations prohibit us from lending funds or extending credit to
any person to purchase shares in the conversion.
Marketing Arrangements
We have engaged Keefe, Bruyette & Woods, Inc. as our financial advisor in
connection with the offering. Keefe, Bruyette & Woods, Inc. has agreed to
exercise its best efforts to assist us in the sale of the shares in the
offering. As compensation, Keefe, Bruyette & Woods, Inc. will receive a
management fee in the amount of $20,000 and a success fee of $50,000 payable
upon successful completion of the conversion. If shares are offered for sale in
a Syndicated Community Offering, Keefe, Bruyette & Woods, Inc. will organize and
manage the syndicate of selected broker-dealers. The commission to be paid to
any such selected broker-dealers will be at a rate to be agreed to jointly by
Keefe, Bruyette & Woods, Inc. and us. Fees paid to Keefe, Bruyette & Woods, Inc.
and to any other broker-dealer may be deemed to be underwriting fees, and Keefe,
Bruyette & Woods, Inc. and such broker-dealers may be deemed to be underwriters.
Keefe, Bruyette & Woods, Inc. will also be reimbursed for allocable expenses
incurred by them, including legal fees. Keefe, Bruyette & Woods, Inc.'s
reimbursable out-of-pocket expenses other than legal fees will not exceed $5,000
and its reimbursable legal fees will not exceed $25,000. If the conversion and
the offering are not completed because we do not receive subscriptions for the
minimum number of shares, Keefe, Bruyette & Woods, Inc. will receive only the
management fee and out-of-pocket expenses actually incurred. We have agreed to
indemnify Keefe, Bruyette & Woods, Inc. for reasonable costs and expenses in
connection with certain claims or liabilities which might be asserted against
Keefe, Bruyette & Woods, Inc. This indemnification covers the investigation,
preparation of defense and defense of any action, proceeding or claim arising
out of the conversion or action taken by Keefe, Bruyette & Woods, Inc. as our
agent or relating to misrepresentation or breach of warranty of the written
agreement among Keefe, Bruyette &
- 32 -
Woods, Inc. and us or the omission or alleged omission of a material fact
required to be stated or necessary in the prospectus or other documents.
The shares will be offered principally by the distribution of this document
and through activities conducted at a Stock Information Center located at our
office. The Stock Information Center is expected to operate during our normal
business hours throughout the offering. A registered representative employed by
Keefe, Bruyette & Woods, Inc. will be working at, and supervising the operation
of, the Stock Information Center. Keefe, Bruyette & Woods, Inc. will assist us
in responding to questions regarding the conversion and the offering and
processing order forms. Our personnel will be present in the Stock Information
Center to assist Keefe, Bruyette & Woods, Inc. with clerical matters and to
answer questions related solely to our business.
Stock Pricing
We have retained Feldman Financial, an independent economic consulting and
appraisal firm, which is experienced in the evaluation and appraisal of business
entities, including savings institutions involved in the conversion process, to
prepare an appraisal of our estimated pro forma market value. We will pay
Feldman Financial a fee of $12,500 for preparing the appraisal and $2,000 each
for any updates and will reimburse Feldman Financial for reasonable
out-of-pocket expenses. We have agreed to indemnify Feldman Financial under
certain circumstances against liabilities and expenses arising out of or based
on any misstatement or untrue statement of a material fact contained in the
information supplied by us to Feldman Financial.
Feldman Financial prepared the appraisal in reliance upon the information
contained herein, including the financial statements. The appraisal contains an
analysis of a number of factors, including, but not limited to, our financial
condition and operating trends, the competitive environment within which we
operate, operating trends of certain savings institutions and savings and loan
holding companies, relevant economic conditions, both nationally and in the
Commonwealth of Kentucky which affect the operations of savings institutions,
and stock market values of certain savings institutions. In addition, Feldman
Financial has advised us that it has considered the effect of the additional
capital raised by the sale of the shares on our estimated aggregate pro forma
market value.
On the basis of the above, Feldman Financial has determined, in its
opinion, that as of May 5, 2003 our estimated aggregate pro forma market value
was $2,100,000. OTS regulations require, however, that the appraiser establish a
range of value for the stock to allow for fluctuations in the aggregate value of
the stock due to changing market conditions and other factors. Accordingly,
Feldman Financial has established the Estimated Valuation Range from $1,785,000
to $2,415,000 for the offering. The Estimated Valuation Range will be updated
prior to consummation of the conversion and the Estimated Valuation Range may
increase to $2,777,250.
The Board of Directors has reviewed the independent appraisal, including
the stated methodology of the independent appraiser and the assumptions used in
the preparation of the independent appraisal. The Board of Directors is relying
upon the expertise, experience and independence of the appraiser.
- 33 -
In order for stock sales to be completed, Feldman Financial must confirm to
the OTS that, to the best of Feldman Financial's knowledge and judgment, nothing
of a material nature has occurred which would cause Feldman Financial to
conclude that the Purchase Price on an aggregate basis was incompatible with
Feldman Financial's estimate of our pro forma market value of us in converted
form at the time of the sale. If, however, the facts do not justify such a
statement, an amended Estimated Valuation Range may be established.
The appraisal is not a recommendation of any kind as to the advisability of
purchasing these shares. In preparing the appraisal, Feldman Financial has
relied upon and assumed the accuracy and completeness of financial and
statistical information provided by us. Feldman Financial did not independently
verify the financial statements and other information provided by us, nor did
Feldman Financial value independently our assets and liabilities. The appraisal
considers us only as a going concern and should not be considered as our
liquidation value. Moreover, because the appraisal is based upon estimates and
projections of a number of matters which are subject to change, the market price
of the common stock could decline below $10.00.
Change in Number of Shares to be Issued in the Conversion
Depending on market and financial conditions at the time of the completion
of the Subscription and Community Offerings, we may significantly increase or
decrease the number of shares to be issued in the conversion. In the event of an
increase in the valuation, we may increase the total number of shares to be
issued in the conversion. An increase in the total number of shares to be issued
in the conversion would decrease a subscriber's percentage ownership interest
and the pro forma net worth (book value) per share and increase the pro forma
net income and net worth (book value) on an aggregate basis. In the event of a
material reduction in the valuation, we may decrease the number of shares to be
issued to reflect the reduced valuation. A decrease in the number of shares to
be issued in the conversion would increase a subscriber's percentage ownership
interest and the pro forma net worth (book value) per share and decrease pro
forma net income and net worth on an aggregate basis.
In the event a change in the number of shares to be issued in the
conversion results in an offering which is either less than $1,785,000 or more
than $2,777,250, subscribers will be affirmatively resolicited.
Restrictions on Repurchase of Shares
Generally, except in extraordinary circumstances, during the first year
following the conversion, the Company may not repurchase its shares. SEC rules
also govern the method, time, price, and number of shares of common stock that
may be repurchased by the Company and affiliated purchasers. If, in the future,
the rules and regulations regarding the repurchase of stock are liberalized, the
Company may utilize the rules and regulations then in effect.
- 34 -
Restrictions on Sales and Purchases of Shares by Directors and Officers
Shares purchased by directors and officers of the Company may not be sold
for one year following completion of the conversion. An exception to this rule
is a disposition of shares in the event of the death of the director or officer.
Any shares issued to directors and officers as a stock dividend, stock split, or
otherwise with respect to restricted stock shall be subject to the same
restrictions.
For three years following the conversion, directors and officers may
purchase shares only through a registered broker or dealer. Exceptions are
available only if the OTS has approved the purchase or the purchase is an arm's
length transaction and involves more than one percent of the outstanding shares.
Directors and officers are also allowed to purchase stock through any management
or employee stock benefit plan of ours.
Interpretation and Amendment of the Plan
We are authorized to interpret and amend the Plan. Our interpretations are
final. Amendments to the Plan after the receipt of member approval will not need
further member approval unless required by the OTS.
Conditions and Termination
Completion of the conversion requires (i) the approval of the Plan by the
affirmative vote of not less than a majority of the total number of votes
eligible to be cast by our members; and (ii) completion of the sale of shares
within 24 months following approval of the Plan by our members. If these
conditions are not satisfied, the Plan will be terminated and we will continue
our business in the mutual form of organization. We may terminate the Plan at
any time prior to the meeting of members to vote on the Plan or at any time
thereafter with the approval of the OTS.
Other
All statements made in this document are hereby qualified by the contents
of the plan of conversion, the material terms of which are set forth herein. The
plan of conversion is attached to the Proxy Statement. Copies of the Plan are
available from us and we should be consulted for further information. Adoption
of the Plan by our members authorizes us to interpret, amend or terminate the
Plan.
- 35 -
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations is intended to assist you in understanding our financial condition
and results of operations. The information in this section should also be read
with our Financial Statements and Notes to the Financial Statements, which are
included elsewhere in this document.
The Company has recently been formed and, accordingly, has no results of
operations. The following discussion relates only to our financial condition and
results of operations.
Our results of operations depend primarily on net interest income, which is
determined by (i) the difference between rates of interest we earn on our
interest-earning assets and the rates we pay on interest-bearing liabilities
(interest rate spread), and (ii) the relative amounts of interest-earning assets
and interest-bearing liabilities. Our results of operations are also affected by
non- interest expense, including primarily compensation and employee benefits,
federal deposit insurance premiums and office occupancy costs. Our results of
operations also are affected significantly by general and economic and
competitive conditions, particularly changes in market interest rates,
government policies and actions of regulatory authorities, all of which are
beyond our control.
Following the conversion, we believe there will be sufficient demand in our
market area to continue our policy of emphasizing lending one- to four-family
residential lending. In addition, we hope to expand our commercial and
multi-family real estate lending; however, there is no assurance that we will be
able to do so. See "Business of Community First Bank -- Lending Activities."
Overview
The Bank has historically followed a conservative business strategy, using
local deposits to fund residential first mortgages on properties in Madisonville
and the surrounding area. Like many traditional thrifts, however, the Bank has
experienced ever-increasing competition for the more credit-worthy borrowers who
have been its principal customers, as the standardization of mortgage lending
has drawn numerous non-bank competitors to the field. The increased competition
for mortgage loans not only eroded the Bank's share of the mortgage market but
also squeezed the overall profitability of mortgage lending.
As its mortgage lending volume declined in the 1990s, the Bank began
devoting a larger percentage of its assets to investments in U.S. government and
federal agency securities. Because these investments generally have lower yields
than residential mortgages, the Bank found its net interest income shrinking
until it was no longer adequate to cover its non-interest expenses, and starting
in 1998, the Bank began experiencing progressively larger operating losses. For
the fiscal years ended March 31, 2001, 2000, and 1999, the Bank had net losses
of $78,000, $51,000 and $11,000, respectively and net interest income declined
from $757,000 to $671,100 during this period. During 2001, the Bank changed its
fiscal year end to December 31. These losses and the
- 36 -
losses during 2002 and 2001 significantly eroded the Bank's capital base to the
point that the Board did not believe that the Bank had adequate capital
resources for further growth.
In 2001, the Board of Directors engaged an executive search firm to find a
new chief executive officer with experience in bank turn-arounds and Mr. William
Tandy was hired in November of that year. Mr. Tandy had previously been involved
in three bank turn-arounds.
The Bank has sought to improve the yield on its interest-earning assets by
shifting a greater percentage of assets from lower yielding investments into
higher yielding loans and has begun to diversify the portfolio into commercial
and multi-family real estate loans. These loans generally have higher yields
than one-to four-family mortgages but often involve more credit and other risks.
The Bank has similarly sought to control interest expense by reducing its
reliance on higher rate, long-term certificates of deposit. As the result of
these efforts, net interest income has improved from $784,000 in the year ended
December 31, 2001 to $980,000 in 2002 and our net interest rate spread has
improved from 2.73% to 3.44%.
The Bank also undertook a comprehensive analysis of its expense structure
and has sought to pare unnecessary expenses. While non-interest expense has
increased and is expected to further increase as the Bank expands, management
believes that its cost-cutting has moderated these increases.
As a result of the initiatives undertaken to improve profitability over the
last year, the Bank has been able to record a lower net loss for the year ended
December 31, 2002 than for the prior year. The Board of Directors, however,
recognizes that the long-term success of the Bank depends on its ability to
re-establish itself as a competitor within its market area. To that end, the
Bank has undertaken various initiatives to improve the Bank's visibility and
competitiveness, including:
o the introduction of new products and services, including overdraft
protection,
o the renovation and remodeling of its main office to make it more
attractive and inviting to the public,
o the adoption of a new corporate title emphasizing the Bank's identity
as a community bank,
o the acquisition of a proposed new branch location in the faster
growing part of Madisonville, and
o the conversion of the Bank from a state building and loan to a federal
savings bank to enhance its lending and other authorities.
While the foregoing initiatives have helped raise the Bank's profile within
the community, management does not believe that the Bank can sustain its current
momentum unless it enhances its capital position. The capital raised through the
conversion will allow the Bank to further grow and diversify its loan portfolio
and position the Bank to extend its presence into faster growing areas of its
market. The conversion will also permit the Bank to incentivize management and
employees with stock-based compensation plans. Finally, the conversion will
strengthen the Bank's ties to the community by allowing members of the local
community to become stockholders and thus share in the Bank's future growth.
- 37 -
Critical Accounting Policies
Accounting policies involving significant judgments and assumptions by
management, which have, or could have, a material impact on the carrying value
of certain assets and impact income, are considered critical accounting
policies. The Bank considers the allowance for loan losses to be a critical
accounting policy. There have been no significant changes in the methods or
assumptions used in the accounting policies that require material estimates and
assumptions.
The allowance for loan losses is management's estimate of probable inherent
credit losses in the loan and lease portfolios at the balance sheet date. The
Bank determines the allowance based on ongoing evaluations. This evaluation is
inherently subjective because it requires material estimates, including the
amounts and timing of cash flows expected to be received on impaired loans.
Those estimates may be susceptible to significant change. Increases to the
allowance are made by charges to the provision for loan losses, which is
reflected in the statements of loss. Loans deemed to be uncollectible are
charged against the allowance. Recoveries of loans previously charged off are
credited to the allowance.
The allowance is the accumulation of various components. All components of
the allowance represent estimation performed pursuant to either SFAS No. 5 or
SFAS No. 114. Management's estimate of each SFAS No. 5 component is based on
data that management believes are most reflective of the underlying credit
losses being estimated. This evaluation includes credit quality trends,
collateral values, changes in the composition of the portfolio and results from
external bank regulatory examinations. Reserves are provided for consumer and
residential loans based on average loss experience, applied to the outstanding
balance in each category. Specific reserves are determined for loans classified
as special mention, substandard or doubtful. Specific reserves are determined on
a loan by loan basis.
While management uses the best information available to establish the
allowance for loan losses, future adjustments to the allowance may be necessary
if conditions differ substantially from the estimates used, or if required by
regulators, based upon information available to them at the time of their
examinations. Such adjustments to original estimates, as necessary, are made in
the period in which these factors and other relevant considerations indicate
that loss levels may vary form previous estimates.
Market/Interest Rate Risk Disclosure
Qualitative Disclosure. Our assets and liabilities may be analyzed by
examining the extent to which our assets and liabilities are interest-rate
sensitive and by monitoring the expected effects of interest rate changes on our
net portfolio value.
An asset or liability is interest rate sensitive within a specific time
period if it will mature or reprice within that time period. If our assets
mature or reprice more quickly or to a greater extent than our liabilities, our
net portfolio value and net interest income would tend to increase during
periods of rising interest rates but decrease during periods of falling interest
rates. Conversely, if our assets mature or reprice more slowly or to a lesser
extent than our liabilities, our net portfolio value and net interest income
would tend to decrease during periods of rising interest rates but increase
during periods of falling interest rates. Our policy has been to mitigate
- 38 -
the interest rate risk inherent in the historical savings institution business
of originating long-term loans funded by short-term deposits by pursuing certain
strategies designed to decrease the vulnerability of our earnings to material
and prolonged changes in interest rates.
Our primary method of managing interest rate is to emphasize the
origination of ARM loans. Our ARM loans provide that the interest rate will
adjust every year. The terms of these loans generally limit the amount of any
single rate change to a maximum of 2% and also provide that the rate may not
increase above a "ceiling" rate established at the time the loan is made, nor
below a floor rate which is the initial rate on the loan. At December 31, 2002,
approximately 80% of our mortgage loan portfolio had adjustable rates. We also
purchase investment securities with relatively short maturities, normally three
years or less. At December 31, 2002, approximately 90% of our investment
portfolio had a maturity of five years or less. We monitor our deposit rates on
a weekly basis to ensure that we remain competitive.
Quantitative Disclosure. We measure our interest rate sensitivity using the
OTS's measurement system. The OTS measures an institution's interest rate risk
by computing the amount by which the net present value of cash flow from assets,
liabilities and off balance sheet items (the institution's net portfolio value
or "NPV") would change in the event of a range of assumed changes in market
interest rates. These computations estimate the effect on an institution's NPV
from instantaneous and permanent 1% to 3% (100 to 300 basis points) increases
and decreases in market interest rates. Because of the current level of interest
rates, the OTS does not calculate the effect of a decline in interest rates
greater than 200 basis points. The following table presents the interest rate
sensitivity of our NPV at December 31, 2002, as calculated by the OTS, which is
based upon quarterly information that we voluntarily provided to the OTS.
NPV as % of Present Value
Net Portfolio Value of Assets
-------------------------------- --------------------------
Change Basis Point
in Rates $ Amount $ Change % Change NPV Ratio Change
- -------- -------- -------- -------- --------- ------
(Dollars in thousands)
+300 bp $1,726 $(595) (26)% 5.79% -164 bp
+200 bp 2,001 (320) (14) 6.60 - 83 bp
+100 bp 2,206 (115) (5) 7.16 - 27 bp
0 bp 2,321 -- -- 7.43 0 bp
- -100 bp 2,335 14 1 7.40 - 3 bp
- -200 bp 2,360 26 2 7.38 - 6 bp
The Board of Directors has established a policy setting forth maximum NPV
variances as a result of such instantaneous and permanent changes in interest
rates. At December 31, 2002, our interest rate sensitivity was within the policy
established by the Board.
While we cannot predict future interest rates or their effects on our NPV
or net interest income, we do not expect current interest rates to have a
material adverse effect on our NPV or net interest income in the near future.
Computations of prospective effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, prepayments and deposit runoff and should not be relied upon as
indicative of actual results. Certain shortcomings are inherent in such
computations. Although certain assets and liabilities may have similar maturity
or periods of repricing, they may react at different times and in different
degrees to changes in the market interest rates. The interest rates on certain
types of
- 39 -
assets and liabilities may fluctuate in advance of changes in market interest
rates, while rates on other types of assets and liabilities may lag behind
changes in market interest rates. Certain assets, such as ARM loans, generally
have features which restrict changes in interest rates on a short-term basis and
over the life of the loan. In the event of a change in interest rates,
prepayments and early withdrawal levels could deviate significantly from those
assumed in making calculations set forth above. Although we underwrite our
adjustable-rate borrowers on the basis of the maximum rate allowed under their
loan agreements, an increased credit risk may result as the ability of many
borrowers to service their debt may decrease in the event of an interest rate
increase.
The Board of Directors reviews our asset and liability policies. The Board
of Directors meets regularly to review interest rate risk and trends, as well as
liquidity and capital ratios and requirements. Management administers the
policies and determinations of the Board of Directors with respect to our asset
and liability goals and strategies. We expect that our asset and liability
policies and strategies will continue as described so long as competitive and
regulatory conditions in the financial institution industry and market interest
rates continue as they have in recent years.
- 40 -
Average Balances, Interest and Average Yields
The following table sets forth certain information relating to our average
balance sheet and reflects the average yield on assets and average cost of
liabilities for the periods indicated and the average yields earned and rates
paid at the date and for the periods indicated. Such yields and costs are
derived by dividing income or expense by the average daily balance of assets or
liabilities, respectively, for the periods presented.
At December 31, Year Ended December 31,
-------------------------------------------------------------
2002 2002 2001
------------------ ----------------------------- ------------------------------
Average Average
Actual Yield/ Average Yield/ Average Yield/
Balance Cost Balance Interest Cost Balance Interest Cost
------- ------ ------- -------- ------- ------- -------- -------
(Dollars in thousands)
Interest-earning assets:
Loans receivable, net(1)..................... $ 25,710 6.53% $ 23,012 $ 1,731 7.52% $ 20,302 $ 1,648 8.12%
Investment securities........................ 1,902 6.00 2,939 169 5.75 4,522 287 6.35
Other investments............................ 659 4.40 1,763 41 2.33 1,885 83 4.40
-------- ------- ------- -------- -------
Total interest-earning assets............. 28,271 6.45 27,714 1,941 7.00 26,709 2,018 7.56
Non-interest-earning assets................... 1,697 2,567 2,043
-------- ------- --------
Total assets.............................. $ 29,968 $ 30,281 $ 28,752
======== ======== ========
Interest-bearing liabilities:
Deposits..................................... $ 26,698 3.55 $ 26,485 949 3.58 $ 25,021 1,210 4.84
Borrowings................................... -- -- 530 12 2.26 540 24 4.44
-------- ------- ------- -------- -------
Total interest-bearing liabilities........ 26,698 3.55 27,015 961 3.56 25,561 1,234 4.83
Non-interest-bearing liabilities.............. 1,521 1,401 1,241
-------- ------- --------
Total liabilities......................... 28,219 28,416 26,802
Total equity.................................. 1,749 1,865 1,950
-------- ------- --------
Total liabilities and equity.............. $ 29,968 $ 30,281 $ 28,752
======== ======== ========
Net interest income........................... $ 980 $ 784
======= =======
Interest rate spread.......................... 2.90% 3.44% 2.73%
==== ==== ====
Net yield on interest-earning assets.......... 3.47% 3.54% 2.94%
==== ==== ====
Ratio of average interest-earning assets to
average interest-bearing liabilities....... 105.89% 102.59% 104.49%
- ------------------
(1) Non-accrual loans are included in average balances, less allowance for loan
losses and deferred fees.
- 41 -
Rate/Volume Analysis
The table below sets forth certain information regarding changes in
interest income and interest expense of the Bank for the periods indicated. For
each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to: (i) changes in volume
(changes in volume multiplied by old rate); and (ii) changes in rate (change in
rate multiplied by old volume). Changes in rate-volume (changes in rate
multiplied by the changes in volume) are allocated between changes in rate and
changes in volume proportionately.
Year Ended December 31,
-----------------------------
2002 vs. 2001
-----------------------------
Increase (Decrease)
Due to
-----------------------------
Volume Rate Total
------ ---- -----
(In thousands)
Interest income:
Loans..................................... $ 210 $(128) $ 82
Investment securities..................... (93) (24) (117)
Other investments......................... (5) (37) (42)
Total interest-earning assets.......... 112 (189) (77)
Interest expense:
Deposits.................................. $ 67 $(329) $(262)
Borrowings................................ -- (12) (12)
Total interest-bearing liabilities..... 67 (341) (274)
Change in net interest income................ $ 45 $ 152 $ 197
Comparison of Financial Condition at December 31, 2002 and December 31, 2001
Total assets increased by approximately $437,000 to $30.0 million at
December 31, 2002 from $29.5 million at December 31, 2001. The Bank's gross loan
portfolio grew by $3.7 million, or 16.5%, from $22.3 million at December 31,
2001 to $26.0 million at December 31, 2002. The increase in loans was
principally the result of one- to four-family first mortgage loan originations
which expanded this portion of the portfolio by $2.7 million, or 14.0%, to $22.4
million The growth in the loan portfolio was partially offset by a decrease in
the investment securities portfolio, which declined $1.9 million, or 50.3%, to
$1.9 million at December 31, 2002 from $3.8 million at December 31, 2001. Cash
and cash equivalents also declined to $758,000 at December 31, 2002 from $2.3
million at December 31, 2001, a decrease of $1.5 million, or 67.1%. The declines
in these asset categories reflect management's decision to direct a greater
proportion of assets into loans which have higher yields than the investment
securities and cash and cash equivalents. Net premises and equipment increased
$356,000, or 85.5% as a result of the renovation of the Bank's main office. As
part of the renovation, the Bank expanded its parking and drive-through teller
bays to make the Bank more accessible to customers and added an ATM machine. The
Bank remodeled and redecorated the lobby and teller area to make it more open
and inviting. As part of the renovation, the Bank also modernized its electrical
wiring, installed a new roof and added new signage to increase visability. We
expect a further increase in premises and equipment during 2003 due to our
proposed new branch.
- 42 -
Funding for the Bank's loan growth also came from increased deposits, which
increased by $1.5 million, or 5.7%, from $26.6 million at December 31, 2001 to
$28.1 million at December 31, 2002. The Bank's deposit growth was primarily
attributable to NOW accounts and certificates of deposit under $100,000. Our
higher level of deposits allowed the Bank to pay off a $1.0 million advance from
the FHLB of Cincinnati.
Retained earnings decreased $84,000, or 4.6%, to $1.7 million at December
31, 2002, due to the net loss during the year. Equity was further reduced by
$5,000 due to a change in unrealized gain on available-for-sale securities, net
of tax benefits.
Comparison of Results of Operations for the Years Ended December 31, 2002 and
2001
General. The Bank's net loss for the year ended December 31, 2002 narrowed
to $84,000 compared to a net loss of $125,000 for the year ended December 31,
2001. The lower loss during the most recent fiscal year reflects management's
efforts to enhance net interest income through better portfolio management. Net
interest income increased $197,000, or 25.1%, to $980,000 compared to $784,000
for the 2001 fiscal year. The increase in net interest income was driven by a
substantial reduction in interest expense in the declining rate environment,
which more than offset a related decline in interest income. The improvement in
net interest income, however, was partially counteracted by a decline in other
income and increases in other expenses and income tax expense.
Net Interest Income. The primary component of the Bank's net income is its
net interest income, which is the difference between income earned on assets and
interest expense paid on the deposits and borrowings used to fund them. Net
interest income is determined by the spread between the yields earned on the
Bank's interest-earning assets and the rates paid on interest- bearing
liabilities as well as the relative amounts of such assets and liabilities. Net
interest income divided by average interest-earning assets represents the Bank's
net interest margin.
For the year ended December 31, 2002, net interest income increased
$197,000, or 25.1%, compared to the prior year. The improvement in net interest
income reflects the declining rate environment which affected the Bank's
interest expense to a greater degree than interest income. Although interest
income decreased $77,000, or 3.8%, for the year ended December 31, 2002,
interest expense decreased an even greater $274,000, or 22.2%. The average yield
on interest- earning assets declined 56 basis points to 7.00% while the average
cost of interest-bearing liabilities fell 127 basis points to 3.56%. As a result
of these rate movements, the Bank's interest rate spread increased to 3.44% for
2002, compared to 2.73% for 2001. The declines in average yields and costs both
reflect a significant decline in interest rates between the periods as the
Federal Reserve cut short-term interest rates a record 12 times. These rate cuts
had a proportionately greater impact on the Bank's cost of funds due to the
Bank's ability to reprice deposits and the maturity of a number of higher rate
certificate accounts. Also contributing to the improvement in net interest
income was a $1.0 million, or 3.76%, increase in the volume of interest-earning
assets and in the percentage of interest-earning assets represented by loans as
the Bank emphasized the origination of loans and correspondingly reduced its
investment portfolio and cash accounts. Despite the increase in volume of
interest-earning assets, the ratio of average
- 43 -
interest-earning assets to average interest-bearing liabilities narrowed to
102.59% from 104.49% in 2001 as average interest-bearing liabilities increased
by approximately $1.5 million, or 5.7%. The Bank's net interest margin, however,
widened to 3.54% for fiscal year 2002 from 2.94% for fiscal year 2001,
reflecting our improved spread.
During the year ended December 31, 2002, the Bank reported net interest
income, before provision for loan losses, of $980,000. Interest income
(consisting of $1.7 million in interest and fees on loans, $169,000 in interest
on investment securities, $29,000 in dividends on stock in the Federal Home Loan
Bank ("FHLB") of Cincinnati and $13,000 in other interest) totaled $1.9 million,
while interest expense, which consisted of $949,000 in interest on deposits and
$12,000 in interest on FHLB advances and other borrowings, totaled $961,000.
During the year ended December 31, 2001, the Bank reported net interest
income, before provision for loan losses, of $784,000. Interest income
(consisting of $1.6 million in interest and fees on loans, $287,000 in interest
on investment securities, $39,000 in dividends on FHLB stock and $44,000 on
other interest) totaled $2.0 million, while interest expense, which consisted of
$1.2 million in interest on deposits and $24,000 in interest on FHLB advances,
totaled $1.2 million.
Provision for Loan Losses. The provision for loan losses for the year ended
December 31, 2002 was $18,000, compared to $94,000 for the year ended December
31, 2001. The higher provision during the 2001 fiscal year reflects higher net
charge-offs. Net charge-offs for the year ended December 31, 2002 were $17,000
(0.07% of average loans), compared to $49,000 (0.24% of average loans) during
the year ended December 31, 2001. There were no significant charge-offs
requiring an additional provision during 2002, resulting in a decrease in the
provision for loan losses for the year ended December 31, 2002. The allowance
for loan losses is management's estimate of probable inherent credit losses in
the loan and lease portfolios at the balance sheet date. The Bank determines the
allowance based on ongoing evaluations. Increases to the allowance are made by
charges to the provision for loan losses, which is reflected in the statement of
loss. Loans deemed to be uncollectible are charged against the allowance.
Recoveries of loans previously charged off are credited to the allowance. At
December 31, 2002, the Bank's allowance for loan losses was $106,000, or 0.41%
of the gross loan portfolio. The Bank increased the amount of the allowance
allocated to various forms of consumer loans, and reduced the proportion
allocated to residential first mortgages reflecting changes in the portfolio.
Reserves are provided for consumer and residential loans based on average loss
experience, applied to the outstanding balance in each category. Specific
reserves are determined for loans classified as special mention, substandard or
doubtful. Specific reserves are determined on a loan by loan basis. As the loan
portfolio diversifies to include more commercial and multi-family real estate
loans, future charge-off rates may differ from historical rates necessitating
revisions to the estimate.
Other Income. Other income for the year ended December 31, 2002 was
$73,000, compared to $130,000 for the year ended December 31, 2001, a decrease
of $57,000, or 44.0%. Noninterest income decreased primarily due to a $33,000
decrease in service charges and fees during 2002. Service and fee charges
include various fees charged in connection with the
- 44 -
origination and pay-off of residential mortgage loans. Because an increasing
number of borrowers have opted for long-term fixed rate loans which the Bank
does not originate for portfolio, the Bank began originating loans as agent for
secondary market investors during 2002. Since the fee income from these
transactions is lower than on portfolio loans, service and fees charges declined
in the most recent fiscal year. The Bank originated $184,000 in mortgage loans
as agent for secondary market investors during fiscal year 2002. No such loans
were originated during 2001. In these transactions, the Bank takes the
application from its customer and transmits it to the secondary market investor,
which underwrites the loan. The Bank may also order credit reports, appraisals
and title searches. The loans are closed in the name of and funded by the
secondary market investor, and the Bank does not advance any funds to the
customer. For its services, the Bank receives a fee from the secondary market
investor based on the loan amount.
Other Expenses. Other expenses for the year ended December 31, 2002 were
$1.1 million compared to $978,000 for the year ended December 31, 2001, an
increase of $131,000, or 13.3%. Other expenses include compensation and
benefits, data processing expense, occupancy expense, advertising, payroll and
other taxes, professional fees, postage, telephone and supplies, and various
other operational expenses. The increase in other expenses primarily reflects
increases in compensation and benefits, which increased $106,000, or 31.0%, as
the Bank added staff, including a new chief executive officer, and an increase
in occupancy expense (which increased $35,000, or 36.2%) related to the higher
depreciation expense associated with the Bank's renovated main office. Also
contributing to the increase in other expenses were increases in advertising (up
$10,000, or 18.8%) and office supplies expenses (up $12,000, or 29.3%), each
reflecting the change in the Bank's name and associated promotional activity.
The Bank experienced increases in expenses related to payroll and other taxes
(up $4,000, or 7.7%), insurance premiums (up $1,700, or 8.5%) and directors fees
(up $1,900, or 4.6%) due to Bank growth and an increase in fees. The foregoing
increases in expenses were partially offset by lower professional fees (down
$11,000, or 25.4%), data processing expense (down $7,000, or 4.0%) and other
operating expenses (down $24,000, or 21.3%). The declines in these expense items
reflect management's efforts to control costs.
We anticipate an increase in compensation and occupancy expense in
connection with the proposed new branch. Data processing expense may also
increase as the result of one-time expenses associated with the proposed
conversion to a new data processing system. Various categories of other expenses
may also increase due to the reporting and other costs associated with operating
as a public company. Finally, compensation expense may be affected by the
implementation of various stock benefit plans following the conversion. While
these increases in expenses could adversely affect our near-term profitability,
we believe that these investments are necessary for the Bank to remain a viable
competitor in its market.
Income Tax Expense (Benefit). For the year ended December 31, 2002, the
Bank incurred a federal tax expense of $10,000, compared to a $33,000 federal
tax benefit during 2001. The tax expense during 2002 related to the
establishment of a valuation allowance for the Bank's net deferred tax assets.
The Bank provides for both the current and deferred tax effects of the
transactions reported in its financial statements and establishes deferred tax
assets and liabilities for
- 45 -
the temporary differences and establishes financial reporting and tax bases of
its assets and liabilities. The Bank, however, establishes valuation allowances
for its net deferred tax assets unless it is more likely than not that these net
deferred tax assets will be realized. Based on its current earnings and other
factors, the Bank determined in 2002 that it was appropriate to establish a
valuation allowance for its net deferred tax assets.
Liquidity and Capital Resources
Our primary sources of funds are deposits, repayment of loans and
mortgage-backed securities, maturities of investments and interest-bearing
deposits and funds provided from operations. We are also able to obtain advances
from the FHLB of Cincinnati, although historically we have done this rarely.
While scheduled repayments of loans and mortgage-backed securities and
maturities of investment securities are relatively predictable sources of funds,
deposit flows and loan prepayments are greatly influenced by the general level
of interest rates, economic conditions and competition. We use our liquidity
resources principally to fund existing and future loan commitments, to fund
maturing time certificates and demand deposit withdrawals, to invest in other
interest-earning assets, to maintain liquidity, and to meet operating expenses.
Liquidity may be adversely affected by unexpected deposit outflows, higher
interest rates paid by competitors, adverse publicity relating to the savings
and loan industry, and similar matters. Management monitors projected liquidity
needs and determines the level desirable, based in part on our commitments to
make loans and management's assessment of our ability to generate funds.
A major portion of our liquidity consists of cash and cash equivalents,
which include cash and interest-bearing deposits in other banks. The level of
these assets is dependent upon our operating, investing, lending and financing
activities during any given period. At December 31, 2002, cash and cash
equivalents totaled $758,000.
Our primary investing activities include origination of loans and purchases
of investment and mortgage-backed securities. During the years ended December
31, 2002 and 2001, purchases of investment and mortgage-backed securities
totaled $500,000 and $1.6 million, respectively, while loan originations totaled
$11.9 million and $11.5 million, respectively. These investments were funded in
part by proceeds from repayments of loans, maturities and calls of investment
and mortgage-backed securities and an increase in deposits for the years ended
December 31, 2002 and 2001.
At December 31, 2002, we had $634,000 in outstanding commitments to
originate loans. We anticipate that we will have sufficient funds available to
meet our current loan origination commitments. Time certificates which are
scheduled to mature in one year or less totaled $10.9 million at December 31,
2002. Based on historical experience, management believes that a significant
portion of such deposits will remain with the Bank, although there can be no
assurance that it will do so. In the event the Bank is unable to retain these
deposits, it may seek replacement funding through the FHLB of Cincinnati or
other sources. At December 31, 2002, we were also party to an agreement to
acquire a property for a new branch location for $360,000. We estimate
- 46 -
that we will spend an additional $500,000 to remodel and equip the existing
structure to serve as a branch. We expect to fund these investments from cash on
hand and internally generated cash flows and do not expect to borrow any funds
for this purpose.
Following the conversion, we expect that the Bank will continue to rely
primarily on local deposits for its funding needs. In order to finance loan
growth, the Bank may also borrow from the FHLB of Cincinnati. At December 31,
2002, the Bank had $5.0 million in unused borrowing capacity at the FHLB of
Cincinnati.
We are subject to federal regulations that impose certain minimum capital
requirements. For a discussion on such capital levels, see "Historical and Pro
Forma Capital Compliance" and "Regulation -- Regulation of the Bank --
Regulatory Capital Requirements."
Recent Accounting Pronouncements
The Bank has reviewed recently issued pronouncements which could be
expected to impact financial institutions including:
SFAS No.143 "Accounting for Asset Retirement Obligations"
SFAS No.144 "Accounting for the Impairment or Disposal of Long-Lived
Assets"
SFAS No.145 "Recission of FASB Statements No. 4, 44 and 64, Amendment
of FASB Statement No. 13 and Technical Corrections as of April 2002"
SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal
Activities"
SFAS No. 148 "Accounting for Stock Based Compensation"
SFAS Interpretation No. 45 "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others"
These recently issued pronouncements are not expected to have a material impact
on the Bank as the GAAP requirements either are not applicable to the Bank or
the impact is insignificant.
Impact of Inflation and Changing Prices
Our financial statements and the accompanying notes presented elsewhere in
this document, have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
operating results in terms of historical dollars without considering the change
in the relative purchasing power of money over time and due to inflation. The
impact of inflation is reflected in the increased cost of our operations. As a
result, interest rates have a greater impact on our performance than do the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or to the same extent as the prices of goods and services.
BUSINESS OF COMMUNITY FIRST BANCORP, INC.
The Company is not an operating company and has not engaged in any
significant business to date. It was formed in March 2003 as a
Maryland-chartered corporation to be the holding
- 47 -
company for Community First Bank. The holding company structure and retention of
proceeds will facilitate: (i) expansion within existing and into new market
areas; (ii) diversification into non- banking activities; (iii) stock
repurchases without adverse tax consequences; and (iv) acquisitions of other
financial institutions, such as savings institutions. There are no present plans
regarding diversification, acquisitions or expansion or stock repurchases.
As a savings and loan holding company formed after May 4, 1999, the
Company's activities will generally be restricted to various financial
activities prescribed by federal statute and regulation. If we fail to maintain
a specified percentage of our assets in housing-related investments, the Company
may become subject to additional restrictions on its activities. The Company
initially will not conduct any active business and does not intend to employ any
persons other than officers but will utilize our support staff from time to
time.
BUSINESS OF COMMUNITY FIRST BANK
Community First has operated as an independent community oriented savings
institution since 1923. It is our intention to continue to operate as an
independent community oriented savings bank following the conversion.
The principal sources of funds for our activities are deposits and payments
on loans. We are also able to borrow from the FHLB of Cincinnati, although
historically we have not relied on this source of funding. Our deposits totaled
$28.1 million at December 31, 2002. Funds are used principally for the
origination of loans secured by first mortgages on one- to four-family
residences which are located in our market area. Such loans totaled $22.4
million, or 86.10%, of our total loans receivable portfolio at December 31,
2002. We also originate other types of loans, including loans secured by
commercial real estate and consumer loans, and purchase investment and
mortgage-backed securities. Our principal source of revenue is interest received
on loans and investments and our principal expense is interest paid on deposits.
Market Area
We consider our primary market area to be the City of Madisonville and
surrounding Hopkins County, Kentucky. Located in the Western Coalfield Region of
Kentucky, Hopkins County had a population of approximately 46,500 in 2000.
Madisonville is the county seat and largest city in Hopkins County and is home
to one of the major healthcare facilities in the Commonwealth of Kentucky.
The largest employers in Madisonville and the surrounding communities
include the Trover Regional Medical Center, General Electric Aircraft Engine,
Carhartt, Inc. and Lear Corporation. By industry, the largest sectors of the
Madisonville economy are healthcare and manufacturing. The 2001 unemployment
rate for Hopkins County was 7.0%, compared to 4.8% nationally. The average per
capita income of $21,092 in 2000 for Hopkins County was below that of Kentucky
as a whole of $24,085 and the average for the United States of $29,649. While
the population of Madisonville grew by approximately 19% from 1990 to 2000,
Hopkins County as a whole grew less than 1.0%. By comparison, the population of
Kentucky grew by 9.6%. The population of
- 48 -
Hopkins County is projected to decline slightly during the next decade according
to projections by the Kentucky Department for Economic Development.
Business Strategy
Historically, our principal business strategy has been that of operating a
community- oriented institution which emphasizes residential real estate loans.
Our loans have typically been secured by properties located within our market
area. Over the past year, we have increased our originations of commercial and
multi-family property loans and consumer loans. The proceeds from the conversion
will enable us to continue growing and continue to meet the needs of the market
in which we do business. We will also consider adding to our products and
services as the competition within our market demands.
Lending Activities
Most of the loans in our portfolio are mortgage loans secured by first
liens on one- to four- family residences. We also make consumer, residential
construction and commercial real estate and commercial business loans. While we
expect to continue our historic emphasis on one- to four-family lending
following the conversion, we also plan to grow our portfolio of commercial and
multi-family mortgages.
At December 31, 2002, our gross loans totaled $26.0 million, of which $22.4
million were first mortgage loans secured by one- to four-family residences. We
originate ARM loans with rates that adjust annually after an initial period of
one, three, five or seven years during which the interest rate is fixed. We
offer similar terms on our commercial and multi-family mortgages. Our consumer
loans may have either fixed or variable rates.
- 49 -
The following table sets forth information concerning the types of loans
held by us at the dates indicated.
At December 31,
-----------------------------------------------------
2002 2001
---------------------- ----------------------
Amount % Amount %
-------- ----- -------- -----
(Dollars in thousands)
Real estate mortgage loans:
One- to four-family residential first........ $22,353 86.10% $19,604 87.97%
One- to four-family residential second....... 582 2.24 626 2.81
Multi-family................................. 450 1.73 104 0.47
Commercial................................... 798 3.07 467 2.10
Construction................................. 207 0.80 67 0.30
Other loans:
Consumer installment......................... 283 1.09 326 1.46
Commercial................................... 102 0.39 8 0.03
Automobile................................... 740 2.85 556 2.50
Passbook..................................... 238 0.92 270 1.21
Other........................................ 209 0.81 256 1.15
------ ------- ------ -------
25,962 100.00% 22,284 100.00%
====== ======
Less:
Unearned interest............................ 1 2
Allowance for loan losses.................... 106 105
Loans in process............................. 145 19
------ ------
Total..................................... $25,710 $22,158
====== ======
- 50 -
The following table sets forth the estimated maturity of the Bank's loan
portfolio at December 31, 2002. The table does not include the effects of
possible prepayments or scheduled repayments. All mortgage loans are shown as
maturing based on the date of the last payment required by the loan agreement.
Due after Due after Due after 10
Due during the year 3 through 5 through through 15 Due over 15
ending 5 years after 10 years after years after years after
December 31, December 31, December 31, December 31, December 31,
-------------------- ------------- -------------- ------------ ------------
2003 2004 2005 2002 2002 2002 2002 Total
---- ---- ---- ---- ---- ---- ---- -----
(In thousands)
Real estate mortgage loans:
One- to four-family residential first.. $ 12 $ 49 $ 74 $ 543 $3,862 $5,800 $12,013 $22,353
One- to four-family residential second. -- 13 29 68 472 -- -- 582
Multi-family........................... -- -- -- -- -- -- 450 450
Commercial............................. -- -- 7 -- 691 29 71 798
Construction........................... 207 -- -- -- -- -- -- 207
Other loans:
Consumer installment................... 19 92 43 129 -- -- -- 283
Commercial............................. -- 4 -- 98 -- -- -- 102
Automobile............................. 12 129 216 383 -- -- -- 740
Passbook............................... 238 -- -- -- -- -- -- 238
Other.................................. 209 -- -- -- -- -- -- 209
--- --- --- ----- ----- ----- ------ ------
Total................................ $697 $287 $369 $1,221 $5,025 $5,829 $12,534 $25,962
=== === === ===== ===== ===== ====== ======
- 51 -
The next table sets forth at December 31, 2002, the dollar amount of all
loans due one year or more after December 31, 2002 which have predetermined
interest rates and have floating or adjustable interest rates.
Predetermined Floating or
Rate Adjustable Rates
------------- ----------------
(In thousands)
Real estate mortgage loans:
One- to four-family residential first................ $2,097 $20,244
One- to four-family residential second............... 582 --
Multi-family......................................... 450 --
Commercial........................................... 466 332
Construction......................................... -- --
Other loans:
Consumer installment................................. 264
Commercial........................................... 102 --
Automobile........................................... 728 --
Passbook............................................. -- --
Other................................................ -- --
----- ------
Total........................................... $4,689 $20,576
====== =======
One- to Four-Family Residential Loans. Our primary lending activity
consists of the origination of one- to four-family residential first mortgage
loans secured by property located in our primary market area. We generally
originate one- to four-family residential mortgage loans in amounts up to 80% of
the lesser of the appraised value or purchase price with a maximum loan amount
of $500,000 and a maximum term of 30 years. We will make residential mortgage
loans with loan-to-value ratios greater than 80% as long as the loan can be sold
into the secondary market. Although we make loans on one- to four-family rental
properties, the vast majority of our residential first mortgages are on
owner-occupied properties.
The first mortgage loans that we originate for our portfolio generally have
rates that adjust annually after an initial period of one, three, five or seven
years during which the rate is fixed. We do not originate 30-year fixed rate
loans for our portfolio.
The interest rate on ARM loans is based on an index plus a stated margin.
ARM loans provide for periodic interest rate adjustments upward or downward of
up to two percentage points per year with a limit of six percentage points over
the life of the loan. Borrowers on ARM loans must qualify at the fully adjusted
rate. The ratio on our ARM loans are generally indexed to the rates on one-year
U.S. Treasury bills adjusted to a constant maturity. We also have in our
portfolio ARM loans which are indexed to the average cost of funds for savings
associations in the 11th Federal Home Loan Bank District. We discontinued using
this index in 1996 because it tended to lag the market and such loans were less
than 6% of the portfolio at December 31, 2002.
In addition to one- to four-family first mortgage loans, we offer second
mortgage loans. We offer second mortgages to customers on whose property we hold
the first mortgage and to other customers as well. Our second mortgage loans
have fixed terms of up to 10 years and have
- 52 -
fixed rates of interest. We only originate a second mortgage if the aggregate
indebtedness secured by the property will not exceed 80% of its appraised value.
We do not offer home equity lines of credit.
ARM loans decrease the risk associated with changes in interest rates by
periodically repricing, but involve other risks because as interest rates
increase, the underlying payments by the borrower increase, thus increasing the
potential for default by the borrower. At the same time, the marketability of
the underlying collateral may be adversely affected by higher interest rates.
Upward adjustment of the contractual interest rate is also limited by the
maximum periodic and lifetime interest rate adjustment permitted by the loan
documents, and, therefore is potentially limited in effectiveness during periods
of rapidly rising interest rates. At December 31, 2002, approximately 90% of the
one- to four-family residential loans we held had adjustable rates of interest.
The mortgage loans we originate and hold generally include due-on-sale
clauses. These clauses gives us the right to deem the loan immediately due and
payable in the event the borrower transfers ownership of the property securing
the mortgage loan without our consent.
Residential Construction Loans. We make a limited number of residential
construction loans on one- to four-family residential properties to the
individuals who will be the owners and occupants upon completion of
construction. Borrowers are required to pay interest on disbursed funds during
the construction period, which may not last beyond 12 months. The borrower may
pay off the loan with a permanent loan from us at completion of construction.
Loan proceeds are disbursed according to a draw schedule and the appraiser must
inspect the progress of the construction before additional funds are disbursed.
Construction loans are offered on either a fixed or adjustable basis.
Construction lending is generally considered to involve a higher degree of
credit risk than long term financing of residential properties. Our risk of loss
on a construction loan is dependent largely upon the accuracy of the initial
estimate of the property's value at completion of construction and the estimated
cost of construction. If the estimate of construction cost and the marketability
of the property upon completion of the project prove to be inaccurate, we may be
compelled to advance additional funds to complete the construction. Furthermore,
if the final value of the completed property is less than the estimated amount,
the value of the property might not be sufficient to assure the repayment of the
loan.
Commercial and Multi-Family Real Estate Loans. We offer commercial and
multi-family real estate loans secured by apartment buildings, churches, office
buildings, and other commercial properties. Commercial and multi-family real
estate loans are made for terms of up to 20 years and have rates of interest
that are fixed for a period of one to seven years and adjust annually
thereafter. The interest rates on commercial and multi-family loans are indexed
to the prime rate. Loan amounts may not exceed 70% of the appraised value of the
property. Over the past year, the Bank has sought to increase its originations
of commercial and multi-family real estate loans in order to diversify the
portfolio and serve the needs of the market.
- 53 -
At December 31, 2002, the Bank's largest commercial real estate loan was a
$450,000 loan secured by a 28-unit apartment complex in Madisonville originated
in December 2002. The 20- year fully amortizing loan bears a fixed rate of
interest for seven years and floats with the prime rate thereafter. The
loan-to-value ratio at origination was 65% and the loan is personally guaranteed
by the principals of the corporate borrower. The Bank's second largest loan was
a $348,000 loan secured by a personal care facility in Madisonville originated
in March 2002. The facility has 48 beds and 22 semi-private rooms. The loan has
a seven-year term with 30-year amortization and bears a fixed rate of interest.
The loan-to-value ratio was 53% at the date of origination and is personally
guaranteed by the principals of the borrower.
Commercial and multi-family real estate lending entails significant
additional risks compared to residential property lending. These loans typically
involve large loan balances to single borrowers or groups of related borrowers.
The repayment of these loans typically is dependent on the successful operation
of the real estate project securing the loan. These risks can be significantly
affected by supply and demand conditions in the market for office and retail
space and may also be subject to adverse conditions in the economy. To minimize
these risks, we generally limit this type of lending to our market area and to
borrowers who are otherwise well known to us.
Commercial Business Loans. We engage in a limited amount of commercial
business lending primarily for the accommodation of existing customers. Our
commercial business loans generally are secured by equipment or other tangible
assets. Our largest commercial business loan at December 31, 2002 had a balance
of $28,000 and was made to a local lumber company.
Unlike residential mortgage loans, which generally are made on the basis of
the borrower's ability to make repayment from his or her employment and other
income and which are secured by real property whose value tends to be more
easily ascertainable, commercial business loans typically are made on the basis
of the borrower's ability to make repayment from the cash flow of the borrower's
business. As a result, the availability of funds for the repayment of commercial
business loans may be substantially dependent on the success of the business
itself and the general economic environment.
Consumer Loans. We offer various types of consumer loans in order to
provide a wider range of financial services to our customers. Consumer loans
totaled $1.5 million, or 5.7%, of our total loans at December 31, 2002. Our
consumer loans consist of automobile, personal unsecured loans, passbook, home
improvement loans and equipment loans. Passbook and certificate of deposit
secured loans are offered up to the maximum of the deposit balance and are due
on demand.
We offer loans for both new and used automobiles with maximum terms of five
years and maximum loan amounts up to 90% of the manufacturer's suggested retail
price on new cars or fair market value of the automobile on used cars. Personal
unsecured loans generally are made for amounts of $2,000 or less and terms of 6
months and may have fixed or variable interest rates.
- 54 -
Consumer loans may entail greater risk than residential mortgage loans,
particularly in the case of consumer loans that are unsecured or secured by
assets that depreciate rapidly. Repossessed collateral for a defaulted consumer
loan may not be sufficient for repayment of the outstanding loan, and the
remaining deficiency may not be collectible.
Loan Solicitation, Approval and Underwriting. The Bank obtains loan
customers from a variety of sources, including advertising, personal
solicitation, repeat customers and referrals from existing customers, realtors,
builders and others. The Bank also solicits applications for residential
mortgages through its website. Although the President and Vice Presidents have
authority to originate loans up to the loans-to-one borrower limits, loans other
than single-family owner-occupied mortgages and residential mortgage loans in
excess of $250,000 are generally submitted to the Board of Directors for
approval.
Upon receipt of a completed loan application from a prospective borrower, a
credit report is ordered. Income and certain other information is verified. If
necessary, additional financial information may be requested. An appraisal or
other estimate of value of the real estate intended to be used as security for
the proposed loan is obtained. Appraisals are prepared by outside fee appraisers
who are approved by the Board of Directors.
A title opinion or title insurance is generally required on all real estate
loans. Borrowers also must obtain fire and casualty insurance. Flood insurance
is also required on loans secured by property which is located in a flood zone.
Loan Originations. The following table sets forth certain information with
respect to our loan originations for the periods indicated. We have not
purchased or sold any loans in the secondary market in recent years.
Year Ended December 31,
--------------------------
2002 2001
-------- --------
(In thousands)
Loans originated:
Real estate mortgage loans:
One- to four-family residential first........ $ 9,332 $10,130
One- to four-family residential second....... 181 227
Multi-family................................. 450 --
Commercial................................... 484 --
Construction................................. 264 --
Other loans:
Consumer installment......................... 262 343
Commercial................................... 110 --
Automobile................................... 637 486
Passbook..................................... 80 186
Other........................................ 124 170
------ ------
Total loans originated.................... $11,924 $11,542
====== ======
- 55 -
Loans to One Borrower. The maximum amount of loans which we may make to any
one borrower may not exceed the greater of $500,000 or 15% of our unimpaired
capital and unimpaired surplus. We may lend an additional 10% of our unimpaired
capital and unimpaired surplus if the loan is fully secured by readily
marketable collateral. Our maximum loans-to-one- borrower limit was $500,000 at
December 31, 2002. At December 31, 2002, our largest loan concentration
outstanding had a balance of $450,000. As a result of the conversion, we expect
an increase in the Bank's legal lending limit but do not plan to increase the
amount we will lend to one borrower.
Nonperforming and Problem Assets
Loan Delinquencies. Generally when a mortgage loan becomes 15 days past
due, a notice of nonpayment is sent to the borrower. If after 30 days payment is
still delinquent, the borrower will receive a formal delinquency notice. The
borrower will be contacted by telephone or visited personally if the loan
remains delinquent after 45 days. If the loan continues in a delinquent status
for 120 days past due and no repayment plan is in effect, the loan will be
referred to an attorney for collection, with foreclosure commenced no later than
180 days. The customer will be notified when foreclosure is commenced. At
December 31, 2002, our loans past due between 30 and 89 days totaled $30,000.
Loans are reviewed on a monthly basis and are generally placed on a
non-accrual status when the loan becomes more than 90 days delinquent or when,
in our opinion, the collection of additional interest is doubtful. Interest
accrued and unpaid at the time a loan is placed on nonaccrual status is charged
against interest income. Subsequent interest payments, if any, are either
applied to the outstanding principal balance or recorded as interest income,
depending on the assessment of the ultimate collectibility of the loan.
- 56 -
Nonperforming Assets. The following table sets forth information regarding
non-accrual loans, accruing loans past due 90 days or more and real estate
owned. The Bank did not have any troubled debt restructurings within the meaning
of Statement of Financial Accounting Standards No. 15 at the dates indicated
below.
At December 31,
----------------------
2002 2001
------ ------
(Dollars in thousands)
Loans accounted for on a non-accrual basis:(1)
Real estate:
One- to four-family residential first .............. $53 $--
One- to four-family residential second ............. -- --
Multi-family ....................................... -- --
Commercial ......................................... -- --
Construction ....................................... -- --
Other loans:
Consumer installment .............................. -- --
Commercial ........................................ -- --
Automobile ........................................ -- --
Passbook .......................................... -- --
Other ............................................. -- --
--- ---
Total ............................................. $53 $--
=== ===
Accruing loans which are contractually
past due 90 days or more:
Real estate:
One- to four-family residential first .............. $31 $44
One- to four-family residential second ............. -- --
Multi-family ....................................... -- --
Commercial ......................................... -- --
Construction ....................................... -- --
Other loans: ......................................... --
Consumer installment .............................. -- --
Commercial ........................................ -- --
Automobile ........................................ -- --
Passbook .......................................... -- 1
Other ............................................. 2 2
--- ---
Total ............................................. $33 $47
=== ===
Total nonperforming loans ......................... $86 $47
=== ===
Percentage of total loans ............................ 0.33% 0.21%
==== ====
Other non-performing assets(2) ....................... $-- $17
=== ===
- --------------------
(1) Non-accrual status denotes loans on which, in the opinion of management,
the collection of additional interest is unlikely. Payments received on a
nonaccrual loan are either applied to the outstanding principal balance or
recorded as interest income, depending on management's assessment of the
collectibility of the loan.
(2) Other nonperforming assets represents property acquired by the Bank through
foreclosure or repossession. This property is carried at the lower of its
fair market value or the principal balance of the related loan, whichever
is lower.
During the year ended December 31, 2002, gross interest income of $897
would have been recorded on loans accounted for on a nonaccrual basis if the
loans had been current throughout the period. Interest on such loans included in
income during such periods amounted to $544.
Loans which are not currently classified as non-accrual, 90 days past due
or restructured but where known information about possible credit problems of
borrowers causes management to have serious concerns as to the ability of the
borrowers to comply with present loan repayment
- 57 -
terms and may result in disclosure as non-accrual, 90 days past due or
restructured amounted to $7,200 at December 31, 2002. This loan consisted of a
six-month demand loan where the borrower had declared bankruptcy but was not 90
days delinquent.
Classified Assets. OTS regulations provide for a classification system for
problem assets of savings institutions which covers all problem assets. Under
this classification system, problem assets of savings institutions such as ours
are classified as "substandard," "doubtful," or "loss." An asset is considered
substandard if it is inadequately protected by the current net worth and paying
capacity of the borrower or of the collateral pledged, if any. Substandard
assets include those characterized by the "distinct possibility" that the
savings institution will sustain "some loss" if the deficiencies are not
corrected. Assets classified as doubtful have all of the weaknesses inherent in
those classified substandard, with the added characteristic that the weaknesses
present make "collection or liquidation in full, on the basis of currently
existing facts, conditions, and, values, "highly questionable and improbable."
Assets classified as loss are those considered "uncollectible" and of such
little value that their continuance as assets without the establishment of a
specific loss reserve is not warranted. Assets may be designated "special
mention" because of potential weakness that do not currently warrant
classification in one of the aforementioned categories.
When a savings institution classifies problem assets as either substandard
or doubtful, it may establish general allowances for loan losses in an amount
deemed prudent by management. General allowances represent loss allowances which
have been established to recognize the inherent risk associated with lending
activities, but which, unlike specific allowances, have not been allocated to
particular problem assets. When a savings institution classifies problem assets
as loss, it is required either to establish a specific allowance for losses
equal to 100% of that portion of the asset so classified or to charge off such
amount. A savings institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS, which may order the establishment of additional general or specific loss
allowances. A portion of general loss allowances established to cover possible
losses related to assets classified as substandard or doubtful may be included
in determining a savings institution's regulatory capital. Specific valuation
allowances for loan losses generally do not qualify as regulatory capital.
At December 31, 2002, we had $266,000 in loans classified as substandard
and $8,000 in loans classified as doubtful. The Bank's substandard assets at
December 31, 2002 consisted of six residential first mortgages with an aggregate
balance of $252,000 and six consumer loans with an aggregate balance of $14,000.
In each case, the loan was either 90 days past due or less than 90 days past due
but involved a borrower in bankruptcy or with past delinquencies. Of these
loans, $53,000 were shown on the table in the preceding section as non-accrual
and $33,000 are shown as accruing 90 days or more past due at December 31, 2002.
The remaining substandard loans were less than 90 days delinquent at December
31, 2002. The doubtful assets consisted of a demand note with a balance of
$7,200 which was 12 days past due at December 2002 but involved a borrower in
bankruptcy, which is disclosed in the preceding section as a loan about which
management had serious doubts as to the ability of the borrower to repay, and an
$800 consumer installment loan which was 102 days delinquent and shown as an
accruing loan over 90
- 58 -
days past due. Reserves of $40,000 have been allocated to the substandard assets
and $4,000 have been allocated to the doubtful assets.
Foreclosed Real Estate. Real estate acquired in settlement of loans is
carried at the lower of the unpaid loan balance or fair value less estimated
costs to sell. Write-downs from the unpaid loan balance to fair value at the
time of foreclosure are charged to the allowance for loan losses. Subsequent
write-downs to fair value, net of disposal costs, are charged to other expenses.
At December 31, 2002, we had no properties which we received in lieu of
foreclosure.
Allowance for Loan Losses. The allowance for loan losses is management's
estimate of probable inherent credit losses in the loan and lease portfolios at
the balance sheet date. The Bank determines the allowance based on ongoing
evaluations. This evaluation is inherently subjective because it requires
material estimates, including the amounts and timing of cash flows expected to
be received on impaired loans. Those estimates may be susceptible to significant
change. Increases to the allowance are made by charges to the provision for loan
losses, which is reflected in the statements of loss. Loans deemed to be
uncollectible are charged against the allowance. Recoveries of loans previously
charged off are credited to the allowance. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Critical Accounting
Policies" for further discussion of the Bank's methodology for determining the
allowance.
We monitor our allowance for loan losses and make additions to the
allowance as economic and other conditions dictate. Although we maintain our
allowance for loan losses at a level that we consider adequate for the inherent
risk of loss in our loan portfolio, actual losses could exceed the balance of
the allowance for loan losses and additional provisions for loan losses could be
required. In addition, our determination as to the amount of its allowance for
loan losses is subject to review by the OTS, as part of its examination process.
After a review of the information available, the OTS might require the
establishment of an additional allowance.
- 59 -
The following table sets forth an analysis of our allowance for loan losses
for the periods indicated.
Year Ended December 31,
-------------------------
2002 2001
-------- --------
(Dollars in thousands)
Balance at beginning of period................. $ 105 $ 60
----- -----
Loans charged-off:
Real estate mortgage loans:
One- to four-family residential first...... -- 28
One- to four-family residential second..... -- --
Multi-family............................... -- --
Commercial................................. -- --
Construction............................... -- --
Other loans:
Consumer installment....................... 15 16
Commercial................................. -- --
Automobile................................. 5 --
Passbook................................... -- --
Other...................................... 5 11
----- -----
Total charge-offs.............................. 25 55
----- -----
Recoveries:
Real estate mortgage loans:
One- to four-family residential first...... -- --
One- to four-family residential second..... -- --
Multi-family............................... -- --
Commercial................................. -- --
Construction............................... -- --
Other loans:
Consumer installment....................... 5 3
----- -----
Commercial................................. -- --
Automobile................................. 3 --
Passbook................................... -- --
Other...................................... -- 3
----- -----
Total recoveries............................... 8 6
----- -----
Net loans charged-off.......................... 17 49
----- -----
Provision for loan losses...................... 18 94
----- -----
Balance at end of period....................... $ 106 $ 105
===== =====
Ratio of net charge-offs to average
loans outstanding during the period......... 0.07% 0.24%
===== =====
- 60 -
The following table illustrates the allocation of the allowance for loan
losses for each category of loan. The allocation of the allowance to each
category is not necessarily indicative of future loss in any particular category
and does not restrict our use of the allowance to absorb losses in other loan
categories.
At December 31,
------------------------------------------------------------
2002 2001
-------------------------- ----------------------------
Percent of Percent of
Loans in Each Loans in Each
Category to Category to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
(Dollars in thousands)
Real estate mortgage loans:
One- to four-family residential first.... $ 48 86.10% $ 50 87.97%
One- to four-family residential second... 5 2.24 5 2.81
Multi-family............................. -- 1.73 -- 0.47
Commercial............................... 10 3.07 10 2.10
Construction............................. 5 0.80 5 0.30
Other loans:
Consumer installment..................... 24 1.09 23 1.46
Commercial............................... 3 0.39 3 0.03
Automobile............................... 7 2.85 6 2.50
Passbook -- 0.92 -- 1.21
Other.................................... 4 0.81 3 1.15
----- ------ ----- ------
Total allowance for loan losses......... $ 106 100.00% $ 105 100.00%
===== ====== ===== ======
Investment Activities
Investment Securities. We are required by federal regulations to maintain a
minimum amount of liquid assets which may be invested in specified short-term
securities and certain other investments. The level of liquid assets varies
depending upon several factors, including: (i) the yields on investment
alternatives; (ii) our judgment as to the attractiveness of the yields then
available in relation to other opportunities; (iii) expectation of future yield
levels; and (iv) our projections as to the short-term demand for funds to be
used in loan origination and other activities. At December 31, 2002, our
investment securities portfolio consisted primarily of FHLB bonds of various
maturities.
Our securities at December 31, 2002 did not contain securities of any
issuer with an aggregate book value in excess of 10% of our equity, excluding
those issued by the United States Government or its agencies.
Mortgage-Backed Securities. We have invested from time to time in
residential mortgage- backed securities. Mortgage-backed securities can serve as
collateral for borrowings and, through repayments, as a source of liquidity.
Mortgage-backed securities represent a participation interest in a pool of one-
to four-family or other type of mortgages. Principal and interest payments are
passed from the mortgage originators, through intermediaries (generally
quasi-governmental agencies) that pool and repackage the participation interests
in the form of securities, to investors such as us. Our mortgage-backed
securities portfolio consists primarily of participations or pass- through
certificates issued by the Government National Mortgage Association ("GNMA").
- 61 -
GNMA certificates are guaranteed as to principal and interest by the full faith
and credit of the United States. Our mortgage-backed securities portfolio was
classified as "held-to-maturity" at December 31, 2002.
Expected maturities will differ from contractual maturities due to
scheduled repayments and because borrowers may have the right to call or prepay
obligations with or without prepayment penalties.
Mortgage-backed securities typically are issued with stated principal
amounts. The securities are backed by pools of mortgages that have loans with
interest rates that are within a set range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed-rate or adjustable
mortgage loans. Mortgage-backed securities are generally referred to as mortgage
participation certificates or pass-through certificates. The interest rate risk
characteristics of the underlying pool of mortgages (i.e., fixed-rate or
adjustable-rate) and the prepayment risk, are passed on to the certificate
holder. The life of a mortgage-backed pass- through security is equal to the
life of the underlying mortgages.
The following table sets forth the carrying value of our investment
securities and mortgage- backed portfolio at the dates indicated.
At December 31,
------------------------
2002 2001
-------- --------
(Dollars in thousands)
Securities available-for-sale:
U.S. government and agency securities........ $ -- $ 754
Securities held-to-maturity:
U.S. government and agency securities........ 1,700 2,400
Mortgage-backed securities................... 202 670
------ ------
Total investments......................... $1,902 $3,824
====== ======
- 62 -
The following table sets forth the scheduled maturities, carrying values,
market values and average yields for our investment portfolio at December 31,
2002.
One Year or Less One to Five Years Five to Ten Years More than Ten Years Total Investment Securities
----------------- ----------------- ----------------- ------------------- ---------------------------
Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Market Average
Value Yield Value Yield Value Yield Value Yield Value Value Yield
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in thousands)
Securities held
to maturity:
U.S. government
and agency securities.. $400 6.05% $1,300 5.62% $ -- --% $ -- --% $1,700 $1,780 5.72%
Mortgage-backed
securities............. -- -- -- -- 56 8.00 146 8.44 202 217 8.32
--- ----- ---- ---- ---- -----
Total................ $400 6.05 $1,300 5.62 $ 56 8.00 $ 146 8.44 $1,902 $1,997 6.00
=== ===== ==== ==== ===== =====
- 63 -
Sources of Funds
Deposits are our major external source of funds for lending and other
investment purposes. Funds are also derived from the receipt of payments on
loans and prepayment of loans and, to a much lesser extent, maturities of
investment securities and mortgage-backed securities, borrowings and operations.
Scheduled loan principal repayments are a relatively stable source of funds,
while deposit inflows and outflows and loan prepayments are significantly
influenced by general interest rates and market conditions.
Deposits. We attract deposits principally from within our primary market
area through the offering of a selection of deposit instruments including
regular savings accounts, money market accounts, and term certificate accounts.
Deposit account terms vary according to the minimum balance required, the time
period the funds must remain on deposit, and the interest rate. The interest
rates we pay on deposits are set weekly at the direction of our senior
management. Interest rates are determined based on our liquidity requirements,
interest rates paid by our competitors, and our growth goals and applicable
regulatory restrictions and requirements.
Like most savings institutions, the Bank has historically relied primarily
on certificates of deposit for funding. In order to attract funds in prior
years, the Bank had paid higher rates on certificate accounts which caused its
cost of funds to increase. Recently, the Bank has attempted to reduce its
reliance on certificate accounts by attracting more transaction accounts, such
as checking, NOW and money market accounts. As higher rate certificates mature,
the Bank expects to reduce its cost of funds.
At December 31, 2002, time certificates in amounts of $100,000 or more
constituted $3.5 million, or 12.6%, of our total deposit base. The majority of
these certificates represent deposits from long-standing customers.
- 64 -
At December 31, 2002, our deposits were represented by the various types of
savings programs described below.
Interest Minimum Minimum Balances Percentage of
Rate* Term Category Balance (in thousands) Total Deposits
----- ---- -------- ------- -------------- --------------
0.00% None Basic checking $ 100 $1,430 5.08%
0.50 None Passbook savings 25 3,169 11.27
0.25 None NOW accounts 100 1,107 3.94
0.75 None Money market account 1,500 2,072 7.37
Certificates of Deposit
-----------------------
1.76 91 day Fixed-term, fixed-rate 1,000 794 2.82
1.95 182 day Fixed-term, fixed-rate 1,000 1,821 6.47
2.27 9 month Fixed-term, fixed-rate 1,000 1,162 4.13
2.50 1 year Fixed-term, fixed-rate 1,000 3,438 12.22
2.76 18 month Fixed-term, fixed-rate 1,000 397 1.41
3.14 23 month Fixed-term, fixed-rate 1,000 223 0.79
3.98 2 year Fixed-term, fixed-rate 1,000 1,081 3.84
3.73 24 month Fixed-term, fixed-rate 1,000 543 1.93
4.46 30 month Fixed-term, fixed-rate 1,000 863 3.07
4.86 3 year Fixed-term, fixed-rate 1,000 2,952 10.50
4.91 4 year Fixed-term, fixed-rate 1,000 397 1.41
5.73 5 year Fixed-term, fixed-rate 1,000 5,029 17.88
2.40 IRA Fixed-term, fixed-rate 1,000 1,615 5.74
7.64 Other 35 0.13
------ -------
Total certificates of deposit $20,350 72.34
------ -------
$28,128 100.00%
====== ======
- ------------------
* Represents weighted average interest rate.
The following table sets forth the average balances and interest rates
based on month-end balances for interest-bearing demand deposits and time
deposits as of the dates indicated.
Year Ended December 31,
-----------------------------------------------
2002 2001
-----------------------------------------------
Average Average Average Average
Balance Rate Balance Rate
------- ------- ------- -------
(Dollars in thousands)
Non interest-bearing demand................. $ 1,202 --% $ 1,033 --%
Interest-bearing demand..................... 2,892 0.91% 2,488 1.90%
Passbook savings............................ 3,363 0.65% 2,746 1.82%
Certificates of deposit..................... 20,230 4.43% 19,787 4.46%
------ ------
Total.................................. $27,687 $26,054
====== ======
- 65 -
The following table sets forth our time certificates classified by interest
rate at the dates indicated.
At December 31,
------------------------
2002 2001
-------- ---------
(Dollars in thousands)
Interest Rate
0.00-1.99%............. $ 1,993 $ 13
2.00-3.99%............. 9,440 7,009
4.00-5.99%............. 5,579 7,013
6.00-7.99%............. 3,328 5,865
8.00-9.99%............. 10 10
Total................ $20,350 $19,910
The following table sets forth the amount and maturities of our time
certificates at December 31, 2002.
Amount Due
--------------------------------------------------------------------------------
Less Than One to Two to After
Rate One Year Two Years Three Years Three Years Total
- ---- --------- --------- ----------- ----------- -----
(In thousands)
0.00-1.99%............. $ 1,993 $ -- $ -- $ -- $ 1,993
2.00-3.99%............. 6,629 1,949 821 41 9,440
4.00-5.99%............. 1,594 1,714 90 2,181 5,579
6.00-7.99%............. 702 190 2,195 241 3,328
8.00-9.99%............. 10 -- -- -- 10
------- ------- -------- -------- -------
Total................ $ 10,928 $ 3,853 $ 3,106 $ 2,463 $ 20,350
======= ======= ======== ======== =======
The following table sets forth our deposit activity for the periods
indicated:
Increase
(Decrease)
Balance at from Balance at
December 31, % of December 31, December 31, % of
2002 Deposits 2001 2001 Deposits
------------ -------- ------------ ------------ --------
(Dollars in thousands)
Basic checking................... $ 1,430 5.08% $ 415 $ 1,015 3.81%
NOW accounts..................... 1,107 3.94 174 933 3.51
Money markets.................... 2,072 7.37 330 1,742 6.55
Passbook savings................. 3,169 11.27 158 3,011 11.31
Certificates of deposit.......... 20,350 72.34 440 19,910 74.82
------ ------ ----- ------ ------
Total........................ $28,128 100.00% $1,517 $26,611 100.00%
====== ====== ===== ====== ======
- 66 -
The following table indicates the amount of our time certificates of
$100,000 or more by original maturity as of December 31, 2002.
Certificates
Maturity Period of Deposits
- --------------- -----------
(In thousands)
Three months or less.................................. $ 508
Over three through six months......................... 201
Over six through 12 months............................ 870
Over 12 months........................................ 1,957
$ 3,536
Borrowings. Advances (borrowings) may be obtained from the FHLB of
Cincinnati to supplement our supply of lendable funds. Advances from the FHLB of
Cincinnati are typically secured by a pledge of our stock in the FHLB of
Cincinnati, a portion of our first mortgage loans and other assets. Each FHLB
credit program has its own interest rate, which may be fixed or adjustable, and
range of maturities. At December 31, 2002, we did not have any borrowings
outstanding.
The following table sets forth certain information at the dates and for the
periods indicated regarding the Bank's FHLB advances which were its only class
of borrowings outstanding during the past two fiscal years.
Year Ended December 31,
-----------------------
2002 2001
-------- --------
Amounts outstanding at end of period.................................. $ -- $ 1,000
Weighted average rate paid ........................................... 2.47% 4.17%
Maximum amount of borrowings outstanding at any month end............. $ 1,000 $ 1,000
Average borrowings outstanding (1).................................... $ 530 $ 540
Approximate weighted average rate paid (1)............................ 2.47% 4.17%
- -------------
(1) Based on month-end balances.
Competition
We compete for deposits with other insured financial institutions such as
local commercial banks, thrift institutions, credit unions and multi-state
regional banks in our market area. We also compete for funds with insurance
products sold by local agents and investment products such as mutual funds and
other securities sold by local and regional brokers. According to data from the
FDIC, we held approximately 5% of FDIC-insured deposits in Hopkins County as of
June 30, 2002, the latest date for which such data was available. Such data does
not cover deposits held by credit unions. We have historically competed for
deposits by paying higher rates than our local competitors.
- 67 -
Our competition for loans depends on market conditions and the type of
lending. Our competition for residential mortgages comes primarily from mortgage
bankers and brokers who primarily originate long-term fixed-rate loans on behalf
of secondary market investors. While we also originate long-term, fixed-rate
loans on behalf of secondary market investors, our principal residential
mortgage loan offerings are our various ARM loans which we market based on
flexibility of terms and superior service. We compete primarily against other
local depository institutions for commercial and multi-family real estate loans.
We compete for these lending opportunities primarily on the basis of our
flexibility and responsiveness as a locally owned and oriented community bank.
We compete against other local financial institutions and a variety of other
lenders including finance companies and automobile dealers for consumer loans
and second mortgages. We generally compete for these loans based on our variety
of lending solutions, customer relationships and quality of service.
Properties
The following table sets forth certain information regarding our main
office, which is our only location.
Book Value at
Year Owned or December 31, Approximate
Opened Leased 2002 Square Footage
------ ------ ---- --------------
(Dollars in thousands)
Main Office:
240 South Main Street
Madisonville, KY 42431 1959 Owned $ 28 4,200
The book value of the Bank's investment in premises and equipment totaled
$773,000 at December 31, 2002. See Note 5 of Notes to Financial Statements.
On April 11, 2003, the Bank acquired a property located at 2400 North Main
Street in Madisonville for a future branch location. The two-acre property
includes an existing building with over 4200 square feet of ground level space
and a paved parking lot. The purchase price was $360,000. The Bank estimates
that it will invest an additional $500,000 to remodel and equip the existing
structure to serve as a branch. The Bank expects to finance these expenditures
from cash on hand and existing cash flows. The Bank expects to begin remodeling
by year end.
Personnel
At December 31, 2002, we had 12 full-time and no part-time employees. None
of our employees are represented by a collective bargaining group. We believe
that our relationship with our employees is good.
- 68 -
Legal Proceedings
We are, from time to time, a party to legal proceedings arising in the
ordinary course of our business, including legal proceedings to enforce our
rights against borrowers. We are not currently a party to any legal proceedings
which are expected to have a material adverse effect on our financial
statements.
REGULATION
Set forth below is a brief description of certain laws which relate to us.
The description is not complete and is qualified in its entirety by references
to applicable laws and regulations.
General
As a federally chartered, SAIF-insured savings institution, the Bank is
subject to extensive regulation by the OTS and the FDIC. The Bank's lending
activities and other investments must comply with various federal and state
statutory and regulatory requirements, and the OTS periodically examines the
Bank for compliance with various regulatory requirements. The FDIC also has
authority to conduct periodic examinations. We must file reports with the OTS
describing our activities and our financial condition, and we must obtain
approvals from regulatory authorities before entering into certain transactions,
such as the conversion or mergers with other financial institutions. We are also
subject to certain reserve requirements promulgated by the Board of Governors of
the Federal Reserve System ("Federal Reserve System"). Our relationship with our
depositors and borrowers is also regulated to a great extent by federal and
state law, especially in such matters as the ownership of savings accounts and
the form and content of our mortgage documents. This supervision and regulation
is primarily intended to protect depositors. The regulatory structure also gives
the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in regulations,
whether by the OTS, the FDIC or any other government agency, could have a
material adverse impact on our operations.
Regulation of the Bank
Insurance of Deposit Accounts. The FDIC maintains two separate funds for
the insurance of deposits up to prescribed statutory limits. The Bank Insurance
Fund ("BIF") insures the deposits of commercial banks and the SAIF insures the
deposits of savings associations. We are a member of the SAIF. The FDIC is
authorized to establish separate annual assessment rates for deposit insurance
for members of the BIF and the SAIF. The FDIC may increase assessment rates for
either fund if necessary to restore the fund's ratio of reserves to insured
deposits to its target level within a reasonable time and may decrease such
assessment rates if such target level has been met. The FDIC has established a
risk-based assessment system for both SAIF and BIF members. Under this system,
assessments are set within a range, based on the risk the institution poses to
its deposit insurance fund. This risk level is determined based on the
institution's capital level and the FDIC's level of supervisory concern about
the institution.
- 69 -
Regulatory Capital Requirements. OTS capital regulations require savings
institutions to meet three capital standards: (1) tangible capital equal to at
least 1.5 % of total adjusted assets, (2) core capital equal to at least 3.0% of
total adjusted assets, and (3) total risk-based capital equal to at least 8.0%
of total risk-weighted assets. In addition, the OTS may require that a savings
institution that has a risk-based capital ratio less than 8.0%, a ratio of Tier
1 capital to risk- weighted assets of less than 4.0% or a ratio of Tier 1
capital to adjusted total assets of less than 4.0% (3.0% if the institution has
received the highest rating on its most recent examination) take certain actions
to increase its capital ratios. If the institution's capital is significantly
below the minimum required levels or if it is unsuccessful in increasing its
capital ratios, the OTS may significantly restrict its activities.
Core capital is defined as common stockholders' equity (including retained
earnings), non- cumulative perpetual preferred stock and minority interests in
the equity accounts of consolidated subsidiaries, certain non-withdrawable
accounts and pledged deposits of mutual savings associations and qualifying
supervisory goodwill, less intangible assets (other than core deposit
intangibles, servicing assets, purchased credit card relationships and other
qualifying intangible assets) and investments in certain subsidiaries. Tier 1
has the same definition as core capital. Tangible capital is defined as core
capital less supervisory goodwill, non-mortgage servicing assets and purchased
credit card relationships and less certain investments in subsidiaries.
Total risk-based capital equals the sum of core capital plus supplementary
capital. The components of supplementary capital include, among other items,
cumulative perpetual preferred stock, perpetual subordinated debt, mandatory
convertible subordinated debt, intermediate-term preferred stock, and the
portion of the allowance for loan losses not designated for specific loan
losses. Overall, supplementary capital is limited to 100% of core capital. A
savings institution must calculate its risk-weighted assets by multiplying each
asset and off-balance sheet item by various risk factors as determined by the
OTS, which range from 0% for cash to 100% for delinquent loans, property
acquired through foreclosure, commercial loans, and other assets. At December
31, 2002, we were in compliance with all regulatory capital requirements as is
shown in the table below.
Percent of
Amount Assets(1)
------ ---------
(Dollars in thousands)
Tangible capital........................... $1,749 5.83%
Tangible capital requirement............... 450 1.50
----- -----
Excess.................................. $1,299 4.33%
===== =====
Core capital............................... $1,749 5.83%
Core capital requirement(2)................ 1,199 4.00
----- -----
Excess.................................. $ 550 1.83%
===== =====
Total risk-based capital................... $1,855 11.12%
Total risk-based capital requirement....... 1,335 8.00
----- -----
Excess.................................. $ 520 3.12%
===== =====
- ----------------
(1) Based on adjusted total assets for purposes of the tangible capital and
core capital requirements and risk-weighted assets for purpose of the total
risk-based capital requirement.
(2) Reflects the capital requirement which the Bank must satisfy to avoid
regulatory restrictions that may be imposed pursuant to prompt corrective
action regulations.
- 70 -
The Bank currently meets the criteria to be treated as well capitalized
under OTS regulations. As a well capitalized institution, the Bank is not
subject to various sanctions that may be imposed on undercapitalized
institutions. As long as the Bank is well capitalized or adequately capitalized,
it may be eligible for expedited treatment of its regulatory applications and
lower examination and deposit insurance assessment rates.
OTS rules require a deduction from capital for savings institutions with
certain levels of interest rate risk. The OTS calculates the sensitivity of an
institution's net portfolio value based on data submitted by the institution in
a schedule to its quarterly Thrift Financial Report and using the interest rate
risk measurement model adopted by the OTS. The amount of the interest rate risk
component, if any, deducted from an institution's total capital is based on the
institution's Thrift Financial Report filed two quarters earlier. The OTS has
indefinitely postponed implementation of the interest rate risk component, and
the Bank has not been required to determine whether it will be required to
deduct an interest rate risk component from capital.
Dividend and Other Capital Distribution Limitations. OTS regulations will
require the Bank to give the OTS 30 days advance notice of any proposed
declaration of dividends to the Company. The OTS may prohibit the payment of
dividends to the Company. In addition, we may not declare or pay a cash dividend
on our capital stock if the effect would be to reduce our regulatory capital
below the amount required for the liquidation account to be established at the
time of the conversion. See "The Conversion -- Effects of Conversion to Stock
Form on Depositors and Borrowers of Community First Bank --Liquidation Account."
Savings associations must submit notice to the OTS prior to making a
capital distribution (which includes dividends, stock repurchases and amounts
paid to stockholders in another institution in a cash merger) if (a) they would
not be well capitalized after the distribution, (b) the distribution would
result in the retirement of any of the association's common or preferred stock
or debt counted as its regulatory capital, or (c) the association is a
subsidiary of a holding company. A savings association must make application to
the OTS to pay a capital distribution if (x) the association would not be
adequately capitalized following the distribution, (y) the association's total
distributions for the calendar year exceed the association's net income for the
calendar year to date plus its net income (less distributions) for the preceding
two years, or (z) the distribution would otherwise violate applicable law or
regulation or an agreement with or condition imposed by the OTS.
A savings institution is prohibited from making a capital distribution if,
after making the distribution, the savings institution would be undercapitalized
(i.e., not meet any one of its minimum regulatory capital requirements).
Further, a savings institution cannot distribute regulatory capital that is
needed for its liquidation account.
Qualified Thrift Lender Test. Savings institutions must meet a Qualified
Thrift Lender test. To satisfy the test, we must either (i) qualify as a
"domestic building and loan association" under the Internal Revenue Code by
maintaining at least 60% of our total assets in specified types of assets,
including cash, certain government securities, loans secured by and other assets
related to residential real property, educational loans and investments in
premises of the institution or (ii)
- 71 -
maintain at least 65% of our portfolio assets (total assets less intangible
assets, property we use in conducting our business and liquid assets in an
amount not exceeding 20% of total assets) in Qualified Thrift Investments.
Qualified Thrift Investments consist primarily of residential mortgage loans and
mortgage-backed and other securities related to domestic, residential real
estate or manufactured housing. The shares of stock we own in the FHLB of
Cincinnati also qualify as Qualified Thrift Investments. Subject to an aggregate
limit of 20% of portfolio assets, we may also count the following as Qualified
Thrift Investments: (i) 50% of the dollar amount of residential mortgage loans
originated for sale, (ii) investments in the capital stock or obligations of any
service corporation or operating subsidiary as long as such subsidiary derives
at least 80% of its revenues from domestic housing related activities, (iii)
200% of the dollar amount of loans and investments to purchase, construct or
develop "starter homes," subject to certain other restrictions, (iv) 200% of the
dollar amount of loans for the purchase, construction or development of domestic
residential housing or community centers in "credit needy" areas or loans for
small businesses located in such areas, (v) loans for the purchase, construction
or development of community centers, (vi) loans for personal, family, household
or educational purposes, subject to a maximum of 10% of portfolio assets, and
(vii) shares of the Federal Home Loan Mortgage Corporation or the Federal
National Mortgage Association stock.
If we satisfy the test, we will continue to enjoy full borrowing privileges
from the FHLB of Cincinnati. If we do not satisfy the test we may lose our
borrowing restrictions and be subject to activities and branching restrictions
applicable to national banks. Compliance with the Qualified Thrift Lender test
is determined on a monthly basis in nine out of every 12 months. As of December
31, 2002, we were in compliance with our Qualified Thrift Lender requirement.
Transactions With Affiliates. Generally, transactions between a savings
institution and its affiliates are subject to certain limitations. Such
transactions must be on terms as favorable to the savings institution as
comparable transactions with non-affiliates. In addition, certain types of
transactions are restricted to an aggregate percentage of the savings
institution's capital. Collateral in specified amounts must usually be provided
by affiliates in order to receive loans from the savings institution. Our
affiliates include the Company and any company which would be under common
control with us. In addition, a savings institution may not extend credit to any
affiliate engaged in activities not permissible for a bank holding company or
acquire the securities of any affiliate that is not a subsidiary. The OTS has
the discretion to treat subsidiaries of savings institution as affiliates on a
case-by-case basis.
Loans to Directors, Executive Officers and Principal Stockholders. Our
loans to our directors, executive officers and, subsequent to the conversion,
our principal stockholders may not be made on terms more favorable than those
afforded to other borrowers, except loans made as part of a benefit or
compensation program widely available to our employees and which does not give
more preferential terms to directors, executive officers or principal
stockholders than to other employees. In addition, we cannot make loans in
excess of certain levels to directors, executive officers or 10% or greater
stockholders (or any of their affiliates) unless the loan is approved in advance
by a majority of our Board of Directors with any "interested" director not
voting. We are also prohibited from paying any overdraft of any of our executive
officers or directors. We
- 72 -
are also subject to certain other restrictions on the amount and type of loans
to executive officers and directors and must annually report such loans to our
regulators.
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Cincinnati, which is one of 12 regional FHLBs. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from funds deposited by savings institutions and proceeds derived from the sale
of consolidated obligations of the FHLB System. It makes loans to members (i.e.,
advances) in accordance with policies and procedures established by the Board of
Directors of the FHLB.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Cincinnati in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year, or 1/20 of its advances from the FHLB of Cincinnati,
whichever is greater. At December 31, 2002, we had $634,000 in FHLB stock, at
cost, which was in compliance with this requirement.
Federal Reserve System. The Federal Reserve System requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts) and non-personal time certificates. At December 31, 2002, the
Bank's reserves met the minimum level required by the Federal Reserve System.
Holding Company Regulation
General. The Company will be required to register and file reports with the
OTS and will be subject to regulation and examination by the OTS. In addition,
the OTS will have enforcement authority over the Company and any non-savings
institution subsidiaries. This will permit the OTS to restrict or prohibit
activities that it determines to be a serious risk to us. This regulation is
intended primarily for the protection of our depositors and not for the benefit
of you, as stockholders of the Company.
The Company will also be required to file certain reports with, and comply
with the rules and regulations of, the SEC under the federal securities laws.
Activities Restrictions. As a savings and loan holding company formed after
May 4, 1999, the Company and its non-savings association subsidiaries are
subject to statutory and regulatory restrictions on their business activities.
Under the Home Owners' Loan Act, as amended by the Gramm-Leach-Bliley Act (the
"GLB Act"), the non-banking activities of the Company are restricted to certain
activities specified by statute or OTS regulation, which include performing
services and holding properties used by a savings association subsidiary,
activities authorized for multiple savings and loan holding companies as of
March 5, 1987, and non-banking activities permissible for bank holding companies
pursuant to the Bank Holding Company Act of 1956 (the "BHC Act") or authorized
for financial holding companies pursuant to the GLB Act. Furthermore, no company
may acquire control of the Bank unless the acquiring company was a unitary
savings and loan holding company on May 4, 1999 (or became a unitary savings and
loan
- 73 -
holding company pursuant to an application pending as of that date) or the
company is only engaged in activities that are permitted for multiple savings
and loan holding companies or for financial holding companies under the BHC Act
as amended by the GLB Act.
Restrictions on Acquisitions. The Company must obtain approval from the OTS
before acquiring control of any other savings institution or savings and loan
holding company, substantially all the assets thereof or in excess of 5% of the
outstanding shares of another savings institution or savings and loan holding
company. The Company's directors and officers or persons owning or controlling
more than 25% of the Company's stock, must also obtain approval of the OTS
before acquiring control of any savings institution or savings and loan holding
company.
The OTS may only approve acquisitions that will result in the formation of
a multiple savings and loan holding company which controls savings institutions
in more than one state if: (i) the multiple savings and loan holding company
involved controls a savings institution which operated a home or branch office
in the state of the institution to be acquired as of March 5, 1987; (ii) the
acquiror is authorized to acquire control of the savings institution pursuant to
the emergency acquisition provisions of the Federal Deposit Insurance Act; or
(iii) the statutes of the state in which the institution to be acquired is
located specifically permit institutions to be acquired by state-chartered
institutions or savings and loan holding companies located in the state where
the acquiring entity is located (or by a holding company that controls such
state-chartered savings institutions).
Federal Securities Law. The Company has filed with the SEC a Registration
Statement under the Securities Act of 1933, as amended (the "Securities Act"),
for the registration of the common stock. Upon completion of the conversion, the
common stock will be registered with the SEC under the Exchange Act and, under
OTS regulations, generally may not be deregistered for at least three years
thereafter. The Company will be subject to the information, proxy solicitation,
insider trading restrictions and other requirements of the Exchange Act.
The registration under the Securities Act of the common stock does not
cover the resale of such shares. Shares of the common stock purchased by persons
who are not affiliates of the Company may generally be resold without
registration. Shares purchased by an affiliate of the Company will be subject to
certain resale restrictions. As long as the Company meets the current public
information requirements, each affiliate of the Company who complies with the
other conditions would be able to sell a limited number of shares based upon the
number of shares outstanding and the average trading volume for the common
stock.
Sarbanes-Oxley Act of 2002. On July 30, 2002, the President signed into law
the Sarbanes-Oxley Act of 2002 (the "Act") which mandated a variety of reforms
intended to address corporate and accounting fraud. The Act provides for the
establishment of a new Public Company Accounting Oversight Board ("PCAOB"),
which will enforce auditing, quality control and independence standards for
firms that audit SEC-reporting companies and will be funded by fees from all SEC
reporting companies. The Act imposes higher standards for auditor independence
and restricts provision of consulting services by auditing firms to companies
they audit. Any non- audit services being provided to an audit client will
require preapproval by the Company's audit
- 74 -
committee members. In addition, certain audit partners must be rotated
periodically. The Act requires chief executive officers and chief financial
officers, or their equivalent, to certify to the accuracy of periodic reports
filed with the SEC, subject to civil and criminal penalties if they knowingly or
willfully violate this certification requirement. In addition, under the Act,
counsel will be required to report evidence of a material violation of the
securities laws or a breach of fiduciary duty by a company to its chief
executive officer or its chief legal officer, and, if such officer does not
appropriately respond, to report such evidence to the audit committee or other
similar committee of the Board of Directors or the Board itself.
Longer prison terms will also be applied to corporate executives who
violate federal securities laws, the period during which certain types of suits
can be brought against a company or its officers has been extended, and bonuses
issued to top executive prior to restatement of a company's financial statements
are now subject to disgorgement if such restatement was due to corporate
misconduct. Executives are also prohibited from trading during retirement plan
"blackout" periods, and loans to company executives are restricted. In addition,
a provision directs that penalties levied by the SEC as a result of any judicial
or administrative action under the Act be deposited in a fund for the benefit of
harmed investors. Directors and executive officers must also report most changes
in their ownership of a company's securities within two business day of the
change.
The Act also increases the oversight and authority of audit committees of
publicly traded companies. Audit committee members must be independent and are
barred from accepting consulting, advisory or other compensatory fees from the
issuer. In addition, all SEC reporting companies must disclose whether at least
one member of the committee is a "financial expert" (as such term is defined by
the SEC rules) and if not, why not. Audit committees of publicly traded
companies will have authority to retain their own counsel and other advisors
funded by the company. Audit committees must establish procedures for the
receipt, retention and treatment of complaints regarding accounting and auditing
matters and procedures for confidential, anonymous submission of employee
concerns regarding questionable accounting or auditing matters.
Beginning six months after the SEC determines that the PCAOB is able to
carry out its functions, it will be unlawful for any person that is not a
registered public accounting firm ("RPAF") to audit an SEC-reporting company.
Under the Act, a RPAF is prohibited from performing statutorily mandated audit
services for a company if such company's chief executive officer, chief
financial officer, comptroller, chief accounting officer or any person serving
in equivalent positions has been employed by such firm and participated in the
audit of such company during the one-year period preceding the audit initiation
date. The Act also prohibits any officer or director of a company or any other
person acting under their direction from taking any action to fraudulently
influence, coerce, manipulate or mislead any independent public or certified
accountant engaged in the audit of the Company's financial statements for the
purpose of rendering the financial statement's materially misleading. The Act
also requires the SEC to prescribe rules requiring inclusion of an internal
control report and assessment by management in the annual report to
stockholders. The Act requires the RPAF that issues the audit report to attest
to and report on management's assessment of the Company's internal controls. In
addition, the Act requires that each financial report required to be prepared in
accordance with (or reconciled to)
- 75 -
generally accepted accounting principles and filed with the SEC reflect all
material correcting adjustments that are identified by a RPAF in accordance with
generally accepted accounting principles and the rules and regulations of the
SEC.
Although the Company anticipates it will incur additional expenses in
complying with the provisions of the Act and the related rules, management does
not expect that such compliance will have a material impact on the Company's
financial condition or results of operations.
TAXATION
Federal Taxation
The Bank is subject to the provisions of the Internal Revenue Code of 1986,
as amended (the "Code"), in the same general manner as other corporations.
However, prior to August 1996, savings institutions such as the Bank, which met
certain definitional tests and certain other conditions prescribed by the Code
could benefit from certain favorable provisions regarding their deductions from
taxable income for annual additions to their bad debt reserve. The amount of the
bad debt deduction that a qualifying savings institution could claim for tax
purposes with respect to additions to its reserve for bad debts for "qualifying
real property loans" could be based upon our actual loss experience (the
"experience method") or as a percentage of our taxable income (the "percentage
of taxable income method"). Historically, we used the method that would allow us
to take the largest deduction.
In August 1996, the Code was revised to equalize the taxation of savings
institutions and banks. Savings institutions, such as the Bank, no longer have a
choice between the percentage of taxable income method and the experience method
in determining additions to bad debt reserves. Thrifts with $500 million of
assets or less may still use the experience method, which is generally available
to small banks currently. Larger thrifts may only take a tax deduction when a
loan is actually charged off. Any reserve amounts added after 1987 will be taxed
over a six year period beginning in 1996; however, bad debt reserves set aside
through 1987 are generally not taxed. A savings institution may delay
recapturing into income its post-1987 bad debt reserves for an additional two
years if it meets a residential-lending test. This law is not expected to have a
material impact on us. At December 31, 2002, we had $525,000 of post-1987
bad-debt reserves.
Earnings appropriated to our bad debt reserve and claimed as a tax
deduction including our supplemental reserves for losses will not be available
for the payment of cash dividends or for distribution (including distributions
made on dissolution or liquidation), unless we include the amount in income,
along with the amount deemed necessary to pay the resulting federal income tax.
If such amount is used for any purpose other than bad debt losses, including a
dividend distribution or a distribution in liquidation, it will be subject to
federal income tax at the then current rate.
The Code imposes a tax ("AMT") on alternative minimum taxable income
("AMTI") at a rate of 20%. AMTI is increased by certain preference items,
including the excess of the tax bad debt reserve deduction using the percentage
of taxable income method over the deduction that
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would have been allowable under the experience method. Only 90% of AMTI can be
offset by net operating loss carryovers of which we currently have $557,000.
AMTI is also adjusted by determining the tax treatment of certain items in a
manner that negates the deferral of income resulting from the regular tax
treatment of those items. Thus, our AMTI is increased by an amount equal to 75%
of the amount by which our adjusted current earnings exceeds our AMTI
(determined without regard to this adjustment and prior to reduction for net
operating losses). In tax years beginning after December 31, 1997, a "small"
corporation will not be subject to the AMT because its tentative minimum tax
will be treated as zero. For a tax year beginning in 1998, a corporation that
has had average annual gross receipts of $5,000,000 or less for its 1995-1997
tax years will be a small corporation. Once a corporation is recognized as a
small corporation, it will continue to be exempt from AMT as long as its average
annual gross receipts for the prior 3-year period is not in excess of
$7,500,000. If a corporation ceases to be a small corporation, the AMT will
apply prospectively only.
The Company may exclude from its income 100% of dividends received from us
as a member of the same affiliated group of corporations. A 70% dividends
received deduction generally applies with respect to dividends received from
corporations that are not members of such affiliated group, except that an 80%
dividends received deduction applies if the Company owns more than 20% of the
stock of a corporation paying a dividend. The above exclusion amounts, with the
exception of the affiliated group figure, were reduced in years in which we
availed our self of the percentage of taxable income bad debt deduction method.
Our federal income tax returns have not been audited by the IRS during the
past five years.
State Taxation
The Commonwealth of Kentucky imposes an annual franchise tax on financial
institutions regularly engaged in business in Kentucky at any time during the
calendar year. This tax is 1.1% of the financial institution's adjusted net
capital. For purposes of this tax, net capital is defined as the aggregate of
the Bank's capital stock, paid-in capital, retained earnings and net unrealized
gains or losses on securities designated as available-for-sale less an amount
equal to the five-year average of the percentage that the book value of any
United States obligations held by the Bank bears to the book value of the Bank's
total assets. Financial institutions which are subject to tax both within and
without Kentucky must apportion their net capital. For the year ended
December 31, 2002, the amount of such expense for Community First Bank was
approximately $25,000.
MANAGEMENT OF COMMUNITY FIRST BANCORP, INC.
The Company's Board of Directors consists of the same individuals who serve
as directors of Community First Bank. The Company's articles of incorporation
and bylaws require that directors be divided into three classes, as nearly equal
in number as possible. Each class of directors serves for a three-year period,
with approximately one-third of the directors elected each year. Our officers
will be elected annually by the Board and serve at the Board's discretion.
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The following individuals will serve as executive officers of the Company.
Name Position(s) with the Company
- ---- ----------------------------
William M. Tandy President and Chief Executive Officer
Marilyn A. Locke Vice President
Michael D. Wortham Vice President and Secretary and Treasurer
MANAGEMENT OF COMMUNITY FIRST BANK
Directors and Executive Officers
The Bank's Board of Directors is composed of nine members, each of whom
serves for a term of three years. The proposed stock charter and bylaws require
that directors be divided into three classes, as nearly equal in number as
possible. Each class of directors serves for a three-year period, with
approximately one-third of the directors elected each year. Officers are elected
annually by our Board and serve at the Board's discretion.
The following table sets forth information with respect to our directors
and executive officers, all of whom will continue to serve in the same
capacities after the conversion.
Age as of
December 31, Director Term
Name 2002 Position(s) with the Bank Since Expires
- ---- ------------ ------------------------- -------- -------
William M. Tandy 47 President and Chief Executive 2001 2004
Officer; Director
Michael D. Wortham 32 Vice President; Secretary 1998 2005
Treasurer and Director
Ralph T. Teague 84 Vice Chairman of the Board; 1979 2005
Director
Paul W. Arison 51 Director 1998 2006
Charlotte E. Baldwin 71 Director 1991 2006
Steven E. Carson 51 Director 1991 2004
Charles G. Ramsey 51 Director 2001 2005
J. Craig Riddle 78 Director 1970 2004
Charles B. Vaughn 55 Director 1999 2006
Marilyn A. Locke 54 Vice President N/A N/A
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The business experience for the past five years of each of the directors
and executive officers is as follows:
William M. Tandy has served as President and Chief Executive officer of the
Bank from November 2001 to the present. From 1993 to 2001, Mr. Tandy served as
President of Hacienda Bank, Santa Maria, California. Mr. Tandy has been in the
banking industry since 1974 and has been brought in as Chief Executive Officer
by three different banks to successfully effect turnarounds. Mr. Tandy is a
member of the Madisonville Rotary Club and is past president of the Santa Maria
Valley Economic Association and a past board member of the Santa Maria Chamber
of Commerce and the Santa Barbara County Workforce Investment Board.
Michael D. Wortham has been employed with the Bank since 1994 and currently
serves as the Bank's Loan Officer, Compliance Officer, Secretary and Treasurer.
Mr. Wortham has served as a board member with the Madisonville Chamber of
Commerce and the United Way and as President of the Kiwanis Club.
Ralph T. Teague is a retired coal company executive. He is active in the
Madisonville Kiwanis Club.
Paul W. Arison has been employed in the Commissary at the Hopkins County
Detention Facility since 2001. Prior to that time, he managed Kuester's Hardware
Store in Madisonville. Mr. Arison is active in the local Kiwanis Club.
Charlotte E. Baldwin retired as Vice President - Municipal and Public Unit
Sales for Cadre Securities in 1993. She had previously been a trust officer at
the First National Bank of Louisville. Ms. Baldwin was the Mayor of Madisonville
from 1978 to 1984 and served as the Kentucky Secretary of Natural Resources from
1984 to 1987. She is a member of the Hopkins County Reapportionment Committee,
the Madisonville Chamber of Commerce and the Madisonville Community College --
Growth Committee. Ms. Baldwin is a trustee of the University of Evansville. She
is a member of the Finance and Visitation Committees of the First United
Methodist Church in Madisonville where she is also a Discipleship Class leader.
Ms. Baldwin is also a Bible Study Leader in a local Ecumenical Group.
Steven E. Carson is the owner/operator of Barnett-Strother Funeral Home,
Inc., in Madisonville. Mr. Carson has been active with the Lions Club and
Salvation Army.
Charles G. Ramsey is Vice President - Finance and Chief Financial Officer
of the Renshaw Automotive Group in Hopkinsville, Kentucky. He is active in the
Kiwanis Club and a member of the Chamber of Commerce. Mr. Ramsey is a Certified
Public Accountant.
J. Craig Riddle is a retired insurance agent. Mr. Riddle was the owner and
principal of the J. Craig Riddle Insurance Co., a full line insurance broker in
Madisonville, Kentucky. Mr. Riddle is a founding member of the Kentucky Lake
Sailing Club.
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Charles B. Vaughn is the President and co-owner of Happy's of Madisonville,
an office equipment dealer located in Madisonville. Mr. Vaughn is a member of
the board of the Madisonville Chamber of Commerce, is a member of the Kiwanis
Club and has been active with the United Way.
Marilyn A. Locke has been employed by the Bank since 1974 and currently
serves as its Vice President and Mortgage Officer. She is active with the Rotary
Club and March of Dimes.
Meetings of the Board of Directors
The Board of Directors conducts its business through meetings of the Board
and through activities of its committees. During the year ended December 31,
2002, the Board of Directors held 12 regular meetings and met informally on a
weekly basis. The Board of Directors does not currently have any separate
committees. No director attended fewer than 75% of the total meetings of the
Board of Directors and committees on which such director served during the year
ended December 31, 2002.
Director Compensation
Directors (including directors who are also employees) receive a monthly
fee of $400. Total fees paid to the directors for the year ended December 31,
2002 were $43,200.
Executive Compensation
Summary Compensation Table. The following table sets forth the cash and
non-cash compensation awarded to or earned by our chief executive officer for
the year ended December 31, 2002. No other employee earned in excess of $100,000
for the year ended December 31, 2002.
Name and Fiscal Annual Compensation All Other
-------------------
Principal Position Year Salary Bonus Compensation(1)
- ------------------ ---- ------ ----- --------------
William M. Tandy 2002 $100,000 $ -- $10,800
President
- ----------------
(1) Consists of $4,800 in directors fees and $6,000 automobile allowance.
Employment and Severance Agreements. We have entered into an employment
agreement with our President, William M. Tandy. The agreement has a term of
three years which may be extended for an additional one-year period on each
anniversary date if the Board of Directors determines that Mr. Tandy has met the
requirements of the Board. Mr. Tandy's base salary under the employment
agreement is $100,000. Mr. Tandy is also eligible to receive bonuses of 7% of
the Bank's quarterly net profits. His agreement is terminable by us for "just
cause" as defined in the agreement. If we terminate Mr. Tandy without just cause
or if Mr. Tandy terminates his employment for "good reason," he will be entitled
to a continuation of his salary from the date of termination through the
remaining term of the agreement, plus an additional 12 months. If Mr. Tandy
shall become disabled during the term of his agreement, he shall continue to
receive
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payment of 100% of the base salary for a period of up to 180 days. Such payments
shall not be reduced by any other benefit payments made under other disability
program in effect for our employees. If Mr. Tandy's employment terminates for a
reason other than just cause, he will be entitled to purchase from us family
medical insurance through any group health plan maintained by us. Mr. Tandy's
agreement also contains a provision stating that in the event of the termination
of employment in connection with any change in control of the Company or us, Mr.
Tandy will be paid a lump sum amount equal to 2.99 times his five-year average
annual taxable cash compensation. We may also enter into change-in-control
severance agreements with Mr. Wortham and Ms. Locke. These agreements would
provide that Mr. Wortham and Ms. Locke would receive a similar payment in the
event of a change in control. If such payments had been made under the
agreements as of December 31, 2002, such payments would have equaled
approximately $300,000, $114,000 and $120,000, respectively. The aggregate
payments that would have been made to them would be an expense to us, thereby
reducing our net income and our capital by that amount.
Future Stock Benefit Plans
Stock Option Plan. We intend to adopt a stock option plan (the Option Plan)
following the conversion, subject to approval by the Company's stockholders at a
meeting to be held no sooner than six months after the conversion. If the Option
Plan is adopted during the first year following the conversion, the Option Plan
would be in compliance with the OTS conversion regulations in effect. See " --
Restrictions on Stock Benefit Plans." If the Option Plan is adopted more than
one year after the conversion, the Option Plan will not be subject to such OTS
regulations and policies. If the Option Plan is implemented within one year
after the conversion, in accordance with OTS regulations, a number of shares
equal to 10% of the aggregate shares of common stock to be issued in the
offering (i.e., 21,000 shares based upon the sale of 210,000 shares at the
midpoint of the Estimated Valuation Range) would be reserved for issuance by the
Company upon exercise of stock options or stock appreciation rights ("SARs") to
be granted to our officers, directors and employees from time to time under the
Option Plan. The purpose of the Option Plan would be to provide additional
performance and retention incentives to certain officers, directors and
employees by facilitating their purchase of a stock interest in the Company.
Under the OTS conversion regulations, the Option Plan would provide for a term
of 10 years, after which no awards could be made, unless earlier terminated by
the Board of Directors pursuant to the Option Plan. The options would vest over
a five-year period (i.e., 20% per year), beginning one year after the date of
grant of the option. Options would expire no later than 10 years from the date
granted and would expire earlier if the Option Committee so determines or in the
event of termination of employment. Options would be granted based upon several
factors, including seniority, job duties and responsibilities, job performance,
our financial performance and a comparison of awards given by other savings
institutions converting from mutual to stock form.
The Company would receive no monetary consideration for the granting of
stock options or SARs under the Option Plan. It would receive the option price
for each share issued to optionees upon the exercise of such options. Shares
issued as a result of the exercise of options will be either authorized but
unissued shares or shares purchased in the open market by the
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Company. However, no purchases in the open market will be made that would
violate applicable regulations restricting purchases by the Company. The
exercise of options and payment for the shares received would contribute to the
equity of the Company.
Management Recognition Plan. We intend to adopt the MRP following the
conversion, the objective of which is to enable us to retain personnel and
directors of experience and ability in key positions of responsibility. The
Company expects to hold a stockholders' meeting no sooner than six months after
the conversion in order for stockholders to vote to approve the MRP. If the MRP
is implemented within one year after the conversion, in accordance with
applicable OTS regulations, the shares granted under the MRP will be in the form
of restricted stock vesting over a five-year period (i.e., 20% per year)
beginning one year after the date of grant of the award. Additionally, the
number of shares to be granted could not exceed 3% of the shares sold in the
conversion (4% if we had tangible capital of 10% or more) if the MRP is adopted
during the first year following conversion. If the MRP is implemented more than
one year after the conversion, the MRP will not be subject to such OTS
regulations and policies. Compensation expense in the amount of the fair market
value of the common stock granted will be recognized pro rata over the years
during which the shares are payable. Until they have vested, such shares may not
be sold, pledged or otherwise disposed of and are required to be held in escrow.
Any shares not so allocated would be voted by the MRP Trustees. Awards would be
granted based upon a number of factors, including seniority, job duties and
responsibilities, job performance, our performance and a comparison of awards
given by other institutions converting from mutual to stock form. The MRP would
be managed by a committee of non-employee directors (the "MRP Trustees"). The
MRP Trustees would have the responsibility to invest all funds contributed by us
to the trust created for the MRP (the "MRP Trust").
The Bank expects to contribute sufficient funds to the MRP so that the MRP
Trust can purchase, in the aggregate, up to 4% of the amount of common stock
that is sold in the conversion. The shares purchased by the MRP would be
authorized but unissued shares or would be purchased in the open market. In the
event the market price of the common stock is greater than $10.00 per share, our
contribution of funds will be increased. Likewise, in the event the market price
is lower than $10.00 per share, our contribution will be decreased. In
recognition of their prior and expected services to us and the Company, as the
case may be, the officers, other employees and directors responsible for
implementation of the policies adopted by the Board of Directors and our
profitable operation will, without cost to them, be awarded stock under the MRP.
Based upon the sale of 210,000 shares of common stock in the offering at the
midpoint of the Estimated Valuation Range, the MRP Trust is expected to purchase
up to 8,400 shares of common stock.
Restrictions on Stock Benefit Plans. OTS regulations provide that in the
event we implement stock option or management and/or employee stock benefit
plans within one year from the date of conversion, such plans must comply with
the following restrictions:
o the plans must be fully disclosed in the prospectus;
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o for stock option plans, the total number of shares for which options
may be granted may not exceed 10% of the shares issued in the
conversion;
o for restricted stock plans such as the MRP, the shares may not exceed
3% of the shares issued in the conversion (4% for institutions with
10% or greater tangible capital);
o the aggregate amount of stock purchased by the ESOP in the conversion
and shares held by the MRP may not exceed 10% (12% for
well-capitalized institutions eligible for a 4% management recognition
plan);
o no individual employee may receive more than 25% of the available
awards under the Option Plan or the MRP;
o directors who are not employees may not receive more than 5%
individually or 30% in the aggregate of the awards under any plan;
o all plans must be approved by a majority of the total votes eligible
to be cast at any duly called meeting of the Company's stockholders
held no earlier than six months following the conversion;
o for stock option plans, the exercise price must be at least equal to
the market price of the stock at the time of grant;
o for restricted stock plans such as the MRP, no stock issued in a
conversion may be used to fund the plan;
o neither stock option awards nor restricted stock awards may vest
earlier than 20% as of one year after the date of stockholder approval
and 20% per year thereafter, and vesting may be accelerated only in
the case of disability or death or change in control;
o the proxy material must clearly state that the OTS in no way endorses
or approves of the plans;
o the plan must provide that directors and executive officers must
exercise or forfeit their options if the Bank becomes critically
undercapitalized or subject to an OTS enforcement action or capital
directive;
o prior to implementing the plans, all plans must be submitted to the
Regional Director of the OTS within five days after stockholder
approval with a certification that the plans approved by the
stockholders are the same plans that were filed with and disclosed in
the proxy materials relating to the meeting at which stockholder
approval was received; and
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o if the plan is amended more than one year following the Conversion,
any material deviations from the foregoing requirements must be
ratified by stockholders.
We have not yet decided whether the Option Plan or the MRP will be
implemented during the first year after the conversion. If they are implemented
after the first anniversary of the conversion, the above-described limitations
and provisions will not apply and the stock benefit plans could include
provisions allowing for benefits to vest over shorter periods of time. Further,
the potential acquisition by management of stock under these plans could make it
more difficult to obtain majority support for stockholder proposals or
transactions which are opposed by management.
Certain Related Transactions
During the year ended December 31, 2002, certain of our officers and
directors had loans from us in amounts exceeding $60,000. All of such loans were
made in the ordinary course of business, were made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with other persons and did not involve more than the
normal risk of collectibility or present other unfavorable features.
RESTRICTIONS ON ACQUISITIONS OF COMMUNITY FIRST BANCORP, INC.
The following discussion is a general summary of the material provisions of
the articles of incorporation and bylaws of the Company and certain other
Maryland corporate law and regulatory provisions, which may be deemed to have
such an anti-takeover effect. The description of these provisions is necessarily
general and we refer you, in each case, to the articles of incorporation and
bylaws of the Company which are incorporated herein by reference. See "Where You
Can Find Additional Information" as to how to obtain a copy of these documents.
While the Board of Directors is not aware of any effort that might be made
to obtain control of the Company after conversion, the Board of Directors
believes that it is appropriate to include certain provisions as part of the
Company's articles of incorporation and bylaws to protect the interests of the
Company and its stockholders from hostile takeovers (sometimes referred to as
"anti-takeover" provisions) which the Board of Directors might conclude are not
in the best interests of the Company or the Company's stockholders. These
provisions may have the effect of discouraging a future takeover attempt which
is not approved by the Board of Directors but which individual stockholders may
deem to be in their best interests or in which stockholders may receive a
substantial premium for their shares over the current market prices. As a
result, stockholders who might desire to participate in such a transaction may
not have an opportunity to do so. Such provisions will also render the removal
of the current Board of Directors or management of the Company more difficult.
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Provisions of the Company's Articles of Incorporation and Bylaws
Restriction on Acquisition of Common Stock; Limitations on Voting Rights.
The articles of incorporation of the Company provide that, for a period of five
years after completion of the conversion, no person may, directly or indirectly,
acquire or offer to acquire beneficial ownership of more than 10% of any class
of equity security outstanding of the Company, unless the "continuing" Board of
Directors has first approved by a two-thirds vote the offer or acquisition. Any
shares acquired in violation of this restriction will not be counted as shares
outstanding for voting purposes, nor will the holder be entitled to vote such
shares. After five years from the date of conversion, should any party acquire
the beneficial ownership of shares in excess of 10%, the record holders of more
than 10% of any outstanding class of equity security of the Company who obtained
such shares without the requisite approval would be entitled to cast only
one-hundredth (1/100) of a vote for each share owned in excess of 10%, and the
aggregate voting power of such holders shall be allocated proportionately among
such record holders. A person is a beneficial owner of a security if he has the
power to vote or direct the voting of all or part of the voting rights of the
security, or has the power to dispose of or direct the disposition of the
security. The articles of incorporation of the Company further provide that this
provision limiting voting rights may only be amended upon the vote of 80% of the
outstanding shares of voting stock unless the amendment has been approved by
two-thirds of the continuing directors.
Election of Directors. The Company's articles of incorporation provide that
the Board of Directors of the Company will be divided into three staggered
classes, with directors in each class elected for three-year terms. As a result
of this provision, it would take two annual elections to replace a majority of
the Company's Board. The Company's bylaws provide that the size of the Board of
Directors may be increased or decreased only if two-thirds of the directors then
in office concur in such action. The Company has also elected to be subject to
certain provisions of Maryland law that provide that any vacancy occurring in
the Board of Directors, including a vacancy created by an increase in the number
of directors, shall be filled by the Board. Finally, the articles impose certain
notice and information requirements in connection with the nomination by
stockholders of candidates for election to the Board of Directors or the
proposal by stockholders of business to be acted upon at an annual or special
meeting of stockholders.
The articles of incorporation provide that a director may only be removed
for cause and only by the affirmative vote of at least 80% of the shares of the
Company entitled to vote generally in an election of directors cast at a meeting
of stockholders called for that purpose.
Restrictions on Call of Special Meeting. In its articles of incorporation,
the Company has elected to be subject to certain provisions of Maryland law that
provide that special meetings of stockholders may be called only by a majority
of the Board of Directors, or a duly designated committee of the Board, or on
the written request of a majority of the stockholders.
Absence of Cumulative Voting. The Company's articles of incorporation
provide that stockholders may not cumulate their votes in the election of
directors.
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Authorized Shares. The articles of incorporation authorize the issuance of
5,000,000 shares of common stock and 1,000,000 shares of preferred stock. The
shares of common stock and preferred stock were authorized in an amount greater
than that to be issued in the conversion to provide the Company's Board of
Directors with as much flexibility as possible to effect, among other
transactions, financings, acquisitions, stock dividends, stock splits and the
exercise of stock options. However, these additional authorized shares may also
be used by the Board of Directors consistent with its fiduciary duty to deter
future attempts to gain control of the Company. The Board of Directors also has
sole authority to determine the terms of any one or more series of Preferred
Stock, including voting rights, conversion rates, and liquidation preferences.
As a result of the ability to fix voting rights for a series of Preferred Stock,
the Board has the power, to the extent consistent with its fiduciary duty, to
issue a series of Preferred Stock to persons friendly to management in order to
attempt to block a post-tender offer merger or other transaction by which a
third party seeks control, and thereby assist management to retain its position.
The Company's Board currently has no plans for the issuance of additional
shares, other than the possible issuance of additional shares pursuant to stock
benefit plans.
Procedures for Certain Business Combinations. The articles of incorporation
require the affirmative vote of at least (i) 80% of the outstanding shares of
the Company entitled to vote in the election of directors and (ii) two-thirds of
the outstanding shares entitled to vote in the election of directors and not
held by "Related Persons" (as defined below), in order for the Company to engage
in or enter into certain "Business Combinations," as defined in the articles of
incorporation, with any Related Person or any affiliates of the Related Person,
unless the proposed transaction has been approved in advance by two-thirds of
the Company's Board of Directors, excluding those who are affiliated with the
Related Person or who were not directors prior to the time the "Related Person"
became the "Related Person." Absent this provision, only the approval of a
two-thirds of the shares outstanding would be generally required unless the
Maryland Business Combination Statute described below applies.
The term "Related Person" is defined to include any person and the
affiliates and associates of the person (other than the Company or its
subsidiary) who beneficially owns, directly or indirectly, 10% or more of the
outstanding shares of voting stock of the Company. Any amendment to this
provision of the articles of incorporation requires the affirmative vote of at
least 80% of the shares of the Company entitled to vote generally in an election
of directors unless the amendment has been pre-approved by two-thirds of the
continuing directors, in which case a majority of the outstanding shares is
required. The term "Business Combination" includes mergers between the Company
and a Related Person, transactions between the Company and the Related Person
involving 25% or more of the Company's or Related Person's assets, the issuance
of the securities of the Company or its subsidiaries to the Related Person, the
acquisition of the Related Person's securities by the Company or a
reclassification or recapitalization involving the Company's stock that has the
effect of increasing the Related Person's ownership by 5% or more.
Amendment to Articles of Incorporation and Bylaws. Amendments to the
Company's articles of incorporation must be approved by the Company's Board of
Directors and also by two- thirds of the outstanding shares of the Company's
voting stock, provided, however, that approval by at least 80% of the
outstanding voting stock is generally required for certain provisions (i.e.,
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provisions relating to restrictions on the acquisition and voting of greater
than 10% of the common stock; number, classification, election and removal of
directors; amendment of Bylaws; call of special stockholder meetings; director
liability; certain business combinations; power of indemnification; and
amendments to provisions relating to the foregoing in the articles of
incorporation). If the amendment is approved by two-thirds of the Continuing
Directors, however, the vote required for approval of the amendment is reduced
to a majority of shares outstanding.
The bylaws may be amended by a majority vote of the Board of Directors or
the affirmative vote of the holders of at least 80% of the outstanding shares of
the Company entitled to vote in the election of directors cast at a meeting
called for that purpose.
Maryland General Corporation Law
The Maryland General Corporation Law contains several provisions described
below which will be applicable to the Company upon completion of the conversion.
Business Combinations. Under the Maryland General Corporation Law, mergers,
consolidations and sales of substantially all of the assets of a Maryland
corporation must generally be approved by the affirmative vote of the holders of
two-thirds of the outstanding shares of stock entitled to vote thereon.
Maryland's Business Combination Statute, however, restricts certain transactions
between a Maryland corporation (or its majority owned subsidiaries), and any
person who, after the date the corporation has 100 or more beneficial owners of
its stock, beneficially owns 10% or more of the corporation's outstanding voting
stock, together with affiliates or associates thereof (an "Interested
Stockholder"). For a period of five years following the date that a stockholder
becomes an Interested Stockholder, Maryland's Business Combination Statute
generally prohibits the following types of transactions between the corporation
and the Interested Stockholder (unless certain conditions, described below, are
met):
(i) mergers, consolidations or share exchanges;
(ii) sales, leases, exchanges or other dispositions other than in the
ordinary course of business or pursuant to a dividend, in any twelve-month
period, of assets having an aggregate book value of 10% or more of the
total market value of the outstanding stock of the corporation or of its
net worth;
(iii) issuances or transfers by the corporation or any subsidiary thereof
of any equity securities of the corporation or any subsidiary thereof
having a market value of 5% or more of the total market value of the
outstanding stock of the corporation;
(iv) the adoption of a proposal or plan of liquidation or dissolution of
the corporation in which anything other than cash will be received by the
Interested Stockholder or any affiliate of any Interested Stockholder;
(v) any reclassification of securities, or recapitalization of the
corporation, or any merger, consolidation, or share exchange of the
corporation with any of its subsidiaries
- 87 -
which has the effect of increasing by 5% or more of the total number of
shares, the proportionate amount of the outstanding shares of any class of
equity securities of the corporation or any subsidiary thereof which is
owned by an Interested Stockholder; and
(vi) the receipt by any Interested Stockholder or any affiliate thereof of
the benefit, directly or indirectly (except proportionately as a
stockholder), of any loan, advance, guarantee, pledge, or other financial
assistance or any tax credit or other tax advantage provided by the
corporation or any of its subsidiaries.
After the five-year moratorium on business combinations has expired, a
business combination must (i) be recommended by the Board of Directors and
approved by (a) 80% of the stockholders entitled to vote, and (b) two-thirds of
the disinterested stockholders, or (ii) meet the fair price requirements of the
business combination statute, or (iii) qualify for one of the statutory
exemptions. This restriction does not apply if before such person becomes an
Interested Stockholder, the Board of Directors approves the transaction in which
the Interested Stockholder becomes an Interested Stockholder or approves the
business combination, or a statutory exemption applies. A Maryland corporation
may exempt particular interested stockholders from the requirements of the
statute by resolution adopted by its Board of Directors prior to the date the
Interested Stockholder first became an Interested Stockholder. Our articles of
incorporation provide that the Business Combination Statute will not apply to
any business combination that has been approved by two-thirds of the continuing
directors as defined in the articles of incorporation.
Control Share Acquisitions. The Maryland General Corporation Law provides
that "control shares" of a Maryland corporation acquired in a "control share
acquisition" have no voting rights except to the extent approved by a vote of
two-thirds of the shares entitled to be voted on the matter, excluding shares of
stock owned by the acquiror or by officers or directors who are employees of the
corporation. "Control shares" are voting shares of stock which, if aggregated
with all other such shares of stock previously acquired by the acquiror, or in
respect of which the acquiror is able to exercise or direct the exercise of
voting power except solely by virtue of a revocable proxy, would entitle the
acquiror to exercise voting power in electing directors within one of the
following ranges of voting power:
(i) one-tenth or more but less than one-third;
(ii) one-third or more but less than a majority; or
(iii) a majority of all voting power.
Control shares do not include shares the acquiring person is then entitled
to vote as a result of having previously obtained stockholder approval. A
"control share acquisition" means the acquisition of control shares, subject to
certain exceptions for shares acquired through descent or distribution, in
satisfaction of a pledge or in a merger, consolidation or share exchange to
which the corporation is a party. The control share acquisition statute applies
to any Maryland corporation with 100 or more beneficial owners of its stock
other than a close corporation or an investment company.
- 88 -
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses and
delivery of an "acquiring person statement"), may compel the corporation's Board
of Directors to call a special meeting of stockholders to be held within 50 days
of demand to consider the voting rights of the shares. If no request for a
meeting is made, the corporation may itself present the question at any
stockholders' meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement within 10 days following a
control share acquisition then, subject to certain conditions and limitations,
the corporation may redeem any or all of the control shares (except for those
which voting rights have previously been approved) for fair value, determined
without regard to the absence of voting rights for the control shares, as of the
date of the last control share acquisition or of any meeting of stockholders at
which the voting rights of such shares are considered and not approved.
Moreover, if voting rights for control shares are approved at a stockholders'
meeting and the acquiror becomes entitled to exercise or direct the exercise of
a majority or more of all voting power, other stockholders may exercise
appraisal rights. The fair value of the shares as determined for purposes of
such appraisal rights may not be less than the highest price per share paid by
the acquiror in the control share acquisition. The foregoing provisions may be
modified by a Maryland corporation's charter or bylaws. The Company's charter
and bylaws, however, do not contain a provision modifying these statutory
provisions.
Benefit Plans
In addition to the provisions of the Company's articles of incorporation
and bylaws described above, certain benefit plans of ours adopted in connection
with the conversion contain provisions which also may discourage hostile
takeover attempts which the Boards of Directors might conclude are not in the
best interests for us or our stockholders. For a description of the benefit
plans and the provisions of such plans relating to changes in control, see
"Management of Community First Bank -- Future Stock Benefit Plans."
Regulatory Restrictions
For three years following conversion, OTS regulations prohibit any person,
without the prior approval of the OTS, from acquiring or making an offer to
acquire more than 10% of the stock of any converted savings institution if such
person is, or after consummation of such acquisition would be, the beneficial
owner of more than 10% of such stock. In the event that any person, directly or
indirectly, violates this regulation, the securities beneficially owned by such
person in excess of 10% shall not be counted as shares entitled to vote and
shall not be voted by any person or counted as voting shares in connection with
any matter submitted to a vote of stockholders. The OTS has recently indicated
that it intends to strictly enforce this regulation.
Federal law provides that no company, "directly or indirectly or acting in
concert with one or more persons, or through one or more subsidiaries, or
through one or more transactions," may acquire "control" of a savings
association at any time without the prior approval of the OTS. In addition, any
company that acquires such control becomes a "savings and loan holding company"
- 89 -
subject to registration, examination and regulation as a savings and loan
holding company. Control in this context means ownership of, control of, or
holding proxies representing more than 25% of the voting shares of a savings
association or the power to control in any manner the election of a majority of
the directors of such institution.
Federal law also provides that no "person," acting directly or indirectly
or through or in concert with one or more other persons, may acquire control of
a savings association unless at least 60 days prior written notice has been
given to the OTS and the OTS has not objected to the proposed acquisition.
Control is defined for this purpose as the power, directly or indirectly, to
direct the management or policies of a savings association or to vote more than
25% of any class of voting securities of a savings association. Under federal
law (as well as the regulations referred to below) the term "savings
association" includes state-chartered and federally chartered SAIF- insured
institutions, federally chartered savings and loans and savings banks whose
accounts are insured by the FDIC and holding companies thereof.
Federal regulations require that, prior to obtaining control of an insured
institution, a person, other than a company, must give 60 days notice to the OTS
and have received no OTS objection to such acquisition of control, and a company
must apply for and receive OTS approval of the acquisition. Control involves a
25% voting stock test, control in any manner of the election of a majority of
the institution's directors, or a determination by the OTS that the acquiror has
the power to direct, or directly or indirectly to exercise a controlling
influence over, the management or policies of the institution. Acquisition of
more than 10% of an institution's voting stock, if the acquiror also is subject
to any one of either "control factors," constitutes a rebuttable determination
of control under the regulations. The determination of control may be rebutted
by submission to the OTS, prior to the acquisition of stock or the occurrence of
any other circumstances giving rise to such determination, of a statement
setting forth facts and circumstances which would support a finding that no
control relationship will exist and containing certain undertakings. The
regulations provide that persons or companies which acquire beneficial ownership
exceeding 10% or more of any class of a savings association's stock after the
effective date of the regulations must file with the OTS a certification that
the holder is not in control of such institution, is not subject to a rebuttable
determination of control and will take no action which would result in a
determination or rebuttable determination of control without prior notice to or
approval of the OTS, as applicable.
DESCRIPTION OF CAPITAL STOCK
The Company is authorized to issue 5,000,000 shares of common stock, $0.01
par value per share, and 1,000,000 shares of preferred stock, $0.01 par value
per share. The Company currently expects to issue up to 277,725 shares of common
stock in the conversion. The Company does not intend to issue any shares of
preferred stock in the conversion, nor are there any present plans to issue such
preferred stock following the conversion. Each share of common stock will have
the same relative rights as, and will be identical in all respects with, each
other share of common stock. The common stock of the Company will represent
nonwithdrawable capital and will not be insured by us, the FDIC, or any other
government agency.
- 90 -
Common Stock
Voting Rights. Each share of the common stock will have the same relative
rights and will be identical in all respects with every other share of the
common stock. The holders of the common stock will possess exclusive voting
rights in the Company, except to the extent that shares of Preferred Stock
issued in the future may have voting rights, if any. Each holder of the common
stock will be entitled to only one vote for each share held of record on all
matters submitted to a vote of holders of the common stock and will not be
permitted to cumulate their votes in the election of the Company's directors.
Liquidation. In the unlikely event of the complete liquidation or
dissolution of the Company, the holders of the common stock will be entitled to
receive all assets of the Company available for distribution in cash or in kind,
after payment or provision for payment of: (i) all debts and liabilities of the
Company (including all deposits with us and accrued interest thereon); (ii) any
accrued dividend claims; (iii) liquidation preferences of any preferred stock
which may be issued in the future; and (iv) any interests in the liquidation
account established upon the conversion for the benefit of Eligible Account
Holders and Supplemental Eligible Account Holders who continue to have their
deposits with us.
Dividends. From time to time, dividends may be declared and paid to the
holders of the common stock, who will share equally in any such dividends. For
information about cash dividends, see "Dividends" and "Taxation."
Restrictions on Acquisition of the Common Stock. See "Restrictions on
Acquisition of the Company" for a discussion of the limitations on acquisition
of shares of the common stock.
Other Characteristics. Holders of the common stock will not have preemptive
rights with respect to any additional shares of the common stock which may be
issued. Therefore, the Board of Directors may sell shares of capital stock of
the Company without first offering such shares to existing stockholders of the
Company. The common stock is not subject to call for redemption, and the
outstanding shares of common stock when issued and upon receipt by the Company
of the full purchase price therefor will be fully paid and non-assessable.
Serial Preferred Stock
None of the 1,000,000 authorized shares of preferred stock of the Company
will be issued in the conversion. After the conversion is completed, the Board
of Directors of the Company will be authorized to issue serial preferred stock
and to fix and state voting powers, designations, preferences or other special
rights of such shares and the qualifications, limitations and restrictions
thereof, subject to regulatory approval but without stockholder approval. If and
when issued, the serial preferred stock is likely to rank prior to the common
stock as to dividend rights, liquidation preferences, or both, and may have full
or limited voting rights. The Board of Directors, without stockholder approval,
can issue serial preferred stock with voting and conversion rights which could
adversely affect the voting power of the holders of the common stock. The Board
of Directors has no present intention to issue any of the serial preferred
stock.
- 91 -
LEGAL AND TAX MATTERS
The legality of the common stock has been passed upon for us by Malizia
Spidi & Fisch, PC, Washington, D.C. Certain legal matters for Keefe, Bruyette &
Woods, Inc., may be passed upon by Vorys, Sater, Seymour and Pease LLP,
Columbus, Ohio. The federal income tax consequences of the conversion have been
passed upon for us by Malizia Spidi & Fisch, PC, Washington, D.C. The Kentucky
income tax consequences of the conversion have been passed upon for us by EKW &
Associates, llp, Owensboro, Kentucky.
EXPERTS
The financial statements of Community First Bank as of December 31, 2002
and 2001 and for the years then ended, have been included herein and the
registration statement filed with the SEC in reliance upon the report of EKW &
Associates, llp, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing. The Bank's financial statements for the period ended December 31, 2001
were previously audited by York-Neel & Co. - Madisonville, LLP. On August 30,
2002, York- Neel notified the Bank that it was resigning from the audit
engagement. York-Neel's report on the Bank's financial statements for fiscal
years 2001 and 2000 did not contain an adverse opinion or disclaimer of opinion,
nor were they qualified or modified as to uncertainty, audit scope, or
accounting principles. There were no disagreements with York-Neel on any matter
of accounting principles or practices, financial statement disclosure or
auditing scope or procedure. The decision to engage EKW & Associates, llp as the
Bank's new auditor was approved by the Board of Directors.
Feldman Financial has consented to the publication herein of a summary of
its letters to us setting forth its opinion as to the estimated pro forma market
value of us in the converted form and its opinion setting forth the value of
subscription rights and to the use of its name and statements with respect to it
appearing in this document.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
The Company has filed with the SEC a registration statement on Form SB-2
under the Securities Act of 1933, as amended, with respect to the common stock
offered in this document. As permitted by the rules and regulations of the SEC,
this document does not contain all the information set forth in the registration
statement. Such information can be examined without charge at the public
reference facilities of the SEC located at 450 Fifth Street, N.W., Washington,
D.C. 20549, and copies of such material can be obtained from the SEC at
prescribed rates. The SEC also maintains an internet address ("Web site") that
contains reports, proxy and information statements and other information
regarding registrants, including the Company, that file electronically with the
SEC. The address for this Web site is "http: //www. sec. gov." The statements
contained in this document as to the contents of any contract or other document
filed as an exhibit to the Form SB-2 describe the material features of such
contract or document but are, of necessity, brief descriptions and are not
necessarily complete; each such statement is qualified by reference to such
contract or document.
- 92 -
Community First Bank has filed an Application for Conversion with the OTS
with respect to the conversion. Pursuant to the rules and regulations of the
OTS, this document omits certain information contained in that Application. The
Application may be examined at the principal office of the OTS, 1700 G Street,
N.W., Washington, D.C. 20552 and at the Southeast Regional Office of the OTS,
1475 Peachtree Street, N.E., Atlanta, Georgia 30309 without charge.
A copy of the articles of incorporation and the bylaws of the Company are
available without charge from Community First Bank.
- 93 -
COMMUNITY FIRST BANK
INDEX TO FINANCIAL STATEMENTS
Page
Independent Auditors' Report F-1
Statements of Financial Condition as of December 31, 2002 and 2001 F-2
Statements of Loss for the Years Ended December 31, 2002 and 2001 F-3
Statements of Changes in Retained Earnings and Accumulated Other
Comprehensive Income for the Years Ended December 31, 2002 and 2001 F-4
Statements of Cash Flows for the Years Ended December 31, 2002 and 2001 F-5
Notes to Financial Statements F-6
All financial statement schedules are omitted because the required information
is either not applicable or is included in the financial statements or related
notes.
Separate financial statements for the Company have not been included since it
will not engage in material transactions until after the conversion. The
Company, which has been inactive to date, has no significant assets,
liabilities, revenues, expenses or contingent liabilities.
- 94 -
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Community First Bank
Madisonville, Kentucky
We have audited the accompanying statements of financial condition of Community
First Bank as of December 31, 2002 and 2001 and the related statements of loss,
changes in retained earnings and accumulated other comprehensive income and cash
flows for the years then ended. These financial statements are the
responsibility of the Association's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with U.S. generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Community First Bank as of
December 31, 2002 and 2001 and the results of their operations and their cash
flows for the years then ended in conformity with U.S. generally accepted
accounting principles.
/s/ EKW & Associates, llp
- ------------------------------------------
Owensboro, Kentucky
January 17, 2003, except for Note 1,
as to which the date is March 13, 2003 and
Note 13, as to which the date is
April 28, 2003
F-1
COMMUNITY FIRST BANK
STATEMENTS OF FINANCIAL CONDITION
December 31, 2002 and 2001
Assets
2002 2001
------------ ------------
Cash and cash equivalents:
Cash and due from banks $ 733,126 $ 707,944
Interest-bearing deposits in other banks - 896,590
Time deposits 25,000 -
Federal funds sold and securities purchased
under agreements to resell - 702,403
------------ ------------
Total cash and cash equivalents 758,126 2,306,937
------------ ------------
Investment securities:
Securities held-to-maturity 1,901,750 3,070,058
Securities available-for-sale - 754,375
------------ ------------
1,901,750 3,824,433
Loans receivable, net of unearned interest 25,815,638 22,262,635
Allowance for loan losses (105,868) (105,000)
Accrued interest receivable 135,220 161,714
Premises and equipment, net 772,662 416,495
Foreclosed real estate - 17,000
Stock in Federal Home Loan Bank, at cost 634,100 605,700
Deferred tax assets - 10,000
Other assets 56,197 30,513
------------ ------------
Total Assets $ 29,967,825 $ 29,530,427
============ ============
Liabilities and Equity
Deposits $ 28,128,252 $ 26,611,224
Advances from Federal Home Loan Bank - 1,000,000
Accrued interest and other liabilities 90,707 81,041
------------ ------------
Total liabilities 28,218,959 27,692,265
------------ ------------
Commitments and contingencies (Notes 11 and 12) - -
------------ ------------
Association equity:
Retained earnings - substantially restricted 1,748,866 1,832,787
Unrealized gain on securities-
available-for-sale - 5,375
------------ ------------
Total equity 1,748,866 1,838,162
------------ ------------
Total liabilities and equity $ 29,967,825 $ 29,530,427
============ ============
The accompanying notes are an integral part of these financial statements.
F-2
COMMUNITY FIRST BANK
STATEMENTS OF LOSS
for the years ended December 31, 2002 and 2001
2002 2001
------------ -----------
Interest income:
Interest and fees on loans $ 1,730,628 $ 1,648,246
Interest on investment securities 169,222 286,687
Federal Home Loan Bank dividends 28,503 39,200
Other interest income 12,523 44,161
------------ -----------
Total interest income 1,940,876 2,018,294
------------ -----------
Interest expense:
Interest on deposits 948,879 1,210,355
Interest on Federal Home Loan Bank
advances 11,314 24,336
Interest on other borrowings 568 -
------------ -----------
Total interest expense 960,761 1,234,691
------------ -----------
Net interest income 980,115 783,603
Provision for loan losses 18,200 93,787
------------ -----------
Net interest income after provision
for loan losses 961,915 689,816
------------ -----------
Other income (expense):
Service charges and fees 63,543 96,725
Loss on sale of fixed assets (4,030) -
Gain (loss) on sale of other real estate (7,362) 9,778
Foreclosed real estate expense, net (984) (13,896)
Insurance commissions and premiums 4,674 9,916
Other income 17,171 27,899
------------ -----------
73,012 130,422
------------ -----------
Other expenses:
Compensation and benefits 450,225 343,740
Directors fees 43,200 41,300
Occupancy expense 131,347 96,413
Insurance premiums 22,193 20,455
Data processing 161,329 168,048
Advertising 65,753 55,352
Office supplies and postage 54,816 42,401
Payroll and other taxes 59,799 55,546
Professional fees 32,181 43,143
Other operating expenses 88,005 111,870
------------ ------------
1,108,848 978,268
------------ -----------
Loss before federal income tax
expense (benefit) (73,921) (158,030)
Federal income tax expense (benefit) 10,000 (32,812)
------------ -----------
Net loss $ (83,921) $ (125,218)
============ ===========
The accompanying notes are an integral part of these financial statements.
F-3
COMMUNITY FIRST BANK
STATEMENTS OF CHANGES IN RETAINED EARNINGS AND
ACCUMULATED OTHER COMPREHENSIVE INCOME
for the years ended December 31, 2002 and 2001
Accumulated
Other Com- Comprehen-
Retained prehensive sive Income
Earnings Income (Loss)
------------- ----------- ------------
Balance January 1, 2001 $ 1,958,005 $ - $ -
Comprehensive income (loss)
Net loss (125,218) - (125,218)
Other comprehensive income:
Change in unrealized gain
on securities available-
for-sale - 5,375 5,375
------------ ------- ---------
Total comprehensive loss $(119,843)
=========
Balance December 31, 2001 1,832,787 5,375
------------ -------
Comprehensive income:
Net loss (83,921) - $ (83,921)
Other comprehensive income:
Change in unrealized gain
on securities available-
for-sale - (5,375) (5,375)
------------ ------- ---------
Total comprehensive loss $ (89,296)
=========
Balance December 31, 2002 $ 1,748,866 $ -
============ =======
The accompanying notes are an integral part of these financial statements.
F-4
COMMUNITY FIRST BANK
STATEMENTS OF CASH FLOWS
for the years ending December 31, 2002 and 2001
2002 2001
------------ ------------
Cash flows from operating activities:
Net loss $ (83,921) $ (125,218)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Provision for loan losses 18,200 93,787
Depreciation, amortization and accretion 49,182 36,805
Loss on sale of equipment 4,030 -
(Gain) loss on sale of other real estate owned 3,762 (9,778)
Deferred income taxes expense (benefit) 10,000 (32,812)
Federal Home Loan Bank stock dividends (28,400) (39,000)
(Increase) decrease in:
Accrued interest receivable 26,494 27,645
Prepaid expenses and other assets (25,684) 9,085
Increase (decrease) in:
Accrued expenses and other liabilities 9,666 (41,333)
------------ ------------
Net cash used by operating activities (16,671) (80,819)
------------ ------------
Cash flows from investing activities:
Net increase in loans (3,562,435) (3,305,257)
Purchase of held-to-maturity securities (500,000) (850,280)
Purchases of available-for-sale securities - (749,000)
Proceeds from maturities/calls of held-
to maturity securities 1,669,564 3,103,385
Proceeds from maturity/call of available-
for sale securities 749,000 -
Purchase of premises and equipment (410,635) (24,737)
Proceeds from sale of foreclosed real estate 5,338 147,700
------------ ------------
Net cash used by investing activities (2,049,168) (1,678,189)
------------ ------------
Cash flows from financing activities:
Net increase in deposits 1,517,028 1,189,682
Principal payments on debt (3,000,000) (1,162,265)
Proceeds from short-term borrowings 2,000,000 2,000,000
------------ ------------
Net cash provided by financing activities 517,028 2,027,417
------------ ------------
Net increase (decrease) in cash and cash equivalents (1,548,811) 268,409
Cash and cash equivalents, beginning of year 2,306,937 2,038,528
------------ ------------
Cash and cash equivalents, end of year $ 758,126 $ 2,306,937
============ ============
Supplemental disclosures:
Cash paid for:
Interest $ 986,936 $ 1,285,561
============ ============
Noncash investing activities:
Loans transferred to foreclosed real estate $ 7,400 $ 154,922
============ ============
Loans to facilitate sale of foreclosed real estate $ 15,300 $ -
============ ============
Total increase (decrease) in unrealized gain
on securities available-for-sale $ (5,375) $ 5,375
============ ============
The accompanying notes are an integral part of the financial statements.
F-5
COMMUNITY FIRST BANK
NOTES TO FINANCIAL STATEMENTS
1. Plan of Conversion
On March 13, 2003, the Board of Directors of the Bank, subject to
regulatory approval, adopted a proposed Plan of Conversion (the "Plan") to
convert from a federally chartered mutual savings bank to a federally
chartered stock savings bank. The Bank will become a wholly owned
subsidiary of a concurrently formed holding company. The Plan provides that
the holding company will offer nontransferable subscription rights to
purchase common stock of the holding company. The rights will be offered
first to eligible account holders, the tax-qualified employee stock benefit
plans, supplemental eligible account holders and other members. Any shares
remaining may then be offered to the general public.
The Plan provides for the establishment, upon completion of the conversion,
of a special "liquidation account" in an amount equal to the Bank's net
worth as of the date of conversion. This account is for the benefit of
eligible account holders and supplemental eligible account holders in the
event of liquidation of the Bank. The interest as to each deposit account
will be in the same proportion of the total liquidation account as the
balance of the deposit account on the qualifying dates was to the aggregate
balance of all deposit account of eligible account holders and supplemental
account holders on the qualifying dates. The liquidation account will be
reduced in a proportionate amount if the amount in any deposit account on
any annual closing date is less than it was on the respective qualifying
dates. The liquidation account will not be increased despite any increase
in a deposit account after the respective qualifying dates.
The regulations of the OTS prohibit the Bank from declaring or paying a
cash dividend if the effect thereof would cause the Bank's regulatory
capital to be reduced below either the amount required for the liquidation
account or the federal regulatory capital requirements.
Costs associated with the conversion will be deferred and deducted from the
proceeds of the stock offering. If, for any reason, the offering is not
successful, the deferred costs will be charged to operations. As of
December 31, 2002, there were no costs associated with the conversion that
have been incurred.
2. Summary of Significant Accounting Policies
(a) Nature of Operations
Community First Bank (Association) provides a variety of financial
services to individuals and corporate customers in Hopkins County,
Kentucky. The Association's primary deposit products are
interest-bearing checking accounts and certificates of deposit. Its
primary lending products are single-family residential loans. The
Association receives insurance commissions for sales of insurance
products in connection with its loan origination activities.
(b) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Continued
F-6
COMMUNITY FIRST BANK
NOTES TO FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies, Continued
(b) Use of Estimates, continued
Material estimates that are particularly susceptible to significant
change relate to the determination of the allowance for losses on
loans and the valuation of real estate acquired in connection with
foreclosures or in satisfaction of loans. In connection with the
determination of the allowances for losses on loans and foreclosed
real estate, management obtains independent appraisals for significant
properties.
While management uses available information to recognize losses on
loans and foreclosed real estate, future additions to the allowances
may be necessary based on changes in local economic conditions. In
addition, regulatory agencies, as an integral part of their
examination process, periodically review the Association's allowances
for losses on loans and foreclosed real estate. Such agencies may
require the Association to recognize additions to the allowances based
on their judgments about information available to them at the time of
their examination. Because of these factors, it is reasonably possible
that the allowances for losses on loans and foreclosed real estate may
change materially in the near term. However, the amount of the change
that is reasonably possible cannot be estimated.
(c) Cash and Cash Equivalents
For purposes of the statement of cash flows, cash and cash equivalents
consist of cash on hand, amounts due from depository institutions,
time deposits in other banks, and securities purchased under resale
agreements, all of which mature within ninety days. At December 31,
2002 an overdraft of interest bearing deposits in other banks of
$21,644 is included in accrued interest payable and other liabilities.
(d) Securities Purchased Under Resale Agreements
The Association enters into purchases of securities under agreements
to resell the identical securities on the next business day (overnight
repurchase agreements). The amounts advanced under these agreements
are reported as cash equivalents on the balance sheet. Although
collateralization is not required under the agreements, the
Association mitigates its market risk by requiring that the purchased
securities be issued by the United States Government or an agency
thereof. Credit risk is mitigated by entering into the agreements only
with credit worthy, quality financial institutions.
(e) Investment Securities
Securities Held-to-Maturity
----------------------------
Debt securities that management has the ability and intent to
hold-to-maturity are classified as held-to-maturity and carried at
cost, adjusted for amortization of premium and accretion of discounts
using methods approximating the interest method over the period to
maturity. Mortgage-backed securities represent participating interests
in pools of long-term first mortgage loans originated and serviced by
issuers of the securities. Mortgage-backed securities are carried at
unpaid principal
Continued
F-7
COMMUNITY FIRST BANK
NOTES TO FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies, Continued
(e) Investment Securities, continued
Securities Held-to-Maturity, continued
------------------------------------------
balances, adjusted for unamortized premiums and unearned discounts.
Premiums and discounts are amortized using the interest method over
the remaining period to contractual maturity, adjusted for anticipated
prepayments.
Securities Available-for-Sale
------------------------------
Available-for-sale securities consist of securities not classified as
trading securities or held-to-maturity securities. Unrealized holding
gains and losses, net of tax, on securities available-for-sale are
recognized as increases or decreases in retained earnings (as
comprehensive income) until realized. Gains and losses on the sale of
available for sale securities are determined using the specific
identification method. The amortization of premiums and accretion of
discounts are recognized in interest income using the interest method
over the period of maturity.
Declines in the fair value of individual held-to-maturity and
available-for-sale securities below their cost that are other than
temporary result in write-downs of the individual securities to their
fair value. The related write-downs, if any, are included in earnings
as realized losses.
(f) Loans and Allowance for Loan Losses
Loans are stated at unpaid principal balances, less the allowance for
loan losses, net deferred loan fees and unearned discounts. Loan
origination and commitment fees, as well as certain direct origination
costs, are deferred and amortized as a yield adjustment over the lives
of the related loans using the interest method.
The recognition of income on a loan is discontinued and previously
accrued interest is reversed, when interest or principal payments
become ninety (90) days past due unless, in the opinion of management,
the outstanding interest remains collectible. Past due status is
determined based on contractual terms. Interest is subsequently
recognized only as received until the loan is returned to accrual
status. A loan is restored to accrual status when all interest and
principal payments are current and the borrower has demonstrated to
management the ability to make payments of principal and interest as
scheduled. The Association's practice is to charge off any loan or
portion of a loan when the loan is determined by management to be
uncollectible due to the borrower's failure to meet repayment terms,
the borrower's deteriorating or deteriorated financial condition, the
depreciation of the underlying collateral, the loan's classification
as a loss by regulatory examiners, or for other reasons.
Continued
F-8
COMMUNITY FIRST BANK
NOTES TO FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies, Continued
(f) Loans and Allowance for Loan Losses, continued
The allowance for loan losses is evaluated on a regular basis by
management and is based upon management's periodic review of the
collectibility of the loans in light of historical experience, the
nature and volume of the loan portfolio, adverse situations that may
affect the borrower's ability to repay, estimated value of any
underlying collateral and trends in loan charge offs. This evaluation
is inherently subjective as it requires estimates that are susceptible
to significant revision as more information becomes available.
A loan is considered impaired when, based on current information and
events, it is probable that the Association will be unable to collect
the scheduled payments of principal or interest when due according to
the contractual terms of the loan agreement. Factors considered by
management in determining impairment include payment status,
collateral value, and the probability of collecting scheduled
principal and interest payments when due. Loans that experience
insignificant payment delays and payment shortfalls generally are not
classified as impaired. Management determines the significance of
payment delays and payment shortfalls on a case-by-case basis, taking
into consideration all of the circumstances surrounding the loan and
the borrower, including the length of the delay, the reasons for the
delay, the borrower's prior payment record, and the amount of the
shortfall in relation to the principal and interest owed. Impairment
is measured on a loan by loan basis for commercial and construction
loans by either the present value of expected future cash flows
discounted at the loan's effective interest rate, the loan's
obtainable market price, or the fair value of the collateral if the
loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Association does not
separately identify individual consumer and residential loans for
impairment disclosures.
(g) Premises and Equipment
Land is carried at cost. Buildings, furniture, fixtures and equipment
are stated at cost, less accumulated depreciation. Maintenance and
repairs are expensed as incurred while major additions and
improvements are capitalized. Buildings, building improvements,
furniture, fixtures and equipment are depreciated primarily using the
straight-line method over the estimated useful lives of the related
assets as follows:
Estimated Useful Lives
----------------------
Buildings 39-50 Years
Building improvements 7-40 Years
Furniture and equipment 3-15 Years
Continued
F-9
COMMUNITY FIRST BANK
NOTES TO FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies, Continued
(h) Foreclosed Real Estate
Foreclosed real estate includes both formally foreclosed property and
in-substance foreclosed property. In-substance foreclosed properties
are those properties for which the institution has taken physical
possession, regardless of whether formal foreclosure proceedings have
taken place.
At the time of foreclosure, foreclosed real estate is recorded at the
lower of the carrying amount or fair value less cost to sell, which
becomes the property's new basis. Any write-downs based on the asset's
fair value at date of acquisition are charged to the allowance for
loan losses. After foreclosure, property held for sale is carried at
the lower of the new cost basis or fair value less cost to sell.
Impairment losses on property to be held and used are measured as the
amount by which the carrying amount of a property exceeds its fair
value. Costs incurred in maintaining foreclosed real estate and
subsequent adjustments to the carrying amount of the property are
included in income (loss) on foreclosed real estate.
(i) Income Taxes
Income taxes are provided for the tax effects of the transactions
reported in the financial statements and consist of taxes currently
due plus deferred taxes related primarily to net operating and other
tax carryforwards and to differences between the basis of
available-for-sale securities, allowance for loan losses, accumulated
depreciation, and Federal Home Loan Bank stock dividends for financial
and income tax reporting. The deferred tax assets and liabilities
represent the future tax return consequences of those differences,
which will either be taxable or deductible when the assets and
liabilities are recovered or settled. Deferred tax assets and
liabilities are reflected at income tax rates applicable to the period
in which the deferred tax assets or liabilities are expected to be
realized or settled. As changes in tax laws or rates are enacted,
deferred tax assets and liabilities are adjusted through the provision
for income taxes. Valuation allowances are established when necessary
to reduce deferred tax assets to the amount expected to be realized.
(j) Advertising
Advertising costs are expensed as incurred and were $65,753 and
$55,352 for the years ended December 31, 2002 and 2001, respectively.
3. Investment Securities
Investment securities have been classified according to management's
intent. The amortized cost of securities and their approximate fair values
held as of December 31, 2002 and 2001 are as follows:
Continued
F-10
COMMUNITY FIRST BANK
NOTES TO FINANCIAL STATEMENTS
3. Investment Securities, Continued
Securities Held-to-
Maturity:
--------
2002
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ------------ ------------ -----------
U.S. Government and
federal agencies $1,700,255 $79,776 $ - $1,780,031
Mortgage-backed
securities:
GNMA 133,660 11,914 - 145,574
FNMA 12,514 537 - 13,051
FHLMC 55,321 2,982 - 58,303
---------- ------- ----- ----------
$1,901,750 $95,209 $ - $1,996,959
========== ======= ===== ==========
Securities Held-to-
Maturity:
--------
2001
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ------------ ---------- -----------
U.S. Government and
federal agencies $2,400,000 $69,938 $ - $2,469,938
Mortgage-backed
securities:
GNMA 227,492 10,711 - 238,203
FNMA 370,903 1,376 - 372,279
FHLMC 71,663 1,702 - 73,365
---------- ------- ----- ----------
$3,070,058 $83,727 $ - $3,153,785
========== ======= ===== ==========
Securities Available-for-Sale:
U.S. Government and
federal agencies $ 749,000 $ 5,375 $ - $ 754,375
========== ======= ===== ==========
The amortized cost and fair value of debt securities, including mortgage
backed securities at December 31, 2002, by contractual maturity are shown
below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties.
Amortized
Cost Fair Value
------------ ------------
Amounts maturing in:
One year or less $ 400,255 $ 407,440
After one year through five years 1,300,000 1,372,591
After five years through
ten years - -
After ten years - -
----------- -----------
1,700,255 1,780,031
Mortgage-backed securities 201,495 216,928
----------- -----------
$ 1,901,750 $ 1,996,959
=========== ===========
Continued
F-11
COMMUNITY FIRST BANK
NOTES TO FINANCIAL STATEMENTS
4. Loans Receivable
Loans at December 31, are summarized as follows:
2002 2001
------------ -----------
Real estate mortgage loans:
One-to four-family residential first $22,353,189 $19,604,158
One-to four-family residential second 582,108 626,494
Multi-family 450,000 103,802
Commercial 798,107 466,661
Construction 206,400 67,000
Other loans:
Consumer installment 283,174 326,100
Commercial 101,777 7,606
Automobile 739,686 556,142
Passbook 238,158 270,249
Other 208,955 255,670
------------ -----------
25,961,554 22,283,882
Less:
Unearned interest (456) (2,147)
Allowance for loan losses (105,868) (105,000)
Loans in process (145,460) (19,100)
------------ -----------
Total $25,709,770 $22,157,635
============ ===========
Activity in the allowance for loan losses is summarized as follows for
the years ended December 31:
Real
2002 Estate Consumer Total
---- -------- -------- ---------
Balance, beginning of year $ 70,000 $ 35,000 $105,000
Provision for loan losses 1,100 17,100 18,200
Loans charged-off (3,643) (21,293) (24,936)
Recoveries of loans previously charged-off - 7,604 7,604
-------- -------- --------
Balance, end of year $ 67,457 $ 38,411 $105,868
======== ======== ========
Real
2001 Estate Consumer Total
---- -------- -------- -------
Balance, beginning of year $ 50,000 $ 10,000 $ 60,000
Provision for loan losses 41,992 51,795 93,787
Loans charged-off (28,148) (26,795) (54,943)
Recoveries of loans previously charged-off 6,156 - 6,156
-------- -------- --------
Balance, end of year $ 70,000 $ 35,000 $105,000
======== ======== ========
In the ordinary course of business, the Association has and expects to
continue to have transactions, including borrowings, with its
employees, officers, and directors. In the opinion of management, such
transactions were on substantially the same terms, including interest
rates and collateral, as those prevailing at the time of comparable
transactions with other persons and did not involve more than a normal
risk of collectibility or present any other unfavorable features to
the Association. Loans to such borrowers, at December 31, 2002 and
2001, are summarized as follows:
2002 2001
---------- ----------
Balance, beginning of year $ 172,241 $ 191,081
Loan proceeds 359,884 133,720
Payments (79,029) (152,560)
---------- ----------
Balance, end of year $ 453,096 $ 172,241
========== ==========
Continued
F-12
COMMUNITY FIRST BANK
NOTES TO FINANCIAL STATEMENTS
4. Loans Receivable, Continued
At December 31, 2002 and 2001, the total recorded investment in loans on
nonaccrual amounted to approximately $53,000 and $ -0-, respectively, and
the total recorded investment in loans past due ninety days or more and
still accruing interest amounted to approximately $33,000 and $47,000,
respectively. At December 31, 2002 and 2001, there were no loans which were
specifically classed as impaired loans. The Association has no commitments
to loan additional funds to the borrowers whose loans have been modified or
classified.
5. Premises and Equipment
Premises and equipment at December 31 are summarized as follows:
2002 2001
---------- ----------
Land $ 73,649 $ 73,649
Buildings and improvements 735,348 513,581
Furniture, fixtures and equipment 360,823 233,713
---------- ----------
1,169,820 820,943
Less accumulated depreciation (397,158) (404,448)
---------- ----------
$ 772,662 $ 416,495
========== ==========
Depreciation expense for the years ended December 31, 2002 and 2001 was
$50,438 and $36,805, respectively
6. Deposits
Deposits at December 31, are summarized as follows:
2002 2001
------------------ -------------------
Amount % Amount %
------------ ---- ------------ ----
Non-interest bearing demand $ 1,430,336 5 $ 1,014,780 4
NOW accounts 1,107,109 4 932,846 4
Money Market accounts 2,072,339 8 1,742,351 6
Passbook savings 3,168,832 11 3,011,000 11
Certificates of deposits 20,349,636 72 19,910,247 75
------------ ---- ------------ ----
$ 28,128,252 100 $ 26,611,224 100
============ ==== ============ ====
Deposit accounts in excess of $100,000 are not federally insured.
The amount of deposit accounts with a minimum denomination of $100,000 was
$3,536,007 and $564,934 at December 31, 2002 and 2001, respectively.
At December 31, 2002, the scheduled maturities of certificates of deposit
are as follows:
2003 $ 10,927,523
2004 3,852,882
2005 3,105,992
2006 509,951
2007 1,953,288
------------
$ 20,349,636
============
Continued
F-13
COMMUNITY FIRST BANK
NOTES TO FINANCIAL STATEMENTS
6. Deposits, Continued
Interest expense on deposits for the years ended December 31, 2002 and 2001
is summarized as follows:
2002 2001
------------ ------------
Certificates of deposit $ 901,739 $ 1,106,214
Money Market accounts 24,573 34,442
NOW accounts 4,406 15,446
Passbook savings 20,610 61,110
------------ ------------
951,328 1,217,212
Less: dividends retained for
early withdrawal 2,449 6,857
------------ ------------
$ 948,879 $ 1,210,355
============ ============
In the ordinary course of business, the Association has continued to have
transactions, including deposits, with its employees, officers and
directors. In the opinion of management, such transactions were on
substantially the same terms, including interest rates prevailing at the
time, of comparable transactions with other persons. Deposits from
employees, officers and directors totaled $611,864 and $433,147 on December
31, 2002 and 2001, respectively.
7. Short-Term Debt
Short-term debt as of December 31, 2001, consisted of a short-term fixed
rate advance from Federal Home Loan Bank. The advance had a 2.09% fixed
interest rate and was repaid in 2002. Advances from the Federal Home Loan
Bank are collateralized with the Association's mortgage portfolio to 150%
of the balance of the note (blanket mortgage collateral) and is further
collateralized by the Association's stock in the Federal Home Loan Bank.
8. Pension Plan
The Association is a participant in the Financial Institutions Retirement
Fund, a qualified defined benefit, noncontributory multi-employer pension
plan covering all full-time salaried employees who are between 21 and 65
years of age and have completed one year of continuous service. The benefit
is the career average salary multiplied by two and one-half percent (2
1/2%) for each year of service.
The Association's policy is to fund normal pension cost on a current basis.
The funded status of the plan is calculated by comparing plan assets to
plan liabilities. Assets in excess of liabilities are recognized as Future
Employer Contribution Offsets (FECO). Although the benefit obligation and
fair value of plan assets are not available as of December 31, 2002, the
Plan's actuary determined that at July 1, 2002, an unfunded liability of
$10,438 existed for prior service costs and that contributions of $22,281
are required for the plan year ending June 30, 2003. Pension expense under
the plan was $26,672 and $12,252 for the years ended December 31, 2002 and
2001, respectively.
Continued
F-14
COMMUNITY FIRST BANK
NOTES TO FINANCIAL STATEMENTS
9. Federal Income Taxes
The provision for federal income tax expense (benefit) for the years ended
December 31, 2002 and 2001 is summarized as follows:
2002 2001
----------- -----------
Current $ - $ -
Deferred 10,000 (32,812)
----------- -----------
$ 10,000 $ (32,812)
=========== ===========
The net deferred tax asset in the accompanying statement of financial
condition includes the following components:
2002 2001
------------ ------------
Deferred tax liabilities:
FHLB stock dividends $ (67,000) $ (63,000)
Book/tax depreciation (14,000) (2,000)
Allowance for loan losses (800) -
Deferred tax assets:
Tax carryforwards 88,900 60,000
----------- -----------
Allowance for loan losses - 15,000
Net deferred tax asset 7,100 10,000
Valuation allowance (7,100) -
----------- -----------
$ - $ 10,000
=========== ===========
Total income tax expense (benefit) differed from the amounts computed by
applying the U.S. federal income tax rates of 34 percent in 2002 and 2001
to loss before income taxes as a result of:
2002 2001
------------ ------------
Tax at statutory rate (34)% $ (25,133) $ (53,730)
Graduated rates 9,153 6,348
Nondeductible expenses 565 -
Change in valuation allowance 7,100 -
Nondeductible expense and other 18,315 14,570
----------- -----------
$ 10,000 $ (32,812)
=========== ===========
Effective income tax rate 13.52% (20.76)%
=========== ===========
Retained earnings at December 31, 2002 and 2001 included approximately
$525,000, which represents bad debt reserves for which no deferred income
taxes have been provided. These amounts represent allocations of income to
bad debt deductions for tax purposes only. Reduction of these reserves for
purposes other than tax bad debt losses or adjustments arising from
carryback of net operating losses would create income for tax purposes,
which would be subject to the then-current corporate income tax rate. The
unrecorded deferred liability on these amounts is approximately $79,000 at
December 31, 2002 and 2001.
The net operating loss carryforward of approximately $557,000 will commence
to expire in the year 2012 and expire in 2023.
Continued
F-15
COMMUNITY FIRST BANK
NOTES TO FINANCIAL STATEMENTS
10. Regulatory Matters
The Association is subject to various regulatory capital requirements
administered by its primary federal regulator, the Office of Thrift
Supervision (OTS). Failure to meet the minimum regulatory capital
requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators, that if undertaken, could have a
direct material affect on the Association's financial statements. Under the
regulatory capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Association must meet specific capital
guidelines involving quantitative measures of the Association's assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Association's capital amounts and
classification under the prompt corrective action guidelines are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Association to maintain minimum amounts and ratios of: total
risk-based capital and Tier I capital to risk-weighted assets (as defined
in the regulations), Tier I capital to adjusted total assets (as defined),
and tangible capital to adjusted total assets (as defined). Management
believes as of December 31, 2002 that the Association meets all capital
adequacy requirements to which it is subject. As of December 31, 2002, the
most recent notification from the OTS categorized the Association as well
capitalized under the regulatory framework for prompt corrective action.
There are no conditions or events since the notification that management
believes have changed the Association's category.
The Association's actual capital and its statutory required capital
levels at December 31, 2002 and 2001 are as follows (in thousands).
To be Well
Capitalized Under
Prompt Corrective
For Capital Adequacy Action
Purposes Required Provisions
Actual Required
---------------------- --------------------- ---------------------
Amount % Amount % Amount %
--------- --------- --------- -------- --------- --------
December 31, 2002
Total risk based capital $1,855 11.12% $1,335 8.0% $1,669 10.0%
Tier 1 risk based capital 1,749 10.48 668 4.0 1,001 6.0
Tier 1 core capital 1,749 5.83 1,199 4.0 1,499 5.0
Tangible equity capital 1,749 5.83 450 1.5 450 1.5
December 31, 2001
Total risk based capital 1,938 13.90 1,116 8.0 1,394 10.0
Tier 1 risk based capital 1,833 13.15 557 4.0 836 6.0
Tier 1 core capital 1,833 6.21 1,180 4.0 1,475 5.0
Tangible equity capital 1,833 6.21 443 1.5 443 1.5
Continued
F-16
COMMUNITY FIRST BANK
NOTES TO FINANCIAL STATEMENTS
10. Regulatory Matters, Continued
A reconciliation of the Association's equity to regulatory capital is as
follows:
2002 2001
--------- ---------
(dollars in thousands)
Total equity per statements of financial $ 1,749 $ 1,838
Condition
Reconciling items:
Unrealized gain on available-for-sale
Securities - (5)
------- -------
Tier one risk based, core and tangible
equity capital 1,749 1,833
------- -------
Reconciling items:
Loan loss reserves 106 105
------- -------
Total risk based capital $ 1,855 $ 1,938
======= =======
11. Loan Commitments
At December 31, 2002, the Association had outstanding firm commitments to
originate loans as follows:
Mortgage loans
7 year adjustable $ 488,800
Construction loans 145,461
---------
$ 634,261
=========
At December 31, 2002, outstanding letters of credit were $25,000.
12. Commitments and Contingent Liabilities
The Association is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest rates.
These financial instruments include commitments to extend credit and
interest-rate caps and floors written. Those instruments involve, to
varying degrees, elements of interest-rate risk in excess of the amount
recognized in the statement of financial condition. The contract or
notional amounts of those instruments reflect the extent of the
Association's involvement in particular classes of financial instruments.
The Association's exposure to credit loss in the event of nonperformance by
the other party to the financial instruments for commitments to extend
credit is represented by the contractual notional amount of those
instruments. The Association uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
Continued
F-17
COMMUNITY FIRST BANK
NOTES TO FINANCIAL STATEMENTS
12. Commitments and Contingent Liabilities, Continued
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. The Association
evaluates each customer's creditworthiness on a case-by-case basis. The
amount and type of collateral obtained, if deemed necessary by the
Association upon extension of credit, varies and is based on management's
credit evaluation of the counterparty.
At December 31, 2002 and 2001, approximately $732,100 and $746,800,
respectively, were held in deposits at financial institutions in excess of
federally insured amounts. Although it does not require collateral, the
Association minimizes its credit risk by placing its deposits in
high-credit, quality financial institutions.
In December 2002, the Bank entered into a real estate purchase contract to
purchase land for expansion of Bank facilities in the amount of $360,000.
The Bank has not formalized plans for expansion and expects to complete the
land transaction in 2003.
The Bank had planned to convert to a new data processing system and entered
into new data processing contracts with a prospective data processing
provider in December 2002. The Bank's current data processing provider has
provided the Bank with a termination contract that calls for termination
related penalties and costs of approximately $400,000. The Bank's current
data processing contracts may be terminated without penalty under certain
conditions including timely notice. The Bank's current processor has
asserted that the Bank's notice of intent to terminate its current
contracts on August 1, 2003 was not received timely. Management does not
believe that it would incur penalties under the new contracts if the
contemplated conversion were not completed. The Bank is not currently
obligated to pay termination fees under its current contracts and does not
plan to enter into the termination contract or otherwise obligate the Bank
to pay contract termination penalties.
13. Fair Values of Financial Instruments
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, requires disclosure of fair value
information about financial instruments, whether or not recognized in the
statement of financial condition. In cases where quoted market prices are
not available, fair values are based on estimates using present value or
other valuation techniques. Those techniques are significantly affected by
the assumptions used, including the discount rate and estimates of future
cash flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases,
could not be realized in immediate settlement of the instruments. Statement
No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate
fair value amounts do not represent the underlying value of the
Association.
Continued
F-18
COMMUNITY FIRST BANK
NOTES TO FINANCIAL STATEMENTS
13. Fair Values of Financial Instruments, Continued
The following methods and assumptions were used by the Association in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts of cash and short-term
instruments approximate fair values.
Interest-bearing deposits in banks: The carrying amounts of
interest-bearing deposits maturing within ninety days, approximate their
fair values.
Time deposits: Fair values of time deposits are estimated using discounted
cash flow analyses based on current rates for similar types of deposits.
Securities: Fair values for securities, excluding Federal Home Loan Bank
stock, are based on quoted market prices.
Federal Home Loan Bank stock: The carrying value of Federal Home Loan Bank
stock approximates fair value based on the redemption provisions of the
Federal Home Loan Bank.
Loans receivable: For variable-rate loans that reprice frequently and with
no significant change in credit risk, fair values are based on carrying
values. Fair values for certain mortgage loans (e.g., one-to-four family
residential, commercial real estate, investment property mortgage loans and
commercial and industrial loans) which do not reprice frequently are
estimated using discounted cash flow analyses, using interest rates
currently being offered for loans with similar terms to borrowers of
similar credit quality. Fair values for non-performing loans are estimated
using discounted cash flow analyses or underlying collateral values, where
applicable.
Accrued interest receivable: The carrying amounts of accrued interest
receivable approximate fair value.
Deposit liabilities: The fair values disclosed for demand deposits (e.g.,
interest and non-interest checking, passbook savings, and certain types of
money market accounts) are, by definition, equal to the amount payable on
demand at the reporting date (i.e., their carrying amounts). Fair values
for fixed-rate certificates of deposit are estimated using a discounted
cash flow calculation that applies interest rates currently being offered
on certificates to a schedule of aggregated expected monthly maturities on
time deposits.
Federal Home Loan Bank advances: The carrying amount of Federal Home Loan
Bank advances, which mature within 90 days, approximate their fair values.
Accrued interest payable: The carrying amounts of accrued interest payable
approximate fair value.
Off-balance-sheet instruments: The fair value of commitments to extend
credit are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and
the counterparties' credit standing.
Continued
F-19
COMMUNITY FIRST BANK
NOTES TO FINANCIAL STATEMENTS
13. Fair Values of Financial Instruments, Continued
The estimated fair values of the Association's financial instruments are as
follows:
2002 2001
------------------------------- -------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------- -------------- ------------- --------------
Financial assets:
Cash and cash equivalents $733,126 $733,126 $1,410,347 $1,410,347
Interest bearing deposits in other
banks - - 896,590 896,590
Time deposits 25,000 25,032 - -
Securities held-to-maturity 1,901,750 1,996,959 3,070,058 3,153,785
Securities available-for-sale - - 754,375 754,375
Federal Home Loan Bank stock 634,100 634,100 605,700 605,700
Loans 25,709,770 25,997,227 22,157,635 22,196,379
Accrued interest receivable 135,220 135,220 161,714 161,714
Financial liabilities:
Deposits 28,128,252 28,429,929 26,611,224 26,932,134
Advances from FHLB - - 1,000,000 1,000,000
Accrued interest payable 19,990 19,990 46,165 46,165
Off balance sheet credit related
financial instruments:
Commitments to extend credit - - - -
F-20
GLOSSARY
ARM Loan Adjustable-rate mortgage loan
BIF Bank Insurance Fund of the FDIC
Common Stock The common stock, $.01 par value per share, of Community First
Bancorp, Inc.
Community Offering Offering for sale to certain members of the general public of any
shares of common stock not subscribed for in the Subscription
Offering, including the possible offering of common stock in a
Syndicated Community Offering
Company Community First Bancorp, Inc.
Conversion Simultaneous conversion of Community First Bank to stock form,
the issuance of the Community First Bank's outstanding capital
stock to the Company and the Company's offer and sale of common
stock
Eligible Account Holders Savings account holders of Community First Bank with account
balances of at least $50 as of the close of business on December 31,
2001
Estimated
Valuation Range Estimated pro forma market value of the common stock ranging
from $1,785,000 to $2,415,000
Exchange Act Securities Exchange Act of 1934, as amended
Expiration Date 12:00 p.m., Central time, on June __, 2003
FDIC Federal Deposit Insurance Corporation
Federal Reserve System The Board of Governors of the Federal Reserve System
Feldman Financial Feldman Financial Advisors, Inc., the independent appraiser for the
Offering
FHLB Federal Home Loan Bank
FHLMC Federal Home Loan Mortgage Corporation
FNMA Federal National Mortgage Association
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IRA Individual retirement account or arrangement
IRS Internal Revenue Service
Keefe, Bruyette Keefe, Bruyette & Woods, Inc., the marketing agent for the offering
& Woods, Inc.
MRP Management recognition plan to be adopted no earlier than six
months after the conversion
NASD National Association of Securities Dealers, Inc.
NOW account Negotiable order of withdrawal account
NPV Net portfolio value
Offering Subscription, Community and Syndicated Community offerings,
collectively
Option Plan Stock option plan to be adopted no earlier than six months after the
conversion
Order Form Form for ordering stock accompanied by a certification concerning
certain matters
Other Members Savings account holders (other than eligible account holders and
supplemental eligible account holders) and borrowers who are
entitled to vote at the Special Meeting due to the existence of a
savings account or a borrowing, respectively, on the Voting Record
Date for the Special Meeting
OTS Office of Thrift Supervision
Plan of Conversion Plan of Community First Bank to convert from a federally chartered
mutual savings bank to a federally chartered stock savings bank and
the issuance of all of Community First Bank's outstanding capital
stock to the Company and the issuance of the Company's stock to
the public
Purchase Price $10.00 per share price of the common stock
SAIF Savings Association Insurance Fund of the FDIC
SEC Securities and Exchange Commission
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Securities Act Securities Act of 1933, as amended
Special Meeting Special Meeting of members of Community First Bank called for the
purpose of approving the Plan
Subscription Offering Offering of non-transferable rights to subscribe for the common
stock, in order of priority, to Eligible Account Holders, tax-
qualified employee plans, Supplemental Eligible Account Holders
and Other Members
Supplemental Eligible Depositors, who are not Eligible Account Holders of Community
Account Holders First Bank, with account balances of at least $50 on March 31, 2003
Syndicated Community Offering of shares of common stock remaining after the
Offering Subscription Offering and undertaken prior to the end and as part of
the Community Offering, and which may, at our discretion, be
made to the general public on a best efforts basis by a selling group
of broker-dealers
Voting Record Date The close of business on May __, 2003, the date for determining
members entitled to vote at the Special Meeting
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No dealer, salesman or other person has been authorized to give any information
or to make any representations not contained in this document in connection with
the offering made hereby, and, if given or made, such information or
representations must not be relied upon as having been authorized by Community
First Bank, the Company, or Keefe, Bruyette & Woods, Inc. This document does not
constitute an offer to sell, or the solicitation of an offer to buy, any of the
securities offered hereby to any person in any jurisdiction in which such offer
or solicitation would be unlawful. Neither the delivery of this document by
Community First Bank, the Company, or Keefe, Bruyette & Woods, Inc. nor any sale
made hereunder shall in any circumstances create an implication that there has
been no change in the affairs of Community First Bank or the Company, since any
of the dates as of which information is furnished herein or since the date
hereof.
COMMUNITY FIRST BANCORP, INC.
(Holding Company for Community First Bank)
Up to 277,725 Shares
Common Stock
PROSPECTUS
Keefe, Bruyette & Woods, Inc.
Dated May __, 2003
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS
AND ARE NOT FEDERALLY INSURED OR GUARANTEED.
Until ___________, 2003 (90 days after the date of this Prospectus), all dealers
that effect transactions in these securities, whether or not participating in
this offering, may be required to deliver a prospectus. This is in addition to
the dealer obligation to deliver a prospectus when acting as underwriters and
with respect to their unsold allotments or subscriptions.
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Indemnification of Directors and Officers of Community First Bank
Federal Regulations clearly define areas for indemnity coverage by
Community First Bank (the "Bank"), as follows:
(a) Any person against whom any action is brought by reason of the fact
that such person is or was a director or officer of the Bank shall be
indemnified by the Bank for:
(i) Reasonable costs and expenses, including reasonable attorney's
fees, actually paid or incurred by such person in connection with
proceedings related to the defense or settlement of such action;
(ii) Any amount for which such person becomes liable by reason of any
judgment in such action;
(iii)Reasonable costs and expenses, including reasonable attorney's
fees, actually paid or incurred in any action to enforce his
rights under this section, if the person attains a final judgment
in favor of such person in such enforcement action.
(b) Indemnification provided for in subparagraph (a) shall be made to such
officer or director only if the requirements of this subparagraph are met:
(i) The Bank shall make the indemnification provided by subparagraph
(a) in connection with any such action which results in a final
judgment on the merits in favor of such officer or director.
(ii) The Bank shall make the indemnification provided by subparagraph
(a) in case of settlement of such action, final judgment against
such director or officer or final judgment in favor of such
director or officer other than on the merits except in relation
to matters as to which he shall be adjudged to be liable for
negligence or misconduct in the performance of his duty, only if
a majority of the directors of the Bank determines that such a
director or officer was acting in good faith within what he was
reasonably entitled to believe under the circumstances was the
scope of his employment or authority and for a purpose which he
was reasonably entitled to believe under the circumstances was in
the best interest of the Bank or their members or stockholders.
(c) As used in this paragraph:
(i) "Action" means any action, suit or other judicial or
administrative proceeding, or threatened proceeding, whether
civil, criminal, or otherwise, including any appeal or other
proceeding for review;
(ii) "Court" includes, without limitation, any court to which or in
which any appeal or any proceeding for review is brought;
(iii)"Final Judgment" means a judgment, decree, or order which is
appealable and as to which the period for appeal has expired and
no appeal has been taken;
(iv) "Settlement" includes the entry of a judgment by consent or by
confession or upon a plea of guilty or of nolo contendere.
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Community First has a directors and officers liability policy providing for
insurance against certain liabilities incurred by directors and officers of
Community First while serving in their capacities as such.
Indemnification of Directors and Officers of Community First Bancorp, Inc.
The Articles of Incorporation of Community First Bancorp, Inc. provide that
the Company will indemnify to the fullest extent permissible under the Maryland
General Corporation Law ("MGCL") any individual who is or was a director,
officer, employee or agent in any proceeding in which the individual is made a
party as a result of his service in such capacity. The MGCL provides that a
Maryland corporation may indemnify any director or officer made a party to any
civil, criminal, administrative or investigative proceeding by reason of serving
in such capacity unless it is established that (a) the act or omission of such
person was material to the matter giving rise to the proceeding and either was
committed in bad faith or was the result of active and deliberate dishonesty,
(b) the person actually received an improper personal benefit in money, property
or services, or (c) in the case of a criminal proceeding, the person had
reasonable cause to believe the act or omission was unlawful. Indemnification
may be against judgments, penalties, fines, settlements, and reasonable expenses
(including attorneys' fees) actually incurred in connection with the proceeding.
If the proceeding was by or in the right of the corporation, however,
indemnification may not be made if the person is adjudged to be liable to the
corporation. The corporation must indemnify directors and officers for expenses
incurred in contesting any such proceeding if such persons are successful on the
merits, unless the corporation's articles of incorporation limit such
indemnification (the Company's Articles do not). Determination that the
indemnification is proper and the amount to be paid in indemnification is to be
made by a majority vote of a quorum of disinterested directors (or a committee
of disinterested directors), by special legal counsel chosen by disinterested
directors (or a committee of disinterested directors) or by a majority vote of
disinterested stockholders. A corporation may purchase and maintain insurance on
behalf of any director or officer against any liability asserted against and
incurred by such person in any such capacity or arising out of such person's
position whether or not the corporation would have the power to indemnify
against such liability under Maryland law. A corporation must report any
indemnification or advance of expenses to a director or officer arising out of a
proceeding by or in the right of the corporation to the stockholders of the
corporation.
Directors and Officers Liability Insurance
Pursuant to the MGCL, the Company is permitted to purchase and maintain
insurance on behalf of an individual who is or was a director, officer,
employee, or agent of the Company. The Bank currently maintains such a policy
and it is intended that the Company will become a party to such policy.
Item 25. Other Expenses of Issuance and Distribution
* Legal Fees $ 50,000
* Marketing Agent Fees and Expenses 100,000
* Printing, Word Processing, Postage and Mailing 30,000
* Appraisal Fees and Expenses 15,000
* Accounting Fees and Expenses 50,000
* Blue Sky Filing Fees and Expenses
(including counsel fees) 5,000
* Transfer Agent Fees 2,500
* Conversion Agent Fees 9,500
* Federal Filing Fees (OTS and SEC) 8,600
* Other Expenses 14,400
Total $ 285,000
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* Estimated.
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Item 26. Recent Sales of Unregistered Securities.
Not applicable.
Item 27. Exhibits
The exhibits filed as a part of this registration statement are as
follows:
Exhibit No. Description
- ----------- -----------
1 Form of Agency Agreement with Keefe, Bruyette & Woods, Inc.*
2 Plan of Conversion
3.1 Articles of Incorporation of Community First Bancorp, Inc.*
3.2 Bylaws of Community First Bancorp, Inc.*
4 Form of Common Stock Certificate of Community First Bancorp,
Inc.*
5 Opinion of Malizia Spidi & Fisch, PC regarding legality of
securities being registered
8.1 Federal Tax Opinion of Malizia Spidi & Fisch, PC*
8.2 State Tax Opinion of EKW & Associates, llp*
8.3 Opinion of Feldman Financial Advisors, Inc., as to the value of
subscription rights for tax purposes*
10.1 Employment Agreement between Community First Bank and William M.
Tandy*
10.2 Form of Change-in-Control Severance Agreement*
16 Letter on Change in Certifying Accountants*
23.1 Consent of Malizia Spidi & Fisch, PC (in their opinions filed as
Exhibits 5 and 8.1)
23.2 Consent of EKW & Associates, llp
23.3 Consent of Feldman Financial Advisors, Inc.
24 Power of Attorney (reference is made to the signature page of the
Form SB-2 as originally filed)
99.1 Proposed Stock Order Form and Form of Certification*
99.2 Proxy Statement for Special Meeting of Members of Community First
Bank; Form of Proxy*
99.3 Form of Miscellaneous Solicitation and Marketing Materials*
99.4 Appraisal Report
99.5 Appraisal Update
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* Previously filed.
Item 28. Undertakings
The undersigned small business issuer will:
(1) File, during any period in which it offers or sells securities, a
post- effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) Reflect in the prospectus any facts or events arising which,
individually or together, represent a fundamental change in the
information set forth in the registration statement;
(iii)To include any additional or changed material information on the
plan of distribution.
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(2) For determining any liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering thereof.
(3) File a post-effective amendment or remove from registration any of the
securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act, and is therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the small business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the small business
issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
questions whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
If the undersigned small business issuer relies on Rule 430A under the
Securities Act, the small business issuer will:
(1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the small business issuer under Rule 424(b)(1), or (4), or
497(h) under the Securities Act as part of this registration statement as of the
time the Commission declared it effective.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this amended
registration statement to be signed on its behalf by the undersigned, in the
City of Madisonville, Commonwealth of Kentucky, on May 14, 2003.
COMMUNITY FIRST BANCORP, INC.
By: /s/ William M. Tandy
William M. Tandy
President and Chief Executive Officer
(Duly Authorized Representative)
POWER OF ATTORNEY
In accordance with the requirements of the Securities Act of 1933, this
amended registration statement has been signed by the following persons in the
capacities and on the dates stated.
Signatures Title Date
/s/ William M. Tandy President, Chief Executive Officer and Director May 14, 2003
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William M. Tandy (Principal Executive Officer)
/s/ Michael D. Wortham* Vice President and Director May 14, 2003
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Michael D. Wortham (Principal Financial and Accounting Officer)
/s/ Ralph T. Teague* Director May 14, 2003
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Ralph T. Teague
/s/ Paul W. Arison* Director May 14, 2003
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Paul W. Arison
/s/ Charlotte E. Baldwin* Director May 14, 2003
- --------------------------------
Charlotte E. Baldwin
/s/ Charles G. Ramsey* Director May 14, 2003
- --------------------------------
Charles G. Ramsey
/s/ J. Craig Riddle* Director May 14, 2003
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J. Craig Riddle
/s/ Charles B.Vaughn* Director May 14, 2003
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Charles B. Vaughn
/s/ Steven E. Carson* Director May 14, 2003
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Steven E. Carson
*By /s/ William M. Tandy May 14, 2003
----------------------------
William M. Tandy
Attorney-in-fact
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