AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 21, 1996
REGISTRATION NO. __________
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
CBES BANCORP, INC.
(Name of Small Business Issuer in Its Charter )
DELAWARE 6712 (TO BE APPLIED FOR)
(State or Jurisdiction (Primary Standard (I.R.S. Employer
of Incorporation or Industrial Classification Code Identification No.)
Organization) Number)
1001 N. JESSE JAMES ROAD
EXCELSIOR SPRINGS, MO 64024-1202
(816) 630-6711
(Address and Telephone Number
of Principal Executive Offices)
1001 N. JESSE JAMES ROAD
EXCELSIOR SPRINGS, MO 64024-1202
(Address of Principal Place of
Business or Intended Principal
Place of Business)
LARRY E. HERMRECK
1001 N. JESSE JAMES ROAD
EXCELSIOR SPRINGS, MO 64024-1202
(816) 630-6711
(Name, Address and Telephone Number
of Agent for Service)
COPIES TO:
ROBERT I. LIPSHER, ESQ.
ROBERT B. POMERENK, ESQ.
LUSE LEHMAN GORMAN POMERENK & SCHICK, P.C.
5335 WISCONSIN AVENUE, N.W.
SUITE 400
WASHINGTON, D.C. 20015
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 shares 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 the delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE OFFERING REGISTRATION FEE
PRICE
(1)
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Common Stock, $.01 par value per share 1,388,625 $10.00 $13,886,250 $4,789
===================================================================================================================
________________
(1) Estimated solely for the purpose of calculating the registration fee.
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 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
CBES BANCORP, INC.
(PROPOSED HOLDING COMPANY FOR COMMUNITY BANK OF EXCELSIOR SPRINGS, A SAVINGS
BANK)
Up to 1,207,500 Shares of Common Stock
(Anticipated Maximum)
CBES Bancorp, Inc. (the "Holding Company"), a Delaware corporation, is
offering up to 1,207,500 shares of its common stock, par value $.01 per share
(the "Common Stock"), in connection with the conversion of Community Bank of
Excelsior Springs, a Savings Bank ("Community Bank" or the "Bank"), from a
federally chartered mutual savings bank to a federally chartered stock savings
bank, and the issuance of all of Community Bank's outstanding capital stock to
the Holding Company pursuant to the Bank's Plan of Conversion (the "Plan" or
"Plan of Conversion"). The simultaneous conversion of the Bank to stock form,
the issuance of Community Bank's outstanding common stock to the Holding Company
and the Holding Company's sale of its Common Stock are referred to herein as the
"Conversion." References herein to the Bank refer to Community Bank both in its
mutual and stock form as the context may indicate.
(continued on following page)
FOR INFORMATION ON HOW TO SUBSCRIBE FOR SHARES OF COMMON STOCK, CALL THE STOCK
INFORMATION CENTER AT
(816) ________
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH
PROSPECTIVE INVESTOR, SEE "RISK FACTORS."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, OR ANY OTHER FEDERAL
AGENCY OR ANY STATE SECURITIES COMMISSION, NOR HAS SUCH COMMISSION,
OFFICE OR OTHER AGENCY OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION ("FDIC"), THE BANK INSURANCE FUND ("BIF"), THE SAVINGS ASSOCIATION
INSURANCE FUND ("SAIF") OR ANY OTHER GOVERNMENT AGENCY.
Estimated Underwriting Fees
and
Purchase Price(1) Other Expenses (2) Estimated Net Proceeds(2)
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Minimum Per Share................ $10.00 $0.59 $9.41
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Midpoint Per Share............... $10.00 $0.50 $9.50
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Maximum Per Share................ $10.00 $0.43 $9.57
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Maximum Per Share, as adjusted(3) $10.00 $0.38 $9.62
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Total Minimum.................... $8,925,000 $525,000 $ 8,400,000
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Total Midpoint................... $10,500,000 $525,000 $ 9,975,000
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Total Maximum.................... 12,075,000 $525,000 $11,550,000
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Total Maximum, as adjusted(3).... $13,886,250 $525,000 $13,361,000
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(footnotes on second following page)
TRIDENT SECURITIES, INC.
The date of this Prospectus is August ___, 1996.
(continued from preceding page)
Non-transferable rights to subscribe for the Common Stock have been
granted, in order of priority, to (i) the Bank's deposit account holders with
deposits of at least $50 as of March 31, 1995 ("Eligible Account Holders"), (ii)
tax-qualified employee stock benefit plans of the Bank ("Tax Qualified Employee
Plans"), (iii) the Bank's deposit account holders with deposits of at least $50
as of June 30, 1996 ("Supplemental Eligible Account Holders") (iv) certain other
depositors as of _______ 1996 and certain borrowers of the Bank as of both
______, 1995 and ________, 1996, who continue to be borrowers as of the date of
the special meeting of members ("Other Members"), and (v) officers, directors
and employees of the Bank in a subscription offering (the "Subscription
Offering"). PURSUANT TO OFFICE OF THRIFT SUPERVISION ("OTS") REGULATIONS, THESE
SUBSCRIPTION RIGHTS ARE NON-TRANSFERABLE. PERSONS VIOLATING THIS PROHIBITION
AGAINST TRANSFER MAY LOSE THEIR RIGHT TO PURCHASE STOCK IN THE CONVERSION AND BE
SUBJECT TO OTHER POSSIBLE SANCTIONS. To the extent that shares remain available
for purchase after the Subscription Offering, the Holding Company and Bank
intend to offer shares of Common Stock for sale in a community offering to
members of the general public to whom a prospectus is delivered with a
preference given to natural persons residing in Clay and Ray Counties, Missouri
(the "Community Offering"). It is anticipated that shares of Common Stock not
subscribed for in the Subscription and Community Offerings may be offered at the
discretion of the Holding Company to certain members of the general public as
part of a community offering on a best efforts basis by a selling group of
broker-dealers managed by Trident Securities, Inc. (the "Syndicated Community
Offering"). The Subscription, Community and Syndicated Community Offerings are
referred to collectively as the "Offerings."
The Bank's Employee Stock Ownership Plan ("ESOP") intends to subscribe for
up to 8% of the total number of shares of Common Stock issued in the Conversion;
however, the Bank reserves the right to have all or part of the order of the
ESOP filled by purchases in the open market, subject to OTS approval, if
required. Shares sold above the maximum of the Estimated Valuation Range (as
hereinafter defined) may be sold to the ESOP to fill its subscription (prior to
filling any other orders). With the exception of the ESOP, no individual
Eligible Account Holder, Supplemental Eligible Account Holder or Other Member
may purchase in the Subscription Offering shares of Common Stock having an
aggregate purchase price of more than $100,000; no individual person or other
entity, together with associates of and persons acting in concert with such
person, may purchase in the Community Offering and the Syndicated Community
Offering shares of Common Stock having an aggregate purchase price of more than
$100,000; and no person, together with associates and persons acting in concert
with such person, may purchase in the aggregate shares of Common Stock having an
aggregate purchase price of more than $200,000. However, the Bank and the
Holding Company in their sole discretion may increase or decrease the purchase
limitations without notice of members or subscribers. The minimum purchase is 25
shares. See "The Conversion--Offering of Holding Company Common Stock--
Limitations on Purchase of Shares."
The Holding Company may, in its absolute discretion, accept or reject, in
whole or in part, any or all subscriptions in the Community Offering or
Syndicated Community Offering at the time of receipt of an order or as soon as
practicable following the completion of such offerings. All orders submitted are
irrevocable until completion of the Conversion. Subscriptions paid by cash,
check, bank draft or money order will be placed in a segregated account at
Community Bank and will earn interest at the rate of 2.25%, the rate currently
paid by Community Bank on passbook savings accounts, from the date of receipt
until completion or termination of the Conversion. Payments may be authorized by
withdrawal from deposit accounts at Community Bank without penalty and will
continue to earn interest at the contractual rate until the Conversion is
completed or terminated; these funds will be otherwise unavailable to the
depositor until such time. See "The Conversion-- Subscription Offering" and "--
Community Offering."
The Holding Company must receive an original stock order form (the "Stock
Order Form") (facsimile copies and photocopies will not be accepted) and a fully
executed separate Certificate Form together with full payment (or appropriate
instructions authorizing a withdrawal from a deposit account at the Bank) of
$10.00 per share for all shares for which subscription is made, at the executive
office of the Bank, 1001 N. Jesse James Road, Excelsior Springs, Missouri, by
3:00 p.m., Excelsior Springs, Missouri Time, on __________, 1996. Payment for
shares of Common Stock by wire transfer will not be accepted.
THE SUBSCRIPTION OFFERING WILL TERMINATE AT NOON, EXCELSIOR SPRINGS,
MISSOURI TIME, ON SEPTEMBER ___, 1996 (THE "EXPIRATION DATE"), unless extended
at the discretion of the Holding Company and the Bank without
notice to subscribers, with the approval of the OTS, if necessary. The Community
Offering may commence simultaneously with, during, or following the completion
of the Subscription Offering and may terminate on the Expiration Date or any
date thereafter at the discretion of the Bank and the Holding Company but not
later than 45 days after the Expiration Date unless extended with the approval
of the OTS. The Syndicated Community Offering may commence subsequent to the
Subscription and Community Offerings and may terminate on any date at the
discretion of the Bank and the Holding Company but not later than 45 days after
the Expiration Date unless extended with the approval of the OTS.
If the Offerings are extended beyond 45 days after the Expiration Date
(i.e. ______, 1996), all subscribers will be notified of such extension, of
their rights to modify or confirm their subscriptions or to rescind their
subscriptions and have their subscription funds returned promptly with interest,
and of the time period within which the subscriber must notify the Bank of his
intention to modify, confirm or rescind his subscription. In the event the value
of an updated independent appraisal of the pro forma market value of the Common
Stock to be issued in the Conversion is less than $8,925,000 or more than
$13,886,250 and the Holding Company determines to sell an amount outside of this
range to its subscribers, all subscribers must be resolicited with an updated
prospectus. The failure of a subscriber to notify the Bank of his intention
during a resolicitation will be deemed a rescission of the subscription. Under
applicable OTS regulations, the Conversion must be completed or terminated no
later than 24 months from the approval of the Conversion by the Bank's members.
The Holding Company and the Bank have engaged Trident Securities, Inc.
("Trident Securities") to consult with and advise the Bank and the Holding
Company in connection with the Conversion and with the sale of shares of the
Common Stock in the Offerings. In addition, in the event the Common Stock is not
fully subscribed for in the Subscription and Community Offerings, Trident
Securities will manage the Syndicated Community Offering. Neither Trident
Securities nor any other broker-dealers will have any obligation to purchase or
accept any shares of Common Stock in the Conversion. See "The Conversion" and
"--Marketing Arrangements."
The Holding Company intends to have the Common Stock listed on the Nasdaq
SmallCap Market under the symbol "CBES," and the Holding Company has received
conditional approval for such a listing. Prior to this offering there has been
no public market for the Common Stock, and there can be no assurance that an
active and liquid trading market for the Common Stock will develop or, if
developed, be maintained. The lack of an active and liquid trading market may
adversely affect liquidity and the price for the Common Stock. See "Market for
Common Stock."
_____________________
(footnotes for preceding table)
(1) Determined in accordance with an independent appraisal prepared by RP
Financial, LC ("RP Financial") as of June 14, 1996. The estimated pro
forma market value of the Holding Company and the Bank, as converted,
ranges from $8,925,000 to $12,075,000 ("Estimated Valuation Range") or
between 892,500 and 1,207,500 shares of Common Stock at the purchase price
of $10.00 per share, which is the amount to be paid for each share of
Common Stock sold in the Offerings ("Purchase Price"). See "The Conversion
--Stock Pricing and Number of Shares to be Issued." THE VALUATION BY RP
FINANCIAL IS NOT INTENDED AND MUST NOT BE CONSTRUED AS A RECOMMENDATION OF
ANY KIND AS TO THE ADVISABILITY OF VOTING TO APPROVE THE CONVERSION OR OF
PURCHASING SHARES OF COMMON STOCK. MOREOVER, BECAUSE THE VALUATION IS
NECESSARILY BASED UPON ESTIMATES OF AND PROJECTIONS AS TO A NUMBER OF
MATTERS (INCLUDING CERTAIN ASSUMPTIONS AS TO EXPENSE FACTORS AFFECTING THE
NET PROCEEDS FROM THE SALE OF COMMON STOCK IN THE CONVERSION AND AS TO THE
NET EARNINGS ON SUCH NET PROCEEDS), ALL OF WHICH ARE SUBJECT TO CHANGE FROM
TIME TO TIME, NO ASSURANCE CAN BE GIVEN THAT PERSONS WHO PURCHASE SUCH
SHARES IN THE CONVERSION WILL BE ABLE TO SELL SUCH SHARES THEREAFTER AT OR
ABOVE THE PURCHASE PRICE.
(2) Consists of the estimated expenses of $525,000, which includes, among other
things, printing, postage, legal, accounting, appraisal and filing fees.
These expenses also include financial advisory and marketing fees to be
paid to Trident Securities of $150,000. Such fees may be deemed to be
underwriting fees, and Trident Securities may be deemed to be an
underwriter. Actual expenses and, thus, net proceeds, may be more or less
than estimated amounts. The Holding Company and the Bank have agreed to
indemnify Trident Securities against certain liabilities, including
liabilities that may arise under the Securities Act of 1933 (the
"Securities Act"). See "Pro Forma Data" and "The Conversion--Marketing
Arrangements."
(3) Gives effect to an increase in the number of shares sold which could occur
without a resolicitation of subscribers or any right of cancellation due to
an increase in the Estimated Valuation Range of up to 15% above the maximum
of the Estimated Valuation Range to reflect changes in market and financial
conditions following commencement of the Offerings or to fill in part or in
whole the order of the ESOP. See "The Conversion--Stock Pricing and Number
of Shares to be Issued."
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[GEOGRAPHIC MAP REPRESENTING
MARKET AREA APPEARS HERE]
THE BANK'S CONVERSION TO STOCK FORM IS CONTINGENT UPON THE APPROVAL OF THE PLAN
BY ITS MEMBERS AND THE SALE OF AT LEAST THE MINIMUM NUMBER OF SHARES OF COMMON
STOCK TO BE ISSUED PURSUANT TO THE PLAN OF CONVERSION.
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PROSPECTUS SUMMARY
The following summary does not purport to be complete. It is qualified in
its entirety by the detailed information and Consolidated Financial Statements
and Notes thereto appearing elsewhere in this Prospectus. The purchase of Common
Stock is subject to certain risks. See "Risk Factors."
COMMUNITY BANK OF EXCELSIOR SPRINGS, A SAVINGS BANK
Community Bank is a federally chartered mutual savings bank headquartered
in Excelsior Springs, Missouri. Community Bank was originally chartered as a
Missouri savings and loan association in 1931 under the name Excelsior Springs
Savings and Loan Association. In 1991, the Bank changed its name to its current
form, and in 1995, the Bank amended its charter to become a federal mutual
savings bank. Its deposits are insured up to the maximum allowable amount by the
SAIF of the FDIC. Through its main office in Excelsior Springs and its branch
office in Kearney, Community Bank primarily serves communities located in Clay
and Ray Counties and to a lesser extent in surrounding counties in the State of
Missouri. At March 31, 1996, Community Bank had total assets of $86.2 million,
deposits of $67.9 million and total equity of $7.9 million.
Community Bank has been, and intends to continue to be, a community-
oriented financial institution offering selected financial services to meet the
needs of the communities it serves. The Bank attracts deposits from the general
public and historically has used such deposits, together with other funds,
primarily to originate one- to four-family residential mortgage loans,
construction and land loans for single-family residential properties, and
consumer loans consisting primarily of loans secured by automobiles. While the
Bank's primary business has been that of a traditional thrift institution,
originating loans in its primary market area for retention in its portfolio, the
Bank also has been an active participant in the secondary market, originating
residential mortgage loans for sale. At March 31, 1996, the Bank's total loan
portfolio was $86.0 million, of which 61.0% were one- to four-family residential
mortgage loans, 25.0% were construction and land loans (the vast majority of
which related to single-family residential properties), and 12.4% were consumer
loans. During the nine months ended March 31, 1996, the Bank originated $14.3
million of one-to four-family residential mortgage loans, of which $12.6
million, or 87.5%, were sold in the secondary market. See "Business - Lending
Activities." To a substantially lesser extent, the Bank invests in various
investment securities, including mortgage-backed securities.
Community Bank's executive office is located at 1001 North Jesse James
Road, Excelsior Springs, Missouri 64024. Its telephone number at that address is
(816) 630-6711.
4
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CBES BANCORP, INC.
CBES Bancorp, Inc. was organized in June 1996 by Community Bank for the
purpose of acquiring all of the outstanding capital stock of Community Bank to
be issued in the Conversion. Immediately following the Conversion, the only
significant assets of the Holding Company will be the capital stock of the Bank,
the note evidencing its loan to fund the Bank's ESOP and approximately 50% of
the net proceeds from the Conversion (less the amount to fund the ESOP loan).
Upon Conversion, the Holding Company initially will be a unitary savings and
loan holding company. See "Regulation - Holding Company Regulation" and "Use of
Proceeds." The business of the Holding Company initially will consist only of
the business of Community Bank. The Holding Company has not engaged and, prior
to the Conversion, will not engage in any material operations. See "CBES
Bancorp, Inc."
THE CONVERSION
The Offerings are being made in connection with the Conversion of Community
Bank from a federally chartered mutual savings bank to a federally chartered
stock savings bank and the formation of CBES Bancorp, Inc. as the holding
company of the Bank. The Holding Company will retain up to 50% of the net
proceeds of the issuance of the Common Stock and will use the remaining 50% of
the net proceeds to purchase all of the stock of Community Bank issued in the
Conversion. Net Conversion proceeds will increase the capital of the Bank and,
consistent with regulatory restrictions, will support the Bank's lending and
investment activities. The conversion to stock form and the use of a holding
company structure are also expected to enhance the ability of the Bank to expand
through possible mergers and acquisitions and facilitate future access to the
capital markets. The Holding Company will have additional authorized shares of
common stock and serial preferred stock available for issuance to raise
additional equity capital for future acquisitions or for other business
purposes, although the Holding Company has no specific plans for expansion and
no present plans for the issuance of such securities. See "Use of Proceeds" and
"Description of Capital Stock - Holding Company Capital Stock."
The Conversion is subject to certain conditions, including the prior
approval of the Plan of Conversion by the Bank's members at a special meeting to
be held at __:__ __.m., Excelsior Springs, Missouri Time on ____________, 1996
(the "Special Meeting"). Approval of the Plan requires the affirmative vote of
members of the Bank holding not less than a majority of the total number of
votes eligible to be cast at the Special Meeting. AFTER THE CONVERSION,
DEPOSITORS AND BORROWERS OF THE BANK WILL HAVE NO VOTING RIGHTS IN THE HOLDING
COMPANY, UNLESS THEY BECOME HOLDING COMPANY STOCKHOLDERS. Eligible Account
Holders and Supplemental Eligible Account Holders, however, will have certain
liquidation rights in the Bank. See "The Conversion - Effects of Conversion to
Stock Form on Depositors and Borrowers of the Bank - Liquidation Rights."
SUBSCRIPTION, COMMUNITY AND SYNDICATED COMMUNITY OFFERINGS. The
Holding Company is offering up to _______ shares of Common Stock, at a price of
$10.00 per share, in the Subscription, Community and Syndicated Community
Offerings. The shares of Common Stock to be issued in the Conversion are being
offered in the following order of priority: (1) Eligible Account Holders
(deposit account holders of the Bank with an account balance of $50 or more as
of March 31, 1995); (2) Tax-Qualified Employee Plans; (3) Supplemental Eligible
Account Holders (deposit account holders of the Bank with an account balance of
$50 or more as of June 30, 1996); (4) Other Members (deposit account holders of
the Bank as of _________ __, 1996, other than Eligible Account Holders or
Supplemental Eligible Account Holders, and certain borrowers as of both
__________ __, 1995 and ________________, 1996, who continue to be borrowers as
of the date of the Special Meeting); and (5) employees, officers and directors
of the Bank. In addition, the Tax-Qualified Employee Plans shall have first
priority Subscription Rights to the extent that the total number of shares of
Common Stock sold in the Conversion exceeds the maximum of the Estimated
Valuation Range. Concurrently with, during, or following the Subscription
Offering, and subject to the prior rights of holders of Subscription Rights, any
shares of Common Stock not subscribed for in the Subscription Offering are being
offered in the Community Offering to certain members of the general public, to
whom a prospectus is delivered, with a preference given to natural persons
residing in Clay and Ray Counties, Missouri. The determination as to the
residency of these subscribers in the Community Offering shall be made by the
Bank in its sole discretion based upon its books and records. See "The
Conversion." THE HOLDING COMPANY AND THE BANK RESERVE THE ABSOLUTE RIGHT TO
ACCEPT OR REJECT ANY ORDERS IN THE COMMUNITY OFFERING,
5
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IN WHOLE OR IN PART, EITHER AT THE TIME OF RECEIPT OF AN ORDER OR AS SOON AS
PRACTICABLE FOLLOWING THE EXPIRATION DATE.
It is anticipated that shares of Common Stock not otherwise subscribed for
in the Subscription Offering and Community Offering, if any, may be offered at
the discretion of the Holding Company to certain members of the general public
as part of a Syndicated Community Offering on a best efforts basis by a selling
group of selected broker-dealers to be managed by Trident Securities. See "The
Conversion--Offering of Holding Company Common Stock."
The Plan of Conversion places limitations on the number of shares that may
be purchased in the Conversion by various categories of persons. Except for the
Tax-Qualified Employee Plans which intend to subscribe for 8% of the total
number of shares of Common Stock offered in the Conversion, no Eligible Account
Holder, Supplemental Eligible Account Holder or Other Member may purchase in
their capacity as such in the Subscription Offering shares of Common Stock
having an aggregate purchase price of more than $100,000; no individual person
or other entity, together with associates of and persons acting in concert with
such person, may purchase in the Community Offering and the Syndicated Community
Offering shares of Common Stock having an aggregate purchase price of more than
$100,000; and no person, together with associates of or persons acting in
concert with such person, may purchase shares of Common Stock having an
aggregate purchase price of more than $200,000. THE PURCHASE LIMITATIONS
DESCRIBED HEREIN ARE SUBJECT TO INCREASE OR DECREASE WITHIN THE SOLE DISCRETION
OF THE BANK AND THE HOLDING COMPANY. Further, to the extent that shares are
available, each subscriber must subscribe for a minimum of 25 shares. See "The
Conversion - Offering of Holding Company Common Stock." The Bank and the Holding
Company have engaged Trident Securities Inc. ("Trident Securities") to consult,
advise and assist in the distribution of shares of Common Stock in the Offerings
on a best efforts basis. Trident Securities is under no obligation to purchase
any of the Common Stock offered in the Conversion.
ALL SUBSCRIPTION RIGHTS FOR COMMON STOCK ARE NON-TRANSFERABLE AND WILL
EXPIRE AT __:__ __.M. EXCELSIOR SPRINGS, MISSOURI TIME ON ____________, 1996,
UNLESS THE SUBSCRIPTION OFFERING IS EXTENDED BY COMMUNITY BANK AND THE HOLDING
COMPANY. The accompanying stock order form and executed certification, together
with full payment for all shares of Common Stock for which subscription is made,
or appropriate instructions authorizing withdrawal of such amount from one or
more deposit accounts at the Bank, must be received by the Holding Company prior
to that time or any extension thereof. Under applicable federal regulations,
all shares of Common Stock must be sold in the Conversion within 45 days after
the completion of the Subscription Offering, unless extended with OTS approval.
If the Conversion is not approved by the members at the Special Meeting, no
shares will be issued, the Conversion will not take place, all subscription
funds received will be returned promptly with interest at the Bank's current
passbook rate, and all withdrawal authorizations will be terminated. If the
aggregate Purchase Price of the Common Stock actually sold in the Conversion is
below $8,925,000 or above $13,886,000 (15% above the maximum of the Estimated
Valuation Range), or if the Offerings are extended beyond ________________,
1996, subscribers will be permitted to modify or cancel their subscriptions and
to have their subscription funds returned promptly with interest. In the event
of such an extension, each subscriber will be notified in writing of the time
period within which the subscriber must notify the Bank of his intention to
maintain, modify or rescind his subscription. In the event the subscriber does
not respond in any manner to the Bank's notice, the funds submitted will be
refunded to the subscriber with interest at 2.25% per annum, the Bank's current
passbook rate, and/or the subscriber's withdrawal authorizations will be
terminated.
STOCK PRICING. The Purchase Price of the Common Stock in the Subscription,
Community and Syndicated Community Offerings is a uniform price for all
subscribers, including members of the Bank's board of directors (the "Board of
Directors") and management. The aggregate Purchase Price is based upon an
independent appraisal of the aggregate pro forma market value of the Holding
Company and the Bank as converted. The aggregate pro forma market value was
estimated by RP Financial, an experienced conversion appraisal firm independent
of the Bank, to range from $8,925,000 to $12,075,000 at June 14, 1996. Depending
upon the final updated valuation, the number of shares to be issued is subject
to a maximum of 1,388,600 shares (15% above the maximum of the
6
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- --------------------------------------------------------------------------------
Estimated Valuation Range) and a minimum of 892,500 shares. THE APPRAISAL
SHOULD NOT BE CONSIDERED A RECOMMENDATION AS TO THE ADVISABILITY OF PURCHASING
SHARES OF THE COMMON STOCK. IN PREPARING THE APPRAISAL, RP FINANCIAL ASSUMED
THE ACCURACY AND COMPLETENESS OF THE FINANCIAL AND STATISTICAL INFORMATION
PROVIDED BY THE BANK AND DID NOT INDEPENDENTLY VALUE THE BANK'S ASSETS AND
LIABILITIES. The Board of Directors of the Holding Company and the Bank have
reviewed the appraisal of RP Financial and in determining the reasonableness and
adequacy of such appraisal consistent with OTS regulations and policies, have
reviewed the methodology and reasonableness of the assumptions utilized by RP
Financial in the preparation of such appraisal. See "The Conversion--Stock
Pricing and Number of Shares to be Issued" for a description of the manner in
which such valuation was made and the limitations on its use. Subject to
regulatory approval, the Estimated Valuation Range may be increased or decreased
to reflect market and financial conditions prior to the completion of the
Conversion and may be increased to permit an increase in the number of shares of
Common Stock sold in the Conversion to cover any oversubscriptions in the
Offerings. The actual number of shares to be issued in the Conversion will not
be determined until completion of the Offerings. No resolicitation of
subscribers will be made and subscribers will not be permitted to modify or
cancel their subscriptions unless the gross proceeds from the sale of the Common
Stock are below the minimum of the Estimated Valuation Range or more than 15%
above the maximum of the Estimated Valuation Range. See "The Conversion--Stock
Pricing and Number of Shares to be Issued."
The Estimated Valuation Range is necessarily based upon estimates of a
number of matters (including certain assumptions as to expense factors affecting
the net proceeds from the sale of Common Stock in the Conversion and as to the
net earnings on such net proceeds), all of which are subject to change from time
to time. As a result, no assurance can be given that persons who purchase such
shares in the Conversion will be able to sell such shares thereafter at or above
the Purchase Price.
NON-TRANSFERABILITY OF SUBSCRIPTION RIGHTS. Prior to the completion of the
Conversion, federal regulations prohibit any person from transferring or
entering into any agreement or understanding to transfer the legal or beneficial
ownership of the Subscription Rights issued under the Plan or the shares of
Common Stock to be issued upon their exercise. Persons violating such
prohibition may lose their right to purchase stock in the Conversion and may be
subject to sanctions by the OTS. Each person exercising Subscription Rights will
be required to certify that a purchase of Common Stock is solely for the
purchaser's own account and that there is no agreement or understanding
regarding the sale or transfer of such shares. See "The Conversion--Restrictions
on Transferability."
USE OF PROCEEDS
The net proceeds from the sale of Common Stock in the Conversion are
estimated to be approximately $8.4 million, $10.0 million, $11.6 million and
$13.4 million, respectively, based on the minimum, midpoint, maximum and 15%
above the maximum, of the Estimated Valuation Range. See "Pro Forma Data." The
Holding Company will purchase all of the common stock of the Bank to be issued
upon Conversion in exchange for 50% of the net proceeds from the issuance of the
Common Stock and will retain the remaining 50% of such net proceeds as its
initial capitalization (less funds loaned to the ESOP sufficient to purchase up
to 8% of shares sold in the Conversion). Subject to regulatory approval, the
Holding Company intends to lend a portion of the net proceeds to the ESOP to
facilitate its purchase of up to 8% of the Common Stock sold in the Conversion.
Based upon the issuance of shares at the minimum and maximum of the Estimated
Valuation Range, the loan to the ESOP to purchase 8% of the Common Stock would
be $714,000 and $966,000, respectively. The Bank intends to make contributions
to the ESOP in an amount to be determined by the Board of Directors, but not
less than the amount needed to pay any currently maturing obligations under the
loan made to the ESOP, subject to the Bank's continuing compliance with OTS
capital requirements. These contributions would be allocated among all eligible
participants in proportion to their compensation. It is expected the ESOP will
purchase up to 8% of the total number of shares sold in the Conversion. See
"Management--Benefit Plans--Employee Stock Ownership Plan." The remaining net
proceeds retained by the Holding Company are anticipated to be initially
invested in short- and intermediate-term securities and will be available as
general working capital. Subject to compliance with OTS regulations, such funds
may also be used to repurchase the Common Stock. However, since the Holding
Company has not yet issued stock, there is currently insufficient information
upon which an intention to repurchase stock could be based. For information
regarding the possible purchase of stock to implement a restricted stock plan
following the Conversion,
7
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see "Use of Proceeds." The net proceeds to the Bank will become part of the
Bank's general funds and will be used to support its lending and investment
activities, subject to applicable regulatory restrictions. A portion of the
proceeds may be used to repay a portion of the Bank's Federal Home Loan Bank
advances. On an interim basis, such proceeds will be invested primarily in
short- and intermediate-term securities and will be available as general working
capital.
PURCHASES BY DIRECTORS AND OFFICERS
The directors and officers of Community have indicated their intention to
purchase in the Conversion an aggregate of $1,100,000 of Common Stock (or
110,000 shares, or approximately 12.3%, 10.5%, 9.1%, or 7.9%, respectively, of
the shares to be issued in the Conversion at the minimum, the midpoint, the
maximum and 15% above the maximum of the Estimated Valuation Range). There is no
formal agreement among the executive officers and directors and their affiliates
regarding their purchases of Common Stock. In addition, 8% of the shares issued
in the Conversion are expected to be purchased by the Bank's ESOP. See
"Management - Benefit Plans - Employee Stock Ownership Plan" and "The
Conversion - Participation by Management."
BENEFITS OF CONVERSION TO DIRECTORS AND EXECUTIVE OFFICERS
EMPLOYMENT AGREEMENTS. The Board of Directors of the Bank intends to enter
into an employment agreement with each of Larry E. Hermreck, Chief Executive
Officer of the Bank and certain other officers of the Bank. See "Management--
Employment Agreements." It is anticipated that the agreement will be at Mr.
Hermreck's current salary and will become effective upon completion of the
Conversion. Under certain circumstances, including involuntary termination of
employment following a change in control, as defined in the employment
agreement, Mr. Hermreck will also be entitled to a severance payment equal to
299% of his base amount of compensation, as defined. Assuming a change in
control occurred as of March 31, 1996, Mr. Hermreck would have received
approximately $215,280 pursuant to the employment agreement's change in control
provision. See "Management--Employment Agreements" for a more detailed
description of this agreement and the other employment agreements to be entered
into with other officers of the Bank.
EMPLOYEE STOCK OWNERSHIP PLAN. The Board of Directors of the Bank has
adopted an ESOP, a tax-qualified employee benefit plan for officers and
employees of the Holding Company and the Bank. The ESOP intends to buy up to 8%
of the Common Stock issued in the Conversion (approximately $714,000 to $966,000
of the Common Stock based on the issuance of the minimum (892,500) shares) and
the maximum (1,207,500 shares) of the Estimated Valuation Range and the $10.00
per share Purchase Price). The ESOP will purchase the shares with funds
borrowed from the Holding Company, and it is anticipated that the ESOP will
repay the loans through periodic tax-deductible contributions from the Bank over
a ten-year period. These contributions will increase the compensation expense
of the Bank. The Bank's contributions to the ESOP will be allocated among
participants on the basis of their compensation. See "Management - Benefit
Plans - Employee Stock Ownership Plan" for a description of this plan.
OTHER STOCK BENEFIT PLANS. The Board of Directors of the Holding Company
intends to adopt a Stock Option and Incentive Plan ("Stock Option Plan") and a
Recognition and Retention Plan ("RRP") to become effective upon approval by
stockholders no earlier than six months following the Conversion. It is
anticipated that certain of the directors and executive officers of the Holding
Company and the Bank will receive awards under these plans. It is currently
anticipated that the Stock Option Plan and the RRP will be funded by shares
subsequently reacquired and held as treasury shares or through the issuance of
authorized but unissued stock of the Holding Company, representing 10% and 4%,
respectively, of the shares sold in the Conversion. To the extent the Stock
Option Plan and RRP are funded from authorized but unissued shares, the funding
of such plans will dilute existing shareholders by an aggregate of 12.9%. See
"Management - Benefit Plans" for a description of these plans. The Stock Option
Plan and the RRP may be submitted for stockholder approval at an annual or
special meeting of stockholders following the Conversion, provided such meeting
is at least six months following the Conversion, or alternatively such approval
may not be sought until after one year following the Conversion. If such plans
are adopted during
8
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the first year following Conversion, they would be subject to certain allocation
and other requirements of the OTS which might not apply after one year.
STOCK OPTION AND INCENTIVE PLAN. Specifically, it is intended that the
directors and executive officers will be granted options to purchase under the
Stock Option Plan, subject to approval by stockholders and OTS, and vesting
provisions, of up to 89,250 to 138,862 shares of Common Stock (based on the
minimum and 15% above the maximum of the Estimated Valuation Range,
respectively). Included in such totals is a proposed grant to Larry E. Hermreck,
Chief Executive Officer of the Bank, and all executive officers of the Bank as a
group (5 persons), of options to purchase 2.2% (19,635 to 30,550 shares at the
minimum and 15% above the maximum, respectively, of the Estimated Valuation
Range) and 5.5% (49,088 to 76,374 shares at the minimum and 15% above the
maximum, respectively, of the Estimated Valuation Range) of the Common Stock
sold in the Conversion, respectively. Also included in such totals is a proposed
grant to all directors of the Holding Company as a group (6 persons) of options
to purchase 3.0% (26,775 to 41,659 shares at the minimum and 15% above the
maximum, respectively, of the Estimated Valuation Range) of the Common Stock
sold in the Conversion. Under certain circumstances, such options may be
exercised and sold on the same day, thereby eliminating any risk to officers and
directors in exercising options in the event the market price exceeds the
exercise price. There is no risk to officers and directors in the event the
market price is less than the exercise price, since the holder may choose not to
exercise the options. See "Management - Benefits - Stock Option and Incentive
Plan" for additional information regarding the proposed Stock Option Plan.
RECOGNITION AND RETENTION PLAN. It is also intended that directors and
executive officers will be granted (without any requirement of payment by the
grantee) from 35,700 to 55,545 restricted shares of Common Stock under the RRP
(based on the minimum and 15% above the maximum of the Estimated Valuation
Range, respectively), subject to approval by the stockholders following the
Conversion, and vesting provisions, with a total value of approximately $357,000
to $555,450, respectively, based on the original Purchase Price of $10.00 per
share. Included in such totals is a proposed award of restricted stock to Larry
E. Hermreck, Chief Executive Officer of the Bank, equal to 0.88% of the Common
Stock sold in the Conversion, or 7,854 to 12,220 shares (based upon the minimum
and 15% above the maximum, respectively, of the Estimated Valuation Range), with
a total value of approximately $78,540 to $122,200, respectively, based on the
original Purchase Price of $10.00 per share, and a proposed award of restricted
stock to all executive officers as a group (5 persons), equal to 2.2% of the
Common Stock sold in the Conversion or 19,635 to 30,550 shares (based upon the
minimum and 15% above the maximum, respectively, of the Estimated Valuation
Range) with a total value of approximately $196,350 to $305,500, respectively,
based upon the original Purchase Price of $10.00 per share. In addition, such
totals include a proposed award of restricted stock to all directors of the
Holding Company as a group (6 persons) equal to 1.2% of the Common Stock sold in
the Conversion, or 10,710 to 16,664 shares (based upon the minimum and 15% above
the maximum, respectively, of the Estimated Valuation Range) with a total value
of approximately $107,100 to $166,640, respectively, based upon the original
Purchase Price of $10.00 per share. See "Management--Benefit Plans--Recognition
and Retention Plan" for additional information regarding the Recognition and
Retention Plan and the proposed awards of restricted stock.
DIVIDENDS
Although no decision has been made yet regarding the payment of dividends,
the Holding Company may consider a policy of paying cash dividends on the Common
Stock following the Conversion. Dividends, when and if paid, will be subject to
determination and declaration by the Board of Directors in its discretion, which
will take into account the Holding Company's consolidated financial condition
and results of operations, tax considerations, industry standards, economic
conditions, regulatory restrictions on dividend payments by the Bank to the
Holding Company, general business practices and other factors. See "Dividends,"
"Regulation--Regulatory Capital Requirements" and "--Limitations on Dividends
and Other Capital Distributions."
9
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MARKET FOR COMMON STOCK
The Holding Company has never issued capital stock to the public and,
consequently, there is no existing market for the Common Stock. Although the
Holding Company has received conditional approval to trade the Common Stock on
the Nasdaq SmallCap Market under the symbol "CBES," there can be no assurance
that the Holding Company will meet Nasdaq SmallCap Market listing requirements,
which include a minimum market capitalization, a minimum of 300 stockholders
immediately upon the closing of the Offerings and a minimum of two market makers
in the Common Stock. Trident Securities has indicated its intention to make a
market in the Common Stock upon consummation of the Conversion, and the Bank
anticipates that it will be able to secure at least one additional market maker
for the Common Stock although no additional market makers have been obtained as
of the date hereof. However, there can be no assurance that an active or liquid
trading market will develop, or that if a market develops, it will continue. A
public market having the desirable characteristics of depth, liquidity and
orderliness depends upon the presence in the marketplace of both willing buyers
and sellers of the Common Stock at any given time, which is not within the
control of the Holding Company or any market maker. Accordingly, there can be
no assurance that purchasers will be able to sell their shares at or above the
Purchase Price. See "Market for Common Stock."
RISK FACTORS
See "Risk Factors" for information regarding the Bank's emphasis on
construction and land lending, geographical concentration of loans, automobile
lending, the adequacy of the Bank's allowance for loan losses, the Bank's return
on equity ratios after the Conversion, interest rate risk exposure, takeover
defensive provisions, regulatory oversight, disparity between BIF and SAIF
insurance premiums, pending legislation regarding bad debt reserves,
competition, risk of delayed offering, absence of active market for the common
stock and possible consequences of amendment to plan of conversion, which
factors should be considered by prospective investors prior to investing in the
Common Stock.
10
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SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA
Set forth below are selected consolidated financial and other data of the
Bank at and for the periods indicated. Financial data as of March 31, 1996 and
for the nine months ended March 31, 1996 and 1995 are unaudited. In the opinion
of management, all adjustments (consisting only of normal recurring accruals)
necessary for a fair presentation have been included. The results of operations
and other data for the nine months ended March 31, 1996 are not necessarily
indicative of the results of operations that may be expected for the fiscal year
ending June 30, 1996. The selected consolidated financial and other data does
not purport to be complete and is qualified in its entirety by reference to the
detailed information and Consolidated Financial Statements and Notes thereto
presented elsewhere in this Prospectus.
At March 31, At June 30,
1996 1995 1994
-------------- --------- ---------
(In Thousands)
SELECTED FINANCIAL CONDITION DATA:
Total assets................................. $ 86,168 $ 93,100 $ 68,543
Loans receivable, net (1).................... 77,273 78,880 53,453
Mortgage-backed securities, held to maturity 549 3,870 4,834
Investment securities, available for sale.... 1,981 3,041 3,032
Deposits..................................... 67,916 68,274 60,180
FHLB advances................................ 9,000 15,877 --
Total equity - substantially restricted...... 7,883 7,481 6,981
Nine Months Ended Year Ended
March 31, June 30,
---------------------- -----------------------
1996 1995 1995 1994
--------- --------- --------- ----------
(In Thousands)
SELECTED OPERATING DATA:
Interest income.................................... $ 5,131 $ 4,127 $ 5,818 $ 4,655
Interest expense................................... 3,089 2,102 3,146 2,093
--------- --------- --------- ---------
Net interest income.............................. 2,042 2,025 2,672 2,562
Provision for loan losses.......................... 188 143 171 33
--------- --------- --------- ---------
Net interest income after provision for
loan losses.................................... 1,854 1,882 2,501 2,529
Fees and service charges........................... 218 198 267 266
Gain (loss) on sales of loans and mortgage-backed
and investment securities (2).................... 193 (309) (272) 4
Other noninterest income........................... 93 77 102 103
--------- --------- --------- ---------
Total noninterest income.................. 504 (34) 97 373
Total noninterest expense.......................... 1,761 1,609 2,133 1,849
--------- --------- --------- ---------
Earnings before income taxes....................... 597 239 465 1,053
Income taxes....................................... 207 211 301 352
--------- --------- --------- ---------
Net earnings....................................... $ 390 $ 28 $ 164 $ 701
========= ========= ========= =========
__________________
(1) Loans receivable, net is comprised of total loans less allowance for loan
losses, deferred loan fees and the undisbursed portion of loans in process.
(2) Includes writedown of investment in mutual funds. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
11
At or For the At or For the
Nine Months Ended Year Ended
March 31, June 30,
------------------------ ---------------------
1996 1995 1995 1994
----------- ---------- --------- ----------
KEY FINANCIAL RATIOS AND OTHER DATA:(1).... (Dollars In Thousands)
Performance ratios:
Return on assets (2)........................................ 0.60% 0.05% 0.21% 1.04%
Return on total equity (3).................................. 6.74 0.52 2.27 10.52
Interest rate spread information:
Average during period..................................... 2.77 3.30 3.11 3.60
End of period............................................. 2.90 2.30 2.19 3.42
Net interest margin (4)..................................... 3.18 3.71 3.52 3.96
Ratio of noninterest expense to average total assets........ 2.62 2.84 2.70 2.75
Ratio of average interest-earning assets to average
interest-bearing liabilities.............................. 108.45 110.56 109.79 110.91
Asset quality ratios:
Non-performing assets to total assets at end of period (5).. 0.38 0.35 0.17 0.55
Allowance for loan losses to non-performing loans........... 109.46 96.70 150.67 57.80
Allowance for loan losses to loans receivable, net.......... 0.45 0.28 0.29 0.30
Net charge-offs during the period to average loans
outstanding during the period............................. 0.11 0.21 0.16 0.04
Capital ratios:
Total equity to total assets at end of period............... 9.15 8.04 10.18 8.50
Average total equity to average assets...................... 8.60 9.48 9.13 9.92
Other data:
Number of full-service offices.............................. 2 2 2 1
Loans serviced for others................................... $30,967 $24,339 $25,743 $25,581
_______________
(1) Ratios for the nine month periods are annualized.
(2) Ratio of net earnings to average total assets.
(3) Ratio of net earnings to average total equity.
(4) Net interest earnings as a percentage of average interest-earning assets.
(5) Non-performing assets include non-accrual loans, foreclosed real estate and
other repossessed assets.
12
RISK FACTORS
The following factors, in addition to those discussed elsewhere in this
Prospectus, should be considered by investors before deciding whether to
purchase the Common Stock offered in the Conversion.
CONSTRUCTION AND LAND LENDING
In response to the rapid growth in the Bank's primary market area, and
particularly the suburban Kansas City area, the Bank has invested a significant
proportion of its loan portfolio in construction and land loans for single-
family residential properties. At March 31, 1996, the Bank had $21.5 million in
construction and land loans, representing 25.0% of its total loan portfolio, as
compared to $18.2 million, or 21.3% of its total loan portfolio at June 30, 1995
and $8.4 million, or 14.5% of its total loan portfolio at June 30, 1994. At
March 31, 1996, the Bank had $17.9 million in construction loans, of which
approximately $12.3 million were "speculative" loans, meaning that, at the time
the loan was made, generally there was no sale contract or permanent loan in
place for the finished home. Although construction and land loans afford the
Bank the opportunity to achieve higher interest rates and fees with shorter
terms to maturity than do its one- to four-family permanent mortgage loans, such
loans are generally considered to involve a higher degree of risk than one- to
four-family permanent mortgage loans due to (i) the concentration of principal
among relatively few borrowers, (ii) the increased difficulty at the time the
loan is made of estimating the building costs and selling price of the residence
to be built, (iii) the increased difficulty and costs of monitoring the loan,
(iv) the higher degree of risk associated with residential sales activity in
changing real estate market conditions, and (v) the increased difficulty of
working out problem loans. Speculative construction loans have the added risk
associated with identifying an end-purchaser for the finished home.
The Bank's portfolio of construction and land loans exhibits several of
these risk characteristics. At March 31, 1996, the Bank's construction loans
were concentrated among approximately 45 builders. At that time, the Bank had
two borrowers where aggregate speculative construction loans outstanding
exceeded $1.0 million. Additionally, a majority of the Bank's construction
loans are secured by properties located in the suburban Kansas City area. A
concentration of loans secured by properties in any single area presents the
risk that any adverse change in regional economic or employment conditions may
result in increased delinquencies and loan losses. Construction loans are also
more difficult to evaluate than are permanent loans. At the time the loan is
made, the value of the collateral securing the loan must be estimated on the
basis of a projected selling price at the time the residence is completed,
typically six to 12 months later, and of estimated building and other costs
(including interest costs). Changes in the demand for new housing in the area
and higher-than-anticipated building costs may cause actual results to vary
significantly from those estimated. Accordingly, the Bank may be confronted, at
the time the residence is completed, with a loan balance exceeding the value of
the collateral. Because construction loans require active monitoring of the
building process, including cost comparisons and on-site inspections, these
loans are more difficult and costly to monitor. Increases in market rates of
interest may have a more pronounced effect on construction loans by rapidly
increasing the end-purchasers' borrowing costs, thereby reducing the overall
demand for new housing. Additionally, working out of problem construction loans
is complicated by the fact that in-process homes are difficult to sell and
typically must be completed in order to be successfully sold. This may require
the Bank to advance additional funds and/or contract with another builder to
complete the residence.
The Bank has sought to address the foregoing risks of its construction
lending by developing and strictly adhering to underwriting policies,
disbursement procedures, and monitoring practices. Specifically, the Bank (i)
seeks to lend to builders with which the Bank has a long-standing history of
satisfactory performance, (ii) limits the exposure to new builders until a
satisfactory record of performance is demonstrated, (iii) seeks to diversify
loans among several development projects, (iv) evaluates and documents the
creditworthiness of the borrower and the viability of the proposed project, (v)
limits loan-to-value ratios to specified levels on the basis of loan size and
risk characteristics of the borrower and the proposed project, (vi) controls the
disbursements of construction loan proceeds on the basis of a comparison of
estimated costs versus actual costs and of on-site inspections by Bank
personnel, and (vii) monitors over time the accuracy of borrowers in estimating
their building costs and independent appraisers in estimating projected selling
prices.
13
GEOGRAPHICAL CONCENTRATION OF LOANS
At March 31, 1996, virtually all of the Bank's real estate mortgage loans
were secured by properties located in the Bank's primary market area of Ray and
Clay Counties, and, to a lesser extent, surrounding counties in Missouri. While
the Bank currently believes that its loans are adequately secured or reserved
for, in the event that real estate prices in the Bank's market area
substantially weaken or economic conditions in Missouri deteriorate, reducing
the value of properties securing the Bank's loans, some borrowers may default
and the value of the real estate collateral may be insufficient to fully secure
the loan. In either event, the Bank may experience increased levels of
delinquencies and related losses having an adverse impact on net income.
AUTOMOBILE LENDING
At March 31, 1996, the Bank's automobile loan portfolio totaled $8.8
million, or 10.2% of the Bank's total loan portfolio. Automobile loans provide
for shorter terms and higher yields as compared to residential mortgage loans,
but generally carry higher risks of default. Moreover, automobile loans are
secured by assets that depreciate rapidly, and repossessed automobiles may not
provide an adequate source of repayment for the outstanding loan. Of the Bank's
automobile loan portfolio, $2.3 million, or 26.3%, consisted of "indirect"
automobile loans at March 31, 1996, for which applications are taken by
employees of automobile dealerships. However, such loans are made pursuant to
the Bank's "direct" automobile underwriting standards, and must be approved by a
Bank employee before disbursement of loan proceeds.
ALLOWANCE FOR LOAN LOSSES
At March 31, 1996, the Bank's allowance for loan losses was $347,000, or
0.45% of loans receivable, net. Although the allowance for loan losses is
maintained at a level which management considers adequate to provide for
potential loan losses, because future events affecting borrowers and loan
collateral cannot be predicted with any degree of certainty, there can be no
assurance that the Bank's allowance for loan losses will be adequate to absorb
all future loan losses. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business--Lending Activities--
Construction and Land Lending," and "--Asset Quality."
RETURN ON EQUITY AFTER CONVERSION
Return on equity (net income for a given period divided by average equity
during that period) is a ratio used by many investors to compare the performance
of a particular financial institution to its peers. The Bank's return on equity
for the fiscal year ended June 30, 1995 was, and the Holding Company's post-
Conversion return on equity will be, less than the average return on equity for
publicly traded thrift institutions and their holding companies. See "Selected
Consolidated Financial Information" for numerical information regarding the
Bank's historical return on equity and "Capitalization" for a discussion of the
Holding Company's estimated pro forma consolidated capitalization as a result of
the Conversion. In addition, the expenses associated with the ESOP and the RRP
(see "Pro Forma Data"), along with other post-Conversion expenses, are expected
to contribute initially to reduced earnings levels. The Bank intends to deploy
the net proceeds of the Offerings to increase earnings per share and book value
per share, without assuming undue risk, with the goal of achieving a return on
equity comparable to the average for publicly traded thrift institutions and
their holding companies. This goal will likely take a number of years to
achieve and no assurances can be given that this goal can be attained.
Consequently, for the foreseeable future, investors should not expect a return
on equity that will meet or exceed the average return on equity for publicly
traded thrift institutions.
INTEREST RATE RISK EXPOSURE
The Bank's profitability, like that of most financial institutions, is
dependent to a large extent upon its net interest income, which is the
difference between its interest income on interest-earning assets, such as loans
and investments, and its interest expense on interest-bearing liabilities, such
as deposits and borrowings. Changes in the level of interest rates also affect
the amount of loans originated by the Bank and, thus, the amount of loan and
commitment fees, as well as the market value of the Bank's interest-earning
assets. Moreover, increases in interest rates also can result in
disintermediation, which is the flow of funds away from savings institutions
into direct
14
investments, such as corporate securities and other investment vehicles, which,
because of the absence of federal insurance premiums, may yield higher rates of
return than those paid by savings institutions.
In addition, changes in interest rates also can affect the market value of
the Bank's interest-earning assets, which are comprised of fixed- and
adjustable-rate instruments with various terms to maturity. Generally, the
value of fixed-rate, longer-term instruments fluctuates inversely with changes
in interest rates. See "Business - Lending Activities - One- to Four-Family
Mortgage Loans." Increases in interest rates also can affect the type (fixed-
rate or adjustable-rate) and amount of loans originated by the Bank and the
average life of loans and securities, which can adversely impact the yields
earned on the Bank's loan and securities portfolio. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Asset/Liability Management."
The OTS utilizes a net market value methodology to measure the interest
rate risk exposure of savings associations. Effective March 31, 1995, for
purposes of calculating risk-based capital, institutions with more than normal
interest rate risk, as defined by OTS regulations, are required to make a
deduction from capital equal to 50% of their interest rate risk exposure
multiplied by the present value of their assets. Based upon this methodology,
at March 31, 1996, the Bank's interest rate risk exposure to a 200 basis point
increase in interest rates was considered "normal" under this regulation.
However, because the Bank has total assets of less than $300 million and risk-
based capital in excess of 12%, the Bank is exempt from this rule unless
otherwise notified by the OTS. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Asset/Liability Management."
TAKEOVER DEFENSIVE PROVISIONS
HOLDING COMPANY AND BANK GOVERNING INSTRUMENTS. Certain provisions of the
Holding Company's Certificate of Incorporation and Bylaws assist the Holding
Company in maintaining its status as an independent publicly owned corporation.
These provisions provide for, among other things, limiting voting rights of
beneficial owners of more than 10% of the Common Stock, staggered terms for
directors, noncumulative voting for directors, limits on the calling of special
meetings, a fair price/supermajority vote requirement for certain business
combinations and certain notice requirements. The 10% vote limitation would not
affect the ability of an individual who is not the beneficial owner of more than
10% of the Common Stock to solicit revocable proxies in a public solicitation
for proxies for a particular meeting of stockholders and to vote such proxies.
In addition, provisions in the Bank's federal stock Charter that have an anti-
takeover effect could also be applicable to changes in control of the Holding
Company as the sole shareholder of the Bank. The Bank's Charter includes a
provision applicable for five years which prohibits acquisitions and offers to
acquire, directly or indirectly, the beneficial ownership of more than 10% of
the Bank's securities. Any person violating this restriction may not vote the
Bank's securities in excess of 10%. Any or all of these provisions may
discourage potential proxy contests and other takeover attempts, particularly
those which have not been negotiated with the Board of Directors. In addition,
the Holding Company's Certificate of Incorporation also authorizes preferred
stock with terms to be established by the Board of Directors which may rank
prior to the Common Stock as to dividend rights, liquidation preferences, or
both, may have full or limited voting rights and may have a dilutive effect on
the ownership interests of holders of the Common Stock. The Board of Directors
of the Holding Company has the ability to waive certain restrictions on
acquisition, provided that the acquisition is approved in advance by a majority
of the disinterested Board of Directors. See "Restrictions on Acquisitions of
Stock and Related Takeover Defensive Provisions."
REGULATORY AND STATUTORY PROVISIONS. Federal regulations prohibit, for a
period of three years following the completion of the Conversion, any person
from offering to acquire or acquiring the beneficial ownership of more than 10%
of the stock of a converted savings institution or its holding company without
prior OTS approval. Federal law also requires OTS approval prior to the
acquisition of "control" (as defined in OTS regulations) of an insured
institution, including a holding company thereof. See "Restrictions on
Acquisitions of Stock and Related Takeover Defensive Provisions."
EMPLOYMENT AGREEMENTS AND OTHER BENEFIT PLANS; VOTING CONTROL OF DIRECTORS
AND OFFICERS AND POSSIBLE DILUTIVE EFFECTS. The employment agreements, the
proposed Stock Option Plan and the proposed RRP also contain provisions that
could have the effect of discouraging takeover attempts of the Holding Company.
15
The Bank intends to enter into employment contracts with Chief Executive
Officer Larry E. Hermreck and three other executive officers. Each of these
employment agreements provide for a payment equal to 299% of the employee's base
compensation in the event that his or her employment is involuntarily terminated
as a result of a change in control of the Holding Company or the Bank. These
provisions may have the effect of increasing the cost of, and thereby
discouraging, a future attempt to takeover the Holding Company or the Bank.
Assuming involuntary termination of the employment of such employees occurred
following a change in control as of March 31, 1996, such employees would have
received approximately $586,318 in the aggregate pursuant to the employment
agreements' change in control provisions. See "Management--Employment
Agreements."
Additionally, if the Holding Company issues additional shares pursuant to
the proposed Stock Option Plan and RRP (as opposed to funding such plans with
shares subsequently reacquired and held as treasury shares) the percentage of
ownership of the Holding Company of those persons purchasing Common Stock in the
Conversion will be diluted. Assuming exercise of all options available under
the Stock Option Plan, the interest of stockholders will be diluted by
approximately 9.1%. The award of all shares available under the RRP will dilute
the interests of stockholders by approximately 3.8%. See "Pro Forma Data,"
"Management - Benefit Plans - Stock Option and Incentive Plan," and "-
Recognition and Retention Plan" and "Restrictions on Acquisitions of Stock and
Related Takeover Defensive Provisions." For financial accounting purposes,
certain incentive grants under the proposed RRP will result in the recording of
compensation expense over the period of vesting. See "Pro Forma Data."
The directors and officers of the Bank are anticipated to purchase an
aggregate of approximately $1,100,000 or approximately 9.1% of the shares
offered in the Conversion at the maximum of the Estimate Valuation Range, or
7.9% at 15% above the maximum of the Estimated Valuation Range, or 12.3% of the
shares offered in the Conversion at the minimum of the Estimated Valuation
Range. Directors and executive officers will also receive awards under the
proposed Stock Option Plan and the proposed RRP. Assuming the purchase of
$1,100,000 of Common Stock in the Conversion by directors and officers in the
aggregate (15 persons), the full vesting of the restricted stock to be awarded
under the proposed RRP and the exercise of all options to be awarded under the
proposed Stock Option Plan in connection with the Conversion, approval of the
Stock Option Plan and the RRP by the stockholders, and the acquisition by the
Holding Company of shares to fund such plans in open-market purchases, the
shares owned by the directors and executive officers in the aggregate would
amount from approximately 21.9% (at 15% above the maximum of the Estimated
Valuation Range) to 26.3% (at the minimum of the Estimated Valuation Range) of
the outstanding shares. In addition, the ESOP is expected to purchase 8% of the
shares sold in the Conversion. This stock ownership, if voted as a block, could
defeat takeover attempts favored by other stockholders. See "Management -
Benefit Plans - Employee Stock Ownership Plan."
REGULATORY OVERSIGHT
The Bank is subject to extensive regulation, supervision and examination by
the OTS as its chartering authority and primary federal regulator, and by the
FDIC, which insures its deposits up to applicable limits. The Bank is a member
of the Federal Home Loan Bank (the "FHLB") of Des Moines and is subject to
certain limited regulation by the Board of Governors of the Federal Reserve
System ("Federal Reserve Board"). As the savings and loan holding company of
the Bank, the Holding Company will be subject to regulation and oversight by the
OTS. See "Regulation." Such regulation and supervision governs the activities
in which an institution can engage and is intended primarily for the protection
of the insurance fund and depositors. Regulatory authorities have been granted
extensive discretion in connection with their supervisory and enforcement
activities which are intended to strengthen the financial condition of the
banking industry, including the imposition of restrictions on the operation of
an institution, the classification of assets by the institution and the adequacy
of an institution's allowance for losses on loans. See "Regulation - Federal
Regulation of Savings Associations" and "- Regulatory Capital Requirements."
Any change in such regulation and oversight, whether by the OTS, the FDIC or
Congress, could have a material impact on the Holding Company, the Bank and
their respective operations.
RECAPITALIZATION OF SAIF, DISPARITY BETWEEN BIF AND SAIF PREMIUMS
Deposits of the Bank are currently insured by the SAIF of the FDIC. The
FDIC also maintains another insurance fund, the Bank Insurance Fund, which
primarily insures commercial bank deposits. For the first three quarters of
1995, both SAIF member institutions and BIF member institutions paid deposit
insurance premiums
16
based on a schedule of from $0.23 to $0.31 per $100 of deposits. Applicable law
requires that both the SAIF and BIF funds be recapitalized to a ratio of 1.25%
of reserves to deposits. The FDIC has announced that the BIF reached the
required reserve ratio during May 1995, but the SAIF is not expected, absent the
changes in law described below, to achieve that reserve ratio before 2002. The
SAIF reserves have not grown as quickly as the BIF reserves due to a number of
factors, including the fact that a significant portion of SAIF premiums have
been and are currently being used to make payments on bonds ("FICO bonds")
issued in the late 1980s by the Financing Corporation to recapitalize the now
defunct Federal Savings and Loan Insurance Corporation.
In August 1995, the FDIC issued final regulations to reduce the assessment
rates for the BIF. Under the revised assessment schedule, which became effective
on June 1, 1995, BIF-insured institutions paid an average of 0.045% of deposits,
with the new assessment rates ranging from 0.04% of deposits to 0.31% of
deposits. The FDIC refunded any assessments that it had collected during 1995 in
excess of those due under the revised schedule. On November 14, 1995, the FDIC
voted to reduce annual assessments to the legal minimum of $2,000, effective
January 1, 1996 for BIF-insured institutions except for institutions that were
not well-capitalized or were assigned to the higher supervisory risk categories.
The FDIC estimated that 92% of the BIF-insured institutions would pay only the
minimum annual assessment. SAIF-insured institutions will continue to pay
assessments at the current assessment rates until the SAIF attains the 1.25%
reserve ratio.
As a result of the BIF premium reduction, SAIF-insured institutions, such
as the Bank, are likely to be subject to a significant competitive disadvantage
relative to BIF-insured institutions, pending any legislative action to remedy
the disparity. The FDIC has recognized that the disparity may have adverse
consequences for SAIF members, including reduced earnings and an impaired
ability to raise funds in capital markets and to attract deposits. Further, it
is not currently known whether SAIF members will be required to pay higher
deposit insurance premiums in the future. In anticipation of the disparity in
BIF and SAIF premiums, the holding companies of several SAIF-insured
institutions have filed applications to charter separate national or state
commercial bank subsidiaries insured by the BIF, which are to be used to attract
and reduce those holding companies' SAIF-insured deposits and reduce their
overall liability for deposit insurance premiums. If this trend expands or
continues, it may result in a reduction in the number and size of OTS-regulated
thrifts, which may, in turn, result in increased OTS assessments for those
institutions that remain regulated by the OTS. It may also accelerate Congress'
consideration of the consolidation of the OTS into one of the other federal
banking regulators.
The proposed Balanced Budget Act of 1995 (the "Budget Act"), which was
vetoed by the President, included provisions that focused on a resolution of the
financial problems of the SAIF. Under the provisions of the Budget Act, all SAIF
member institutions would pay a special assessment to recapitalize the SAIF, and
the assessment base for the payments on the FICO bonds would be expanded to
include the deposits of both BIF- and SAIF-insured institutions. The amount of
the special assessment required to recapitalize the SAIF has been estimated to
be approximately 80 basis points of the SAIF-assessable deposits. This estimate
of the special SAIF assessment is less than the assessment of 85 to 90 basis
points that had been previously estimated. The special assessment would have
been imposed on the first business day of January 1, 1996, or on such other date
prescribed by the FDIC not later than 60 days after enactment of the Budget Act,
based on the amount of SAIF deposits on March 1, 1995. The Budget Act would have
also permitted BIF-insured institutions with deposits subject to SAIF
assessments to reduce such SAIF-deposits by 20% in computing those institutions'
special assessment. If an 85 or a 90 basis point assessment were assessed
against the Bank's deposits as of March 31, 1996, the Bank's aggregate special
SAIF assessment would be approximately $577,000 or $611,000, respectively, and
an assessment of 80 basis points would be $543,000. The Budget Act also would
have provided that the BIF could not assess regular insurance assessments when
it has a reserve ratio of 1.25% or more except on those of its member
institutions that have been found to have "moderately severe" or
"unsatisfactory" financial, operational, or compliance weaknesses.
The Budget Act also provided for the merger of the BIF and SAIF on January
1, 1998, with such merger being conditioned upon the prior elimination of the
thrift charter. Congressional leaders had also agreed that Congress should
consider and act upon separate legislation to eliminate the thrift charter as
early as possible in 1996. If adopted, such legislation would require that the
Bank, as a federal savings bank, convert to a bank charter. Such a requirement
to convert to a bank charter could cause the Association to lose the favorable
tax treatment for its bad debt reserves that it currently enjoys under section
59 of the Internal Revenue Code of 1986, as amended (the
17
"Code") and to have all or part of its existing bad debt reserves recaptured
into income. The Bank's tax bad debt reserve totalled $1.7 million at March 31,
1996.
The above-described provisions of the Budget Act were not the basis for the
President's veto, and Congressional leaders have indicated that these provisions
will be the basis for future legislation to recapitalize the SAIF. If enacted by
Congress, such legislation would have the effect of reducing the capital of SAIF
member institutions by the after-tax cost of the special SAIF assessment, plus
any related additional tax liabilities. The legislation would also have the
effect of reducing any differential that may otherwise be required in the
assessment rates for the BIF and SAIF.
Management cannot predict whether the above legislation or any other
legislative proposal will be enacted as described above, or, if enacted, the
amount of any special SAIF assessment, whether ongoing SAIF premiums will be
reduced to a level equal to that of BIF premiums or whether, if thrifts are
required to convert to bank charters, there will be any relief from the
additional tax liabilities that would be incurred upon the recapture of their
bad debt reserves. It also cannot be predicted whether some other legislative
action will be taken to address the BIF/SAIF premium disparity and what
consequences such action could have for SAIF members. A significant increase in
SAIF insurance premiums, either absolutely or relatively to BIF premiums, a
significant one-time fee to recapitalize the SAIF or a significant tax liability
associated with the recapture of the bad debt reserve could have an adverse
effect on the operating expenses and results of operations of the Bank. See
"Regulation--Regulation of Federal Savings Associations" and "--Insurance of
Accounts and Regulation by the FDIC."
PENDING LEGISLATION REGARDING BAD DEBT RESERVES
Under section 593 of the Code, thrift institutions such as the Bank, which
meet certain definitional tests primarily relating to their assets and the
nature of their businesses, are permitted to establish a tax reserve for bad
debts and to make annual additions thereto, which additions may, within
specified limitations, be deducted in arriving at their taxable income. The
Bank's deduction with respect to "qualifying loans," which are generally loans
secured by certain interests in real property, may currently be computed using
an amount based on the Bank's actual loss experience (the "Experience Method"),
or a percentage equal to 8.0% of the Bank's taxable income (the "PTI Method"),
computed without regard to this deduction and with additional modifications and
reduced by the amount of any permitted addition to the non-qualifying reserve.
See "Regulation--Federal and State Taxation--Federal Taxation."
Under pending legislative proposals, the PTI Method would be repealed and
the Bank would be permitted to use only the Experience Method of computing
additions to its bad debt reserve. In addition, the Bank would be required to
recapture (i.e., take into income) over a multi-year period the excess of the
balance of its bad debt reserves as of September 30, 1996 over the greater of
(a) the balance of such reserves as of September 30, 1988 or (b) an amount that
would have been the balance of such reserves as of September 30, 1996 had the
Bank always computed the additions to its reserves using the experience method.
If the Bank were or becomes a "large bank," (i.e., if the basis of its assets
exceeds $500 million), which it now is not, it would be unable to make additions
to its tax bad debt reserve, would be permitted to deduct bad debts only as they
occur and would additionally be required to recapture over a multi-year period
the excess of the balance of its bad debt reserves as of September 30, 1996 over
the balance of such reserves as of September 30, 1988, or over a lesser amount
if the Bank's loan portfolio has decreased since September 30, 1988. However,
under the proposed legislation, such recapture requirements would be suspended
for each of two successive taxable years beginning October 1, 1997 if the
principle amount of residential loans made by the Bank during each such year is
not less than the average of the principal amounts of such loans made by the
Bank during its six taxable years preceding October 1, 1996. In calculating the
average principal amount of loans made each year, the years with the highest and
the lowest principal amount of loans may be eliminated from the calculation if
the Bank so elects. Similar consequences would result under present law if the
Bank later becomes a large bank and fails to satisfy the qualifying thrift
definitional test. However, under present law, the Bank would be required to
recapture its entire bad debt reserves and not only the excess over the
September 30, 1988 balance of its reserves, and there would be no two-year
suspension of the recapture. See "Regulation" and "Regulation--Federal and State
Taxation--Federal Taxation."
18
COMPETITION
The Bank experiences strong competition in its local market area in both
originating loans and attracting deposits. This competition arises, with
respect to originating loans, from mortgage bankers and to a lesser extent from
commercial banks, savings institutions and credit unions, and with respect to
attracting deposits, from securities firms and mutual funds and from other
financial institutions in its market area. In Clay County alone, where the
Bank's two offices are located, there are 36 commercial banks, 44 credit unions
and ten savings associations, in addition to the Bank. See "Business--Lending
Activities" and "--Market Area and Competition."
RISK OF DELAYED OFFERING
The Subscription Offering will expire at noon, Excelsior Springs, Missouri
Time on ____________, 1996 unless extended by the Bank and the Holding Company.
If the Offerings are extended beyond __________, 1996, all subscribers will have
the right to modify or rescind their subscriptions and to have their
subscription funds returned with interest. There can be no assurance that the
Offerings will not be extended as set forth above.
A material delay in the completion of the sale of all unsubscribed shares
in the Community or Syndicated Community Offering may result in a significant
increase in the costs in completing the Conversion. Significant changes in the
Bank's operations and financial condition, the aggregate market value of the
shares to be issued in the Conversion and general market conditions may occur
during such material delay. In the event the Conversion is not consummated
within 24 months after the date of the Special Meeting, OTS regulations would
require the Bank to charge accrued Conversion costs to then-current period
operations. See "The Conversion - Risk of Delayed Offering."
ABSENCE OF ACTIVE MARKET FOR THE COMMON STOCK
The Holding Company, as a newly organized company, has never issued capital
stock. Consequently, there is not at this time any market for the Common Stock.
The Common Stock has received conditional approval for trading on the Nasdaq
SmallCap Market under the symbol "CBES." However, there can be no assurance
that the Bank will meet Nasdaq SmallCap Market listing requirements, which
include a minimum market capitalization, at least two market makers, and at
least 300 stockholders. The Holding Company will seek to encourage and assist
at least two market makers to make a market in the Common Stock upon
consummation of the Conversion. Trident Securities has indicated its intention
to make a market in the Common Stock, and the Bank anticipates that it will be
able to secure at least one additional market maker for the Common Stock.
However, there can be no assurance that market makers will be obtained, that an
active and liquid market for the Common Stock will develop or be maintained or
that resales of the Common Stock can be made at or above the Purchase Price.
See "Market for Common Stock."
POSSIBLE CONSEQUENCES OF AMENDMENT TO PLAN OF CONVERSION
The Plan of Conversion provides that, if deemed necessary or desirable by
the Boards of Directors of the Bank and the Holding Company, the Plan of
Conversion may be substantively amended (including an amendment to eliminate the
formation of the holding company as part of the Conversion) by a two-thirds vote
of the respective Boards of Directors of the Bank and the Holding Company, as a
result of comments from regulatory authorities or otherwise, at any time with
the concurrence of the OTS. Moreover, if the Plan of Conversion is amended,
subscriptions which have been received prior to such amendment will not be
refunded unless otherwise required by the OTS. If the Plan of Conversion is
amended in a manner that is deemed to be material to the subscribers by the
Holding Company, the Bank and the OTS, such subscriptions will be resolicited.
No such amendments are currently contemplated, although the Bank reserves the
right to increase or decrease purchase limitations. See "The Conversion -
Approval, Interpretation, Amendment and Termination."
19
COMMUNITY BANK OF EXCELSIOR SPRINGS, A SAVINGS BANK
Community Bank is a federally chartered mutual savings bank headquartered
in Excelsior Springs, Missouri. Community Bank was originally chartered as a
Missouri savings and loan association in 1931 under the name Excelsior Springs
Savings and Loan Association. In 1991, the Bank changed its name to its current
form, and in 1995, the Bank amended its charter to become a federal mutual
savings bank. Its deposits are insured up to the maximum allowable amount by
the SAIF of the FDIC. Through its main office in Excelsior Springs and its
branch office in Kearney, Community Bank primarily serves communities located in
Clay and Ray Counties and to a lesser extent in surrounding counties in the
State of Missouri. At March 31, 1996, Community Bank had total assets of $86.2
million, deposits of $67.9 million and total equity of $7.9 million.
Community Bank has been, and intends to continue to be, a community-
oriented financial institution offering selected financial services to meet the
needs of the communities it serves. The Bank attracts deposits from the general
public and historically has used such deposits, together with other funds,
primarily to originate one- to four-family residential mortgage loans,
construction and land loans for single-family residential properties, and
consumer loans consisting primarily of loans secured by automobiles. While the
Bank's primary business has been that of a traditional thrift institution,
originating loans in its primary market area for retention in its portfolio, the
Bank also has been an active participant in the secondary market, originating
residential mortgage loans for sale. At March 31, 1996, the Bank's total loan
portfolio was $86.0 million, of which 61.0% were one- to four-family residential
mortgage loans, 25.0% were construction and land loans (the vast majority of
which related to single-family residential properties), and 12.4% were consumer
loans. During the nine months ended March 31, 1996 and the fiscal year ended
June 30, 1995, the Bank originated and sold $12.6 million and $4.7 million,
respectively, of one-to four-family residential mortgage loans in the secondary
market. See "Business - Lending Activities."
To a substantially lesser extent, the Bank invests in various investment
securities, including mortgage-backed securities. The Bank utilizes such
investments primarily to provide and maintain liquidity within regulatory
guidelines, to maintain a balance of high quality, diversified investments to
reduce credit risk, and to absorb liquidity when loan demand is low and provide
liquidity when loan demand is high. See "Business - Investment Activities."
Community Bank's executive office is located at 1001 North Jesse James
Road, Excelsior Springs, Missouri 64024. Its telephone number at that address
is (816) 630-6711.
CBES BANCORP, INC.
CBES Bancorp, Inc. was organized in June 1996 by Community Bank for the
purpose of acquiring all of the outstanding capital stock of Community Bank to
be issued in the Conversion. Immediately following the Conversion, the only
significant assets of the Holding Company will be the capital stock of the Bank,
the note evidencing its loan to fund the Bank's ESOP and approximately 50% of
the net proceeds from the Conversion (less the amount to fund the ESOP loan).
Upon Conversion, the Holding Company initially will be a unitary savings and
loan holding company. See "Regulation - Holding Company Regulation" and "Use of
Proceeds." The business of the Holding Company initially will consist only of
the business of Community Bank. The Holding Company has not engaged and, prior
to the Conversion, will not engage in any material operations.
The initial activities of the Holding Company are anticipated to be funded
by such retained proceeds and the income thereon and dividends from Community
Bank, if any. See "Dividends," "Use of Proceeds," "Regulation - Holding Company
Regulation" and "Regulation - Federal and State Taxation." Thereafter,
activities of the Holding Company may also be funded through sales of additional
securities, through borrowings and through income generated by other activities
of the Holding Company. At this time, there are no plans regarding any other
activities.
The executive office of the Holding Company is located at 1001 North Jesse
James Road, Excelsior Springs, Missouri 64024. Its telephone number at that
address is (816) 630-6711.
20
CAPITALIZATION
The table below sets forth the capitalization, including deposits and
borrowings, of Community Bank as of March 31, 1996 and the pro forma
capitalization of the Holding Company at the minimum, the midpoint, maximum and
15% above the maximum of the Estimated Valuation Range, after giving effect to
the Conversion and based on other assumptions set forth in the table and under
the caption "Pro Forma Data."
Holding Company - Pro Forma Based
Upon Sale at $10.00 Per Share
----------------------------------------------------------
Bank's 892,500 1,050,000 1,207,500 1,388,625
Historical Shares Shares Shares Shares
------------- ---------- ------------ ------------- ------------
(In Thousands)
Deposits/(1)/...................................... $ 67,916 $ 67,916 $ 67,916 $ 67,916 $ 67,916
FHLB advances...................................... 9,000 9,000 9,000 9,000 9,000
-------- --------- -------- -------- --------
Total deposits and borrowings.................. $ 76,916 $ 76,916 $ 76,916 $ 76,916 $ 76,916
======== ========= ======== ======== ========
Capital stock:
Preferred Stock, $.01 par value per share:
authorized - 500,000 shares; assumed
outstanding - none.............................. $ -- $ -- $ -- $ -- $ --
Common Stock, $.01 par value per share:
authorized - 3,500,000 shares; shares to
be outstanding - as shown/(5)/.................. -- 9 11 12 14
Additional paid-in capital........................ -- 8,391 9,965 11,538 13,347
Less common shares acquired by:
ESOP/(3)/........................................ -- (714) (840) (966) (1,111)
RRP.............................................. -- (357) (420) (483) (555)
-------- --------- -------- -------- -------
Retained earnings, substantially restricted/(2)/.. 7,896 7,896 7,896 7,896 7,896
-------- --------- -------- -------- -------
Unrealized (losses) on available-for-sale
securities, net of tax.......................... (13) (13) (13) (13) (13)
Total stockholders' equity..................... $ 7,883 $ 15,212 $ 16,599 $ 17,984 $ 19,578
======== ========= ======== ======== ========
_____________________________
/(1)/ No effect has been given to withdrawals from savings accounts for
the purpose of purchasing Common Stock in the Conversion. Any
such withdrawals will reduce pro forma deposits by the amount of
such withdrawals.
/(2)/ See Notes 10, 11 and 12 of the Notes to Consolidated Financial
Statements for information regarding restrictions on retained
income, "Dividends" and "Regulation - Limitations on Dividends
and Other Capital Distributions" regarding restrictions on future
dividend payments and "The Conversion - Effects of Conversion to
Stock Form on Depositors and Borrowers of the Bank" regarding the
liquidation account to be established upon Conversion. Does not
take into account Holding Company dividends, if any, which may be
paid subsequent to the Conversion. See "Dividends."
/(3)/ Assumes that 8% of the shares issued in the Conversion will be
acquired by the ESOP and that the ESOP will be funded by the
Holding Company. The Bank intends to make contributions to the
ESOP sufficient to service and ultimately retire its debt. Since
the Holding Company will finance the ESOP debt, the ESOP debt
will be eliminated through consolidation and no liability will be
reflected on the Holding Company's consolidated financial
statements. Accordingly, the amount of stock acquired by the ESOP
is shown in this table as a reduction of total stockholders'
equity. See "Management - Benefit Plans -Employee Stock Ownership
Plan."
/(4)/ While management does not currently intend to do so, following
OTS and stockholder approval, shares utilized to fund the RRP
could be obtained from newly issued shares. In the event RRP
shares are obtained from authorized but unissued shares, the
existing ownership of current stockholders would be diluted by
approximately 3.8%. However, there would be no impact on
stockholders' equity.
/(5)/ Does not reflect the shares of Common Stock that may be reserved
for issuance pursuant to the proposed Stock Option Plan and the
proposed RRP. See "Management--Benefit Plans."
21
\\ PRO FORMA DATA
The following table sets forth the historical consolidated net earnings,
total equity and per share data of the Bank at and for the nine months ended
March 31, 1996 and at and for the year ended June 30, 1995, and after giving
effect to the Conversion, the pro forma consolidated net income, stockholders'
equity and per share data of the Holding Company at and for the same period. The
pro forma data is computed on the assumptions that (i) the specified number of
shares of Common Stock were sold at the beginning of the specified period and
yielded net proceeds to the Holding Company as indicated and (ii) such net
proceeds were invested by the Bank and the Holding Company at the beginning of
the period to yield a return of 5.38% and 5.63% for the nine months ended March
31, 1996 and the fiscal year ended June 30, 1995, respectively. The assumed
return is based on the yield on one-year U.S. Government securities at March 31,
1996 and June 30, 1995, respectively, which is deemed by management to more
accurately reflect pro forma reinvestment rates than the arithmetic average of
the Bank's weighted average yield on all interest-earning assets and the
weighted average rate paid on deposits. After adjusting for applicable federal
and state taxes totaling 40%, the after-tax yields were equal to 3.23% and 3.38%
for the nine months ended March 31, 1996 and the fiscal year ended June 30,
1995, respectively. The table also assumes that the proposed RRP awards equal to
4% of the shares sold in the Conversion were purchased by the RRP at $10.00 per
share in the open market and fixed expenses (including a management fee of
$150,000 payable to Trident Securities) were $525,000. No effect has been given
to the stock reserved for issuance under the Stock Option Plan. ACTUAL
CONVERSION EXPENSES MAY BE MORE OR LESS THAN THOSE ESTIMATED BECAUSE FEES PAID
MAY VARY DEPENDING UPON WHETHER SELECTED BROKER-DEALERS ARE USED, MARKET
CONDITIONS AND OTHER FACTORS. THE PRO FORMA NET EARNINGS AMOUNTS DERIVED FROM
THE ASSUMPTIONS SET FORTH HEREIN SHOULD NOT BE CONSIDERED INDICATIVE OF THE
ACTUAL RESULTS OF OPERATIONS OF THE HOLDING COMPANY THAT WOULD HAVE BEEN
ATTAINED FOR ANY PERIOD IF THE CONVERSION HAD BEEN ACTUALLY CONSUMMATED AT THE
BEGINNING OF SUCH PERIOD, AND THE ASSUMPTIONS REGARDING INVESTMENT YIELDS SHOULD
NOT BE CONSIDERED INDICATIVE OF THE ACTUAL YIELDS EXPECTED TO BE ACHIEVED DURING
ANY FUTURE PERIOD.
The total number of shares to be issued in the Conversion may be increased
or decreased to reflect changes in market and financial conditions prior to the
close of the Offerings. However, if the aggregate Purchase Price of the Common
Stock actually sold in the Conversion is below $8,925,000 or more than
$13,886,250 (15% above the maximum of the Estimated Valuation Range) subscribers
will be offered the opportunity to modify or cancel their subscriptions. See
"The Conversion - Stock Pricing and Number of Shares to be Issued." //
22
At or For the Nine Months Ended March 31, 1996
\\ -----------------------------------------------------------------------
892,500 1,050,000 1,207,500 1,388,625
Shares Shares Shares Shares
at $10.00 at $10.00 at $10.00 at $10.00
per Share per Share per Share per Share
(Minimum) (Midpoint) (Maximum) (Supermax)/(1)/
----------- ----------- ---------- -----------
(In thousands, except per share amount)
Gross proceeds......................................... $ 8,925 $ 10,500 $ 12,075 $ 13,886
Less estimated expenses................................ 525 525 525 525
-------- ---------- ---------- ----------
Estimated net Conversion proceeds..................... 8,400 9,975 11,550 13,361
Less Common Stock acquired by ESOP.................... (714) (840) (966) (1,111)
Less Common Stock acquired by RRP..................... (357) (420) (483) (555)
-------- ---------- ---------- ----------
Estimated net proceeds available for
investment.......................................... $ 7,329 $ 8,715 $ 10,101 $ 11,695
======== ========== ========== ==========
Consolidated net earnings:
Historical............................................ $ 390 $ 390 $ 390 $ 390
Pro forma adjustments:
Net earnings from proceeds/(2)/...................... 177 211 245 283
Less pro forma ESOP adjustment /(3)/................. (32) (38) (43) (50)
Less pro forma RRP adjustment /(4)/.................. (32) (38) (43) (50)
-------- ---------- ---------- ----------
Pro forma net earnings............................. $ 503 $ 525 $ 549 $ 573
======== ========== ========== ==========
Consolidated net earnings per share: /(5)(6)/
Historical............................................ $ 0.47 $ 0.40 $ 0.35 $ 0.30
Pro forma adjustments:
Net earnings from proceeds /(2)/..................... 0.22 0.22 0.22 0.23
Less pro forma ESOP adjustment /(3)/................. (0.04) (0.04) (0.04) (0.04)
Less pro forma RRP adjustment /(4)/.................. (0.04) (0.04) (0.04) (0.04)
-------- ---------- ---------- ----------
Pro forma earnings per share....................... $ 0.61 $ 0.54 $ 0.49 $ 0.45
======== ========== ========== ==========
Consolidated stockholders' equity (book value):/(7)/
Historical............................................ $ 7,883 $ 7,883 $ 7,883 $ 7,883
Estimated net Conversion proceeds..................... 8,400 9,975 11,550 13,361
Less Common Stock acquired by:
ESOP................................................. (714) (840) (966) (1,111)
RRP /(4)/............................................ (357) (420) (483) (555)
-------- ---------- ---------- ----------
Pro forma stockholders' equity..................... $ 15,212 $ 16,598 $ 17,984 $ 19,578
======== ========== ========== ==========
Consolidated stockholders' equity per share: /(6)(8)/
Historical............................................ $ 8.83 $ 7.51 $ 6.53 $ 5.68
Estimated net Conversion proceeds..................... 9.41 9.50 9.56 9.62
Less Common Stock acquired by:
ESOP................................................. (0.80) (0.80) (0.80) (0.80)
RRP /(4)/............................................ (0.40) (0.40) (0.40) (0.40)
-------- ---------- ---------- ----------
Pro forma stockholders' equity/(9)/................ $ 17.04 $ 15.81 $ 14.89 $ 14.10
======== ========== ========== ==========
Pro forma price to book value.......................... 58.69% 63.25% 67.16% 70.92%
======== ========== ========== ==========
Pro forma price to earnings (P/E ratio) /(10)/......... 12.30 13.89 15.31 16.67
======== ========== ========== ==========
Number of shares used in calculating
earnings per share.................................... 826,455 972,300 1,118,145 1,285,867
======== ========== ========== ==========
Number of shares used in calculating
equity per share...................................... 892,500 1,050,000 1,207,500 1,388,625
======== ========== ========== ==========
(footnotes begin on second following page)\\
23
\\ At or For the Year Ended June 30, 1995
---------------------------------------------------------------------------
892,500 1,050,000 1,207,500 1,388,625
Shares Shares Shares Shares
at $10.00 at $10.00 at $10.00 at $10.00
per Share per Share per Share per Share
(Minimum) (Midpoint) (Maximum) (Supermax)/(1)/
----------- ----------- ---------- ----------
(In thousands, except per share amount)
Gross proceeds......................................... $ 8,925 $ 10,500 $ 12,075 $ 13,886
Less estimated expenses................................ 525 525 525 525
-------- ---------- ---------- ----------
Estimated net Conversion proceeds..................... 8,400 9,975 11,550 13,361
Less Common Stock acquired by ESOP.................... (714) (840) (966) (1,111)
Less Common Stock acquired by RRP..................... (357) (420) (483) (555)
-------- ---------- ---------- ----------
Estimated net proceeds available for
investment.......................................... $ 7,329 $ 8,715 $ 10,101 $ 11,695
======== ========== ========== ==========
Consolidated net earnings:
Historical............................................ $ 164 $ 164 $ 164 $ 164
Pro forma adjustments:
Net earnings from proceeds/(2)/...................... 248 294 341 395
Less pro forma ESOP adjustment /(3)/................. (43) (50) (58) (67)
Less pro forma RRP adjustment /(4)/.................. (43) (50) (58) (67)
-------- ---------- ---------- ----------
Pro forma net earnings............................. $ 326 $ 358 $ 389 $ 425
======== ========== ========== ==========
Consolidated net earnings per share: /(5)(6)/
Historical............................................ $ 0.20 $ 0.17 $ 0.15 $ 0.13
Pro forma adjustments:
Net earnings from proceeds /(2)/..................... 0.30 0.30 0.30 0.31
Less pro forma ESOP adjustment /(3)/................. (0.05) (0.05) (0.05) (0.05)
Less pro forma RRP adjustment /(4)/.................. (0.05) (0.05) (0.05) (0.05)
-------- ---------- ---------- ----------
Pro forma earnings per share....................... $ 0.40 $ 0.37 $ 0.35 $ 0.34
======== ========== ========== ==========
Consolidated stockholders' equity (book value):/(7)/
Historical............................................ $ 7,481 $ 7,481 $ 7,481 $ 7,481
Estimated net Conversion proceeds..................... 8,400 9,975 11,550 13,361
Less Common Stock acquired by:
ESOP................................................. (714) (840) (966) (1,111)
RRP /(4)/............................................ (357) (420) (483) (555)
-------- ---------- ---------- ----------
Pro forma stockholders' equity..................... $ 14,810 $ 16,196 $ 17,582 $ 19,176
======== ========== ========== ==========
Consolidated stockholders' equity per share: /(6)(8)/
Historical............................................ $ 8.38 $ 7.12 $ 6.20 $ 5.39
Estimated net Conversion proceeds..................... 9.41 9.50 9.57 9.62
Less Common Stock acquired by:
ESOP................................................. (0.80) (0.80) (0.80) (0.80)
RRP /(4)/............................................ (0.40) (0.40) (0.40) (0.40)
-------- ---------- ---------- ----------
Pro forma stockholders' equity per share/(9)/...... $ 16.59 $ 15.42 $ 14.57 $ 13.81
======== ========== ========== ==========
Pro forma price to book value.......................... 60.28% 64.85% 68.63% 72.41%
======== ========== ========== ==========
Pro forma price to earnings (P/E ratio) /(10)/......... 25.00 27.03 28.57 29.41
======== ========== ========== ==========
Number of shares used in calculating
earnings per share.................................... 828,240 974,400 1,120,560 1,288,644
Number of shares used in calculating ======== ========== ========== ==========
equity per share...................................... 892,500 1,050,000 1,207,500 1,388,625
======== ========== ========== ==========
(footnotes begin on following page)\\
24
\\_____________________
/(1)/ Gives effect to the sale of an additional 181,125 shares in the
Conversion, which may be issued as a result of an increase in the pro
forma market value of the Holding Company and the Bank as converted,
without the resolicitation of subscribers or any right of cancellation.
The issuance of such additional shares will be conditioned on a
determination of the independent appraiser that such issuance is
compatible with its determination of the estimated pro forma market value
of the Holding Company and the Bank as converted. See "The Conversion--
Stock Pricing and Number of Shares to be Issued."
/(2)/ No effect has been given to withdrawals from accounts for the purpose of
purchasing Common Stock in the Conversion.
/(3)/ It is assumed that 8% of the shares of Common Stock offered in the
Conversion will be purchased by the ESOP. The funds used to acquire such
shares will be borrowed by the ESOP (at an interest rate equal to the
prime rate as published in The Wall Street Journal on the closing date of
the Conversion, which rate is currently 8.25%), from the net proceeds
from the Conversion retained by the Holding Company. The amount of this
borrowing has been reflected as a reduction from gross proceeds to
determine estimated net proceeds. The Bank intends to make contributions
to the ESOP in amounts at least equal to the principal and interest
requirement of the debt. As the debt is paid down, stockholders' equity
will be increased. The Bank's payment of the ESOP debt is based upon
equal installments of principal over a 10-year period, assuming a
combined federal and state tax rate of 40%. Interest income earned by the
Holding Company on the ESOP debt offsets the interest paid by the Bank on
the ESOP loan. No reinvestment is assumed on proceeds contributed to fund
the ESOP. The ESOP expense reflects adoption of Statement of Position
("SOP") 93-6, which will require recognition of expense based upon shares
committed to be released and the exclusion of unallocated shares from
earnings per share computations. The valuation of shares committed to be
released would be based upon the average market value of the shares
during the year, which, for purposes of this calculation, was assumed to
be equal to the $10.00 per share Purchase Price. See "Management of the
Bank--Benefits--Employee Stock Ownership Plan. "
/(4)/ In calculating the pro forma effect of the RRP, it is assumed that the
required stockholder approval has been received, that the shares were
acquired by the RRP at the beginning of the period presented in open
market purchases at the Purchase Price and that 20% of the amount
contributed was an amortized expense during such period. The issuance of
authorized but unissued shares of the Common Stock instead of open market
purchases would dilute the voting interests of existing stockholders by
approximately 3.85% and pro forma net income per share would be $0.59,
$0.53, $0.48 and $0.44 for the nine months ended March 31, 1996 and
$0.39, $0.36, $0.35 and $0.33 for the fiscal year ended June 30, 1995 at
the minimum, midpoint, maximum and 15% above the maximum of the Estimated
Valuation Range for the nine months ended March 31, 1996 and for the
fiscal year ended June 30, 1995, respectively, and pro forma
stockholders' equity per share would be $16.77, $15.58, $14.71 and $13.94
at March 31, 1996 and $16.34, $15.22, $14.39 and $13.63 at June 30, 1995
at the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Valuation Range at March 31, 1996 and June 30, 1995,
respectively. Shares issued under the RRP vest 20% per year and, for
purposes of this table, compensation expense is recognized on a straight-
line basis over each vesting period. In the event the fair market value
per share is greater than $10.00 per share on the date of stockholder
approval of the RRP, total RRP expense would increase. No effect has been
given to the shares reserved for issuance under the proposed Stock Option
Plan. If stockholders approve the Stock Option Plan following the
Conversion, the Holding Company will have reserved for issuance under the
Stock Option Plan authorized but unissued shares of Common Stock
representing an amount of shares equal to 10% of the shares sold in the
Conversion. If all of the options were to be exercised utilizing these
authorized but unissued shares rather than treasury shares (which could
be acquired), the voting interests of existing stockholders would be
diluted by approximately 9.1%. See "Management of the Bank--Benefits--
1996 Stock Option Plan" and "--Management Recognition Plan."
/(5)/ Per share amounts are based upon shares outstanding of 826,455, 972,300,
1,118,145 and 1,285,867, and of 828,240, 974,400, 1,120,560 and 1,288,644
at the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Valuation Range for the nine months ended March 31, 1996 and
the fiscal year ended June 30, 1995, respectively, which includes the
shares of Common Stock sold in the Conversion less the number of shares
assumed to be held by the ESOP not committed to be released within the
first two months and year, respectively, following the Conversion.
/(6)/ Historical per share amounts have been computed as if the shares of
Common Stock expected to be issued in the Conversion had been outstanding
at the beginning of the period or on the date shown, but without any
adjustment of historical net income or historical retained earnings to
reflect the investment of the estimated net proceeds of the sale of
shares in the Conversion, the additional ESOP expense or the proposed RRP
expense, as described above.
25
/(7)/ "Book value" represents the difference between the stated amounts of the
Bank's assets and liabilities. The amounts shown do not reflect the
liquidation account that will be established for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders in the
Conversion, or the federal income tax consequences of the restoration to
income of the Bank's special bad debt reserves for income tax purposes,
which would be required in the unlikely event of liquidation. See "The
Conversion--Effects of Conversion to Stock Form on Depositors and
Borrowers of the Bank" and "Taxation." The amounts shown for book value
do not represent fair market values or amounts distributable to
stockholders in the unlikely event of liquidation.
/(8)/ Per share amounts are based upon shares outstanding of 892,500,
1,050,000, 1,207,500 and 1,388,625 at the minimum, midpoint, maximum and
15% above the maximum of the Estimated Valuation Range, respectively.
/(9)/ Neither represents, nor is intended to represent, possible future price
appreciation or depreciation of the Common Stock.
/(10)/ Annualized.\\
26
\\ PRO FORMA REGULATORY CAPITAL
Set forth below is a summary of the Bank's compliance with the
regulatory capital standards as of March 31, 1996, on an historical and a pro
forma basis assuming that the indicated number of shares were sold as of such
date.
Pro Forma Based Upon Sale of
--------------------------------------------------------------
892,500 Shares 1,050,000 Shares
(Minimum of Estimated (Midpoint of Estimated
Historical Valuation Range) Valuation Range)
------------------------- ------------------------------ ------------------------------
Amount Percent/(1)/ Amount/(2)/ Percent/(1)(2)/ Amount/(2)/ Percent/(1)(2)/
---------- ------------- ------------ ---------------- ------------ ----------------
Capital under generally
accepted accounting
principles..................... $7,883 9.15% $11,012 12.23% $11,611 12.80%
====== ===== ======= ===== ======= =====
Tangible capital/(2)/........... $7,896 9.15% $11,025 12.23% $11,624 12.79%
Tangible capital
requirement/(5)/............... 1,295 1.50 1,353 1.50 1,364 1.50
------ ----- ------- ----- ------- -----
Excess........................ $6,601 7.65% $ 9,672 10.73% $10,260 11.29%
====== ===== ======= ===== ======= =====
Core capital/(2)/............... $7,896 9.15% $11,025 12.23% $11,624 12.79%
Core capital requirement/(3)(5)/ 2,591 3.00 2,705 3.00 2,727 3.00
------ ----- ------- ----- ------- -----
Excess........................ $5,305 6.15% $ 8,321 9.23% 8,896 9.79%
====== ===== ======= ===== ======= =====
Risk-based capital/(2)(4)/...... $7,725 12.04% $10,854 16.71% $11,453 17.60%
Risk-based capital
requirement/(5)(6)/............ 5,133 8.00 5,195 8.00 5,207 8.00
------ ----- ------- ----- ------- -----
Excess........................ $2,592 4.04% $ 5,659 8.71% $ 6,247 9.60%
====== ===== ======= ===== ======= =====
------------------------------------------------------------
1,388,625 Shares
1,207,500 Shares (15% Above the
(Maximum of Estimated Maximum of Estimated
Valuation Range) Valuation Range)
----------------------------- -----------------------------
Amount/(2)/ Percent/(1)(2)/ Amount/(2)/ Percent/(1)(2)/
----------- ---------------- ----------- ----------------
Capital under generally
accepted accounting
principles..................... $12,209 13.35% $12,897 13.97%
======= ===== ======= =====
Tangible capital/(2)/........... $12,222 13.34% $12,910 13.96%
Tangible capital
requirement/(5)/............... 1,374 1.50 1,387 1.50
------- ----- ------- -----
Excess........................ $10,848 11.84% $11,523 12.46%
======= ===== ======= =====
Core capital/(2)/............... $12,222 13.34% $12,910 13.96%
Core capital requirement/(3)(5)/ 2,749 3.00 2,774 3.00
------- ----- ------- -----
Excess........................ $ 9,473 10.34% $10,137 10.96%
======= ===== ======= =====
Risk-based capital/(2)(4)/...... $12,051 18.48% $12,739 19.48%
Risk-based capital
requirement/(5)(6)/............ 5,218 8.00 5,231 8.00
------- ----- ------- -----
Excess........................ $ 6,833 10.48% $ 7,508 11.48%
======= ===== ======= =====
______________________
/(1)/ Tangible and core capital levels are shown as a percentage of total
adjusted assets; risk-based capital levels are shown as a percentage of
risk-weighted assets.
/(2)/ Assumes retention by the Holding Company of 50% of the net Conversion
proceeds (less the amount of the loan made to the ESOP from the Holding
Company's portion of the net Conversion proceeds). The remaining 50% of
the net Conversion proceeds will be provided to the Bank. For regulatory
capital purposes, the Bank's capital will be reduced by the anticipated
purchases by the ESOP of 8% of the shares of Common Stock sold in the
Conversion and the proposed issuance of 4% of the shares of Common Stock
sold in the Conversion for the RRP. For purposes of calculating
regulatory capital, the valuation allowance applicable to investment
securities in accordance with Statement of Financial Accounting Standards
("SFAS") No. 115 has been excluded from capital. See Note 11 of Notes to
Consolidated Financial Statements.
/(3)/ In April 1991, the OTS proposed a core capital requirement for savings
associations comparable to the requirement for national banks that became
effective December 31, 1990. The proposal calls for an OTS core capital
requirement of at least 3% of total adjusted assets for thrifts that
receive the highest supervisory rating for safety and soundness, with a
4% to 5% core capital requirement for all other thrifts. If adopted as
proposed, management would expect the Bank to be subject to a 4% to 5%
core capital requirement. See "Regulation - Regulatory Capital
Requirements."
/(4)/ Includes $347,000 of general valuation allowances which qualify as
supplementary capital. See "Regulation - Regulatory Capital
Requirements."
/(5)/ Assumes investment of net proceeds in U.S. Government agency securities
which have a 20% risk weight.
/(6)/ The OTS utilizes a net market value methodology to measure the interest
rate risk exposure of savings associations. Effective March 31, 1996,
institutions with more than normal interest rate risk, as defined by OTS
regulations, are required to make a deduction from capital equal to 50%
of its interest rate risk exposure multiplied by the present value of its
assets. Based upon this methodology, at March 31, 1996, the latest date
for which such information is available, the Bank's interest rate risk
exposure to a 200 basis point increase in interest rates was considered
"normal" under this regulation. However, since the Bank has assets of
less than $300 million and a total risk-based capital ratio in excess of
12%, it is exempt from this requirement unless the OTS determines
otherwise. See "Regulation - Regulatory Capital Requirements."
\\
27
USE OF PROCEEDS
The net proceeds from the sale of Common Stock in the Conversion, based on
the minimum, midpoint, maximum and 15% above the maximum of the Estimated
Valuation Range, are estimated at $8.4 million, $10.0 million, $11.6 million and
$13.4 million, respectively. See "Pro Forma Data." The Holding Company will
retain up to 50% of the net Conversion proceeds as its initial capitalization
and will use the balance of the net Conversion proceeds to purchase all of the
common stock of the Bank to be issued upon Conversion. The Holding Company
intends to lend a portion of the net proceeds retained by it to the ESOP to
facilitate its purchase of 8% of the Common Stock in the Conversion. Based upon
the issuance of shares at the minimum and maximum of the Estimated Valuation
Range, the loan to the ESOP to purchase 8% of the Common Stock would be $714,000
and $966,000, respectively. See "Management - Benefit Plans - Employee Stock
Ownership Plan." The remainder of the proceeds will be invested on an interim
basis in short- and intermediate-term securities. These funds would be available
for general corporate purposes which may include expansion of operations through
acquisitions of other financial service organizations and diversification into
other related or unrelated businesses, or for investment purposes. See
"Regulation - Holding Company Regulation" for a discussion of OTS activity
restrictions. Currently, there are no specific plans being considered for the
expansion of the business of the Holding Company. In addition, the funds may be
used to infuse additional capital to the Bank when and if appropriate.
The net proceeds retained by the Holding Company may also be used to
repurchase the Holding Company's Common Stock as permitted by the OTS. Upon
completion of the Conversion, the Board of Directors will have the authority to
adopt stock repurchase plans, subject to statutory and regulatory requirements.
Since the Holding Company has not yet issued stock, there is currently
insufficient information upon which an intention to repurchase stock could be
based.
Based upon facts and circumstances which may arise following Conversion,
the Board of Directors may determine to repurchase stock in the future. Such
facts and circumstances may include but are not limited to: (i) market and
economic factors such as the price at which the stock is trading in the market,
the volume of trading, the attractiveness of other investment alternatives in
terms of the rate of return and risk involved in the investment, the ability to
increase the book value or earnings per share of the remaining outstanding
shares, and the effect on the Holding Company's return on equity; (ii) the
avoidance of dilution to stockholders by not having to issue additional shares
to cover the exercise of stock options or to fund employee stock benefit plans;
and (iii) any other circumstances in which repurchases would be in the best
interests of the Holding Company and its shareholders.
Any stock repurchases will be subject to the determination of the Board of
Directors that both the Holding Company and the Bank will be capitalized in
excess of all applicable regulatory requirements after any such repurchases and
that capital will be adequate taking into account, among other things, the level
of non-performing assets and other loans of concern, the Holding Company's and
the Bank's current and projected results of operations and asset/liability
structure, the economic environment and tax and other regulatory considerations.
Subject to certain exceptions, no repurchases may be implemented within the
first year following Conversion pursuant to OTS regulations. A stock repurchase
program may have the effect of: (i) reducing the overall market value of the
Holding Company, (ii) increasing the cost of capital and (iii) promoting a
temporary demand for Common Stock.
Should the Holding Company implement a restricted stock plan (i.e., the
RRP) following the Conversion, a portion of the net proceeds may be used to fund
the purchase by the plan of Common Stock in an amount up to 4% of the shares
sold in the Conversion. The actual cost of such purchase will depend on the
number of shares sold in the Conversion and the market price at the time of
purchase. Based upon the minimum and the maximum of the Estimated Valuation
Range and on a $10.00 per share purchase price, the cost would be approximately
$357,000 and $483,000, respectively.
The net proceeds from the sale of the Common Stock in the Conversion will
substantially increase the capital of Community Bank. Community Bank will use
the net proceeds for general corporate business purposes, such as
28
lending and investment activities in the ordinary course of business. A portion
of the proceeds may be used to repay FHLB advances. On an interim basis, the
proceeds will be invested by the Bank in short- and intermediate-term
securities. Notwithstanding the foregoing, the Holding Company and the Bank
reserve the right to use the proceeds in any manner authorized by law.
The actual net proceeds may be more or less than the estimated net proceeds
calculated as shown under "Pro Forma Data," above. Additionally, the actual
expenses may be more or less than those estimated. See "The Conversion - Stock
Pricing and Number of Shares to be Issued."
DIVIDENDS
Although no decision has been made yet regarding the payment of dividends,
the Holding Company may consider a policy of paying cash dividends on the Common
Stock following the Conversion. Dividends, when and if paid, will be subject to
determination and declaration by the Board of Directors in its discretion, which
will take into account the Holding Company's consolidated financial condition
and results of operations, tax considerations, industry standards, economic
conditions, regulatory restrictions, general business practices and other
factors. Therefore, no assurances can be made as to the future ability of the
Holding Company to pay dividends. Delaware law generally limits dividends of
the Holding Company to an amount equal to the excess of its net assets (the
amount by which total assets exceeds total liabilities) over its paid-in capital
or, if there is no excess, to its net profits for the current and immediately
preceding fiscal year.
It is presently anticipated that the Holding Company will not conduct
significant operations independent of those of the Bank for some time following
the Conversion. As such, the Holding Company does not expect to have any
significant source of income other than earnings on the net Conversion proceeds
retained by the Holding Company and dividends from Community Bank, if any.
Consequently, the ability of the Holding Company to pay cash dividends to its
stockholders will be dependent upon such retained proceeds and earnings thereon,
and upon the ability of the Bank to pay dividends to the Holding Company.
Management believes that, upon completion of the Conversion, the Bank will
qualify as a Tier 1 institution, and thereby be entitled to make capital
distributions without OTS approval in an amount not exceeding 100% of its net
income year-to-date plus 50% of the Bank's capital surplus, as measured at the
beginning of the calendar year. See "Regulation - Regulatory Capital
Requirements" and "- Limitations on Dividends and Other Capital Distributions."
Assuming only the minimum number of shares are sold in the Conversion, the
purchase of the Bank's stock by the Holding Company in exchange for
substantially all the net proceeds from the Conversion (less 50% to be retained
by the Holding Company) and the investment of such proceeds in 20% risk-weighted
assets, on a pro forma basis as of March 31, 1996, the Bank would have had risk-
based capital of $5.7 million above its fully phased-in, risk-based capital
requirement. The 50% of net proceeds retained by the Holding Company would be
immediately available for the payment of dividends. See "Regulation -
Regulatory Capital Requirements" and "- Limitations on Dividends and Other
Capital Distributions." Earnings appropriated to the Bank's "excess" bad debt
reserves and deducted for federal income tax purposes cannot be used by the Bank
to pay cash dividends to the Holding Company without adverse tax consequences.
See "Regulation - Federal and State Taxation."
MARKET FOR COMMON STOCK
The Holding Company has never issued capital stock to the public and,
consequently, there is no existing market for the Common Stock and no assurance
can be given that an established and liquid trading market for the Common Stock
will develop. Depending on the number of shares sold, it is expected that
following the Conversion, the Common Stock will be traded in the over-the-
counter market. The Holding Company has applied to list the Common Stock on the
Nasdaq SmallCap Market under the symbol "CBES." However, there can be no
assurance that the Holding Company will meet Nasdaq SmallCap Market listing
requirements, which include a minimum market capitalization, at least two market
makers, and at least 300 stockholders. At the close of the Conversion,
29
the Holding Company, assisted by Trident Securities, will use its best efforts
to encourage and assist market makers to establish and maintain a market for the
Common Stock and to list the Common Stock on the Nasdaq SmallCap Market,
although there can be no assurance that it will succeed in doing so. Trident
Securities has indicated its intention to make a market in the Holding Company's
Common Stock upon consummation of the Conversion, depending upon the volume or
trading activity in the Common Stock and subject to compliance with applicable
laws and other regulatory requirements.
The development of a public market that has depth, liquidity and
orderliness depends upon the presence in the marketplace of a sufficient number
of willing buyers and sellers at any given time, over which neither the Holding
Company nor any market maker has any control. Accordingly, there can be no
assurance that an active or liquid trading market for the Common Stock will
develop, or that if a market develops, it will continue. Furthermore, there can
be no assurance that purchasers will be able to sell their shares at or above
the Purchase Price. See "The Conversion - Stock Pricing and Number of Shares to
be Issued."
30
COMMUNITY BANK OF EXCELSIOR SPRINGS, A SAVINGS BANK
CONSOLIDATED STATEMENTS OF EARNINGS
The following Consolidated Statements of Earnings of the Bank for the
fiscal years ended June 30, 1995 and 1994 have been audited by KPMG Peat Marwick
LLP, independent certified public accountants, whose report thereon appears
elsewhere herein. The Consolidated Statements of Earnings for the nine months
ended March 31, 1996 and 1995 are unaudited and have been prepared in accordance
with the requirements for a presentation of interim financial statements and are
in accordance with generally accepted accounting principles. In the opinion of
management, all adjustments, consisting of normal recurring adjustments, that
are necessary for a fair presentation of the interim periods, have been
reflected. The results of operations for the nine months ended March 31, 1996
are not necessarily indicative of the results of operations that may be expected
for the fiscal year ending June 30, 1996. These Statements should be read in
conjunction with the Consolidated Financial Statements of the Bank and Notes
thereto included elsewhere in this Prospectus.
Nine Months ended Year ended
March 31, June 30,
-------------------------- --------------------------
1996 1995 1995 1994
------------- ----------- ----------- -----------
(Unaudited)
Interest income:
Loans receivable.................................... $ 4,811,056 $ 3,712,366 $ 5,249,045 $ 3,882,043
Mortgage-backed securities.......................... 129,261 233,026 304,343 398,903
Investment securities............................... 78,407 128,838 173,022 191,603
Loans held for sale................................. 51,631 792 25,820 32,125
Other............................................... 60,505 51,910 65,633 149,979
------------ ------------ ------------ ------------
Total interest income............................. 5,130,860 4,126,932 5,817,863 4,654,653
------------ ------------ ------------ ------------
Interest expense:
Deposits (note 6)................................... 2,484,979 1,782,516 2,577,149 2,090,280
FHLB advances....................................... 604,241 319,314 568,783 2,461
------------ ------------ ------------ ------------
Total interest expense............................ 3,089,220 2,101,830 3,145,932 2,092,741
------------ ------------ ------------ ------------
Net interest income 2,041,640 2,025,102 2,671,931 2,561,912
Provision for loan losses (note 4)................... 188,341 143,056 171,277 33,590
------------ ------------ ------------ ------------
Net interest income after provision
for loan losses.................................. 1,853,299 1,882,046 2,500,654 2,528,322
------------ ------------ ------------ ------------
Noninterest income:
Gain on sales of loans, net......................... 139,277 4,948 42,106 140,331
Customer service charges............................ 147,046 143,214 193,017 203,041
Loan servicing fees................................. 71,545 54,516 73,774 63,470
Net realized gain (loss) on sale of investment and
mortgage-backed securities available-for-sale...... 54,205 -- -- (135,933)
Writedown of investment in mutual fund (note 2)..... -- (314,148) (314,148) --
Other............................................... 93,022 76,576 101,940 103,269
------------ ------------ ------------ ------------
Total noninterest income.......................... 505,095 (34,894) 96,689 374,178
------------ ------------ ------------ ------------
Noninterest expense:
Compensation, payroll taxes and fringe benefits..... 914,857 809,447 1,080,572 952,462
Office property and equipment....................... 201,325 174,783 245,411 213,257
Data processing..................................... 128,246 119,034 162,722 152,215
Federal insurance premiums.......................... 118,058 104,274 139,020 136,103
Advertising......................................... 50,642 41,182 55,875 34,780
Real estate owned and repossessed assets............ 11,404 25,502 23,243 1,161
Other............................................... 336,733 334,596 425,704 359,812
------------ ------------ ------------ ------------
Total noninterest expense......................... 1,761,265 1,608,818 2,132,547 1,849,790
------------ ------------ ------------ ------------
Earnings before income taxes 597,129 238,334 464,796 1,052,710
Income taxes (note 8)................................ 207,098 210,650 301,238 352,000
------------ ------------ ------------ ------------
Net earnings........................................ $ 390,031 $ 27,684 $ 163,558 $ 700,710
============ ============ ============ ============
See accompanying Notes to Consolidated Financial Statements.
31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
This discussion is intended to assist in understanding the financial
condition and results of operations of the Bank. The information contained in
this section should be read in conjunction with the Consolidated Financial
Statements and accompanying Notes thereto and the other sections contained in
this Prospectus.
The Holding Company has only recently been formed and, accordingly,
has no results of operations. The following discussion relates only to the
financial condition and results of operations of the Bank.
The earnings of the Bank depend primarily on its level of net interest
income, which is the difference between interest earned on interest-earning
assets, consisting primarily of mortgage and consumer loans and other
investments, and the interest paid on interest-bearing liabilities, consisting
of deposits and FHLB advances. Net interest income is a function of the Bank's
"interest rate spread," which is the difference between the average yield earned
on interest-earning assets and the average rate paid on interest-bearing
liabilities, as well as a function of the average balance of interest-earning
assets as compared to interest-bearing liabilities. The interest rate spread is
affected by regulatory, economic and competitive factors that influence interest
rates, loan demand and deposit flows. The Bank, like other financial
institutions, is subject to interest-rate risk to the degree that its interest-
earning assets mature or reprice at different times, or on different bases, than
its interest-bearing liabilities. The Bank's operating results are also
affected by the amount of its non-interest income, including gain on the sales
of loans, service charges, loan servicing income and other income. Non-interest
expense consists principally of employee compensation and benefits, occupancy
expense, data processing, federal insurance premiums, advertising, real estate
owned operations, and other operating expenses. The Bank's operating results
are significantly affected by general economic and competitive conditions, in
particular, the changes in market interest rates, government policies and
actions by regulatory authorities.
FINANCIAL CONDITION
Total assets decreased $6.9 million, or 7.4%, to $86.2 million at March 31,
1996 from $93.1 million at June 30, 1995. This was primarily the result of
decreases of $3.3 million in mortgage-backed securities, $1.5 million in loans
receivable, net and $2.0 million in investment securities and other interest-
earning assets. Additionally, deposits decreased by $358,000 and FHLB advances
by $6.9 million, partially offset by an increase of total equity of $402,000.
Mortgage-backed securities decreased $3.3 million, or 85.8%, to $549,000 at
March 31, 1996 from $3.9 million at June 30, 1995 reflecting the sale of $2.9
million of fixed rate securities in December 1995.
Loans receivable, net decreased by $1.6 million, or 2.0%, to $77.3
million at March 31, 1996 from $78.9 million at June 30, 1995 due to reductions
in one- to four-family portfolio loans of $2.8 million and consumer loans of
$600,000, partially offset by an increase in land loans of $1.6 million due to
an increase in demand for the construction of single-family housing.
Investment securities decreased $1.1 million, or 34.9%, to $2.0 million at
March 31, 1996 from $3.0 million at June 30, 1995 due to the sale of $1.1
million of mutual funds which were reinvested in loans.
Deposits decreased $358,000, or 0.5%, to $67.9 million at March 31, 1996
from $68.3 million at June 30, 1995. Interest credited during the nine months
ended March 31, 1996 totaled $2.0 million, while withdrawals exceeded deposits
by $2.4 million.
32
FHLB advances decreased $6.9 million, or 43.3%, to $9.0 million at March
31, 1996 from $15.9 million at June 30, 1995. Cash flows from the sale of
mortgage-backed securities and mutual funds along with principal paydowns from
portfolio loans were used to pay down advances.
Total equity increased $402,000, or 5.4%, to $7.9 million at March 31, 1996
due to $390,000 of net earnings during the nine months ended March 31, 1996 and
a $12,000 unrealized gain on investment securities available for sale.
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between interest earned on
interest-earning assets and interest paid on interest-bearing liabilities. Net
interest income depends on the volumes of interest-earning assets and interest-
bearing liabilities and the interest rates earned or paid on them.
33
The following table presents for the periods indicated the total dollar
amount of interest income from average interest-earning assets and the resultant
yields as well as the total dollar amount of interest expense on average
interest-bearing liabilities and the resultant rates. The average yields include
loan fees which are considered adjustments to yields. The amount of interest
income resulting from the recognition of loan fees was $211,000, $220,000,
$313,000 and $123,000 for the nine months ended March 31, 1996 and 1995 and for
the fiscal years ended June 30, 1995 and 1994, respectively. No tax equivalent
adjustments were made. All average balances are monthly average balances. The
Bank's management does not believe that the use of monthly balances instead of
daily balances has caused a material difference in the information presented.
Non-accruing loans have been included in the table as loans carrying a zero
yield.
Nine Months Ended March 31,
-----------------------------------------------------------------------------
1996 1995
-------------------------------------- -------------------------------------
At March 31, 1996 Average Average
-----------------------
Outstanding Outstanding Interest Outstanding Interest
Balance Yield/Rate Balance Earned/Paid Yield/Rate Balance Earned/Paid Yield/Rate
----------- ----------- ----------- ------------ ----------- ----------- ------------ -----------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable (1)...... $ 77,273 8.03% $ 77,834 $ 4,863 8.33% $ 62,632 $ 3,713 7.90%
Mortgage-backed securities 549 6.93 2,482 129 6.93 4,405 233 7.05
Investment securities..... 1,981 4.48 2,309 78 4.50 3,026 129 5.68
Investments in other
financial institutions... 1,316 0.52 2,158 17 1.05 2,172 20 1.23
FHLB stock................ 811 6.71 801 44 7.32 532 32 8.02
------- ------- ------- ------- -------
Total interest-earning
assets (1)............. 81,930 7.80 85,584 5,131 7.99 72,767 4,127 7.56
------- -------
Noninterest-earning assets. 4,239 4,155 2,815
------- ------- -------
Total assets............ $ 86,169 $ 89,739 $ 75,582
======= ======= =======
Interest-bearing
liabilities:
Savings deposits.......... $ 3,656 2.25 3,587 60 2.23 3,827 64 2.23
Demand and NOW deposits... 13,697 2.28 13,291 216 2.17 14,438 239 2.21
Certificate accounts...... 49,042 5.65 49,586 2,209 5.94 41,623 1,480 4.74
FHLB advances............. 9,000 5.91 12,451 604 6.47 5,927 319 7.18
------- ------- ------- ------- -------
Total interest-bearing
liabilities............ 75,395 4.90 78,915 3,089 5.22 65,815 2,102 4.26
Noninterest-bearing ------- -------
liabilities............... 2,891 3,113 2,599
------- ------- -------
Total liabilities....... $ 78,286 $ 82,028 $ 68,414
======= ======= =======
Net interest income........ $ 2,042 $ 2,025
======= =======
Net interest rate spread
(2)....................... 2.90% 2.77% 3.30%
==== ==== ====
Net earning assets......... $ 6,535 $ 6,669 $ 6,952
======= ======= =======
Net yield on average
interest-earning 3.18% 3.71%
assets (3)................ ==== ====
Average interest-earning
assets to average interest-
bearing liabilities....... 108.45% 110.56%
======= =======
34
Year Ended June 30,
-------------------------------------------------------------------------------
1995 1994
---------------------------------------- -------------------------------------
Average Average
Outstanding Interest Outstanding Interest
Balance Earned/Paid Yield/Rate Balance Earned/Paid Yield/Rate
----------- ------------ ------------ ----------- ----------- ----------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable (1)............ $66,107 $ 5,275 7.98% $49,380 $ 3,914 7.93%
Mortgage-backed securities...... 4,307 304 7.06 5,624 399 7.09
Investment securities........... 3,033 173 5.70 3,738 192 5.14
Investments in other financial
institutions................... 1,992 22 1.10 5,471 107 1.96
FHLB stock...................... 577 44 7.63 521 43 8.25
------- ------- ------- -------
Total interest-earning
assets (1)................... 76,016 5,818 7.65 64,734 4,655 7.19
------- -------
Noninterest-earning assets....... 3,110 2,406
------- -------
Total assets................ $79,126 $67,140
======= =======
Interest-bearing liabilities:
Savings deposits................ 3,819 85 2.23 3,719 83 2.23
Demand and NOW deposits......... 14,187 312 2.20 16,031 369 2.30
Certificate accounts............ 43,315 2,180 5.03 38,558 1,638 4.25
FHLB advances................... 7,919 569 7.19 57 3 5.26
------- ------- ------- -------
Total interest-bearing
liabilities.................. 69,240 3,146 4.54 58,365 2,093 3.59
------- -------
Noninterest-bearing liabilities.. 2,657 2,169
------- -------
Total liabilities........... $71,897 $60,534
======= =======
Net interest income.............. $ 2,672 $ 2,562
======= =======
Net interest rate spread (2)..... 3.11% 3.60%
==== ====
Net earning assets............... $ 6,776 $ 6,369
======= =======
Net yield on average interest-
earning assets (3).............. 3.52% 3.96%
==== ====
Average interest-earning
assets to average interest-
bearing liabilities............. 109.79% 110.91%
======= =======
_______________________________
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loan loss reserves.
(2) Net interest rate spread represents the difference between the average rate
on interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net interest margin represents net interest income divided by average
interest-earning assets.
35
RATE/VOLUME ANALYSIS
The following schedule presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the changes due to
changes in outstanding balances and those due to changes in interest rates. For
each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (i.e.,
changes in volume multiplied by prior interest rate) and (ii) changes in rate
(i.e., changes in rate multiplied by prior volume). For purposes of this table,
changes attributable to both rate and volume, which cannot be segregated, have
been allocated proportionately to the changes due to volume and the changes due
to rate.
Nine Months Ended March 31, Years Ended June 30,
---------------------------------- ---------------------------------
1996 vs. 1995 1995 vs. 1994
---------------------------------- ---------------------------------
Increase/(Decrease) Increase/(Decrease)
Due to Total Due to Total
-------------------- ---------------------
Increase Increase
Volume Rate (Decrease) Volume Rate (Decrease)
-------- ------ ---------- -------- ------ ----------
(In Thousands)
Interest-earning assets:
Loans receivable...................... $ 940 $ 210 $ 1,150 $ 1,336 $ 25 $ 1,361
Mortgage-backed securities............ (100) (4) (104) (93) (2) (95)
Investment securities................. (27) (24) (51) (39) 20 (19)
Investments in other financial
institutions......................... -- (3) (3) (50) (35) (85)
FHLB stock............................ 17 (5) 12 4 (3) 1
------- ------- -------- ------- ------ ---------
Total interest-earning assets...... $ 830 $ 174 $ 1,004 $ 1,158 $ 5 $ 1,163
======= ======= -------- ======= ====== ---------
Interest-bearing liabilities:
Savings deposits...................... $ (4) $ -- $ (4) $ 2 $ -- $ 2
Demand and NOW deposits............... (19) (4) (23) (41) (16) (57)
Certificate accounts.................. 314 415 729 218 324 542
FHLB advances......................... 339 (54) 285 565 1 566
------- ------- -------- ------- ------ ---------
Total interest-bearing liabilities.. $ 630 $ 357 987 $ 744 $ 309 1,053
======= ======= -------- ======= ====== ---------
Net interest income..................... $ 17 $ 110
======== =========
36
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED MARCH 31, 1996 AND
1995
Performance Summary. Net earnings for the nine months ended March 31, 1996
increased by $362,000, or 1292.9%, to $390,000 from $28,000 for the nine months
ended March 31, 1995. The increase was primarily due to the combined effects of
a $17,000 increase in net interest income, a $538,000 increase in non-interest
income, and a $4,000 decrease in income taxes for the 1996 period as compared to
the 1995 period, which more than offset a $45,000 increase in the provision for
loan losses and a $152,000 increase in noninterest expense. For the nine months
ended March 31, 1996 and 1995, the returns on average assets were 0.60% and
0.05%, respectively, while the returns on average equity were 6.74% and 0.52%,
respectively.
Net Interest Income. For the nine months ended March 31, 1996, net interest
income increased by $17,000, or 0.8%, to $2.04 million from $2.03 million for
the nine months ended March 31, 1995. The increase reflected an increase of $1.0
million in interest income to $5.1 million from $4.1 million which more than
offset an increase of $987,000 in interest expense to $3.1 million from $2.1
million. The increase in interest income reflected increased balances of loans
receivable, primarily adjustable rate mortgage loans and consumer loans
originated in fiscal 1995 and construction lending on single-family residences.
Interest expense increased by $987,000, or 47.0%, as a result of an $8.0
million, or 19.1%, increase in average certificate accounts due principally to a
special certificate promotion as well as increased certificate rates, primarily
due to higher market interest rates, and increased borrowings to fund loan
demand.
For the nine months ended March 31, 1996 the average yield on interest-
earning assets was 7.99% compared to 7.56% for the nine months ended March 31,
1995. The average cost of interest-bearing liabilities was 5.22% for the nine
months ended March 31, 1996, an increase from 4.26% for the same period ended
March 31, 1995. The average balance of interest-earning assets increased by
$12.8 million to $85.6 million for the nine months ended March 31, 1996 from
$72.8 million for the nine months ended March 31, 1995. During this same period,
average interest-bearing liabilities increased by $13.1 million to $78.9 million
for the nine months ended March 31, 1996 from $65.8 million for the same period
ended March 31, 1995.
The Bank's average interest rate spread was 2.77% for the nine months ended
March 31, 1996 compared to 3.30% for the earlier year period. The average net
interest margin was 3.18% for the nine months ended March 31, 1996 compared to
3.71% for the nine months ended March 31, 1995.
Provision for Loan Losses. During the nine months ended March 31, 1996, the
Bank charged $188,000 against earnings as a provision for loan losses compared
to a provision of $143,000 for the nine months ended March 31, 1995. This charge
resulted in an allowance for loan losses of $347,000, or 0.45% of loans
receivable, net at March 31, 1996, compared to $205,000, or 0.28% of loans
receivable, net at March 31, 1995. The allowance for loan losses as a percentage
of non-performing loans increased to 109.46% at March 31, 1996 from 96.70% at
March 31, 1995. The ratio increased due to the provision for loan losses for the
nine months ended March 31, 1996 exceeding net charge-offs. The allowance for
loan losses is based on a detailed review of non-performing and other problem
loans, prevailing economic conditions, actual loss experience and other factors,
which, in management's view, recognizes the changing composition of the Bank's
loan portfolio and the inherent risk associated with different types of loans.
Management will continue to monitor its allowance for loan losses and make
future additions to the allowance through the provision for loan losses as
economic conditions dictate. Although the Bank maintains its allowance for loan
losses at a level which it considers to be adequate to provide for potential
losses, there can be no assurance that future losses will not exceed estimated
amounts or that additional provisions for loan losses will not be required in
future periods.
Non-Interest Income. For the nine months ended March 31, 1996, non-interest
income increased $538,000 to $504,000 from ($34,000) for the same period ended
March 31, 1995. Included in non-interest income was the gain on the sale of
loans originated for sale; during the nine months ended March 31, 1996, the Bank
sold $12.6
37
million of such loans with a gain of $139,000. During the nine months ended
March 31, 1995, the gain on sale of loans was $5,000 represented by $1.2 million
of sold loans. Customer service charges, primarily relating to fees on
transaction accounts, were $147,000 for the nine months ended March 31, 1996 and
$143,000 for the same period ended March 31, 1995. During the nine months ended
March 31, 1996, the Bank recognized a gain of $54,000 on the sale of mortgage-
backed and investment securities. There were no sales of securities during the
nine months ended March 31, 1995; however, management determined its investment
in mutual funds had an other than temporary decline in value and wrote down its
investment by $314,000 during the nine months ended March 31, 1995. Other
income included late charges on loans of $46,000 and $38,000 for the nine months
ended March 31, 1996 and 1995, respectively.
Non-Interest Expense. Non-interest expense increased by $152,000 to $1.8
million for the nine months ended March 31, 1996 from $1.6 million for the nine
months ended March 31, 1995. Compensation expense increased $105,000 to $915,000
for the nine months ended March 31, 1996 from $809,000 for the same period ended
March 31, 1995, due to an increase in employees to staff the new branch office
in Kearney, Missouri and to increase the mortgage loan processing staff due to
an increase in originations of loans held for sale. Federal insurance premiums
increased $14,000 to $118,000 from $104,000 due to an increase in deposits.
Other increases in noninterest expense principally relate to the new branch
location in Kearney, Missouri.
Income Taxes. Income taxes increased by $4,000 to $207,000 for the nine
months ended March 31, 1996 from $211,000 for the nine months ended March 31,
1995. Exclusive of the mutual fund write down in 1995, the effective tax rates
were 34.7% and 38.1% for the nine months ended March 31, 1996 and 1995,
respectively.
COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED JUNE 30, 1995 AND
1994
Performance Summary. Net earnings for the year ended June 30, 1995
decreased by $537,000, or 76.7%, to $164,000 from $701,000 for the year ended
June 30, 1994. The decrease was primarily due to a reduction in noninterest
income of $277,000, an increase in the provision for loan losses of $138,000,
and an increase in noninterest expense of $283,000, which was only partially
offset by an increase of $110,000 in net interest income and lower income taxes.
For the fiscal years ended June 30, 1995 and 1994, the returns on average assets
were 0.21% and 1.04%, respectively, while the returns on average equity were
2.27% and 10.52%, respectively.
Net Interest Income. For the year ended June 30, 1995, net interest income
increased by $110,000 to $2.7 million from $2.6 million for fiscal 1994. The
increase reflected an increase of $1.2 million in interest income to $5.8
million from $4.7 million, which more than offset an increase of $1.1 million in
interest expense to $3.1 million from $2.1 million. The increase in interest
income reflected the increase in loans receivable due to favorable economic
conditions and increased demand for single-family homes in communities northeast
of Kansas City, Missouri and management's aggressive pursuit of these markets.
Interest expense increased primarily due to increased borrowings to meet loan
demand and an increase in certificate balances and rates. Net interest income
increased primarily as a result of the increase in the average balance of
interest-eaming assets in fiscal 1995, as compared to the increase in the
average balance of interest-bearing liabilities.
For the year ended June 30, 1995 the average yield on interest-eaming
assets was 7.65% compared to 7.19% for fiscal 1994. The average cost of
interest-bearing liabilities was 4.54% for the year ended June 30, 1995, an
increase from 3.59% for fiscal 1994. The average balance of interest-earning
assets increased by $11.3 million to $76.0 million for the year ended June 30,
1995 compared to $64.7 million for fiscal 1994. During this same period, the
average balance of interest-bearing liabilities increased by $10.9 million to
$69.2 million for the year ended June 30, 1995 from $58.4 million for fiscal
1994.
Due to these higher funding costs, the average interest rate spread was
3.11% for the year ended June 30, 1995 compared to 3.60% a year earlier. The
average net interest margin was 3.52% for the year ended June 30, 1995 compared
to 3.96% for the year ended June 30, 1994.
38
Provision for Loan Losses. During the year ended June 30, 1995 the Bank
charged $171,000 against earnings as a provision for loan losses compared to
$33,000 for the year ended June 30, 1994. The increase in the fiscal 1995
provision for loan losses resulted primarily from an increase in net charge-offs
on consumer loans of $86,000 and an increase in construction lending. The
consumer loan losses were principally due to loans made to customers purchasing
automobiles from one specific used-car dealer. The Bank has identified all these
loans. The allowance for loan losses was $226,000, or 0.29% of loans receivable
at June 30, 1995, compared to $163,000, or 0.30% of loans receivable at June 30,
1994. The allowance for loan losses as a percentage of non-performing loans
increased to 150.67% at June 30, 1995 from 57.80% at June 30, 1994.
Non-Interest Income. For the year ended June 30, 1995 non-interest income
decreased by $276,000 to $97,000 from $373,000 for fiscal 1994. Included in non-
interest income is gain on sales of loans originated for sale which decreased
$98,000 during fiscal 1995 due to consumers' lack of demand for fixed rate
product and increased demand for adjustable rate mortgages which the Bank
retains in its own portfolio. During the year ended June 30, 1995 management
recorded a write down of $314,000 for a mutual fund investment as it determined
an other-than-temporary decline in value existed. During fiscal 1994, mutual
funds were sold with a loss of $136,000 to offset taxable capital gains of a
like amount.
Non-Interest Expense. Non-interest expense increased by $284,000 to $2.1
million for the year ended June 30, 1995 from $1.8 million for the year ended
June 30, 1994. The increase reflected normal salary increases as well as an
increase of $128,000 in compensation, payroll taxes and fringe benefits due to
an increase in the number of employees to obtain and process mortgage loan
applications and to staff the opening of the Kearney, Missouri branch. Other
increases principally related to the new branch location in Kearney, Missouri
and the addition of mortgage lending personnel.
Income Taxes. Income taxes decreased by $51,000 to $301,000 for the year
ended June 30, 1995 from $352,000 for the year ended June 30, 1994. The
effective tax rates, exclusive of the mutual fund write down, were 38.6% and
33.4% for the years ended June 30, 1995 and 1994, respectively.
ASSET/LIABILITY MANAGEMENT
Savings institutions such as the Bank are subject to interest rate risk to
the extent their interest-bearing liabilities (consisting primarily of deposit
accounts, FHLB advances and other borrowings) mature or reprice more rapidly, or
on a different basis, than their interest-earning assets (consisting
predominantly of intermediate and long-term real estate loans and investments
held for investment and liquidity purposes). Having interest-bearing liabilities
that mature or reprice more frequently on average than assets may be beneficial
in times of declining interest rates, although such an asset/liability structure
may result in declining net interest earnings during periods of rising interest
rates. Conversely, having interest-earning assets that mature or reprice more
frequently on average than liabilities may be beneficial in times of rising
interest rates, although this asset/liability structure may result in declining
net interest earnings during periods of falling interest rates.
39
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at March 31, 1996, which are expected
to reprice or mature in each of the future time periods shown, assuming a 43.27%
annual pre-payment rate for fixed rate real estate loans, a 9.41% annual pre-
payment rate for mortgage-backed securities, a 15.15% annual pre-payment rate
for adjustable rate real estate loans, and a 51.05% annual pre-payment rate for
consumer loans. Except for deposits, which are classified as repricing in the
"within 1 year" category, the amounts of assets and liabilities shown which
reprice or mature during a particular period were determined in accordance with
the earlier of term to repricing or the contractual terms of the asset
liability. For information regarding the contractual maturities of the Bank's
loans, investments and deposits, see "Business--Lending Activities," "--
Investment Activities" and "--Sources of Funds."
Amounts Maturing or Repricing at March 31, 1996
------------------------------------------------------------------------
Within Over
1 Year 1-3 Years 3-5 Years 5-10 Years 10 Years Total
------ --------- --------- ---------- -------- -------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable, net (1)................... $ 66,145 $ 10,036 $ 739 $ 340 $ 13 $ 77,273
Mortgage-backed securities.................. 43 405 31 66 4 549
Investment securities....................... 1,981 -- -- -- -- 1,981
Investments in other financial institutions. 1,316 -- -- -- -- 1,316
FHLB stock.................................. 811 -- -- -- -- 811
-------- --------- --------- ------- --------- --------
Total interest-earning assets (1).......... $ 70,296 $ 10,441 $ 770 $ 406 $ 17 $ 81,930
======== ========= ========= ======= ========= ========
Interest-bearing liabilities:
Savings deposits............................ $ 3,656 $ -- $ -- $ -- $ -- $ 3,656
Demand and NOW deposits..................... 13,697 -- -- -- -- 13,697
Certificate accounts........................ 39,947 5,611 1,377 2,107 -- 49,042
FHLB advances............................... 4,000 2,000 3,000 -- -- 9,000
-------- --------- --------- ------- --------- --------
Total interest-bearing liabilities......... $ 61,300 $ 7,611 $ 4,377 $ 2,107 $ -- $ 75,395
======== ========= ========= ======= ========= ========
Interest sensitivity gap..................... $ 8,996 $ 2,830 $ (3,607) $(1,701) $ 17 $ 6,535
======== ========= ========= ====== ========= ========
Cumulative interest sensitivity gap.......... $ 8,996 $ 11,826 $ 8,219 $ 6,518 $ 6,535 $ 6,535
======== ========= ========= ======= ========= ========
Ratio of interest-earning assets to
interest-bearing liabilities................ 114.68% 137.18% 17.59% 19.27% --% 108.67%
====== ====== ====== ====== ======== ======
Ratio of cumulative gap to total assets...... 10.44% 13.72% 9.54% 7.56% 7.58% 7.58%
====== ====== ====== ====== ======== ======
______________________________________
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loan loss reserves.
40
Net Portfolio Value. In order to measure its interest rate risk, the Bank
computes the amounts by which the net present value of the Bank's cash flows
from assets, liabilities and off-balance sheet items, if any (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 the
Bank's NPV of instantaneous and permanent 1% to 4% increases and decreases in
market interest rates. The Board of Directors has established maximum increases
and decreases in NPV. The table below indicates the Board limits and the
estimates of projected changes in NPV in the event of 1%, 2%, 3% and 4%
instantaneous and permanent increases and decreases in market interest rates,
respectively.
The Net Portfolio Value method of calculating interest rate risk originated
in a rule adopted by the OTS for the purpose of incorporating an interest rate
risk ("IRR") component into its risk-based capital rules. The IRR component is a
dollar amount that will be deducted from total capital for the purpose of
calculating an institution's risk-based capital requirement and is measured in
terms of the sensitivity of its NPV to changes in interest rates. NPV is the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts. An institution's IRR is measured as
the change to its NPV as a result of a hypothetical 200 basis point change in
market interest rates. A resulting change in NPV of more than 2% of the
estimated market value of its assets will require the institution to deduct from
its capital 50% of that excess change. The rule provides that the OTS will
calculate the IRR component quarterly for each institution. The Bank, based on
asset size and risk-based capital, has been informed by the OTS that it is
exempt from this rule. Nevertheless, the following table presents the Bank's NPV
at March 31, 1996, as calculated by the OTS, based on information provided to
the OTS by the Bank.
As another measure to calculate its interest rate risk, the Bank computes
the amounts by which Net Interest Income (NII) would change in the event of a
range of changes in interest rates. These computations estimate the effect on
the Bank's NII of instantaneous and permanent 1% to 4% increases and decreases
in interest rates. The Board has established maximum increases and decreases in
NII. The following table indicates the Board limits and the estimates of
projected changes in NII in the event of 1%, 2%, 3% and 4% instantaneous and
permanent increases and decreases in interest rates, respectively.
Computations of prospective effects of hypothetical interest rate changes
are based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposit run offs, and should not be relied upon as
indicative of actual results. Further, the computations do not contemplate any
actions the Bank may undertake in response to changes in interest rates.
Board Board
Change in Amount of Percent Limit of Amount of Percent Limit of
Interest Rates Estimated Change Change Change Net Interest Change Change Change
(basis points) NPV in NPV in NPV in NPV Income in NII in NII in NII
- ---------------- --------- --------- -------- -------- ------------ -------- ------- -------
(Dollars In Thousands)
+400bp $7,713 $(3,126) (28.84) (40.0) $2,993 $(369) (10.98) (30.0)
+300bp 8,843 (1,996) (18.41) (30.0) 3,148 (214) (6.37) (20.0)
+200bp 9,843 (996) (9.19) (20.0) 3,297 (65) (1.93) (20.0)
+100bp 10,547 (292) (2.69) (10.0) 3,427 65 1.93 (20.0)
0bp 10,839 -- -- -- 3,362 -- -- --
-100bp 10,724 (115) (1.06) (10.0) 3,299 (63) (1.87) (20.0)
-200bp 10,444 (395) (3.64) (20.0) 3,236 (126) (3.75) (20.0)
-300bp 10,291 (548) (5.06) (30.0) 3,180 (182) (5.41) (20.0)
-400bp 10,351 (488) (4.50) (40.0) 3,125 (237) (7.05) (30.0)
Although the OTS has informed the Bank that it is not subject to the IRR
component discussed above, the Bank is still subject to interest rate risk and,
as can be seen above, rising interest rates will reduce the Bank's NPV. The
41
OTS has the authority to require otherwise exempt institutions to comply with
the rule concerning interest rate risk. See "Regulation--Regulatory Capital
Requirements."
Certain shortcomings are inherent in the method of analysis presented in
both the computation of NPV and in the analysis presented in the prior table
setting forth the maturing and repricing of interest-earning assets and
interest-bearing liabilities. Although certain assets and liabilities may have
similar maturities or periods within which they will reprice, they may react
differently to changes in market interest rates. The interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, adjustable-rate mortgages have features which
restrict changes in interest rates on a short-term basis and over the life of
the asset. The proportion of adjustable-rate loans could be reduced in future
periods if market interest rates would decrease and remain at lower levels for a
sustained period, due to increased refinance activity. Further, in the event of
a change in interest rates, prepayment and early withdrawal levels would likely
deviate significantly from those assumed in the table. Finally, the ability of
many borrowers to service their adjustable-rate debt may decrease in the event
of a sustained interest rate increase.
The Bank's Board of Directors has formulated an Asset/Liability Policy
designed to promote long-term profitability while managing interest rate risk.
The Asset/Liability Policy is designed to reduce the impact of changes in
interest rates on the Bank's net interest income by achieving a more favorable
match between the maturity or repricing dates of its interest-earning assets and
interest-bearing liabilities. The Bank has sough to reduce exposure of its
earnings to changes in market interest rates by increasing the interest rate
sensitivity of the Bank's assets through the origination of loans with interest
rates subject to periodic adjustment to market conditions. Accordingly, the Bank
has emphasized the origination of adjustable-rate mortgage ("ARM") loans and
consumer loans for retention in its portfolio. The Bank also generally sells its
long-term fixed-rate loans in the secondary market. The Bank has also increased
its portfolio of construction loans which generally have shorter maturities and
higher yields. Finally, the Bank has sought to maintain a strong base of less
interest sensitive and lower costing "core deposits" in the form of passbook
accounts, NOW accounts, money market accounts and noninterest-bearing demand
accounts, and by promoting longer-term certificates of deposit in an effort to
extend the maturity of its liabilities.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds are deposits, FHLB advances, repayments
on and sales of loans, the maturity of investment securities and interest
income. Although maturity and scheduled amortization of loans are relatively
predictable sources of funds, deposit flows and prepayments on loans are
influenced significantly by general interest rates, economic conditions and
competition.
The primary investing activity of the Bank is the origination of loans to
be held for investment. For the nine months ended March 31, 1996 and the fiscal
year ended June 30, 1995, the Bank originated loans for portfolio in the amount
of $33.9 million and $52.8 million, respectively. There were no purchases of
loans during these periods. The Bank also originates loans for sale in the
secondary market. For the nine months ended March 31, 1996 and the fiscal year
ended June 30, 1995, the Bank originated $12.0 million and $6.1 million,
respectively, of mortgage loans for sale in the secondary market. For the nine
months ended March 31, 1996 and the fiscal year ended June 30, 1995, these
activities were funded primarily by principal repayments of $23.0 million and
$26.4 million, respectively, and proceeds from the sale of loans of $12.6
million and $4.7 million, respectively.
The Bank is required to maintain minimum levels of liquid assets under the
OTS regulations. Savings institutions are required to maintain an average daily
balance of liquid assets (including cash, certain time deposits, and specified
U.S. Government, state or federal agency obligations) of not less than 5.0% of
its average daily balance of net withdrawal accounts plus short-term borrowings.
It is the Bank's policy to maintain its liquidity portfolio in excess of
regulatory requirements. The Bank's eligible liquidity ratios were 5.96% and
9.53%, respectively, at March 31, 1996 and at June 30, 1995.
42
The Bank's most liquid assets are cash and cash equivalents, which include
short-term investments. The levels of these assets are dependent on the Bank's
operating, financing, lending and investing activities during any given period.
At March 31, 1996 and at June 30, 1995, cash and cash equivalents were $2.1
million and $3.1 million, respectively. The decrease in cash and cash
equivalents in 1996 compared to 1995 resulted primarily from the use of cash to
fund loans. The principal component of cash provided during the nine months
ended March 31, 1996 and the fiscal year ended June 30, 1995 was the proceeds
from loan repayments, sales of loans, deposit activity, and investment
maturities. The Bank may initially maintain a somewhat higher level of liquidity
following consummation of the Conversion until appropriate investments are
identified for the proceeds raised. See "Use of Proceeds."
Liquidity management for the Bank is both an ongoing and long-term function
of the Bank's asset/liability management strategy. Excess funds generally are
invested in overnight deposits at the FHLB of Des Moines. Should the Bank
require funds beyond its ability to generate them internally, additional sources
of funds are available through FHLB of Des Moines advances. The Bank would
pledge its FHLB of Des Moines stock or certain other assets as collateral for
such advances. For the nine months ended March 31, 1996, the Bank had an
average balance of $12.5 million in FHLB advances.
At March 31, 1996, the Bank had outstanding loan commitments of $1.4
million, unused lines of credit of $428,000 and undisbursed loans in process of
$8.1 million. The Bank anticipates it will have sufficient funds available to
meet its current loan commitments, including loan applications received and in
process prior to the issuance of firm commitments. Certificates of deposit which
are scheduled to mature in one year or less at March 31, 1996 were $39.4
million. Management believes that a significant portion of such deposits will
remain with the Bank.
Following consummation of the Conversion, the Holding Company initially
will have no business other than holding the capital stock of the Bank and the
investment of the net proceeds from the Conversion retained by it. Management
believes the net proceeds will provide sufficient funds for the Holding
Company's operations.
Under federal law, the Bank is required to meet certain tangible, core and
risk based capital requirements. For information regarding the Bank's regulatory
capital compliance, see "Pro Forma Regulatory Capital" and "Regulation -
Regulatory Capital Requirements."
RECENT ACCOUNTING DEVELOPMENTS
Statement of Financial Accounting Standards No. 119, Disclosures About
Derivative Financial Instruments and Fair Value of Financial Instruments,
requires disclosures of information such as credit and market risks, cash
requirements and accounting policies about derivative financial instruments.
SFAS No. 119 is effective for financial statements issued for fiscal years
ending after December 15, 1994, except for entities with less than $150 million
in total assets. For those entities, SFAS No. 119 is effective for financial
statements issued for fiscal years ending after December 15, 1995. SFAS No. 119
is effective for the Bank for the fiscal year ending June 30, 1996.
The Financial Accounting Standards Board ("FASB") has issued SFAS No. 107,
Disclosure about Fair Value of Financial Instruments, which generally requires
disclosure of the fair value of financial instruments, both assets and
liabilities recognized and not recognized in the balance sheets. The FASB has
also issued SFAS No. 114, Accounting by Creditors for Impairment of a Loan, and
SFAS No. 118, Accounting by Creditors for Impairment of a Loan -Income
Recognition and Disclosures. SFAS No. 107, SFAS No. 114 and SFAS No. 118 are
effective for fiscal years beginning after December 15, 1994. SFAS No. 114, as
amended by SFAS No. 118, requires that impaired loans be measured at the present
value of expected future cash flows discounted at the loan's effective interest
rate or, as a practical expedient, at the loan's observable market price or the
fair value of the collateral if the loan is collateral dependent. Homogeneous
loans, such as single-family loans and most categories of consumer loans, are
excluded from this requirement. Adoption of these statements will be effective
for the fiscal year beginning July 1, 1995. Management does not expect the
adoption of SFAS Nos. 114 and 118 will have a material adverse impact on the
Bank's financial position or results of operations.
43
In November 1993, the AICPA issued SOP 93-6, "Employers' Accounting for
Employee Stock Ownership Plans," which is effective for fiscal years beginning
after December 15, 1993 and which applies to shares of capital stock of
sponsoring employers acquired by ESOPs after December 31, 1992 that have not
been committed to be released as of the beginning of the year in which the ESOP
is adopted. The SOP requires that shares to be released in an accounting period
should be reflected in the consolidated financial statements as compensation
expense equal to the fair value of the shares at the time of release. Thus, as
shares increase or decrease in value, earnings will be affected relative to the
shares to be released in that period. Additionally, the SOP requires that
outstanding shares for purposes of computing both primary and fully diluted
earnings per share include only those shares scheduled to be released in that or
prior periods. Thus, as additional shares are released by the ESOP in future
periods, earnings per share may be diluted. Shares of Common Stock of the
Holding Company to be acquired by the ESOP are scheduled to be released over a
ten-year period commencing with the consummation of the Conversion. However,
the effect on net income and book value per share for 1996 cannot be predicted
due to the uncertainty of the fair value of the shares subsequent to their
issuance.
SFAS No. 123, Accounting for Stock-Based Compensation, is effective for
fiscal years beginning after December 15, 1995. This statement establishes
financial accounting and reporting standards for stock-based employee
compensation plans, including stock option plans. These plans include all
arrangements by which employees receive shares of stock or other equity
investments of the employer or where an employer issues its equity instruments
to acquire goods and services from nonemployees. This statement will require pro
forma disclosures in fiscal 1997 of net income and earnings per share as if a
new accounting method based on the estimated fair value of employee stock
options had been adopted. The Bank has not yet determined whether the optional
accounting treatment proposed by SFAS No. 123 will be adopted.
SFAS No. 122, Accounting for Mortgage Servicing Rights, will be effective
for the Bank for the year beginning July 1, 1996 and generally requires entities
that sell or securitize loans and retain the mortgage servicing rights to
allocate the total cost of the mortgage loans to the mortgage servicing right
and the loan based on their relative fair value. Costs allocated to mortgage
servicing rights should be recognized as a separate asset and amortized over the
period of estimated net servicing income and evaluated for impairment based on
fair value. The adoption of this statement is not expected to have a material
effect on the Consolidated Financial Statements.
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and Long-
Lived Assets to be Disposed of, is effective for the fiscal year beginning July
1, 1996. The statement requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. An impairment loss is recognized if the sum of the
expected future cash flows is less than the carrying amount of the asset.
Management does not expect the implementation of SFAS No. 121 to have a material
impact on the Bank's consolidated financial position or results of operations.
In April 1995, the FASB issued SOP 94-6, Disclosure of Certain Significant
Risks and Uncertainties. This SOP applies to financial statements prepared in
conformity with generally accepted accounting principles by all nongovernmental
entities. The disclosure requirements in SOP 94-6 focus primarily on risks and
uncertainties that could significantly affect the amounts reported in the
financial statements in the near-term functioning of the reporting entity. The
risks and uncertainties discussed in SOP 94-6 stem from the nature of the
entity's operations, from the necessary use of estimates in the preparation of
the entity's financial statements, and from significant concentrations in
certain aspects of the entity's operations. SOP 94-6 is effective for financial
statements issued for fiscal years ending after June 30, 1995 and is not
expected to have any impact on the Bank's operations.
44
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with generally accepted accounting principles,
which generally requires 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 due to inflation. The impact of
inflation is reflected in the increased cost of the Bank's operations. Nearly
all the assets and liabilities of the Bank are financial, unlike most industrial
companies. As a result, the Bank's performance is directly impacted by changes
in interest rates, which are indirectly influenced by inflationary expectations.
The Bank's ability to match the interest sensitivity of its financial assets to
the interest sensitivity of its financial liabilities in its asset/liability
management may tend to minimize the effect of change in interest rates on the
Bank's performance. Changes in interest rates do not necessarily move to the
same extent as changes in the price of goods and services. In the current
increasing interest rate environment, liquidity and the maturity structure of
the Bank's assets and liabilities are critical to the maintenance of acceptable
performance levels.
BUSINESS
GENERAL
Community Bank has been, and intends to continue to be, a community-
oriented financial institution offering selected financial services to meet the
needs of the communities it serves. The Bank attracts deposits from the general
public and historically has used such deposits, together with other funds,
primarily to originate one- to four-family residential mortgage loans,
construction and land loans for single-family residential properties, and
consumer loans consisting primarily of loans secured by automobiles. While the
Bank's primary business has been that of a traditional thrift institution,
originating loans in its primary market area for retention in its portfolio, the
Bank also has been an active participant in the secondary market, originating
residential mortgage loans for sale. At March 31, 1996, the Bank's total loan
portfolio was $86.0 million, of which 61.0% were one- to four-family residential
mortgage loans, 25.0% were construction and land loans (the vast majority of
which related to single-family residential properties), and 12.4% were consumer
loans. During the nine months ended March 31, 1996 and the fiscal year ended
June 30, 1995, the Bank originated and sold $12.6 million and $4.7 million,
respectively, of one-to four-family residential mortgage loans in the secondary
market. See "Lending Activities."
At March 31, 1996, substantially all of the Bank's real estate mortgage
loans were secured by properties located in the Bank's market area. See "Risk
Factors - Geographical Concentration of Loans." To a substantially lesser
extent, the Bank invests in various investment securities, including mortgage-
backed securities.
The Bank currently offers a variety of deposit accounts, which include
passbook savings, NOW, noninterest bearing demand, money market and certificate
accounts. The Bank generally solicits deposits in its primary market area. The
Bank does not accept any brokered deposits.
CURRENT BUSINESS STRATEGY
The Bank's business strategy is to operate as a well-capitalized,
profitable and independent community savings institution dedicated primarily to
home-mortgage lending. In recent years, in response to significant growth in its
primary market area, the Bank has implemented this strategy by (i) increasing
its construction and land lending in response to the increased demand for such
loans; (ii) increasing its origination of one- to four-family residential
mortgage loans for sale in the secondary mortgage market; and (iii) increasing
the origination of adjustable-rate one-to four-family residential mortgage loans
for retention in its portfolio. The Bank has sought to increase such lending
activity while simultaneously (1) maintaining asset quality, (2) managing
interest rate risk exposure, (3) maintaining acceptable levels of capital, (4)
controlling operating expenses, and (5) maintaining and, if possible, increasing
the Bank's profitability.
45
The highlights of the Bank's business strategy are as follows:
. Increasing Construction and Land Lending. In order to take advantage
of significant new real estate development in the north Kansas City
area, the Bank has substantially increased its origination of
construction and land loans in recent years. At March 31, 1996 and at
June 30, 1995, construction and land loans constituted 25.0% and
21.3%, respectively, of the Bank's total loan portfolio. By
comparison, at June 30, 1994, construction and land loans constituted
14.5% of the Bank's total loan portfolio.
. Originating Single-Family Loans for Secondary Market Sale. Also in
response to market demand, the Bank has increased its originations and
sales of single-family fixed-rate mortgage loans into the secondary
mortgage market. The sale of such loans into the secondary mortgage
market reduces the Bank's interest rate risk and permits the Bank to
generate non-interest income from servicing such loans. For the nine
months ended March 31, 1996, the Bank originated $14.3 million of
fixed-rate one- to four-family residential mortgage loans and sold
$12.6 million, or 87.6%, of such loans into the secondary mortgage
market.
. Originating for Portfolio Adjustable-Rate Single Family Loans. The
Bank has sought to increase its portfolio of adjustable-rate single
family mortgage loans. For the nine months ended March 31, 1996, the
Bank originated $4.5 million in adjustable-rate single family mortgage
loans. The Bank's ability to originate adjustable-rate mortgage loans
to a certain extent is dependent upon relative customer demand for
such loans, which is affected by the interest rate environment, among
other factors.
. Asset Quality. The Bank's non-performing assets have ranged between
0.17% and 0.55% of total assets during the last two fiscal years and
represented 0.38% of total assets at March 31, 1996. The Bank's
allowance for loan losses at March 31, 1996 totalled $347,000, or
0.45% of total loans receivable, net.
. Managing Interest Rate Risk. Management of the Bank has attempted to
reduce interest rate risk by: (i) emphasizing the origination of
adjustable rate mortgages for retention in its portfolio; (ii)
originating virtually all of its long-term fixed rate loans for sale
in the secondary mortgage market; (iii) originating for retention in
its portfolio construction loans and non-mortgage consumer loans,
which have shorter terms; (iv) maintaining a strong base of less
interest rate sensitive "core deposits" and promoting longer-term
certificates of deposit, where practical; and (v) utilizing FHLB
borrowings to lengthen the maturity of its liabilities. For the nine
months ended March 31, 1996, of the $6.3 million in one- to four-
family mortgage loans originated by the Bank for its portfolio, $4.5
million, or 71.0%, had adjustable interest rates. In addition, of the
$14.3 million in fixed-rate one-to four-family residential mortgage
loans originated by the Bank, $12.6 million of such loans, or 88.1%,
were sold in the secondary mortgage market. The Bank's base of core
deposit accounts consisting of passbook accounts, demand deposits and
money market deposit accounts amounted to $18.9 million at March 31,
1996, or 27.8% of the Bank's total deposits.
. Capital Strength. At March 31, 1996, the Bank exceeded all of its
regulatory capital requirements with tangible and core capital of
9.14% of adjusted total assets and risk-based capital of 12.04% of
total risk-weighted assets. As a result of the Conversion and based on
the assumptions stated herein, at the midpoint of the Estimated
Valuation Range at March 31, 1996, the Bank would have had pro forma
equity of approximately $11.6 million, or 12.8% of total assets.
. Controlling Operating Expense. The Bank's management monitors
operating expenses on an ongoing basis and places significant emphasis
on controlling such costs. The Bank's noninterest expense totaled $1.8
million in the nine months ended March 31, 1996, $2.1 million in
fiscal 1995, and $1.8 million in fiscal 1994. The Bank's ratio of
noninterest expense to average total assets was 2.62% for
46
the nine months ended March 31, 1996, and 2.70% and 2.75% for fiscal
1995 and 1994, respectively. In recent years, the Bank's operating
expenses have increased as a result of the increase in personnel hired
to originate one-to four-family and construction and land loans in
response to the increased demand for such loans in the Bank's primary
market area. The increase in operating expenses also reflects the
opening in 1995 of the Bank's Kearney branch office.
. Profitability. Although no assurance can be made regarding future
profitability, the Bank has been profitable during recent years. The
Bank had net earnings of $164,000 in fiscal 1995 and $701,000 in
fiscal 1994. The Bank's average interest rate spread was 2.77%, 3.11%
and 3.60%, respectively, for the nine months ended March 31, 1996 and
for fiscal 1995 and 1994. The Bank is attempting to increase its net
earnings by increasing its servicing fees on loans originated for sale
into the secondary market, and by increasing its interest rate spread
by increasing its portfolio of higher-yielding construction and land
loans, particularly for new home construction in the area around the
Bank's Kearney branch office, and by increasing the origination of
higher-yielding consumer loans. See "Business--Lending Activities" and
"Risk Factors--Construction and Land Lending."
MARKET AREA AND COMPETITION
Community Bank serves communities located in Clay and Ray Counties and in
surrounding counties in Missouri from its main office in Excelsior Springs and
its branch office in Kearney. Both Excelsior Springs and Kearney are located in
Clay County, which is part of the Kansas City Metropolitan Statistical Area.
Excelsior Springs and Kearney are small towns with 1990 populations estimated at
11,000 and 2,000, respectively. Clay County has a relatively large population
(estimated at 166,000 as of 1995), and the northern portion of Clay County is a
combination of suburban and rural areas containing a number of small towns,
including Excelsior Springs and Kearney. Southern Clay County is a rapidly
developing suburban market, and is home to a large number of people who commute
to jobs in areas closer to Kansas City.
Most of the employment in Clay County is provided by light manufacturing,
services and retail trade. Included among the largest employers in Clay County
are a number of hospitals (Liberty Hospital, Excelsior Springs Medical Center,
North Kansas City Hospital, and St. Luke's Northland Hospital), local school
districts and two community colleges. Employers in the manufacturing sector
include Ford Motor Company, Farmland Industries and Wilcox Electric. In the
immediate Excelsior Springs area, the largest employers are American Italian
Pasta, Precise Technology Incorporated, Douglas & Lomason and Gilmour
Manufacturing.
The Bank's business and operating results are significantly affected by the
general economic conditions present in the Bank's market area. As of April
1996, the latest date for which statistical data are available, the unemployment
rate in Clay County was 2.6% and the unemployment rate in Ray County was 3.5%.
The Bank faces significant competition in attracting deposits from
commercial banks, other savings institutions and credit unions. The Bank faces
additional competition for deposits from short-term money market funds, from
other corporate and government securities funds and from brokerage funds and
insurance companies. The Bank also faces significant competition in the
origination of loans from savings institutions, mortgage banking companies,
credit unions and commercial banks. In Clay County alone, where the Bank's two
offices are located, there are 36 commercial banks, 44 credit unions, and 10
savings institutions.
47
LENDING ACTIVITIES
GENERAL. The Bank has emphasized and will continue to emphasize the
origination of one- to four-family residential mortgage loans. In recent years,
subject to market conditions, the Bank has emphasized the origination for
portfolio of ARM loans and the origination and sale of fixed-rate residential
mortgage loans. Due to the high level of construction activity in southern Clay
County in recent years, and in an effort to improve the yield on overall
interest-earning assets, the Bank has increased its portfolio of residential
construction loans. The Bank also originates land loans secured by vacant land
or building lots for which the borrower intends to ultimately construct a
residential property. The Bank also originates commercial real estate and multi-
family residential loans, which are generally offered on a case-by-case basis as
an accommodation to existing Bank customers. The Bank's non-mortgage loans
consist primarily of automobile loans, which are originated on a direct and on
an indirect basis.
Under OTS regulations, a thrift institution's loans-to-one borrower limit
is generally limited to the greater of 15% of unimpaired capital and surplus or
$500,000. See "Regulation - Federal Regulation of Savings Associations." At
March 31, 1996, the maximum amount which the Bank could have lent under this
limit to any one borrower and the borrower's related entities was approximately
$1.2 million. At March 31, 1996, the Bank had no loans or groups of loans to
related borrowers with outstanding balances in excess of this amount. The
Bank's largest lending relationship at March 31, 1996 was approximately $1.0
million in loans to a residential builder for the construction of single-family
residences and was secured by real estate located in Clay County, Missouri. At
March 31, 1996, all of these loans were performing in accordance with their
terms.
LOAN PORTFOLIO COMPOSITION. Set forth below is data relating to the
composition of the Bank's loan portfolio by type of loan as of the dates
indicated.
At March 31, At June 30,
----------------- ------------------------------------
1996 1995 1994
----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent
------- -------- ------- -------- ------- --------
(Dollars in Thousands)
Real estate loans:
One- to four-family residential..... $52,471 61.00% $55,257 64.46% $39,001 67.32%
Multi-family........................ 321 0.37 134 0.16 163 0.28
Commercial.......................... 1,025 1.19 818 0.95 317 0.55
Land................................ 3,641 4.23 1,992 2.32 545 0.94
Construction........................ 17,888 20.80 16,221 18.93 7,857 13.56
------- ------ ------- ------ ------- ------
Total real estate loans.............. 75,346 87.59 74,422 86.82 47,883 82.65
------- ------ ------- ------ ------- ------
Consumer loans:
Direct automobile loans............. 6,452 7.50 6,426 7.50 5,240 9.05
Indirect automobile loans........... 2,302 2.68 2,960 3.45 3,090 5.33
Deposit accounts.................... 536 0.62 524 0.61 445 0.77
Home improvement.................... 236 0.27 279 0.33 292 0.50
Other............................... 1,150 1.34 1,107 1.29 985 1.70
------- ------ ------- ------ ------- ------
Total consumer loans............. 10,676 12.41 11,296 13.18 10,052 17.35
------- ------ ------- ------ ------- ------
Total loan portfolio............. 86,022 100.00% 85,718 100.00% 57,935 100.00%
====== ====== ======
Less:
Loans in process.................... 8,143 6,391 4,068
Deferred loan origination fees and
discounts on loans, net........... 259 221 251
Allowance for loan losses........... 347 226 163
------- ------- -------
Total loans receivable, net....... $77,273 $78,880 $53,453
======= ======= =======
48
The following table shows the composition of the Bank's loan portfolio by
fixed- and adjustable-rates at the dates indicated.
At March 31, At June 30,
---------------------- -----------------------------------
1996 1995 1994
---------------------- ----------------- ----------------
Amount Percent Amount Percent Amount Percent
------------ -------- ------- -------- ------- --------
(Dollars in Thousands)
Fixed Rate Loans:
Real estate:
One- to four-family............. $ 6,887 8.01% $ 6,924 8.08% $ 4,458 7.70%
Multi-family.................... 34 0.04 44 0.05 64 0.11
Commercial...................... 80 0.09 -- -- -- --
Land............................ 312 0.36 280 0.33 145 0.25
Construction.................... 17,888 20.80 16,221 18.93 7,857 13.56
------- ------ ------- ------ ------- -------
Total real estate loans.......... 25,201 29.30 23,469 27.38 12,524 21.62
------- ------ ------- ------ ------- -------
Consumer loans.................... 10,469 12.17 11,296 13.18 10,052 17.35
------- ------ ------- ------ ------- -------
Total fixed-rate loans....... 35,670 41.47 34,765 40.56 22,576 38.97
------- ------ ------- ------ ------- -------
Adjustable Rate Loans:
Real estate:
One- to four-family............. $45,584 52.99% $48,333 56.39% $34,543 59.62%
Multi-family.................... 287 0.33 90 0.10 99 0.17
Commercial...................... 945 1.10 818 0.95 317 0.55
Land............................ 3,329 3.87 1,712 2.00 400 0.69
Construction.................... -- -- -- -- -- --
------- ------ ------- ------ ------- -------
Total real estate loans.......... 50,145 58.29 50,953 59.44 35,359 61.03
------- ------ ------- ------ ------- -------
Consumer loans.................... 207 0.24 -- -- -- --
------- ------ ------- ------ ------- -------
Total adjustable-rate loans.. 50,352 58.53 50,953 59.44 35,359 61.03
------- ------ ------- ------ ------- -------
Total loan portfolio......... 86,022 100.00% 85,718 100.00% 57,935 100.00%
====== ====== =======
Less:
Loans in process................ 8,143 6,391 4,068
Deferred fees and discounts..... 259 221 251
Allowance for losses............ 347 226 163
------- ------- -------
Total loans receivable, net... $77,273 $ 78,880 $53,453
======= ======= =======
ONE- TO FOUR-FAMILY MORTGAGE LOANS. The Bank's primary lending activity is
the origination of one- to four-family, owner-occupied, residential mortgage
loans secured by property located in the Bank's market area. Loans are generated
through the Bank's marketing efforts, its existing customers and referrals, real
estate brokers, builders and local businesses. The Bank also employs its
Chairman of the Board as a full-time loan originator to solicit loans. The Bank
generally has limited its real estate loan originations to the financing of
properties located within its market area and will not make out-of-state loans.
At March 31, 1996, the Bank had $52.5 million, or 61.0% of its loan portfolio,
invested in mortgage loans secured by one- to four-family residences.
The Bank originates fixed-rate residential one- to four-family loans with
terms of 15 and 30 years. Such loans may either be retained in portfolio or
sold in the secondary mortgage market depending on the yield on such loans and
the Bank's asset/liability management objectives. Currently, the Bank's policy
is to sell into the secondary market fixed-rate residential real estate loans.
As of March 31, 1996, $6.9 million, or 8.0% of the Bank's loan portfolio,
consisted of fixed-rate residential one- to four-family loans. The Bank's
fixed-rate mortgage loans amortize monthly with principal and interest due each
month. Residential real estate loans often remain outstanding for significantly
shorter periods than their contractual terms because borrowers may refinance or
prepay loans at their option.
49
Fixed-rate residential one- to four-family loans originated for sale in the
secondary mortgage market are underwritten in conformity with the criteria
established by the Federal Home Loan Mortgage Corporation ("FHLMC") for sale
primarily to FHLMC. Such loans are sold on a non-recourse basis. The Bank
retains servicing rights on a portion of such loans, depending upon customer
preferences and competitive conditions. For the nine months ended March 31,
1996, of the $14.3 million in fixed-rate residential one- to four-family loans
originated by the Bank, $12.6 million of such loans, or 88.1%, were sold in the
secondary mortgage market.
The Bank also offers ARM loans for terms ranging up to 30 years. The Bank
currently offers ARM loans that adjust every year, with interest rate adjustment
limitations up to two percentage points per year and with a cap of up to six
percentage points on total interest rate increases over the life of the loan,
although a majority of the ARM loans in the Bank's portfolio have adjustment
limitations of one percentage point and five percentage point interest rate
caps. In a rising interest rate environment, such rate limitations may prevent
ARM loans from repricing to market interest rates, which would have an adverse
effect on net interest income. The Bank has used different interest indices for
ARM loans in the past, and currently uses the one year U.S. Treasury Index
adjusted to a constant maturity, with margins of 275 basis points for agency-
conforming ARM loans and 300 basis points for non-conforming ARM loans. ARM
loans secured by residential one- to four-family real estate totaled $45.6
million, or 53.0% of the Bank's total loan portfolio at March 31, 1996. The
origination of fixed-rate mortgage loans versus ARM loans is monitored on an
ongoing basis and is affected significantly by the level of market interest
rates, customer preference, the Bank's interest rate gap position and loan
products offered by the Bank's competitors. Particularly in a relatively low
interest rate environment, borrowers may prefer fixed-rate loans to ARM loans.
During the nine months ended March 31, 1996, the Bank originated $14.3 million
in fixed-rate residential mortgage loans and $4.5 million of ARM loans. During
1995, the Bank originated $6.6 million of fixed-rate residential mortgage loans
and $19.7 million of ARM loans.
The primary purpose of offering ARM loans is to make the Bank's loan
portfolio more interest rate sensitive. However, as the interest income earned
on ARM loans varies with prevailing interest rates, such loans do not offer the
Bank predictable cash flows as would long-term, fixed-rate loans. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Asset and Liability Management. ARM loans carry increased credit
risk associated with potentially higher monthly payments by borrowers as general
market interest rates increase. It is possible, therefore, during periods of
rising interest rates, that the risk of delinquencies and defaults on ARM loans
may increase due to the upward adjustment of interest costs to the borrower,
resulting in increased loan losses.
The Bank's residential first mortgage loans customarily include due-on-sale
clauses, which are provisions giving the Bank the right to declare a loan
immediately due and payable in the event, among other things, that the borrower
sells or otherwise disposes of the underlying real property serving as security
for the loan. Due-on-sale clauses are a means of imposing assumption fees and
increasing the interest rate on the Bank's mortgage portfolio during periods of
rising interest rates.
Regulations limit the amount that a savings association may lend relative
to the appraised value of the real estate securing the loan, as determined by an
appraisal at the time of loan origination. Such regulations permit a maximum
loan-to-value ("LTV") ratio of 95% for residential property (and 100% for loans
guaranteed by the Veterans Administration) and 90% for all other real estate
loans. The Bank's lending policies, however, generally limit the maximum LTV
ratio on fixed-rate and ARM loans to 80% of the lesser of the appraised value or
the purchase price of the property securing the loan in the case of loans
secured by one- to four-family owner-occupied properties. On conventional one-to
four-family loans, the Bank will lend up to a 95% LTV ratio; however, any loans
with LTV ratios in excess of 80% require private mortgage insurance. The maximum
LTV ratio on other types of real estate loans is generally the lesser of 80% of
the appraisal value or the purchase price of the property.
When underwriting residential real estate loans, the Bank reviews and
verifies each loan applicant's employment, income and credit history. The Bank's
policy is to obtain credit reports and financial statements on all borrowers and
guarantors, and to verify references. Properties securing real estate loans are
appraised by Bank-approved independent appraisers. Appraisals are subsequently
reviewed by the Bank's Loan Committee, as applicable.
50
Management believes that stability of income, past credit history and adequacy
of the proposed security are integral parts in the underwriting process.
Generally, the applicant's total monthly mortgage payment, including all escrow
amounts, is limited to 28% of the applicant's total monthly income. In addition,
total monthly obligations of the applicant, including mortgage payments, should
not generally exceed 36% of total monthly income. Written appraisals are always
required on real estate property offered to secure an applicant's loan. The Bank
requires fire and casualty insurance on all properties securing real estate
loans, as well as title insurance.
CONSTRUCTION AND LAND LENDING. The Bank invests a significant proportion of
its loan portfolio in construction and land loans. Prompted by increased
residential development in Clay County in recent years, such lending has been a
growing part of the Bank's loan portfolio. Substantially all of the Bank's
construction and land loans are secured by residential properties located in
Clay County.
The Bank originates four basic types of construction and land loans:
1. "Speculative" construction loans are made to home builders for the
construction principally of one- to four-family residences and
residential development projects and, to a lesser extent, multi-family
residences (primarily duplexes). Speculative construction loans
generally do not have a sale contract or permanent loan in place for
the finished home, and the purchasers for the finished homes may be
identified either during or following the construction period.
2. "Contract" construction loans are made to builders who have a signed
contract to build a new home.
3. "Construction" loans are made to individuals who have contracted with
a builder to construct their personal residence.
4. "Land acquisition" loans ("land loans") are made by the Bank to
individuals and builders for the acquisition of land upon which the
borrower can then build.
The table below presents information on the Bank's construction and land
loans at March 31, 1996:
Outstanding Percent of
Loan Balance/(1)/ Total
------------ ----------
(Millions)
\\ Speculative.............................. $12,259 57.0%
Contract................................. 2,010 9.3
Construction............................. 3,619 16.8
------- -------
Total construction....................... 17,888 83.1
Land..................................... 3,641 16.9
------- -----
Total construction and land.............. $21,529 100.0%
======= =======
_____________________
/(1)/Includes loans in process.\\
At March 31, 1996, the Bank's $17.9 million of construction loans and $3.6
million of land loans represented 20.8% and 4.2%, respectively, of total loans
receivable. At the same time, the Bank's $12.3 million of speculative
construction loans represented 14.3% of total loans receivable.
Construction and land lending affords the Bank the opportunity to achieve
higher interest rates and fees with shorter terms to maturity than does its
single-family permanent mortgage lending. Construction and land lending,
however, is generally considered to involve a higher degree of risk than single-
family permanent mortgage lending due to (i) the concentration of principal
among relatively few borrowers and development projects, (ii) the increased
51
difficulty at the time the loan is made of estimating building costs and the
selling price of the residence to be built, (iii) the increased difficulty and
costs of monitoring the loan, (iv) the higher degree of risk associated with
residential sales activity in changing real estate market conditions, and (v)
the increased difficulty of working out problem loans. Speculative construction
loans have the added risk associated with identifying an end-purchaser for the
finished home. See "Risk Factors -Construction and Land Lending." The Bank has
sought to address these risks by developing and adhering to underwriting
policies, disbursement procedures, and monitoring practices.
The Bank seeks to make construction loans to those builders with which it
has a long-standing history of satisfactory performance. New builders typically
borrow from the Bank in limited amounts and may borrow additional amounts based
on proven experience with the Bank. At March 31, 1996, the Bank had one borrower
for which speculative construction loans outstanding totaled more than $1.0
million. The foregoing builder with speculative construction and land loans
totaling more than $1.0 million has been a customer of the Bank for more than
two years.
While substantially all of the Bank's construction and land loans are
secured by properties located in southern Clay County, the Bank also seeks to
diversify its construction and land lending risks among several subdivisions. At
March 31, 1996, the Bank had speculative construction loans secured by
properties in 61 subdivisions of which two represented an exposure to a single
subdivision of more than $1.0 million.
One- to Four-Family Construction Loans. Loans for the construction of one-
to four-family residences are generally made for terms of six to 12 months. The
Bank's loan policy includes maximum loan-to-value ratios of up to 85% for
speculative construction loans and up to 80% for construction loans. Prior to
preliminary approval of a construction loan application, Bank personnel inspect
the site, review the existing or proposed improvements, identify the market for
the proposed project, analyze the pro forma data and assumptions on the project,
and satisfy themselves with the experience and expertise of the builder. After
preliminary approval has been given, the application is processed. Processing
includes obtaining credit reports, financial statements and tax returns on the
borrowers and guarantors, if any, an independent appraisal of the project, and
any other expert reports necessary to evaluate the proposed project.
The Bank requires that construction loan proceeds be disbursed in
increments as construction progresses based upon inspections by Bank personnel.
To control the disbursement process, the Bank requires that builders and their
subcontractors and vendors submit invoices to the Bank for payment. In the event
of cost overruns, depending on the circumstances (i.e., whether due to "add-ons"
not included in the original plans or due to unanticipated changes in building
costs) the Bank may seek to require the borrower to deposit funds with the Bank
for additional disbursements, increase the loan amount on the basis of an
increased appraisal and disburse additional loan proceeds consistent with the
original loan-to-value ratio, or become more active in the monitoring and
progress of the project.
The Bank regularly monitors the accuracy of assumptions made in its
construction loan business over time. In particular, the Bank tracks the
accuracy of its independent appraisers by comparing actual selling prices with
the appraised value estimated in connection with the loan approval.
Additionally, the Bank tracks the performance of its builder customers by
comparing actual costs with those estimated in the loan application.
Commercial and Multi-family Construction Loans. Occasionally, the Bank
originates loans for the construction of commercial buildings and multi-family
residences on terms similar to those on one- to four-family construction loans.
Land Loans. At March 31, 1996, the Bank had total land loans of $3.6
million. In making land loans, the Bank follows similar underwriting policies as
for construction loans. The Bank originates land loans with similar terms and at
similar rates as construction loans, except that the initial term on
conventional land loans is typically five to ten years (not to exceed 30 years)
as opposed to the term of up to 12 months that is typical of construction loans.
52
MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING. The Bank also originates
loans secured by multi-family and commercial real estate. At March 31, 1996,
$1.3 million, or 1.6%, of the Bank's loan portfolio consisted of multi-family
loans and commercial real estate loans.
Multi-family and commercial real estate loans originated by the Bank may be
either fixed- or adjustable-rate loans with terms to maturity and amortization
schedules of up to 30 years. Rates on such ARM loans generally adjust annually
to specified spreads over the one-year U.S. Treasury securities index adjusted
to a constant maturity of one year, subject to annual and life-of-loan interest
rate caps. Multi-family and commercial real estate loans are written in amounts
of up to 80% of the lesser of the appraised value of the property or the sales
price.
The Bank's commercial real estate portfolio consists primarily of loans on
small office buildings located in the Bank's primary market area. Multi-family
loans generally are secured by duplexes. Appraisals on properties which secure
multi-family and commercial real estate loans are performed by an independent
appraiser designated by the Bank before the loan is made. All appraisals on
multi-family and commercial real estate loans are reviewed by the Bank's
management. In underwriting such loans, the Bank primarily considers the cash
flows generated by the real estate to support the debt service, the financial
resources and income level of the borrower and the Bank's experience with the
borrower. In addition, the Bank's underwriting procedures require verification
of the borrower's credit history, an analysis of the borrower's income,
financial statements and banking relationships, a review of the borrower's
property management experience and references, and a review of the property,
including cash flow projections and historical operating results. The Bank seeks
to ensure that the property securing the loans will generate sufficient cash
flow to adequately cover operating expenses and debt service payments.
Multi-family and commercial real estate lending affords the Bank an
opportunity to receive interest at rates higher than those generally available
from one- to four-family residential lending. Nevertheless, loans secured by
such properties are generally larger, more difficult to evaluate and monitor
and, therefore generally, involve a greater degree of risk than one- to four-
family residential mortgage loans. Because payments on loans secured by
commercial real estate and multi-family properties are often dependent on the
successful operation or management of the properties, repayment of such loans
may be subject to adverse conditions in the real estate market or the economy.
If the cash flow from the project is reduced, the borrower's ability to repay
the loan might be impaired. The Bank has attempted to minimize these risks by
lending primarily to the ultimate user of the property or on existing income-
producing properties.
CONSUMER LENDING. Community Bank offers a variety of consumer loans,
including automobile and home improvement loans, second mortgage home equity
loans, lines of credit secured by first or second mortgage loans, and loans
secured by deposits. The Bank currently originates substantially all of its
consumer loans in its primary market area generally to its existing customers.
At March 31, 1996, the Bank's consumer loan portfolio totaled $10.7 million, or
12.4% of its loan portfolio.
The primary component of the Bank's consumer loan portfolio consists of
automobile loans secured by both new and used cars and light trucks. The Bank
originates automobile loans on a direct basis, where the Bank extends credit
directly to the borrower, and on an indirect basis through automobile
dealerships. Although applications for indirect automobile loans are taken by
employees of the dealer, the loans are made pursuant to the Bank's underwriting
standards using the Bank's documentation. All such indirect automobile loans
must be approved by a Bank loan officer before disbursement of loan proceeds.
The Bank seeks to limit the credit risk of indirect automobile lending by doing
business with local dealers with which it has had a satisfactory prior
relationship, and through strict adherence to its underwriting standards.
The Bank's automobile loans generally have terms that do not exceed five
years and carry a fixed-rate of interest. Generally, loans on new vehicles are
made in amounts up to 80% of dealer cost and loans on used vehicles are made in
amounts up to 80% of the vehicle's published NADA value. Collision and
comprehensive insurance and vendor single-interest coverage is required on all
automobile loans. At March 31, 1996, the Bank's indirect
53
automobile loans totaled $2.3 million, or 2.7% of the Bank's loan portfolio and
direct automobile loans totalled $6.5 million, or 7.5% of the Bank's loan
portfolio.
Community Bank also originates Federal Housing Administration ("FHA") Title
I home improvement loans. Generally, such loans have a maximum term of ten
years, have fixed rates and may be originated up to a 100% loan-to-value ratio.
While the Bank retains a portion of such loans in portfolio, the majority of its
FHA Title I home improvement loans are originated for sale in the secondary
market. At March 31, 1996, the Bank's FHA Title I home improvement loans totaled
$210,000, or 0.2% of the Bank's loan portfolio.
The Bank also originates for portfolio second mortgage/home equity loans.
These loans are generally limited to 80% or less of the appraised value of the
property securing the loan. These loans are originated as fixed-rate loans and
generally have maximum terms of 15 years. At March 31, 1996, the Bank's second
mortgage/home equity loans totaled $732,000, or 0.9% of the Bank's loan
portfolio.
The Bank also originates for portfolio lines of credit secured by first or
second mortgages. Such loans are adjustable-rate loans, adjust annually, and may
be originated up to an 80% loan-to-value ratio, with a maximum term of five
years. At March 31, 1996, the Bank's lines of credit secured by first or second
mortgages totaled $1.2 million, or 1.5% of the Bank's loan portfolio.
Consumer loan terms vary according to the type and value of collateral,
length of contract and creditworthiness of the borrower. The underwriting
standards employed by the Bank for consumer loans include an application, a
determination of the applicant's payment history on other debts and an
assessment of ability to meet existing obligations and payments on the proposed
loan. Although creditworthiness of the applicant is a primary consideration, the
underwriting process also includes a comparison of the value of the security, if
any, in relation to the proposed loan amount.
Consumer loans entail greater credit risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured or are
secured by rapidly depreciable assets, such as automobiles. Further, any
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment of the outstanding loan balance as a result of the greater
likelihood of damage, loss or depreciation. In addition, consumer loan
collections are dependent on the borrower's continuing financial stability, and
thus are more likely to be affected by adverse personal circumstances.
Furthermore, the application of various federal and state laws, including
bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans. At March 31, 1996, $32,000 in consumer loans were non-performing.
See "Asset Quality--Delinquent Loans and Non-performing Assets." There can be no
assurances, however, that delinquencies will not increase in the future.
54
LOAN MATURITY SCHEDULE
The following schedule illustrates the contractual maturity and weighted
average rates of the Bank's total loan portfolio at June 30, 1995. Mortages
which have adjustable or renegotiable interest rates are shown as maturing in
the period during which the contract is due. The schedule does not reflect the
effects of scheduled payments, possible prepayments or enforcement of due-on-
sale clauses. The total amount of loans due after June 30, 1996 that have
predetermined interest rates is $16.5 million, and that have floating or
adjustable rates is $49.8 million.
Real Estate
---------------------------------------------------------------------------------------------
Multi-Family
One- to Four-Family and Commercial Land Construction
------------------- ---------------- ----------------------------------------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ---- ------ ----
(Dollars in Thousands)
Due During Years Ending June 30,
- --------------------------------
1996............................. $ 445 8.48% $ -- --% $ 264 8.23% $16,221 7.03%
1997............................. 131 9.60 -- -- 3 8.50 -- --
1998............................. 212 7.41 48 9.00 8 8.45 -- --
1999 and 2000.................... 777 8.01 84 8.19 25 9.68 -- --
2001 to 2005..................... 3,847 7.99 149 8.65 132 8.28 -- --
2006 to 2020..................... 20,117 7.70 239 8.76 587 8.50 -- --
2021 and following............... 29,728 7.14 432 7.19 973 8.47 -- --
------- ------ ------ -------
$55,257 7.43 $ 952 7.99 $1,992 8.45 $16,221 7.03
======= ====== ====== =======
Consumer Total
---------------- ---------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ ---- ------ ----
(Dollars in Thousands)
Due During Years Ending June 30,
- --------------------------------
1996............................. $ 2,482 9.61% $19,412 7.41%
1997............................. 1,301 10.91 1,435 10.79
1998............................. 2,561 10.05 2,829 9.83
1999 and 2000.................... 4,780 9.49 5,666 9.26
2001 to 2005..................... 161 10.27 4,289 8.11
2006 to 2020..................... 11 11.51 `20,954 7.74
2021 and following............... -- -- 31,133 7.18
------- -------
$11,296 9.82 $85,718 7.70
======= =======
55
ORIGINATION OF LOANS
Loan originations are developed from continuing business with depositors
and borrowers, soliciting realtors, builders, walk-in customers and third-party
sources. The Bank also employs its Chairman of the Board as a full-time loan
originator to solicit loans. The Board of Directors of the Bank has authorized
certain officers to originate loans within specified underwriting limits. Each
of the Chief Executive Officer and the Mortgage Lending Officer have authority
to make secured real estate loans up to $203,000 and secured installment loans
up to $30,000. Unsecured installment loans may be approved by the Chief
Executive Officer up to $15,000 and by the Mortgage Lending Officer up to
$10,000. All loans in excess of these limitations must be approved by the Board
of Directors. The Bank has established a Loan Audit Committee which reviews
loans made or denied by officers of the Bank. The Loan Audit Committee meets
monthly and consists of the Chief Executive Officer as well as three members of
the Board of Directors.
While the Bank originates both adjustable-rate and fixed-rate loans, its
ability to originate loans to a certain extent is dependent upon the relative
customer demand for loans in its market, which is affected by the interest rate
environment, among other factors. For the nine months ended March 31, 1996, the
Bank originated $38.5 million in fixed-rate loans and $7.4 million in
adjustable-rate loans. For the year ended June 30, 1995, the Bank originated
$37.7 million in fixed-rate loans and $21.3 million in adjustable-rate loans.
In recent years, the Bank has not purchased loans. For the nine months
ended March 31, 1996 and for the year ended June 30, 1995, the Bank purchased no
loans. The Bank has recently expanded its mortgage banking operations and
expects such operations to expand further in the future. For the nine months
ended March 31, 1996, the Bank sold $12.6 million in conforming residential one-
to four-family loans, compared to $1.2 million for the nine months ended March
31, 1995. The residential loans sold by the Bank are fixed-rate residential
loans with maturities of 15 and 30 years.
Set forth below is a table showing the Bank's loan originations, sales and
repayments for the periods indicated.
Nine Months
Ended March 31, Year Ended June 30,
----------------------- --------------------------
1996 1995 1995 1994
-------- -------- --------- ---------
(In Thousands)
Originations by type:
Adjustable rate:
Real estate -
One- to four-family residential......... $ 4,499 $ 15,759 $ 19,693 $ 8,305
Multi-family............................ 52 -- -- --
Commercial.............................. 383 252 382 89
Land.................................... 2,247 817 1,176 379
Consumer................................. 187 -- -- --
-------- --------- --------- ---------
Total adjustable rate..................... 7,368 16,828 21,251 8,773
-------- --------- --------- ---------
Fixed rate:
Real estate -
One- to four-family residential......... 14,333 2,865 6,605 16,776
Land.................................... 126 156 198 151
Construction............................ 17,755 14,685 19,903 9,509
Consumer................................. 6,305 7,809 10,956 10,169
-------- --------- --------- ---------
Total fixed rate.......................... 38,519 25,515 37,662 36,605
-------- --------- --------- ---------
Total loans originated.................... 45,887 42,343 58,913 45,378
Sales and Repayments:
Real Estate -
One- to four-family residential.......... 12,561 1,156 4,721 15,809
-------- --------- --------- ---------
Total loans sold......................... 12,561 1,156 4,721 15,809
Principal repayments...................... 33,022 19,629 26,409 19,913
-------- --------- --------- ---------
Total sales and repayments............... 45,583 20,785 31,130 35,722
Decrease (increase) in other items, net.... (1,911) (2,558) (2,356) (2,927)
-------- --------- --------- ---------
Net (decrease) increase.................. $ (1,607) $ 19,000 $ 25,427 $ 6,729
======== ========= ========= =========
56
ASSET QUALITY
The Bank's collection procedures provide that when a loan is past due, a
first notice is sent to the borrower requesting payment ten days (for consumer
loans) and 16 days (for real estate loans) after the due date. A second notice
is sent 16 days (for consumer loans) and 30 days (for real estate) after the due
date. At the time of the second notice, phone calls are made by the Bank with
personal letter backups. If the loan remains delinquent for 30 days, a telephone
contact is made. If the loan becomes 60 days delinquent, a right-to-cure letter
generally is sent and the borrower is notified of the availability of financial
or counseling aid. If consumer loans are not resolved by 90 days, the account is
put on non-accrual status and repossession and/or legal action is normally
initiated. If a real estate loan is past due 60 days or more, the loan is
presented to the Board of Directors for future disposition. In most cases, the
Board of Directors authorizes the initiation of foreclosure proceedings. At
March 31, 1996, and at June 30, 1995 and 1994 the percentage of total loans
delinquent 90 days or more to net loans receivable were 0.42%, 0.21% and 0.71%,
respectively.
DELINQUENT LOANS AND NON-PERFORMING ASSETS. Loans are reviewed on a
regular basis and are placed on a non-accrual status when, in the opinion of
management, the collection of additional interest is doubtful. Mortgage loans
are placed on non-accrual status when principal is 90 days or more past due.
Interest accrued and unpaid at the time a loan is placed on non-accrual status
is charged against interest income. The loan will remain on non-accrual status
until the loan is brought current.
Real estate acquired through foreclosure or by deed-in-lieu of foreclosure
is classified as real estate owned until such time as it is sold. When real
estate owned is acquired, it is recorded at the lower of the unpaid principal
balance of the related loan, or its fair market value, less estimated selling
expenses. Any further write-down of real estate owned is charged against
earnings. At March 31, 1996, the Bank has no property classified as real estate
owned.
The following table sets forth information with respect to the Bank's
delinquent loans at March 31, 1996.
Loans Delinquent For
------------------------------------------------------------------
60-89 Days 90 Days and Over Total Delinquent Loans
------------------------------- -------------------------------- --------------------------------
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
-------- -------- --------- -------- -------- -------- -------- -------- --------
Real Estate:
One- to four-family....... 10 $ 733 1.40% 5 $ 285 0.54% 15 $ 1,018 1.94%
Consumer.................. 10 61 0.57 6 24 0.23 16 85 0.80
------- ------- ------- -------- ------- --------
Total.................... 20 $ 794 1.03 11 $ 309 0.40 31 $ 1,103 1.43
======= ======= ======= ======== ======= ========
57
The following table sets forth information regarding non-performing loans
and real estate owned by the Bank at the dates indicated. As of the dates
indicated, the Bank did not have any material restructured loans within the
meaning of SFAS No. 15.
At March 31, At June 30,
-----------------------
1996 1995 1994
--------------- ----------- ----------
(Dollars In Thousands)
Non-accruing loans:
One- to four-family............................ $ 70 $ 81 $ 221
Consumer....................................... 25 52 53
------- ------- -------
Total....................................... 95 133 274
------- ------- -------
Accruing loans delinquent more than 90 days:/(1)/
One- to four-family............................ 215 17 --
Consumer....................................... 7 -- 8
------- ------- -------
Total....................................... 222 17 8
------- ------- -------
Foreclosed assets:
One- to four-family............................ -- -- 68
Land........................................... -- -- 13
Consumer....................................... 11 12 16
------- ------- -------
Total....................................... 11 12 97
------- ------- -------
Total non-performing assets........................ $ 328 $ 162 $ 379
======= ======= =======
Total loans delinquent 90 days or more
to net loans receivable.......................... 0.41% 0.19% 0.53%
======= ======== ========
_______________________
/(1)/These loans are not currently delinquent 90 days or more with respect to
principal, but are delinquent with respect to late fees or interest.
For the nine months ended March 31, 1996 and the fiscal year ended June 30,
1995, gross interest income which would have been recorded had the non-accruing
loans been current in accordance with their original terms amounted to $6,000
and $11,000, respectively. The amount that was included in interest income on
such loans was $6,000 and $7,000 for the nine months ended March 31, 1996 and
the fiscal year ended June 30, 1995, respectively.
CLASSIFIED ASSETS. Federal regulations provide for the classification of
loans and other assets, such as debt and equity securities, considered by the
OTS to be of lesser quality, as "substandard," "doubtful" or "loss." An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard" with the added characteristic that
the weaknesses present make "collection or liquidation in full" on the basis of
currently existing facts, conditions and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted.
When an insured institution classifies problem assets as either substandard
or doubtful, it may establish general allowances for losses in an amount deemed
prudent by management. General allowances represent loss
58
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as "loss," it is required either to establish a specific
allowance for losses equal to 100% of that portion of the asset so classified or
to charge-off such amount. An institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the regulatory authorities, who may order the establishment
of additional general or specific loss allowances.
In connection with the filing of its periodic reports with the OTS and in
accordance with its classification of assets policy, the Bank reviews loans in
its portfolio monthly to determine whether such assets require classification in
accordance with applicable regulations. On the basis of management's review of
its assets, at March 31, 1996, the Bank had classified a total of $60,000 of its
assets as substandard. At March 31, 1996 the Bank had no assets classified as
doubtful or as loss. At March 31, 1996, total classified assets comprised
$60,000, or 0.76% of the Bank's capital and 0.07% of the Bank's total assets.
OTHER LOANS OF CONCERN. In addition to the non-performing loans set forth
in the tables above, as of March 31, 1996, there were no loans classified by the
Bank with respect to which known information about the possible credit problems
of the borrowers or the cash flows of the security properties have caused
management to have some doubts as to the ability of the borrowers to comply with
present loan repayment terms and which may result in the future inclusion of
such items in the non-performing asset categories.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in its loan portfolio and changes in the nature and volume of its loan
activity, including those loans which are being specifically monitored by
management. Such evaluation, which includes a review of loans for which full
collectibility may not be reasonably assured, considers among other matters, the
loan classifications discussed above, the estimated fair value of the underlying
collateral, economic conditions, historical loan loss experience, the amount of
loans outstanding and other factors that warrant recognition in providing for an
adequate loan loss allowance.
Real estate properties acquired through foreclosure are recorded at the
lower of cost or fair value minus estimated cost to sell. If fair value at the
date of foreclosure is lower than the balance of the related loan, the
difference will be charged-off to the allowance for loan losses at the time of
transfer. Valuations are periodically updated by management and if the value
declines, a specific provision for losses on such property is established by a
charge to operations. At March 31, 1996, the Bank had no properties which were
acquired through foreclosure.
Although management believes that it uses the best information available to
determine the allowance, unforeseen market conditions could result in
adjustments and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in making the final
determination. Future additions to the Bank's allowance for loan losses will be
the result of periodic loan, property and collateral reviews and thus cannot be
predicted in advance. In addition, federal regulatory agencies, as an integral
part of the examination process, periodically review the Bank's allowance for
loan losses. Such agencies may require the Bank to increase the allowance based
upon their judgment of the information available to them at the time of their
examination. At March 31, 1996, the Bank had a total allowance for loan losses
of $347,000, representing 109.46% of total non-performing loans and 0.45% of the
Bank's loans receivable, net. See Note 1 of the Notes to Consolidated Financial
Statements.
59
The following table sets forth the allocation for loan losses by category
for the periods indicated.
At At June 30,
-------------------------------------------------------------
March 31, 1996 1995 1994
----------------------------------- ------------------------------ -----------------------------
Percent Percent Percent
of Loans of Loans of Loans
Loan in Each Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category Amount of Amounts Category
Loan Loss by to Total Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans Allowance Category Loans
--------- -------- -------- --------- -------- --------- --------- -------- --------
(Dollars in Thousands)
One- to four-family.......... $ 30 $ 52,471 61.00% $ 34 $ 55,257 64.46% $ 28 $ 39,001 67.32%
Multi-family................. 1 321 0.37 1 134 0.16 1 163 0.28
Commercial real estate....... 6 1,025 1.19 4 818 0.95 2 317 0.55
Land......................... 21 3,641 4.23 8 1,992 2.32 3 545 0.94
Construction or development.. 149 17,888 20.80 58 16,221 18.93 29 7,857 13.56
Consumer..................... 140 10,676 12.41 121 11,296 13.18 100 10,052 17.35
------- -------- ------- ------ -------- -------- ------ -------- --------
Total................... $ 347 $ 86,022 100.00% $ 226 $ 85,718 100.00% $ 163 $ 57,935 100.00%
======= ======== ======= ====== ======== ======== ====== ======== ========
60
The following table sets forth information with respect to the Bank's
allowance for loan losses for the periods indicated.
Nine Months
Ended March 31, Years Ended June 30,
----------------- ----------------------
1996 1995 1995 1994
-------- ------- ---------- ---------
(In thousands)
Balance at beginning of period........................................ $ 226 $ 163 $ 163 $ 150
------- ------ ------
Charge-offs:
One- to four-family................................................. -- 10 10 8
Consumer............................................................ 91 147 161 40
------- ------ ------- ------
91 157 171 48
Recoveries:
Consumer............................................................ 24 56 63 28
------- ------ ------- ------
24 56 63 28
------- ------ ------- ------
Net charge-offs....................................................... 67 101 108 20
Provision for loan losses............................................. 188 143 171 33
------- ------ ------- ------
Balance at end of period.............................................. $ 347 $ 205 $ 226 $ 163
======= ====== ======= ======
Ratio of net charge-offs during the period
to average loans outstanding during the period....................... 0.11% 0.21% 0.16% 0.04%
======= ====== ======= ======
Ratio of allowance for loan loss to ending
loans receivable, net................................................ 0.45% 0.28% 0.29% 0.30%
======= ====== ======= ======
Ratio of allowance for loan loss to non-
performing assets at end of period................................... 105.79% 67.88% 139.51% 43.01%
======= ====== ======= ======
61
INVESTMENT ACTIVITIES
GENERAL. Community Bank must maintain minimum levels of investments that
qualify as liquid assets under OTS regulations. Liquidity may increase or
decrease depending upon the availability of funds and comparative yields on
investments in relation to the return on loans. Historically, the Bank has
generally maintained liquid assets at levels above the minimum requirements
imposed by the OTS regulations and at levels believed adequate to meet the
requirements of normal operations, including repayments of maturing debt and
potential deposit outflows. Cash flows projections are regularly reviewed and
updated to assure that adequate liquidity is maintained. At March 31, 1996, the
Bank's liquidity ratio (liquid assets as a percentage of net withdrawable
savings deposits and current borrowings) was 5.96%. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -Liquidity and
Capital Resources" and "Regulation - Liquidity."
Federally chartered savings institutions have the authority to invest in
various types of liquid assets, including U.S. Treasury obligations, securities
of various federal agencies, certain certificates of deposit of insured banks
and savings institutions, certain bankers' acceptances, repurchase agreements
and federal funds. Subject to various restrictions, federally chartered savings
institutions may also invest their assets in commercial paper, investment grade
corporate debt securities and mutual funds whose assets conform to the
investments that a federally chartered savings institution is otherwise
authorized to make directly.
Generally, the investment policy of the Bank, as established by the Board
of Directors, is to invest funds among various categories of investments and
maturities based upon the Bank's liquidity needs, asset/liability management
policies, investment quality, marketability and performance objectives.
MORTGAGE-BACKED SECURITIES. The Bank purchases mortgage-backed securities
to supplement residential loan production and as part of its asset/liability
strategy. The type of securities purchased is based upon the Bank's
asset/liability management strategy and balance sheet objectives. The Bank has
invested primarily in federal agency securities, principally FHLMC and
Government National Mortgage Association ("GNMA") obligations. At March 31,
1996, the Bank's investment in mortgage-backed securities totaled $549,000, or
0.6% of its total assets. At March 31, 1996 and at June 30, 1995 and 1994, all
of the Bank's mortgage-backed securities were classified as held-to-maturity.
See Note 3 of the Notes to Consolidated Financial Statements .
The FHLMC and GNMA certificates are modified pass-through mortgage-backed
securities that represent undivided interests in underlying pools of fixed-rate,
or certain types of adjustable-rate, single-family residential mortgages issued
by these government-sponsored entities. As a result, the interest rate risk
characteristics of the underlying pool of mortgages, i.e., fixed rate or
adjustable rate, as well as prepayment risk, are passed on to the certificate
holder. FHLMC provides the certificate holder a guarantee of timely payments of
interest and ultimate collection of principal, whether or not they have been
collected. GNMA's guarantee to the holder of timely payments of principal and
interest is backed by the full faith and credit of the U.S. Government.
While mortgage-backed securities carry a reduced credit risk as compared to
whole loans, such securities remain subject to the risk that a fluctuating
interest rate environment, along with other factors such as the geographic
distribution of the underlying mortgage loans, may alter the prepayment rate of
such mortgage loans and so affect both the prepayment speed, and value, of such
securities.
Set forth below is a table showing the Bank's purchases, sales and
repayments of mortgage-backed securities for the periods indicated.
Nine Months
Ended March 31, Year Ended June 30,
---------------------------- --------------------------
1996 1995 1995 1994
---------- ---------- --------- ----------
(In Thousands)
Purchases.................................................. $ -- $ -- $ -- $ --
Sales...................................................... (2,914) -- -- --
Repayments................................................. (407) (753) (965) (1,572)
---------- ---------- --------- ----------
Net increase (decrease).................................... $ (3,321) $ (753) $ (965) $ (1,572)
========== ========== ========= ==========
62
OTHER INVESTMENTS. At March 31, 1996, the Bank's investment securities
other than mortgage-backed securities consisted of federal agency obligations,
FHLB stock and other FHLB interest-earning assets. In addition, in recent years,
the Bank has also invested in certain mutual funds whose assets conform to the
investments that a federally-chartered saving institution is otherwise
authorized to make directly.
OTS regulations restrict investments in corporate debt and equity
securities by the Bank. These restrictions include prohibitions against
investments in the debt securities of any one issuer in excess of 15% of the
Bank's unimpaired capital and unimpaired surplus as defined by federal
regulations, plus an additional 10% if the investments are fully secured by
readily marketable collateral. At March 31, 1996, the Bank was in compliance
with this regulation. See "Regulation - Federal Regulation of Savings
Associations" for a discussion of additional restrictions on the Bank's
investment activities.
The following table sets forth the composition of the Bank's investment
securities, net of premiums and discounts, at the dates indicated. The Bank
adopted SFAS No. 115 on July 1, 1993. Investment securities with an original
maturity of less than five years are classified as available-for-sale and are
valued at fair value at March 31, 1996 and at June 30, 1995.
At At
March 31, June 30,
---------------------- -----------------------------------------
1996 1995 1994
--------------------- ----------------- --------------------
Book % of Book % of Book % of
Value Total Value Total Value Total
--------- --------- ------ ------ -------- --------
(Dollars in Thousands)
Investment securities available-for-sale:
Federal agency obligations........................... $ 1,981 48.22% $ 1,962 31.12% $ 1,994 25.74%
Mutual funds......................................... -- -- 1,079 17.11 1,038 13.40
--------- --------- -------- ------ -------- -------
Subtotal............................................... 1,981 48.22 3,041 48.23 3,032 39.14
FHLB stock............................................. 811 19.74 795 12.61 521 6.72
--------- --------- -------- ------ -------- -------
Total investment securities and
FHLB stock......................................... 2,792 67.96 3,836 60.84 3,553 45.86
--------- --------- -------- ------ -------- -------
Other interest-earning assets:
FHLB certificates of deposit......................... -- -- -- -- 1,600 20.65
FHLB checking........................................ 1,316 32.04 2,417 38.34 1,078 13.91
FHLB daily time...................................... -- -- 52 0.82 1,517 19.58
--------- --------- -------- ------ -------- -------
Total other interest-earnings assets................ 1,316 32.04 2,469 39.16 4,195 54.14
--------- --------- -------- ------ -------- -------
Total investment portfolio............................. $ 4,108 100.00% $ 6,305 100.00% $ 7,748 100.00%
========= ========= ======== ======= ======== =======
Average remaining life of investment
securities available for sale........................ 1.17 years 1.92 years 2.92 years
63
INVESTMENT PORTFOLIO MATURITIES. The following table sets forth the
scheduled maturities, carrying values, market values and average yields for the
Bank's investment securities excluding FHLB stock at March 31, 1996.
March 31, 1996
--------------------------------------------------------------------------------
Less than 1 to 5 5 to 10 Over
1 Year Years Years 10 Years Total Investment Securities
--------------- ---------- ---------- ---------- ---------------------------
Book Book Book Book Book Market
Value Value Value Value Value Value
--------------- ---------- ---------- ---------- ------------ -----------
(Dollars in Thousands)
Federal agency obligations.................... $ 991 $ 990 $ -- $ -- $ 1,981 $ 1,981
--------- --------- -------- -------- -------- --------
Total investment securities................... $ 991 $ 990 $ -- $ -- $ 1,981 $ 1,981
========= ========= ======== ======== ======== ========
Weighted average yield........................ 4.73% 4.23% --% --% 4.48% 4.48%
SOURCES OF FUNDS
GENERAL. The Bank's primary sources of funds are deposits, receipt of
principal and interest on loans and securities, FHLB advances, and other funds
provided from operations.
FHLB advances are used to support lending activities and to assist in the
Bank's asset/liability management strategy. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -Asset\Liability
Management." Typically, the Bank does not use other forms of borrowings. At
March 31, 1996, the Bank had $9.0 million in FHLB advances.
DEPOSITS. Community Bank offers a variety of deposit accounts having a
wide range of interest rates and terms. The Bank's deposits consist of passbook,
demand, NOW, money market deposit and certificate accounts. The certificate
accounts currently range in terms from 91 days to seven years.
The Bank relies primarily on advertising, competitive pricing policies and
customer service to attract and retain these deposits. Currently, Community Bank
solicits deposits from its market area only, and does not use brokers to obtain
deposits. The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates and
competition.
The Bank has become more susceptible to short-term fluctuations in
deposit flows as customers have become more interest-rate conscious. The Bank
endeavors to manage the pricing of its deposits in keeping with its
profitability objectives giving consideration to its asset/liability management.
Notwithstanding the foregoing, a significant percentage of the Bank's deposits
are for terms of less than one year. At March 31, 1996, $39.4 million, or 80.3%
of the Bank's certificates of deposit were in certificates of deposit with terms
of 12 months or less. The Bank believes that upon maturity most of these
deposits will remain at the Bank. The ability of the Bank to attract and
maintain savings accounts and certificates of deposit, and the rates paid on
these deposits, has been and will continue to be significantly affected by
market conditions.
64
SAVINGS PORTFOLIO
The following table sets forth the dollar amount of savings deposits with
various types of deposit programs offered by the Bank at the periods indicated.
At March 31, At June 30,
------------------------------------------------------
1996 1995 1994
-------------------------- ------------------------- -------------------------
Balance Percent Balance Percent Balance Percent
----------- ------------ ----------- ------------ ------------ ----------
(Dollars in Thousands)
Transactions and Savings
Deposits:
Passbook savings.......................... $ 3,656 5.38% $ 3,740 5.48% $ 3,952 6.57%
NOW accounts.............................. 7,919 11.66 7,601 11.13 7,619 12.66
Money market accounts..................... 5,778 8.51 5,874 8.61 8,178 13.59
Noninterest-bearing demand accouts........ 1,521 2.24 1,320 1.93 936 1.55
------- ------ ------- ------ ------- ------
Total non-certificates.................. 18,874 27.79 18,535 27.15 20,685 34.37
------- ------ ------- ------ ------- ------
Certificates:
2.00 - 3.99%.............................. 13 0.02 876 1.28 16,894 28.07
4.00 - 5.99%.............................. 37,675 55.47 19,118 28.00 19,812 32.92
6.00 - 7.99%.............................. 10,869 16.01 29,114 42.64 1,598 2.66
8.00 - 9.99%.............................. 485 0.71 631 0.93 868 1.44
10.00% & over............................. -- -- -- -- 323 0.54
------- ------ ------- ----- ------- ------
Total certificates...................... 49,042 72.21 49,739 72.85 39,495 65.63
------- ------ ------- ----- ------- ------
Total.............................. $67,916 100.00% $68,274 100.00% $60,180 100.00%
======= ====== ======= ====== ======= ======
DEPOSIT ACTIVITY
The following table sets forth the deposit activities of the Bank for the
periods indicated:
Nine Months
Ended March 31, Years Ended June 30,
---------------------- ------------------------
1996 1995 1995 1994
-------- -------- -------- --------
(Dollars in Thousands)
Opening balance................................. $ 68,274 $ 60,180 $ 60,180 $ 58,750
Deposits(1)..................................... 117,991 117,519 161,534 134,976
Withdrawals..................................... 120,345 112,572 155,498 135,252
Interest credited............................... 1,996 1,386 2,058 1,706
-------- -------- -------- --------
Ending balance.................................. $ 67,916 $ 66,513 $ 68,274 $ 60,180
======== ======== ======== ========
Net (decrease) increase......................... $ (358) $ 6,333 $ 8,094 $ 1,430
======== ======== ======== ========
Percent (decrease) increase..................... (0.52)% 10.52% 13.45% 2.43%
======== ======== ======== ========
_____________________
(1) Does not reflect the rollover of certificates of deposit.
65
TIME DEPOSIT MATURITY SCHEDULE
The following table shows rate and maturity information for the Bank's
certificates of deposit as of March 31, 1996.
Percent
2.00-3.99% 4.00-5.99% 6.00-7.99% 8.00-9.99% Total of Total
---------- ---------- ---------- ---------- ----- --------
(Dollars in thousands)
Certificate accounts
maturing in quarter ending:
- --------------------------
June 30, 1996................ $ -- $ 6,715 $ 8,110 $ 201 $15,026 30.64%
September 30, 1996........... -- 7,989 13 239 8,241 16.80
December 31, 1996............ -- 3,946 161 45 4,152 8.47
March 31, 1997............... -- 11,942 10 -- 11,952 24.37
June 30, 1997................ -- 1,041 -- -- 1,041 2.12
September 30, 1997........... -- 1,871 -- -- 1,871 3.82
December 31, 1997............ -- 880 -- -- 880 1.79
March 31, 1998............... -- 661 -- -- 661 1.35
June 30, 1998................ -- 874 15 -- 889 1.81
September 30, 1998........... -- 490 34 -- 524 1.07
December 31, 1998............ -- 157 97 -- 254 0.52
March 31, 1999............... -- 64 -- -- 64 0.13
Thereafter................... 13 574 2,900 -- 3,487 7.11
--------- ---------- ---------- ---------- ------- --------
Total....................... $ 13 $ 37,204 $ 11,340 $ 485 $49,042 $100.00%
========= ========== ========== ========== ======= ========
Percent of total............. 0.03% 75.86% 23.12% 0.99% 100.00%
========= ========== ========== ========== =======
The following table indicates the amount of the Bank's certificates of
deposit and other deposits by time remaining until maturity as of March 31,
1996.
Maturity
-------------------------------------------------------
3 Months Over 3 to 6 Over 6 to 12 Over
or Less Months Months 12 Months Total
-------- ----------- ------------ --------- -------
(Dollars in Thousands)
Certificates of deposit less
than $100,000................... $13,880 $7,935 $15,162 $9,063 $46,040
Certificates of deposit of
$100,000 or more................ 1,146 306 942 608 3,002
------- ------ ------- ------ -------
Total certificates of deposit.. $15,026 $8,241 $16,104 $9,671 $49,042
======= ====== ======= ====== =======
66
BORROWINGS. Community Bank's borrowings historically have consisted of
advances from the FHLB of Des Moines. Such advances may be made pursuant to
different credit programs, each of which has its own interest rate and range of
maturities. Federal law limits an institution's borrowings from the FHLB to 20
times the amount paid for capital stock in the FHLB, subject to regulatory
collateral requirements. At March 31, 1996, the Bank had $9.0 million in
advances from the FHLB. The Bank has the ability to purchase additional capital
stock from the FHLB. For additional information regarding the term to maturity
on FHLB advances, see Note 7 of the Notes to Consolidated Financial Statements
and "Business - Lending Activities."
The following tables set forth the maximum month-end balance and average
balance of FHLB advances for the periods indicated, as well as the amount of
such advances and the weighted average interest rate at the dates indicated.
Nine Months
Ended March 31, Years Ended June 30,
-------------------- ---------------------
1996 1995 1995 1994
---------- -------- ------ -------
(In Thousands)
Maximum Balance:
- ---------------
FHLB advances................... $14,360 $10,926 $15,877 $ --
Average Balance:
- ---------------
FHLB advances................... $12,451 $ 5,927 $ 7,919 $ 57
At
March 31, At June 30,
--------------------
1996 1995 1994
------- ------- ---------
(In Thousands)
FHLB advances................... $ 9,000 $15,877 $ --
======= ======= ==========
Weighted average interest rate.. 5.91% 6.91% --%
EMPLOYEES
At March 31, 1996, the Bank had a total of 42 full-time and eight
part-time employees. The Bank's employees are not represented by any collective
bargaining group. Management considers its employee relations to be good.
PROPERTIES
The Bank conducts its business through its main office, located in
Excelsior Springs, Missouri and one branch office located in Kearney, Missouri.
The Bank's Kearney branch office space is leased. The following table sets
forth information relating to the Bank's offices as of March 31, 1996. The
total net book value of the Bank's premises and equipment (including land,
buildings and leasehold improvements and furniture, fixtures and equipment) at
March 31, 1996 was approximately $1.3 million.
67
Total
Approximate
Date Square Net Book Value at
Location Acquired Footage March 31, 1996
- ------------------------------------ -------------- ----------- ------------------
(In thousands)
Main Office: 1983 10,000 $1,159
1001 North Jesse James Road
Excelsior Springs, Missouri 64020
Branch Office: Leased 2,725 127
178 West 6th Street (Expires
Kearney, Missouri 64020 January 2000)
Community Bank believes that its current facilities are adequate to meet the
present and forseeable needs of the Bank and the Holding Company.
LEGAL PROCEEDINGS
Community Bank is involved, from time to time, as plaintiff or defendant in
various legal actions arising in the normal course of their businesses. While
the ultimate outcome of these proceedings cannot be predicted with certainty, it
is the opinion of management, after consultation with counsel representing
Community Bank in the proceedings, that the resolution of these proceedings
should not have a material effect on the Holding Company's financial position or
results of operations on a consolidated basis.
SERVICE CORPORATION ACTIVITIES
As a federally chartered savings association, Community Bank is permitted
by OTS regulations to invest up to 2% of its assets, or approximately $1.7
million at March 31, 1996, in the stock of, or loans to, service corporation
subsidiaries. Community may invest an additional 1% of its assets in service
corporations where such additional funds are used for inner-city or community
development purposes and up to 50% of its total capital in conforming loans to
service corporations in which it owns more than 10% of the capital stock. In
addition to investments in service corporations, federal associations are
permitted to invest an unlimited amount in operating subsidiaries engaged solely
in activities in which a federal association may engage. At March 31, 1996,
Community Bank had one subsidiary, CBES Service Corporation ("CBES"). CBES was
established in March 1993 for the purpose of offering credit life, health and
accident insurance to its customers. At March 31, 1996, the Bank's investment in
CBES was $1,000. Also, for the fiscal year ended June 30, 1995, CBES had pre-tax
income of approximately $2.
REGULATION
GENERAL
Community Bank is a federally chartered savings bank, the deposits of which
are federally insured and backed by the full faith and credit of the U.S.
Government. Accordingly, the Bank is subject to broad federal regulation and
oversight extending to all its operations. The Bank is a member of the FHLB of
Des Moines and is subject to certain limited regulation by the Federal Reserve
Board. As the savings and loan holding company of the Bank, the Holding Company
also is subject to federal regulation and oversight. The purpose of the
regulation of the Holding Company and other holding companies is to protect
subsidiary savings and loan associations. The Bank is a member of the SAIF. The
deposits of the Bank are insured by the SAIF of the FDIC. As a result, the FDIC
has certain regulatory and examination authority over the Bank.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
68
FEDERAL REGULATION OF SAVINGS ASSOCIATIONS
The OTS has extensive authority over the operations of savings and loan
associations. As part of this authority, the Bank is required to file periodic
reports with the OTS and is subject to periodic examinations by the OTS and the
FDIC. The last regular OTS and FDIC examinations of the Bank were as of May 1995
and April 1991, respectively. When these examinations are conducted by the OTS
and the FDIC, the examiners may require the Bank to provide for higher general
or specific loan loss reserves.
All savings associations are subject to a semi-annual assessment, based
upon the savings and loan association's total assets. The Bank's OTS assessment
for the fiscal year ended June 30, 1995, was approximately $24,000.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including the Bank and the Holding
Company. This enforcement authority includes, among other things, the ability to
assess civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority of the Bank is
prescribed by federal laws, and regulations, and it is prohibited from engaging
in any activities not permitted by such laws and regulations. For example, no
savings institution may invest in non-investment grade corporate debt
securities. In addition, the permissible level of investment by federal
associations in loans secured by non-residential real property may not exceed
400% of total capital, except with approval of the OTS. Federal savings and loan
associations are also generally authorized to branch nationwide. The Bank is in
compliance with the noted restrictions.
OTS regulations limit a thrift institution's loans to one borrower to the
greater of $500,000 or 15% of unimpaired capital and surplus (except for loans
fully secured by certain readily marketable collateral, in which case this limit
is increased to 25% of unimpaired capital and surplus). At March 31, 1996, the
Bank's lending limit under this restriction was approximately $1.2 million.
Assuming the sale of the minimum number of shares in the Conversion at March 31,
1996, that limit would be increased to approximately $1.7 million. The Bank is
in compliance with the loans-to-one borrower limitation.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, internal controls and audit systems, interest
rate risk exposure and compensation and other employee benefits. Any institution
which fails to comply with these standards must submit a capital compliance
plan. A failure to submit a plan or to comply with an approved plan will subject
the institution to further enforcement action. The OTS and the other federal
banking agencies have also proposed additional guidelines on asset quality and
earnings standards. No assurance can be given as to whether or in what form the
proposed regulations will be adopted. The guidelines are not expected to
materially effect the Bank.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC
Community Bank is a member of the SAIF, which is administered by the FDIC.
Deposits are insured up to applicable limits by the FDIC and such insurance is
backed by the full faith and credit of the U.S. Government. As insurer, the FDIC
imposes deposit insurance premiums and is authorized to conduct examinations of
and to require reporting by FDIC-insured institutions. It also may prohibit any
FDIC-insured institution from engaging in any activity the FDIC determines by
regulation or order to pose a serious risk to the FDIC. The FDIC also has the
authority to initiate enforcement actions against savings and loan associations,
after giving the OTS an opportunity to take such action, and may terminate the
deposit insurance if it determines that the institution has engaged or is
engaging in unsafe or unsound practices, or is in an unsafe or unsound
condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums, ranging from .23% to .31% of
deposits, based upon their level of capital and supervisory evaluation. Under
the system, institutions classified as well capitalized (i.e., a core capital
ratio of at least 5%, a ratio of core capital to risk-weighted assets of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
would pay the lowest premium while institutions
69
that are less than adequately capitalized (i.e., a core capital or core capital
to risk-based capital ratios of less than 4% or a risk-based capital ratio of
less than 8%) and considered of substantial supervisory concern would pay the
highest premium. Risk classification of all insured institutions will be made
by the FDIC for each semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a semiannual basis,
if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC. See "Risk Factors -Recapitalization of SAIF, Disparity
Between BIF and SAIF Premiums" for information regarding the FDIC's proposed
regulations which would revise BIF premiums.
As is the case with the SAIF, the FDIC is authorized to adjust the
insurance premium rates for banks that are insured by the BIF of the FDIC in
order to maintain the reserve ratio of the BIF at 1.25% of BIF insured deposits.
The FDIC has reported that the BIF attained the 1.25% reserve ratio in May 1995
but that the SAIF is not likely to reach the 1.25% reserve ratio until 2002. In
August 1995, the FDIC issued final regulations to reduce the assessment rates
for the BIF. Under the revised assessment schedule, which became effective on
June 1, 1995, BIF-insured institutions paid an average of 0.045% of deposits,
with new assessment rates ranging from 0.04% of deposits to 0.31% of deposits.
The FDIC refunded any assessments collected in excess of those due under the
revised schedule. On November 14, 1995, the FDIC voted to reduce annual BIF
assessments to the legal minimum of $2,000, effective January 1, 1996 for all
BIF-insured institutions except for those that were not well capitalized or were
assigned to the higher supervisory risk categories. It is estimated that 92% of
the BIF-insured institutions will pay only the minimum annual assessment. SAIF-
insured institutions will continue to pay assessments at the current assessment
rates until the SAIF attains the 1.25% reserve ratio. The resulting disparity in
deposit insurance assessments between SAIF members and BIF members is likely to
provide BIF-insured institutions with certain competitive advantages in the
pricing of loans and deposits, and in lowered operating costs, pending any
legislative action to remedy the disparity.
The proposed Budget Act, which was vetoed by the President, included
provisions that focused on a resolution of the financial problems of the SAIF.
Under the provisions of the Budget Act, all SAIF member institutions would pay a
special assessment to recapitalize the SAIF, and the assessment base for the
payments on the FICO bonds would be expanded to include the deposits of both
BIF and SAIF-insured institutions. The amount of the special assessment required
to recapitalize the SAIF has been estimated to be approximately 80 basis points
of the SAIF-assessable deposits. This estimate of the special SAIF assessment is
less than the assessment of 85 to 90 basis points that had been previously
estimated. The special assessment would have been imposed on the first business
day of January 1996, or on such other date prescribed by the FDIC not later than
60 days after enactment of the Budget Act, based on the amount of SAIF deposits
on March 31, 1995. The Budget Act would have also permitted BIF-insured
institutions with deposits subject to SAIF assessments to reduce such SAIF-
deposits by 20% in computing the institution's special assessment. If an 85 or a
90 basis point assessment were assessed against the Bank's deposits as of March
31, 1996, the Bank's aggregate special SAIF assessment would be approximately
$577,000 or $611,000, respectively, and an assessment of 80 basis points would
be $543,000. The Budget Act also would have provided that the BIF could not
assess regular insurance assessments when it has a reserve ratio of 1.25% or
more except on those of its member institutions that have been found to have
"moderately severe" or "unsatisfactory" financial, operational, or compliance
weaknesses.
The Budget Act also provided for the merger of the BIF and SAIF on January
1, 1998, with such merger being conditioned upon the prior elimination of the
thrift charter. Congressional leaders had also agreed that Congress should
consider and act upon separate legislation to eliminate the thrift charter as
early as possible in 1996. If adopted, such legislation would require that the
Bank, as a federal savings and loan association, convert to a bank charter. Such
a requirement to convert to a bank charter could cause the Bank to lose the
favorable tax treatment for its bad debt reserves that it currently enjoys under
Section 593 of the Code and to have all or part of its existing bad debt
reserves recaptured into income. At March 31, 1996, the Bank had a balance of
approximately $1.7 million in bad debt reserves.
The above described provisions of the Budget Act were not the basis for the
President's veto, and Congressional leaders have indicated that these provisions
will be the basis for future legislation to recapitalize the SAIF. If enacted by
Congress, such legislation would have the effect of reducing the capital of SAIF
member institutions by the after-tax
70
cost of the special SAIF assessment, plus any related additional tax
liabilities. The legislation would also have the effect of reducing any
differential that may otherwise be required in the assessment rates for the BIF
and SAIF.
REGULATORY CAPITAL REQUIREMENTS
Federally insured savings and loan associations, such as the Bank, are
required to maintain a minimum level of regulatory capital. The OTS has
established capital standards, including a tangible capital requirement, a
leverage ratio (or core capital) requirement and a risk-based capital
requirement applicable to such savings and loan associations. Generally, these
capital requirements must be generally as stringent as the comparable capital
requirements for national banks. The OTS is also authorized to impose capital
requirements in excess of these standards on individual associations on a case-
by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement. Further, the valuation allowance applicable to the write-down
of investments and mortgage-backed securities in accordance with SFAS No. 115 is
excluded from the regulatory capital calculation. At March 31, 1996, the Bank
had no intangible assets and a valuation allowance, net of tax under SFAS No.
115 of $13,000.
The OTS regulations establish special capitalization requirements for
savings and loan associations that own subsidiaries. In determining compliance
with the capital requirements, all subsidiaries engaged solely in activities
permissible for national banks or engaged in certain other activities solely as
agent for its customers are "includable" subsidiaries that are consolidated for
capital purposes in proportion to the Bank's level of ownership. For excludable
subsidiaries the debt and equity investments in such subsidiaries are deducted
from assets and capital. The Bank has one service corporation subsidiary.
At March 31, 1996, the Bank had tangible capital of $7.9 million, or 9.15%
of adjusted total assets, which is approximately $6.6 million above the minimum
requirement of 1.5% of adjusted total assets in effect on that date. On a pro
forma basis, after giving effect to the sale of the minimum, midpoint and
maximum number of shares of Common Stock offered in the Conversion and
investment of the net proceeds in assets not excluded for tangible capital
purposes, the Bank would have had tangible capital equal to 12.23%, 12.79% and
13.34%, respectively, of adjusted total assets at March 31, 1996, which is $9.7
million, $10.3 million and $10.9 million, respectively, above the requirement.
The capital standards also require core capital equal to at least 3% of
adjusted total assets (as defined by regulation). Core capital generally
consists of tangible capital plus certain intangible assets, including
supervisory goodwill (which is phased-out over a five-year period) and a limited
amount of purchased credit card relationships and purchased mortgage servicing
rights. As a result of the prompt corrective action provisions of the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") discussed
below, however, a savings and loan association must maintain a core capital
ratio of at least 4% to be considered adequately capitalized unless its
supervisory condition is such to allow it to maintain a 3% ratio. At March 31,
1996, the Bank had no intangibles which were subject to these tests.
At March 31, 1996, the Bank had core capital equal to $7.9 million, or
9.15% of adjusted total assets, which is $5.3 million above the minimum leverage
ratio requirement of 3% as in effect on that date. On a pro forma basis, after
giving effect to the sale of the minimum, midpoint and maximum number of shares
of Common Stock offered in the Conversion and investment of the net proceeds in
assets not excluded from core capital, the Bank would have had core capital
equal to 12.23%, 12.79% and 13.34%, respectively, of adjusted total assets at
March 31, 1996, which is $8.4 million, $8.9 million and $9.5 million,
respectively, above the requirement.
The OTS risk-based requirement requires savings and loan associations to
have total capital of at least 8% of risk-weighted assets. Total capital
consists of core capital, as defined above, and supplementary capital.
Supplementary capital consists of certain permanent and maturing capital
instruments that do not qualify as core capital and general valuation loan and
lease loss allowances up to a maximum of 1.25% of risk-weighted assets.
Supplementary capital may be used to satisfy the risk-based requirement only to
the extent of core capital. At March 31, 1996, the Bank had $347,000 of general
loan valuation allowances, which was less than 1.25% of risk-weighted assets.
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Certain exclusions from capital and assets are required to be made for the
purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio (these
items are excluded on a sliding scale through March 31, 1995, after which they
must be excluded in their entirety) and reciprocal holdings of qualifying
capital instruments. Community Bank had $518,000 of such exclusions from capital
and assets at March 31, 1996.
In determining the amount of risk-weighted assets, all assets, including
certain off-balance sheet items, will be multiplied by a risk weight, ranging
from 0% to 100%, based on the risk inherent in the type of asset. For example,
the OTS has assigned a risk weight of 50% for prudently underwritten permanent
one- to four-family first lien mortgage loans not more than 90 days delinquent
and having a loan to value ratio of not more than 80% at origination unless the
loan amount in excess of such ratio is insured by an insurer approved by the
Federal National Mortgage Association ("FNMA") or FHLMC.
On March 31, 1996, the Bank had total capital of $7.9 million
(including approximately $7.9 million in core capital and $347,000 in qualifying
supplementary capital) and risk-weighted assets of $64.2 million (with no
converted off-balance sheet assets); or total capital of 12.0% of risk-weighted
assets. This amount was $2.6 million above the 8% requirement in effect on that
date. On a pro forma basis, after giving effect to the sale of the minimum,
midpoint and maximum number of shares of Common Stock offered in the Conversion,
the infusion to the Bank of 50% of the net Conversion proceeds and the
investment of those proceeds in 20% risk-weighted government securities, the
Bank would have had total capital of 16.71%, 17.60% and 18.48%, respectively, of
risk-weighted assets, which is above the current 8% requirement by $5.7 million,
$6.2 million and $6.8 million, respectively.
The OTS has adopted a final rule that requires every savings and loan
association with more than normal interest rate risk exposure to deduct from its
total capital, for purposes of determining compliance with such requirement, an
amount equal to 50% of its interest-rate risk exposure multiplied by the present
value of its assets. This exposure is a measure of the potential decline in the
net portfolio value of a savings association, greater than 2% of the present
value of its assets, based upon a hypothetical 200 basis point increase or
decrease in interest rates (whichever results in a greater decline). Net
portfolio value is the present value of expected cash flows from assets,
liabilities and off-balance sheet contracts. The rule provides for a two quarter
lag between calculating interest rate risk and recognizing any deduction from
capital. The rule will not become effective until the OTS adopts the process by
which savings and loan associations may appeal an interest rate risk deduction
determination. Any savings and loan association with less than $300 million in
assets and a total risk-based capital ratio in excess of 12% is exempt from this
requirement unless the OTS determines otherwise. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Asset/Liability
Management" for information regarding the effect of this rule on the Bank.
Pursuant to FDICIA, the federal banking agencies, including the OTS, have
also proposed regulations authorizing the agencies to require a depository
institution to maintain additional total capital to account for concentration of
credit risk and the risk of non-traditional activities. No assurance can be
given as to the final form of any such regulation.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings and loan associations that
fail to meet their capital requirements. Effective December 19, 1992, the
federal banking agencies, including the OTS, were given additional enforcement
authority over undercapitalized depository institutions. The OTS is generally
required to take action to restrict the activities of an "undercapitalized
association" (generally defined to be one with less than either a 4% core
capital ratio, a 4% Tier 1 risked-based capital ratio or an 8% risk-based
capital ratio). Any such association must submit a capital restoration plan and
until such plan is approved by the OTS may not increase its assets, acquire
another institution, establish a branch or engage in any new activities, and
generally may not make capital distributions. The OTS is authorized to impose
the additional restrictions that are applicable to significantly
undercapitalized associations.
As a condition to the approval of the capital restoration plan, any company
controlling an undercapitalized association must agree that it will enter into a
limited capital maintenance guarantee with respect to the institution's
achievement of its capital requirements.
Any savings and loan association that fails to comply with its capital
plan or is "significantly undercapitalized" (i.e., Tier 1 risk-based or core
capital ratios of less than 3% or a risk-based capital ratio of less than 6%)
must be made
72
subject to one or more of additional specified actions and operating
restrictions, which may cover all aspects of its operations and include a forced
merger or acquisition of the Bank. An association that becomes "critically
undercapitalized" (i.e., a tangible capital ratio of 2% or less) is subject to
further mandatory restrictions on its activities in addition to those applicable
to significantly undercapitalized associations. In addition, the OTS must
appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings association, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized.
Any undercapitalized association is also subject to the general enforcement
activity of the OTS and the FDIC, including the appointment of a receiver or
conservator.
The OTS is also generally authorized to reclassify an association into a
lower capital category and impose restrictions applicable to such category if
the institution is engaged in unsafe or unsound practices or is in an unsafe or
unsound condition.
The imposition by the OTS or the FDIC of any of these measures on Community
Bank may have a substantial adverse effect on the Bank's operations and
profitability and the value of the Common Stock purchased in the Conversion.
Holding Company shareholders do not have preemptive rights and, therefore, if
the Holding Company is directed by the OTS or the FDIC to issue additional
shares of Common Stock, such issuance may result in the dilution in the
percentage of ownership of the Holding Company of those persons purchasing
shares in the Conversion.
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS
OTS regulations impose various restrictions or requirements on associations
with respect to their ability to pay dividends or make other distributions of
capital. OTS regulations prohibit an association from declaring or paying any
dividends or from repurchasing any of its stock if, as a result, the regulatory
capital of the Bank would be reduced below the amount required to be maintained
for the liquidation account established in connection with its mutual-to-stock
conversion. See "The Conversion - Effects of Conversion to Stock Form on
Depositors and Borrowers of the Bank" and "-Restrictions on Repurchase of
Stock."
The OTS utilizes a three-tiered approach to permit associations, based on
their capital level and supervisory condition, to make capital distributions
which include dividends, stock redemptions or repurchases, cash-out mergers and
other transactions charged to the capital account. See "- Regulatory Capital
Requirements."
Generally, Tier 1 associations, which are associations that before and
after the proposed distribution meet their fully phased-in capital requirements,
may make capital distributions during any calendar year equal to the greater of
100% of net income for the year-to-date plus 50% of the amount by which the
lesser of the Bank's tangible, core or risk-based capital exceeds its fully
phased-in capital requirement for such capital component, as measured at the
beginning of the calendar year, or the amount authorized for a Tier 2
association. However, a Tier 1 association deemed to be in need of more than
normal supervision by the OTS may be downgraded to a Tier 2 or Tier 3
association as a result of such a determination. The Bank meets the requirements
for a Tier 1 association and has not been notified of a need for more than
normal supervision. Tier 2 associations, which are associations that before and
after the proposed distribution meet their current minimum capital requirements,
may make capital distributions of up to 75% of net income over the most recent
four quarter period.
Tier 3 associations (which are associations that do not meet current
minimum capital requirements) that propose to make any capital distribution and
Tier 2 associations that propose to make a capital distribution in excess of the
noted safe harbor level must obtain OTS approval prior to making such
distribution. Tier 2 associations proposing to make a capital distribution
within the safe harbor provisions and Tier 1 associations proposing to make any
capital distribution need only submit written notice to the OTS 30 days prior to
such distribution. As a subsidiary of the Holding Company, the Bank will also be
required to give the OTS 30 days' notice prior to declaring any dividend on its
stock. The OTS may object to the distribution during that 30-day period based on
safety and soundness concerns. See "- Regulatory Capital Requirements."
The OTS has proposed regulations that would revise the current capital
distribution restrictions. The proposal eliminates the current tiered structure
and the safe-harbor percentage limitations. Under the proposal a savings and
loan association may make a capital distribution without notice to the OTS
(unless it is a subsidiary of a holding company)
73
provided that it has a CAMEL 1 or 2 rating, is not in troubled condition and
would remain adequately capitalized (as defined by regulation) following the
proposed distribution. Savings and loan associations that would remain
adequately capitalized following the proposed distribution but do not meet the
other noted requirements must notify the OTS 30 days prior to declaring a
capital distribution. The OTS stated it will generally regard as permissible
that amount of capital distributions that do not exceed 50% of the institution's
excess regulatory capital plus net income to date during the calendar year. A
savings and loan association may not make a capital distribution without prior
approval of the OTS and the FDIC if it is undercapitalized before, or as a
result of, such a distribution. A savings and loan association will be
considered in troubled condition if it has a CAMEL rating of 4 or 5, is subject
to an enforcement action relating to its safety and soundness or financial
viability or has been informed in writing by the OTS that it is in troubled
condition. As under the current rule, the OTS may object to a capital
distribution if it would constitute an unsafe or unsound practice. No assurance
may be given as to whether or in what form the regulations may be adopted.
LIQUIDITY
All savings and loan associations, including the Bank, are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. For a discussion of what the Bank
includes in liquid assets, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources." This liquid asset ratio requirement may vary from time to time
(between 4% and 10%) depending upon economic conditions and savings flows of all
savings and loan associations. At the present time, the minimum liquid asset
ratio is 5%.
In addition, short-term liquid assets (e.g., cash, certain time deposits,
certain bankers acceptances and short-term U.S. Treasury obligations) currently
must constitute at least 1% of the Bank's average daily balance of net
withdrawable deposit accounts and current borrowings. Penalties may be imposed
upon associations for violations of either liquid assets ratio requirement. At
March 31, 1996, the Bank was in compliance with both requirements, with an
overall liquid assets ratio of 5.96% and a short-term liquid assets ratio of
4.06%.
ACCOUNTING
An OTS policy statement applicable to all savings and loan associations
clarifies and re-emphasizes that the investment activities of a savings and loan
association must be in compliance with approved and documented investment
policies and strategies, and must be accounted for in accordance with generally
accepted accounting principles. Under the policy statement, management must
support its classification of and accounting for loans and securities (i.e.,
whether held for investment, sale or trading) with appropriate documentation.
The OTS has adopted an amendment to its accounting regulations, which may
be made more stringent than generally accepted accounting principles by the OTS,
to require that transactions be reported in a manner that best reflects their
underlying economic substance and inherent risk and that financial reports must
incorporate any other accounting regulations or orders prescribed by the OTS.
The Bank is in compliance with these amended rules.
QUALIFIED THRIFT LENDER TEST
All savings and loan associations, including the Bank, are required to meet
a qualified thrift lender ("QTL") test to avoid certain restrictions on their
operations. This test requires a savings and loan association to have at least
65% of its portfolio assets (as defined by regulation) in qualified thrift
investments on a monthly average for nine out of every 12 months on a rolling
basis. Such assets primarily consist of residential housing related loans and
investments. At March 31, 1996, the Bank met the test and has always met the
test since its effectiveness.
Any savings and loan association that fails to meet the QTL test must
convert to a national bank charter, unless it requalifies as a QTL and
thereafter remains a QTL. If an association does not requalify and converts to a
national bank charter, it must remain SAIF-insured until the FDIC permits it to
transfer to the BIF. If such an association has not yet requalified or converted
to a national bank, its new investments and activities are limited to those
permissible for both a savings and loan association and a national bank, and it
is limited to national bank branching rights in its home state. In addition, the
Bank is immediately ineligible to receive any new FHLB borrowings and is subject
to national bank limits for payment of dividends. If such association has not
requalified or converted to a national bank within three years
74
after the failure, it must divest of all investments and cease all activities
not permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "- Holding Company Regulation."
COMMUNITY REINVESTMENT ACT
Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking practices to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products and services
that it believes are best suited to its particular community, consistent with
the CRA. The CRA requires the OTS, in connection with the examination of the
Bank, to assess the institution's record of meeting the credit needs of its
community and to take such record into account in its evaluation of certain
applications, such as a merger or the establishment of a branch, by the Bank. An
unsatisfactory rating may be used as the basis for the denial of an application
by the OTS.
The federal banking agencies, including the OTS, have recently revised the
CRA regulations and the methodology for determining an institution's compliance
with the CRA. Due to the heightened attention being given to the CRA in the past
few years, the Bank may be required to devote additional funds for investment
and lending in its local community. The Bank was examined for CRA compliance in
January 1996 and received a rating of "satisfactory record of meeting community
credit needs."
TRANSACTIONS WITH AFFILIATES
Generally, transactions between a savings and loan association or its
subsidiaries and its affiliates are required to be on terms as favorable to the
Bank as transactions with non-affiliates. In addition, certain of these
transactions, such as loans to an affiliate, are restricted to a percentage of
the Bank's capital. Affiliates of the Bank include the Holding Company and any
company which is under common control with the Bank. In addition, a savings and
loan association may not lend to any affiliate engaged in activities not
permissible for a bank holding company or acquire the securities of most
affiliates.
Certain transactions with directors, officers or controlling persons are
also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
HOLDING COMPANY REGULATION
The Holding Company will be a unitary savings and loan holding company
subject to regulatory oversight by the OTS. As such, the Holding Company is
required to register and file reports with the OTS and is subject to regulation
and examination by the OTS. In addition, the OTS has enforcement authority over
the Holding Company and its non-savings and loan association subsidiaries which
also permits the OTS to restrict or prohibit activities that are determined to
be a serious risk to the subsidiary savings and loan association.
As a unitary savings and loan holding company, the Holding Company
generally is not subject to activity restrictions. If the Holding Company
acquires control of another savings and loan association as a separate
subsidiary, it would become a multiple savings and loan holding company, and the
activities of the Holding Company and any of its subsidiaries (other than the
Bank or any other SAIF-insured savings and loan association) would become
subject to such restrictions unless such other associations each qualify as a
QTL and were acquired in a supervisory acquisition.
If the Bank fails the QTL test, the Holding Company must obtain the
approval of the OTS prior to continuing after such failure, directly or through
its other subsidiaries, any business activity other than those approved for
multiple savings and loan holding companies or their subsidiaries. In addition,
within one year of such failure the Holding Company must register as, and will
become subject to, the restrictions applicable to bank holding companies. The
75
activities authorized for a bank holding company are more limited than are the
activities authorized for a unitary or multiple savings and loan holding
company. See "- Qualified Thrift Lender Test."
The Holding Company must obtain approval from the OTS before acquiring
control of any other SAIF-insured association. Such acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings and loan associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings and loan association.
FEDERAL SECURITIES LAW
The stock of the Holding Company will be registered with the Securities and
Exchange Commission ("SEC") under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). The Holding Company will be subject to the
information, proxy solicitation, insider trading restrictions and other
requirements of the SEC under the Exchange Act.
Holding Company stock held by persons who are affiliates (generally
officers, directors and principal stockholders) of the Holding Company may not
be resold without registration or unless sold in accordance with certain resale
restrictions. If the Holding Company meets specified current public information
requirements, each affiliate of the Holding Company is able to sell in the
public market, without registration, a limited number of shares in any three-
month period.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board requires all depository institutions to maintain
noninterest-bearing reserves at specified levels against their transaction
accounts (primarily checking, NOW and Super NOW checking accounts). At March 31,
1996, the Bank was in compliance with these reserve requirements. The balances
maintained to meet the reserve requirements imposed by the Federal Reserve Board
may be used to satisfy liquidity requirements that may be imposed by the OTS.
See "- Liquidity."
Savings and loan associations are authorized to borrow from the Federal
Reserve Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the FHLB of Des Moines, which is one of 12 regional
FHLBs, that administers the home financing credit function of savings and loan
associations. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures established
by the board of directors of the FHLB. These policies and procedures are subject
to the regulation and oversight of the Federal Housing Finance Board. All
advances from the FHLB are required to be fully secured by sufficient collateral
as determined by the FHLB. In addition, all long-term advances are required to
provide funds for residential home financing.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Des Moines. At March 31, 1996, the Bank had $810,700 (at cost) of FHLB
stock, which was in compliance with this requirement. In past years, the Bank
has received substantial dividends on its FHLB stock. Over the past five fiscal
years such dividends have averaged 8.10% and were 7.63% for fiscal 1995. For the
fiscal year ended June 30, 1995, dividends paid by the FHLB of Des Moines to the
Bank totaled approximately $44,000, which constitutes a $1,000 increase over the
amount of dividends received in fiscal year 1994. No assurance can be given that
such dividends will continue in the future at such levels.
Under federal law, the FHLBs are required to provide funds for the
resolution of troubled savings and loan associations and to contribute to low-
and moderately priced housing programs through direct loans or interest
subsidies on advances targeted for community investment and low- and moderate-
income housing projects. These contributions have affected adversely the level
of FHLB dividends paid and could continue to do so in the future. These
contributions
76
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of the Bank's FHLB stock may result in a corresponding
reduction in the Bank's capital.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION. Savings and loan associations such as the Bank that meet
certain definitional tests relating to the composition of assets and other
conditions prescribed by the Code are permitted to establish reserves for bad
debts and to make annual additions thereto which may, within specified formula
limits, be taken as a deduction in computing taxable income for federal income
tax purposes. The amount of the bad debt reserve deduction for "non-qualifying
loans" is computed under the experience method. The amount of the bad debt
reserve deduction for "qualifying real property loans" (generally loans secured
by improved real estate) may be computed under either the experience method or
the percentage of taxable income method (based on an annual election).
Under the experience method, the bad debt reserve deduction is an amount
determined under a formula based generally upon the bad debts actually sustained
by the savings and loan association over a period of years.
The percentage of specially computed taxable income that is used to compute
a savings and loan association's bad debt reserve deduction under the percentage
of taxable income method (the "percentage bad debt deduction") is 8%. The
percentage bad debt deduction thus computed is reduced by the amount permitted
as a deduction for non-qualifying loans under the experience method. The
availability of the percentage of taxable income method permits qualifying
savings and loan associations to be taxed at a lower effective federal income
tax rate than that applicable to corporations generally (approximately 31.3%
assuming the maximum percentage bad debt deduction).
If an association's specified assets (generally, loans secured by
residential real estate or deposits, educational loans, cash and certain
government obligations) constitute less than 60% of its total assets, the Bank
may not deduct any addition to a bad debt reserve and generally must include
existing reserves in income over a four-year period. No representation can be
made as to whether the Bank will meet the 60% test for subsequent taxable years.
Under the percentage of taxable income method, the percentage bad debt
deduction cannot exceed the amount necessary to increase the balance in the
reserve for "qualifying real property loans" to an amount equal to 6% of such
loans outstanding at the end of the taxable year or the greater of (i) the
amount deductible under the experience method or (ii) the amount which when
added to the bad debt deduction for "non-qualifying loans" equals the amount by
which 12% of the amount comprising savings accounts at year end exceeds the sum
of surplus, undivided profits and reserves at the beginning of the year. At
March 31, 1996, the 6% and 12% limitations did not restrict the percentage bad
debt deduction available to the Bank. It is possible that these limitations will
be a limiting factor in the future.
In addition to the regular federal income tax, corporations, including
savings and loan associations such as the Bank, generally are subject to a
minimum tax. An alternative minimum tax is imposed at a minimum tax rate of 20%
on alternative minimum taxable income, which is the sum of a corporation's
regular taxable income (with certain adjustments) and tax preference items, less
any available exemption. The alternative minimum tax is imposed to the extent it
exceeds the corporation's regular income tax and net operating losses can offset
no more than 90% of alternative minimum taxable income. For taxable years
beginning after 1986 and before 1996, corporations, including savings and loan
associations such as the Bank, are also subject to an environmental tax equal to
0.12% of the excess of alternative minimum taxable income for the taxable year
(determined without regard to net operating losses and the deduction for the
environmental tax) over $2 million.
To the extent earnings appropriated to a savings and loan association's bad
debt reserves for "qualifying real property loans" and deducted for federal
income tax purposes exceed the allowable amount of such reserves computed under
the experience method and to the extent of the Bank's supplemental reserves for
losses on loans ("Excess"), such Excess may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of March 31, 1996, the Bank's Excess for tax purposes totaled
approximately $1.7 million.
The Bank and its subsidiary file consolidated federal income tax returns on
a fiscal year basis using the accrual method of accounting. The Holding Company
intends to file consolidated federal income tax returns with the Bank. Savings
and loan associations, such as the Bank, that file federal income tax returns as
part of a consolidated group are
77
required by applicable Treasury regulations to reduce their taxable income for
purposes of computing the percentage bad debt deduction for losses attributable
to activities of the non-savings and loan association members of the
consolidated group that are functionally related to the activities of the
savings and loan association member.
The Bank has not been audited by the IRS recently with respect to federal
income tax returns. In the opinion of management, any examination of still open
returns would not result in a deficiency which could have a material adverse
effect on the financial condition of the Bank.
STATE TAXATION. The Missouri Corporation Income Tax Act provides for an
exemption from the Missouri Corporation Income Tax for mutual savings banks and
for banking corporations, which includes stock associations (e.g., the Bank).
However, this exemption does not extend to non-banking entities such as the
Company. The non-banking subsidiaries of the Bank (as well as the Company) are
subject to the Missouri Corporate Income Tax based on their Missouri taxable
income, as well as franchise taxes. The Missouri Corporation Income Tax applies
at graduated rates from 4% upon the first $25,000 of Missouri taxable income to
8% on all Missouri taxable income in excess of $200,000. For these purposes,
"Missouri taxable income" means net income which is earned within or derived
from sources within the State of Missouri, after adjustments permitted under
Missouri law including a federal income tax deduction and an allowance for net
operating losses, if any. In addition, the Bank will become subject to the
Missouri Shares Tax after the Conversion, which will be imposed on the assessed
value of the Bank's stock. The formula for deriving the assessed value is to
calculate 15% of the sum of (i) 20% of a corporation's capitalized earnings,
plus (ii) 80% of a corporation's taxable stockholders' equity, and to subtract
from that amount 50% of a corporation's real and personal property assessment.
Other various items may also be subtracted in calculating a corporation's
capitalized earnings.
DELAWARE TAXATION. As a Delaware holding company, the Holding Company is
exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware. The Holding Company
is also subject to an annual franchise tax imposed by the State of Delaware.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE HOLDING COMPANY
The Board of Directors of the Holding Company currently consists of six
members, each of whom is also a director of the Bank. See "Directors of the
Bank." Each Director of the Holding Company has served as such since the Holding
Company's incorporation in June 1996. Directors of the Holding Company will
serve three-year staggered terms so that approximately one-third of the
directors will be elected at each annual meeting of stockholders. The terms of
the current directors of the Holding Company are the same as their terms as
directors of the Bank. The Holding Company intends to pay directors a fee of
$2,000 per annum, payable on a quarterly basis. See "-Directors of the Bank."
The executive officers of the Holding Company, each of whom held his
present position since June 1996, are elected annually and hold office until his
respective successor has been elected and qualified or until death, resignation
or removal by the Board of Directors. The executive officers of the Holding
Company, are set forth below. See "-Executive Officers Who are Not Directors."
Name Title
----------------- ----------------------------
Larry E. Hermreck Chief Executive Officer and Secretary
Dennis D. Hartman Controller and Chief Financial Officer
It is not anticipated that the executive officers of the Holding Company
will receive any remuneration in their capacity as Holding Company executive
officers. For information regarding compensation of directors and executive
officers of the Bank, see "- Meetings of the Board of Directors of the Bank," "-
Compensation of the Board of Directors of the Bank" and "- Executive
Compensation."
78
COMMITTEES OF THE HOLDING COMPANY
The Holding Company formed standing Audit, Nominating and Compensation
Committees in connection with its organization in June 1996. The Holding Company
was not incorporated in fiscal 1995 and therefore the committees did not meet
during that fiscal year.
The Audit Committee will review audit reports and related matters to ensure
effective compliance with regulations and internal policies and procedures. This
committee also will act on the recommendation by management of an accounting
firm to perform the Holding Company's annual audit and acts as a liaison between
the auditors and the Board. The current members of this committee are Directors
Cox, Lalumondier, Lamb, Radley and Rounkles.
The Nominating Committee will meet annually in order to nominate candidates
for membership on the Board of Directors. This committee is comprised of the
Board members who are not up for election.
The Compensation Committee will establish the Holding Company's
compensation policies and review compensation matters. The current members of
this Committee are Directors Cox, Lalumondier, Lamb, Radley and Rounkles.
INDEMNIFICATION
The Certificate of Incorporation of the Holding Company provides that a
director or officer of the Holding Company shall be indemnified by the Holding
Company to the fullest extent authorized by the Delaware General Corporation Law
("DGCL") against all expenses, liability and loss reasonably incurred or
suffered by such person in connection with his activities as a director or
officer or as a director or officer of another company, if the director or
officer held such position at the request of the Holding Company. Delaware law
requires that such director, officer, employee or agent, in order to be
indemnified, must have acted in good faith and in a manner reasonably believed
to be not opposed to the best interests of the Holding Company and, with respect
to any criminal action or proceeding, either had reasonable cause to believe
such conduct was lawful or did not have reasonable cause to believe his conduct
was unlawful.
The Certificate of Incorporation and Delaware law also provide that the
indemnification provisions of such Certificate and the statute are not exclusive
of any other right which a person seeking indemnification may have or later
acquire under any statute, provision of the Certificate of Incorporation, Bylaws
of the Holding Company, agreement, vote of stockholders or disinterested
directors or otherwise.
These provisions may have the effect of deterring shareholder derivative
actions, since the Holding Company may ultimately be responsible for expenses
for both parties to the action. A similar effect would not be expected for
third-party claims.
In addition, the Certificate of Incorporation and Delaware law also provide
that the Holding Company may maintain insurance, at its expense, to protect
itself and any director, officer, employee or agent of the Holding Company or
another corporation, partnership, joint venture, trust or other enterprise
against any expense, liability or loss, whether or not the Holding Company has
the power to indemnify such person against such expense, liability or loss under
the DGCL. The Holding Company intends to obtain such insurance.
DIRECTORS OF THE BANK
Prior to the Conversion, the direction and control of the Bank, as a mutual
savings institution, had been vested in its Board of Directors. Upon conversion
of the Bank to stock form, each of the directors of the Bank will continue to
serve as a director of the converted Bank. The Board of Directors of the Bank
currently consists of six directors. The directors are divided into three
classes. Approximately one-third of the directors are elected at each annual
meeting of stockholders. Because the Holding Company will own all of the issued
and outstanding shares of capital stock of the converted Bank after the
Conversion, directors of the Holding Company will elect the directors of the
Bank.
79
The following table sets forth certain information regarding the directors
of the Bank and the Holding Company:
Director Term
Name Position(s) Held with the Bank Age/(1)/ Since Expires
- ---- ----------------------------------- -------- ---------- -----------
Robert E. McCrorey Chairman of the Board and President 55 1973 1996
Edgar L. Radley Vice Chairman of the Board 68 1979 1997
Richard N. Cox Director 49 1992 1996
Robert L. Lalumondier Director 56 1992 1998
Cecil E. Lamb Director 67 1985 1998
Rodney G. Rounkles Director 58 1984 1997
____________________________
/(1)/ At March 31, 1996.
The business experience of each director is set forth below. All directors
have held their present position for at least the past five years, except as
otherwise indicated.
ROBERT E. MCCROREY. Mr. McCrorey has served as a loan originator for the
Bank since 1993. Prior to that time, he served as a branch manager for a beer
distributor.
EDGAR L. RADLEY. Mr. Radley is the retired owner and operator of a Coast to
Coast hardware store, which he operated until 1990.
RICHARD N. COX. Mr. Cox is the owner and operator of Cox Tool Co., Inc., a
designer/builder of plastic molds, located in Excelsior Springs, Missouri.
ROBERT L. LALUMONDIER. Mr. Lalumondier is the owner of Lalumondier
Insurance Agency, located in Kearney, Missouri.
CECIL E. LAMB. Mr. Lamb is a retired postmaster.
RODNEY G. ROUNKLES. Mr. Rounkles was the plant manager of a molding
products plant in Excelsior Springs, Missouri until his retirement in 1995.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The Bank's executive officers who are not also directors will retain their
offices in the converted Bank. Officers of the Bank are elected annually by the
Board of Directors of the Bank. The business experience of the executive
officers of the Bank and the Holding Company who are not also directors are set
forth below.
LARRY E. HERMRECK. Mr. Hermreck, age 56, has been with the Bank for the
past 23 years and has served as Chief Executive Officer for 18 years. In that
capacity, he is responsible for overseeing the day to day operations of the
Bank.
DERYL R. GOETTLING. Mr. Goettling, age 49, is the Manager of the Bank's
Mortgage Loan Department and is responsible for the supervision of all mortgage
lending operations of the Bank. Mr. Goettling joined the Bank in 1986 and served
in various capacities prior to being promoted to his current position in 1992.
MARGARET E. TEEGARDEN. Ms. Teegarden, age 47, is the Manager of the Bank's
Savings Department, responsible for managing the Bank's savings department. Ms.
Teegarden joined the Bank in 1978.
DENNIS D. HARTMAN. Mr. Hartman, age 41, is the Controller and Manager of
the Bank's Accounting Department. He is responsible for the supervision of the
Accounting Department and reporting to the regulatory authorities. He is also
responsible for overseeing the Bank's asset/liability management program. Mr.
Hartman joined the Bank in 1978.
80
JAMES V. ALDERSON. Mr. Alderson, age 50, has served as the Manager of the
Consumer Loan Department since June 1994, responsible for supervision of the
Bank's consumer lending operations. Mr. Alderson has been with the Bank since
1990 and served as a loan officer until June 1994.
MEETINGS OF THE BOARD OF DIRECTORS AND COMMITTEES OF THE BANK
The Board of Directors met 28 times during the year ended June 30, 1995.
During fiscal 1995, no director of the Bank attended fewer than 75% of the
aggregate of the total number of Board meetings and the total number of meetings
held by the committees of the Board of Directors on which he served.
The Board of Directors of the Bank has established various committees,
including Executive, Audit and Salary Review Committees. The Board of Directors
does not have a separate Nominating Committee. The full Board of Directors acts
as the Nominating Committee, except for directors who are up for election at the
upcoming meeting.
The Executive Committee generally has the power and authority to act on
behalf of the Board of Directors on important matters between scheduled Board
meetings, unless specific Board of Directors action is required. The members of
the Executive Committee consist of Messrs. McCrorey, Radley and Rounkles. The
Executive Committee did not meet during the year ended June 30, 1995.
The Audit Committee reviews (i) the independent auditors' reports and
results of their examination, subject to review by and with the entire Board of
Directors, (ii) the internal audit function, which is under the control of and
reports directly to the Audit Committee, and (iii) the examination reports of
the OTS and the FDIC and other regulatory reports, subject to review by and with
the entire Board of Directors. The Bank's full Board of Directors acts as the
Audit Committee. The Audit Committee met 12 times during the year ended June 30,
1995.
The Salary Review Committee reviews the compensation of the Bank's officers
and employees, and it is expected that the members of the Committee will serve
as trustees of the ESOP and as administrators of the Stock Option Plan and the
Recognition and Retention Plan. The members of the committee are Messrs. Lamb,
Rounkles, Lalumondier, Radley, Cox and Hermreck, and the committee met one time
during the year ended June 30, 1995.
COMPENSATION OF THE BOARD OF DIRECTORS OF THE BANK
During fiscal 1995, all directors received a fee of $650 per month from
July to December 1994, plus an additional $650 fee for a year-end special
meeting of the board held in December 1994, and a fee of $700 per month from
January to June 1995. During fiscal 1995, directors also received fees of $200
per month for participation on board committees. Each director received
aggregate board and committee fees of $11,150 during fiscal 1995. During fiscal
1996, the Bank paid directors board fees of $700 per month from July to December
1995, plus an additional $700 fee for a special meeting of the board held in
December 1995. Effective January 1996, board fees were increased to $800 per
month. Each director except for Mr. Lalumondier also receives group
hospitalization, dental, prescription and life insurance coverage. Mr. McCrorey
also is paid a salary for services performed as a loan originator for the Bank.
In order to encourage directors to remain members of the Bank's board, in
February 1995 the Bank entered into Director Emeritus Agreements (the "Emeritus
Agreements") with each of the directors of the Bank. Pursuant to the Emeritus
Agreements, upon reaching age 75, directors Radley, Lamb, Lalumondier, McCrorey,
Rounkles and Cox will receive a benefit of $671, $525, $642, $1,225, $817, and
$846, respectively, per month paid monthly for ten years following retirement.
Upon termination of service for disability or retirement prior to age 75, the
director will receive a reduced amount pursuant to a schedule as set forth in
the Emeritus Agreements, paid monthly for ten years following termination, or if
earlier, until the director's recovery from disability. Upon termination
following a change in control of the Bank, each director would be entitled to a
lump sum payment of a reduced amount pursuant to a schedule as set forth in the
Emeritus Agreement. Upon the death or termination for cause of a director, no
benefits will be paid to such director. The Bank purchased life insurance to
finance the benefits that would be payable to five of the six directors. The
Bank accrued expenses during fiscal 1995 in the aggregate amount of $4,440 for
the Emeritus Agreements.
Upon completion of the Conversion, and subject to the approval of the
Holding Company's stockholders, each director of the Bank who is not a full-time
employee (5 persons) will receive an option to purchase shares of Common Stock
and an award of restricted stock under the RRP equal to 0.5% and 0.2%,
respectively, of the Common Stock issued
81
in the Conversion. See "Benefit Plans - Stock Option and Incentive Plan" and
"Benefit Plans Recognition and Retention Plan." In addition, Mr. McCrorey, who
serves as both a director of the Bank and as the Bank's loan originator will
receive an option to purchase shares of Common Stock and an award of restricted
stock under the RRP equal to 1.0% and 0.4%, respectively, of the Common Stock
issued in the Conversion. One-half of Mr. McCrorey's awards are being granted to
him as a director, and the other half as the Bank's loan originator.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation paid
or granted to the Bank's Chief Executive Officer. No other executive officer of
the Bank had aggregate compensation (salary plus bonus) in excess of $100,000 in
fiscal 1995.
===================================================================================================================
SUMMARY COMPENSATION TABLE
- -------------------------------------------------------------------------------------------------------------------
LONG-TERM
Compensation
ANNUAL COMPENSATION/(1)/ AWARDS
- -------------------------------------------------------------------------------------------------------------------
OTHER RESTRICTED
ANNUAL STOCK OPTIONS/ ALL OTHER
NAME AND PRINCIPAL FISCAL COMPENSATION AWARD SARS COMPENSATION
POSITION YEAR/(1)/ SALARY($) BONUS($) ($) ($) (#) ($)
- -------------------------------------------------------------------------------------------------------------------
Larry E. Hermreck, Chief 1995 $56,000 $16,000 $ --- ---/(2)/ ---/(2)/ $ ---
Executive Officer
===================================================================================================================
________________________
/(1)/ In accordance with the revised rules on executive officer and
director compensation disclosure adopted by the SEC, Summary
Compensation information is excluded for the fiscal years ended
June 30, 1993 and 1994, as the Bank was not a public company during
such periods.
/(2)/ Pursuant to the proposed Stock Option Plan, the Holding Company
intends to grant to Mr. Hermreck options to purchase a number of
shares equal to 2.2% (19,635 shares at the minimum and 26,565
shares at the maximum of the Estimated Valuation Range) of the
total number of shares of Common Stock sold in the Conversion at an
exercise price equal to the market value per share of the Common
Stock on the date of the grant. See "- Benefit Plans - Stock Option
and Incentive Plan." In addition, pursuant to the proposed RRP, the
Holding Company intends to grant to Mr. Hermreck a number of shares
of restricted stock equal to 0.88% (7,854 shares at the minimum and
10,626 shares at the maximum of the Estimated Valuation Range), of
the total number of shares of Common Stock sold in the Conversion.
See " - Benefit Plans -Recognition and Retention Plan."
82
EMPLOYMENT AGREEMENTS
The Bank has determined to enter into an employment agreement effective
upon consummation of the Conversion, with Larry E. Hermreck, the Bank's Chief
Executive Officer, providing for a term of three years. The contract provides
for payment to the employee for the remaining term of the contract unless the
employee is terminated "for cause."
The employment agreement for Mr. Hermreck provides for an annual base
salary as determined by the Board of Directors, but not less than the employee's
current salary. Mr. Hermreck's base salary (exclusive of director fees and
bonuses) will be $56,000, assuming the employment contract is entered into in
fiscal 1997. So long as the contract remains in force, salary increases will be
reviewed not less often than annually thereafter, and are subject to the sole
discretion of the Board of Directors. The employment contract provides for
annual extensions for one additional year, but only upon express authorization
by the Board of Directors at the end of each year. The contract provides for
termination upon the employee's death, for cause or in certain events specified
by OTS regulations. The employment contract is terminable by the employee upon
90 days' notice to the Bank.
In the event there is a change in control of the Holding Company or the
Bank, as defined in the agreement, if employment terminates involuntarily, as
defined in the Agreement, in connection with such change in control or within 12
months thereafter, the employment contract provides for a payment equal to 299%
of Mr. Hermreck's base amount of compensation as defined in the Code. Assuming
a change in control were to take place as of March 31, 1996, the aggregate
amounts payable to Mr. Hermreck pursuant to this change in control provision
would be approximately $215,280.
The contract provides, among other things, for participation in an
equitable manner in employee benefits applicable to executive personnel. The
employment contract may have an "anti-takeover" effect that could affect a
proposed future acquisition of control of the Bank after its Conversion. See
"Restrictions on Acquisitions of Stock and Related Takeover Defensive
Provisions."
The Bank also intends to enter into an employment agreement with Messrs.
Goettling and Hartman and Ms. Teegarden. These agreements will each provide for
a term of three years and a change of control payment equal to 299% of the
employee's base amount of compensation. These agreements are expected to be
similar to the employment agreement with Mr. Hermreck.
SALARY CONTINUATION AGREEMENTS
In order to encourage the Bank's Chief Executive Officer to remain an
employee of the Bank, the Bank entered into Salary Continuation Agreement (the
"Agreement") in February 1995 with Mr. Hermreck. Pursuant to the Agreement,
upon retirement on or after reaching age 65, Mr. Hermreck would receive a
monthly benefit of $2,917 paid monthly for 15 years following retirement. Upon
termination of service for disability or retirement prior to age 65, Mr.
Hermreck would receive a reduced amount pursuant to a schedule set forth in the
Agreement, paid monthly for 15 years following termination or, if earlier, until
Mr. Hermreck's recovery from disability. Upon termination following a change in
control of the Bank, Mr. Hermreck would be entitled to a lump sum payment of a
reduced amount pursuant to a schedule set forth in the Agreement. The Agreement
provides for a death benefit if Mr. Hermreck dies while in active service of the
Bank equal to the amount that would be paid to Mr. Hermreck upon serving until
age 65. If Mr. Hermreck dies after benefit payments commence but before
receiving all payments, the Bank will pay the remaining benefits at the same
time and in the same amounts they would have been paid had Mr. Hermreck
survived. The Bank purchased life insurance on Mr. Hermreck whereby the Bank is
the beneficiary in order to offset the expected payments to Mr. Hermreck. The
Bank has also entered into Salary Continuation Agreements with Messrs. Alderson,
Goettling and Hartman and Ms. Teegarden. These agreements are similar to the
Agreement with Mr. Hermreck, although providing for lower payments.
83
BENEFIT PLANS
GENERAL. The Bank currently provides health care benefits, including
medical, prescription and dental, subject to certain deductibles and copayments
by employees, and group life insurance to its full time employees.
STOCK OPTION AND INCENTIVE PLAN. Among the benefits to the Bank
anticipated from the Conversion is the ability to attract and retain personnel
through prudent use of stock option and other stock-related incentive programs.
It is anticipated that a Stock Option Plan will be adopted by the Board of
Directors of the Holding Company, subject to approval by stockholders of the
Holding Company following Conversion. Stock options, stock appreciation rights
and limited stock appreciation rights covering shares representing an aggregate
of up to 10% of the shares of Common Stock sold in the Conversion may be granted
to directors, officers and employees of the Holding Company or its subsidiaries
under the Stock Option Plan.
Options granted under the Stock Option Plan may be either options that
qualify as "incentive stock options" (options that afford tax treatment to
recipients upon compliance with certain restrictions and that do not normally
result in tax deductions to the employer) or options that do not so qualify. In
the event of a change in control of the Holding Company, outstanding options may
become immediately exercisable to the extent such options have vested. The
exercise price of stock options granted under the Stock Option Plan is required
to be at least equal to the fair market value per share of the stock on the date
of grant.
The proposed Stock Option Plan provides for the grant of Stock Appreciation
Rights ("SARs") at any time, whether or not the participant then holds stock
options, granting the right to receive the excess of the market value of the
shares represented by the SARs on the date exercised over the exercise price.
SARs generally will be subject to the same terms and conditions and exercisable
to the same extent as stock options. There is no present intention to grant any
SARs.
The Stock Option Plan will be administered by the Holding Company's
Compensation Committee each of the members of which is a "disinterested person"
under applicable regulations. The Compensation Committee will select the
recipients and terms of awards pursuant to the Stock Option Plan. See " -
Committees of the Holding Company."
The Compensation Committee currently intends to grant options to employees
to purchase shares of Common Stock in amounts expressed as a percentage of the
shares offered in the Conversion, as follows: Mr. Hermreck - 2.2%; and all
executive officers of the Bank and Holding Company as a group (5 persons) -
5.5%. Under the terms of the Stock Option Plan, a ten-year, non-qualified stock
option is intended to be granted to each current director of the Bank or the
Company in an amount equal to 0.5% of the shares issued in the Conversion. It is
further expected that Mr. McCrorey will be granted an incentive option to
purchase an additional 0.5% of the shares issued in the Conversion. In
addition, the Bank intends to grant each director elected subsequent to the
Conversion a ten-year, non-qualified stock option in an amount equal to 0.5% of
the shares issued in the Conversion, subject to availability. The options
granted under the Stock Option Plan will have an exercise price equal to the
market value per share of the Common Stock on the date of the grant, which under
OTS regulations may not be any sooner than six months after completion of the
Conversion. All of these grants are made upon consideration of past services
rendered to the Bank and in an amount deemed necessary (after a review of grants
made by other converting institutions) to encourage the continued retention of
the officers and directors who are considered necessary for the continued
success of the Bank. In this regard, all options granted as described above
will vest in five equal annual installments commencing one year from the date of
grant, subject to the continued service of the holder of such option. All
options will expire ten years after the date such option was granted, which is
the date of shareholder approval of the Stock Option Plan.
In granting awards under the proposed Stock Option Plan, the Compensation
Committee will consider, among other things, position and years of service,
value of the participant's service to the Bank and the Holding Company and the
added responsibilities of such individuals as executive officers and directors
of a public company. As a stock-related incentive plan, the proposed Stock
Option Plan is designed to recognize the past contributions of the officers,
directors and employees to the Bank and to encourage them to remain with the
Bank. The Bank also believes that the equity stake of such persons in the
Holding Company will give them an incentive to perform to the best of their
abilities in the interest of the Bank and its affiliates. All proposed grants
to officers are subject to modification by the Compensation Committee based upon
its performance evaluation of the option recipients prior to ratification of the
Stock Option Plan by stockholders following completion of the Conversion and
subject to OTS regulations.
84
EMPLOYEE STOCK OWNERSHIP PLAN. The Boards of Directors of Community and
the Holding Company have approved the adoption of an ESOP for the benefit of
employees of Community. The ESOP is designed to meet the requirements of an
employee stock ownership plan as described at Section 4975(e)(7) of the Code and
Section 407(d)(6) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and, as such, the ESOP is empowered to borrow in order to
finance purchases of the Holding Company's Common Stock.
It is anticipated that the ESOP will be capitalized with a loan from the
Holding Company. The proceeds from this loan are expected to be used by the
ESOP to purchase up to 8.0% of the Common Stock issued in the Conversion. After
the Conversion, as a qualified employee pension plan under Section 401(a) of the
Code, the ESOP will be in the form of a stock bonus plan and will provide for
contributions, predominantly in the form of either the Holding Company's Common
Stock or cash, which will be used within a reasonable period after the date of
contributions primarily to purchase Holding Company Common Stock. The Bank will
receive a tax deduction equal to the amount it contributes to the ESOP, subject
to the limitations set forth in the Code. The maximum tax-deductible
contribution by the Bank in any year is an amount equal to the maximum amount
that may be deducted by the Bank under Section 404 of the Code, subject to
reduction based on contributions to other Tax-Qualified Employee Plans.
Additionally, the Bank will not make contributions if such contributions would
cause the Bank to violate its regulatory capital requirements. The assets of
the ESOP will be invested primarily in Holding Company Common Stock.
From time to time, the ESOP may purchase additional shares of Common Stock
for the benefit of plan participants through purchases of outstanding shares in
the market, upon the original issuance of additional shares by the Holding
Company or upon the sale of shares held in treasury by the Holding Company.
Such purchases, which are not currently contemplated, would be subject to then-
applicable laws, regulations and market conditions.
Generally accepted accounting principles require that any borrowing by the
ESOP be reflected as a liability in the Holding Company's consolidated financial
statements, whether or not such borrowing is guaranteed by, or constitutes a
legally binding contribution commitment of the Holding Company or the Bank. In
addition, shares purchased with borrowed funds will, to the extent of the
borrowings, be excluded from stockholders' equity, representing unearned
compensation to employees for future services not yet performed. Consequently,
if the ESOP purchases already-issued shares in the open market, the Holding
Company's consolidated liabilities will increase to the extent of the ESOP's
borrowings, and total and per share stockholders' equity will be reduced to
reflect such borrowings. If the ESOP purchases newly issued shares from the
Holding Company, total stockholders' equity would neither increase nor decrease,
but per share stockholders' equity and per share net income would decrease
because of the increase in the number of outstanding shares. In either case, as
the borrowings used to fund ESOP purchases are repaid, total stockholders'
equity will correspondingly increase.
All employees of the Bank are eligible to participate in the ESOP after
they attain age 21 and complete one year of service during which they work at
least 1,000 hours. Employees will be credited for years of service to the Bank
prior to the adoption of the ESOP for participation and vesting purposes. The
Bank's contribution to the ESOP is allocated among participants on the basis of
compensation. Each participant's account will be credited with cash and shares
of Holding Company Common Stock based upon compensation earned during the year
with respect to which the contribution is made. After completing five years of
service, a participant will be 100% vested in his ESOP account. ESOP
participants are entitled to receive distributions from their ESOP accounts only
upon termination of service. Distribution will be made in cash and in whole
shares of Holding Company Common Stock. Fractional shares will be paid in cash.
Participants will not incur a tax liability until a distribution is made.
Participating employees are entitled to instruct the trustee of the ESOP as
to how to vote the shares held in their account. The trustee, who has
dispositive power over the shares in the Plan, will not be affiliated with the
Holding Company or Community. The ESOP may be amended by the Board of Directors
of the Holding Company, except that no amendment may be made which would reduce
the interest of any participant in the ESOP trust fund or divert any of the
assets of the ESOP trust fund to purposes other than the benefit of participants
or their beneficiaries.
RECOGNITION AND RETENTION PLAN. It is anticipated that the Holding Company
will establish an RRP as a method of providing directors, officers and employees
with a proprietary interest in the Holding Company in a manner designed to
encourage such individuals to remain with the Bank. In this respect, it is
anticipated that Restricted Stock Awards ("Awards") covering up to 4% of the
shares of Common Stock that will be outstanding upon completion of the
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Conversion may be awarded to the Bank's directors, officers and key employees
under the RRP. The RRP will be subject to stockholder approval at the Holding
Company's meeting of stockholders following the Conversion.
The RRP will be administered by the Compensation Committee. Under the
terms of the proposed RRP, Awards may be granted to directors and key employees
in the form of shares of Common Stock held by the RRP. Awards are non-
transferable and non-assignable. Recipients will earn (i.e., become vested in),
over a period of time, the shares of Common Stock covered by the Awards. The
Compensation Committee will determine the period of time over which the Awards
are to be earned. Awards will be 100% vested upon termination of employment due
to death or disability.
The Compensation Committee currently intends to grant to Mr. Hermreck, and
all executive officers of the Bank and Holding Company as a group (5 persons)
RRP awards of 0.88% and 2.2%, respectively, of the shares issued in the
Conversion, respectively. It is intended that the Awards to officers and
employees will vest in five equal annual installments commencing one year from
the date of grant, subject in each case to the continued service of the holder
as an employee, officer, director or advisory director of the Bank and to the
Bank meeting its fully phased-in regulatory capital requirements. In addition,
it is intended that each director of the Bank (6 persons) at the date of
completion of the Conversion receive an Award of 0.2% of the Common Stock sold
in the Conversion. It is further expected that Mr. McCrorey will receive an
additional award of 0.2% of the shares issued in the Conversion. Each director
elected subsequent to approval of the RRP by stockholders who is not an employee
is intended to receive an Award equal to 0.2% of the dollar value of the Award
to each non-employee director at the date of the approval of the RRP, subject to
availability. Awards are intended to vest in five equal annual installments
commencing one year from the date of grant, subject to the continued service of
the director and to the Bank's meeting its fully phased-in capital requirements.
The Award recipient may receive any dividends paid on the restricted shares
upon vesting of such shares. In addition, upon the vesting of such shares,
recipients of Awards may direct the voting of the shares allocated to them. The
cost of the RRP will be reflected as compensation expense in the Statements of
Income as vesting occurs.
In granting awards under the RRP, the Compensation Committee will consider,
among other things, position and years of service, value of the participant's
service to the Bank and the Holding Company and the added responsibilities of
such individuals as executive officers and directors of a public company. In
addition, as a stock-based retention plan, the RRP is designed to recognize the
past contributions of the officers, directors and employees to the Bank and to
encourage them to remain with the Bank. The Bank also believes that the equity
stake of such persons will give them incentive to perform in the best interests
of the Bank and the Holding Company. All proposed grants to officers are
subject to modification by the Compensation Committee based upon its performance
evaluation of the award recipients prior to ratification of the RRP by
stockholders following completion of the Conversion.
It is currently anticipated that the RRP will be funded by shares
subsequently reacquired and held as treasury shares or through the issuance of
authorized but unissued shares. To the extent the RRP is funded from authorized
but unissued shares, the funding of the RRP will have the effect of diluting
existing stockholders. See "Prospectus Summary-Benefits of Conversion to
Directors and Executive Officers" and "Capitalization."
INDEBTEDNESS OF MANAGEMENT
The Bank has followed a policy of granting consumer loans and loans secured
by one- to four-family real estate to officers, directors and employees. Loans
to directors and executive officers are made in the ordinary course of business
and on the same terms and conditions as those of comparable transactions with
the general public prevailing at the time, in accordance with the Bank's
underwriting guidelines, and do not involve more than the normal risk of
collectibility or present other unfavorable features.
All loans by the Bank to its directors and executive officers are subject
to OTS regulations restricting loan and other transactions with affiliated
persons of the Bank. Federal law currently requires that all loans to directors
and executive officers be made on terms and conditions comparable to those for
similar transactions with non-affiliates. Loans to all directors, executive
officers, employees and their associates totaled $1,795,400 at March 31, 1996,
which was 15.5% of the Bank's equity capital at that date and 10.8% of the
Holding Company's stockholders' equity at that date, assuming completion of the
Conversion at the midpoint of the Estimated Valuation Range. There were no
loans outstanding to any director, executive officer or their affiliates at
preferential rates or terms which in the aggregate
86
exceeded $60,000 during the three years ended June 30, 1995 and the nine months
ended March 31, 1996. All loans to directors and officers were performing in
accordance with their terms at March 31, 1996.
THE CONVERSION
The Board of Directors of the Bank and the OTS have approved the Plan of
Conversion, subject to approval by the members of the Bank and the satisfaction
of certain other conditions. OTS approval does not constitute a recommendation
or endorsement by the OTS of the Plan of Conversion. Certain terms used in the
following summary are defined in the Plan of Conversion, a copy of which may be
obtained by contacting the Bank.
GENERAL
On May 14, 1996, the Board of Directors of the Bank adopted the Plan,
subject to approval by the OTS and the members of the Bank. Pursuant to the
Plan, the Bank is to be converted from a federal mutual savings bank to a
federal stock savings bank, with the concurrent formation of a holding company.
The OTS has approved the Plan, subject to its approval by the affirmative vote
of the members of the Bank holding not less than a majority of the total number
of votes eligible to be cast at a Special Meeting called for that purpose to be
held on September ___, 1996.
The Conversion will be accomplished through amendment of the Bank's federal
mutual charter to authorize the issuance of capital stock, at which time the
Bank will become a wholly owned subsidiary of the Holding Company. The
Conversion will be accounted for as a pooling of interests.
Subscription Rights are being given to Eligible Account Holders as of March
31, 1995, the Tax-Qualified Employee Plans of the Bank and the Holding Company,
Supplemental Eligible Account Holders, Other Members, and officers, directors
and employees of the Bank. Concurrently with, during, or following the
Subscription Offering, and subject to the prior rights of holders of
Subscription Rights, members of the general public to whom a prospectus is
delivered are being afforded the opportunity to subscribe for Holding Company
Common Stock in the Community Offering with a preference to natural persons
residing in the Local Community. The residence of such individuals shall be
determined by the Bank in its sole discretion based upon the books and records
of the Bank. See "- Offering of Holding Company Common Stock." Depending upon
market conditions, any shares not initially subscribed for in the Subscription
Offering may be offered for sale by the Holding Company to the general public in
a Syndicated Community Offering. See "-Syndicated Community Offering."
Subscriptions for shares will be subject to the maximum and minimum purchase
limitations set forth in the Plan of Conversion.
BUSINESS PURPOSES
The Bank has several business purposes for the Conversion. The sale of
Holding Company Common Stock will have the immediate result of providing the
Bank with additional equity capital. This increased capital will support
expansion of its financial services, subject to applicable regulatory
restrictions. The sale of the Common Stock is the most effective means of
increasing the Bank's permanent capital and does not involve the high interest
cost and repayment obligation of subordinated debt. In addition, investment of
the net Conversion proceeds is expected to provide additional operating income
to further increase the Bank's capital on a continuing basis.
The Board of Directors of the Bank believes that a holding company
structure could facilitate the acquisition of other financial institutions as
well as other companies. If a multiple holding company structure is utilized in
a future acquisition, the acquired savings institution would be able to operate
on a more autonomous basis as a wholly owned subsidiary of the Holding Company
rather than as a division of the Bank. For example, the acquired savings
institution could retain its own directors, officers and corporate name as well
and have representation on the Board of Directors of the Holding Company. As of
the date hereof, there are no plans or understandings by the Bank or the Holding
Company regarding the acquisition of any other institutions.
87
The Board of Directors of the Bank also believes that a holding company
structure will facilitate the diversification of the Bank's business activities.
While diversification will be maximized if a unitary holding company structure
is utilized because the types of business activities permitted to a unitary
holding company are broader than those of a multiple holding company, either
type of holding company may engage in a broader range of activities than may a
thrift institution directly. Currently, there are no plans that the Holding
Company engage, immediately after Conversion, in any material activities apart
from holding the shares of the Bank, although the Board may determine to expand
the Holding Company's activities after Conversion.
The preferred stock and additional common stock of the Holding Company
being authorized in the Conversion will be available for future acquisitions
(although the Holding Company has no current negotiations, understandings or
plans with respect to any acquisition) and for issuance and sale to raise
additional equity capital, subject to market conditions and generally without
stockholder approval.
The Conversion will structure the Bank in the stock form used in the United
States by all commercial banks, most major business corporations and an
increasing number of savings institutions. The Conversion will permit the
Bank's members to become stockholders of the Holding Company, thereby allowing
them to own stock in the parent corporation of the Bank in which they maintain
deposit accounts or with which they have a borrowing relationship. Such
ownership may encourage customers who become stockholders to promote the Bank to
others, thereby further contributing to the Bank's growth. The more flexible
operating structure provided by the Holding Company and the stock form of
ownership is expected to assist the Bank in competing aggressively with other
financial institutions in its principal market area.
The Bank is also expected to benefit from its management and employees
owning stock, because stock ownership is viewed as an effective performance
incentive and a means of attracting, retaining and compensating personnel.
EFFECTS OF CONVERSION TO STOCK FORM ON DEPOSITORS AND BORROWERS OF THE BANK
VOTING RIGHTS. Upon Conversion, neither deposit account holders nor
borrowers will have voting rights in the Bank or the Holding Company and will
therefore not be able to elect directors of either entity or to control their
affairs. These rights are currently accorded to deposit account holders with
regard to the Bank. Subsequent to Conversion, voting rights will be vested
exclusively in the Holding Company as the sole stockholder of the Bank. Voting
rights as to the Holding Company will be held exclusively by its stockholders.
Each purchaser of Holding Company Common Stock shall be entitled to vote on any
matters to be considered by the Holding Company stockholders. A stockholder
will be entitled to one vote for each share of Common Stock owned, subject to
certain limitations applicable to holders of 10% or more of the shares of the
Common Stock. See "Restrictions on Acquisitions of Stock and Related Takeover
Defensive Provisions." The Holding Company intends to supply each stockholder
with quarterly and annual reports and proxy statements.
DEPOSIT ACCOUNTS AND LOANS. The terms of the Bank's deposit accounts, the
balances of the individual accounts and the existing FDIC insurance coverage
will not be affected by the Conversion. Furthermore, the Conversion will not
affect the loan accounts, the balances of these accounts, or the obligations of
the borrowers under their individual contractual arrangements with the Bank.
TAX EFFECTS. The Bank has received an opinion from Luse Lehman Gorman
Pomerenk & Schick, P.C. with regard to federal income taxation, and an opinion
of KPMG Peat Marwick LLP with regard to Missouri taxation, to the effect that
the adoption and implementation of the Plan of Conversion set forth herein will
not be taxable for federal or Missouri tax purposes to the Bank or the Holding
Company. See "- Income Tax Consequences."
LIQUIDATION RIGHTS. The Bank has no plan to liquidate either before or
after the Conversion. However, if there should ever be a complete liquidation,
either before or after Conversion, deposit account holders would receive the
protection of insurance by the FDIC up to applicable limits. Subject thereto,
liquidation rights before and after Conversion would be as follows:
88
LIQUIDATION RIGHTS IN PRESENT MUTUAL BANK. In addition to the protection
of FDIC insurance up to applicable limits, in the event of a complete
liquidation each holder of a deposit account in the Bank in its present mutual
form would receive his pro rata share of any assets of the Bank remaining after
payment of claims of all creditors (including the claims of all depositors in
the amount of the withdrawal value of their accounts). Such holder's pro rata
share of such remaining assets, if any, would be in the same proportion of such
assets as the balance in his deposit account was to the aggregate balance in all
deposit accounts in the Bank at the time of liquidation.
LIQUIDATION RIGHTS IN PROPOSED CONVERTED BANK. After Conversion each
deposit account holder, in the event of a complete liquidation, would have a
claim of the same general priority as the claims of all other general creditors
of the Bank in addition to the protection of FDIC insurance up to applicable
limits. Therefore, except as described below, the deposit account holder's claim
would be solely in the amount of the balance in his deposit account plus accrued
interest and the holder would have no interest in the value of the Bank above
that amount.
The Plan of Conversion provides that there shall be established, upon the
completion of the Conversion, a special "liquidation account" for the benefit of
Eligible Account Holders and Supplemental Eligible Account Holders (i.e.,
depositors with an account balance of $50 or more at March 31, 1995 and June 30,
1996, respectively) in an amount equal to the net worth of the Bank as of the
date of its latest consolidated statement of financial condition contained in
the final Prospectus relating to the sales of shares of Holding Company Common
Stock in the Conversion. Each Eligible Account Holder and Supplemental Eligible
Account Holder would have an initial interest in such liquidation account for
each qualifying deposit account held in the Bank on the qualifying date. An
Eligible Account Holder's or Supplemental Eligible Account Holder's interest as
to each deposit account would be in the same proportion of the total liquidation
account as the balance in his account on March 31, 1995 and June 30, 1996,
respectively, was to the aggregate balance in all qualifying deposit accounts of
Eligible Account Holders and Supplemental Eligible Account Holders on such date.
For accounts in existence on both dates, separate subaccounts shall be
determined on the basis of the qualifying deposits in such accounts on the
record dates. However, if an Eligible Account Holder or Supplemental Eligible
Account Holder should reduce the amount in the qualifying deposit account on any
annual closing date of the Bank to a level less than the lowest amount in such
account on March 31, 1995 or June 30, 1996, respectively, and on any subsequent
closing date, then the account holder's interest in this special liquidation
account would be reduced by an amount proportionate to any such reduction, and
the account holder's interest would cease to exist if such qualifying deposit
account were closed.
In addition, the interest in the special liquidation account would never be
increased despite any increase in the balance of the account holders' related
accounts after Conversion, and would only decrease.
Any assets remaining after the above liquidation rights of Eligible Account
Holders and Supplemental Eligible Account Holders were satisfied would be
distributed to the Holding Company as the sole stockholder of the Bank.
No merger, consolidation, purchase of bulk assets with assumption of
deposit accounts and other liabilities, or similar transaction, whether the
Bank, as converted, or another SAIF-insured institution if the surviving
institution, is deemed to be a complete liquidation for purposes of distribution
of the liquidation account and, in any such transaction, the liquidation account
would be assumed to the full extent authorized by regulations of the OTS as then
in effect. The OTS has stated that the consummation of a transaction of the type
described in the preceding sentence in which the surviving entity is not an
SAIF-insured institution would be reviewed on a case-by-case basis to determine
whether the transaction should constitute a "complete liquidation" requiring
distribution of any then remaining balance in the liquidation account. While the
Bank believes that such a transaction should not constitute a complete
liquidation, there can be no assurance that the OTS will not adopt a contrary
position and, in such event, that the Bank's position will be determined to be
correct.
COMMON STOCK. For information as to the characteristics of the Common
Stock to be issued under the Plan of Conversion, see "Dividends" and
"Description of Capital Stock." Common Stock issued under the Plan of Conversion
cannot, and will not, be insured by the FDIC or any other government agency.
89
THE BANK WILL CONTINUE, IMMEDIATELY AFTER COMPLETION OF THE CONVERSION, TO
PROVIDE ITS SERVICES TO DEPOSITORS AND BORROWERS PURSUANT TO ITS EXISTING
POLICIES AND WILL MAINTAIN THE EXISTING MANAGEMENT AND EMPLOYEES OF THE BANK.
OTHER THAN FOR PAYMENT OF EXPENSES INCIDENT TO THE CONVERSION, NO ASSETS OF THE
BANK WILL BE DISTRIBUTED IN THE CONVERSION. THE BANK WILL CONTINUE TO BE A
MEMBER OF THE FHLB SYSTEM, AND ITS DEPOSIT ACCOUNTS WILL CONTINUE TO BE INSURED
BY THE FDIC. THE AFFAIRS OF THE BANK WILL CONTINUE TO BE DIRECTED BY THE
EXISTING BOARD OF DIRECTORS AND MANAGEMENT.
OFFERING OF HOLDING COMPANY COMMON STOCK
Under the Plan of Conversion, up to 1,207,500 shares of Holding Company
Common Stock will be offered for sale, subject to certain restrictions described
below through a Subscription and Community Offering.
SUBSCRIPTION OFFERING. The Subscription Offering will expire at ______
p.m. Excelsior Springs, Missouri Time, on September ____, 1996 (the
"Subscription Expiration Date") unless extended by the Bank and the Holding
Company. Regulations of the OTS require that all shares to be offered in the
Conversion be sold within a period ending not more than 45 days after the
Subscription Expiration Date (or such longer period as may be approved by the
OTS) or, despite approval of the Plan of Conversion by members, the Conversion
will not be effected and the Bank will remain in mutual form. This period
expires on ________, 1996, unless extended with the approval of the OTS. If the
Conversion is not completed by __________, 1996, all subscribers will have the
right to modify or rescind their subscriptions and to have their subscription
funds returned promptly with interest. In the event of such an extension, all
subscribers will be notified in writing of the time period within which
subscribers must notify the Bank of their intention to maintain, modify or
rescind their subscriptions. If the subscriber rescinds or does not respond in
any manner to the Bank's notice, the funds submitted will be refunded to the
subscriber with interest at 2.25%, the Bank's current passbook rate per annum,
and/or the subscriber's withdrawal authorizations will be terminated. In the
event that the Conversion is not effected, all funds submitted and not
previously refunded pursuant to the Subscription and Community Offering will be
promptly refunded to subscribers with interest at 2.25%, the Bank's current
passbook rate per annum, and all withdrawal authorizations will be terminated.
SUBSCRIPTION RIGHTS. In accordance with OTS regulations, non-transferable
Subscription Rights have been granted under the Plan of Conversion to the
following persons in the following order of priority: (1) Eligible Account
Holders (deposit account holders of the Bank maintaining an account balance of
$50 or more as of March 31, 1995), (2) Tax-Qualified Employee Plans, (3)
Supplemental Eligible Account Holders (deposit account holders of the Bank
maintaining an account balance of $50 or more as of June 30, 1996); (4) Other
Members of the Bank (deposit account holders of the Bank as of _________, 1996
and certain borrowers as of both ________, 1995 and _______, 1996, who continue
to be borrowers as of the date of the Special Meeting, other than Eligible
Account Holders and Supplemental Eligible Account Holders), and (5) officers,
directors and employees of the Bank. All subscriptions received will be subject
to the availability of Common Stock after satisfaction of all subscriptions of
all persons having prior rights in the Subscription Offering, and to the maximum
and minimum purchase limitations set forth in the Plan of Conversion.
SUBSCRIPTION RIGHTS ARE NON-TRANSFERABLE. PERSONS FOUND TO BE SELLING OR
OTHERWISE TRANSFERRING THEIR RIGHT TO PURCHASE STOCK IN THE SUBSCRIPTION
OFFERING OR PURCHASING COMMON STOCK ON BEHALF OF ANOTHER PERSON WILL BE SUBJECT
TO FORFEITURE OF SUCH RIGHTS AND POSSIBLE FURTHER SANCTIONS AND PENALTIES
IMPOSED BY THE OTS, AN AGENCY OF THE U.S. GOVERNMENT. The preference categories
are more fully described below.
Category No. 1 is reserved for the Bank's Eligible Account Holders.
Subscription Rights to purchase shares under this category will be allocated
among Eligible Account Holders to permit each such depositor to purchase shares
in an amount equal to the greater of $100,000 of Common Stock, one-tenth of one
percent (.10%) of the total shares of Common Stock offered in the Conversion, or
15 times the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of Common Stock to be issued by a
fraction of which the numerator is the amount of the qualifying deposit of the
Eligible Account Holder and the denominator is the total amount of the
qualifying deposit of the Eligible Account Holders in the converting Bank in
each case on March 31, 1995 (the "Eligibility Record Date"); if sufficient
shares are not available, shares shall be allocated first to permit each
subscribing Eligible Account Holder to purchase to the extent possible 100
shares, and thereafter among each subscribing Eligible Account Holder pro rata
in the same proportion that his qualifying deposit bears to the total qualifying
deposits of all subscribing Eligible Account Holders whose subscriptions remain
unsatisfied.
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Category No. 2 provides for the issuance of Subscription Rights to Tax-
Qualified Employee Plans to purchase up to 10% of the total shares issued in the
Subscription Offering, provided that singly or in the aggregate such plans
(other than that portion of such plans which is self-directed) shall not
purchase more than 10% of the shares of the Holding Company Conversion Stock.
Subscription Rights received pursuant to this Category shall be subordinated to
all rights received by Eligible Account Holders to purchase shares pursuant to
Category No. 1; provided, however, that notwithstanding any other provision in
the Plan of Conversion to the contrary, the Tax-Qualified Employee Plans shall
have a first priority Subscription Right to the extent that the total number of
shares of Holding Company Conversion Stock sold in the Subscription and
Community Offering exceeds the maximum of the Estimated Valuation Range.
However, such plans shall not, in the aggregate, purchase more than 10% of the
Holding Company Common Stock issued. It is currently intended that the ESOP will
purchase 8% of the shares of Common Stock issued in the Conversion.
Category No. 3 provides that each Supplemental Eligible Account Holder
shall receive non-transferable Subscription Rights to subscribe for shares of
Holding Company Conversion Stock in an amount equal to the greater of $100,000
of Common Stock, one-tenth of one percent (.10%) of the total offering of
shares, or 15 times the product (rounded down to the next whole number) obtained
by multiplying the total number of shares of common stock to be issued by a
fraction of which the numerator is the amount of the qualifying deposit of the
Supplemental Eligible Account Holder and the denominator is the total amount of
qualifying deposits of all Supplemental Eligible Account Holders in the
converting association in each case on June 30, 1996 (the "Supplemental
Eligibility Record Date"). Subscription Rights received pursuant to this
category shall be subordinated to all Subscription Rights received by Eligible
Account Holders and Tax-Qualified Employee Plans. Any non-transferable
Subscription Rights to purchase shares received by an Eligible Account Holder in
accordance with Category No. 1 shall reduce to the extent thereof the
Subscription Rights to be distributed to such person pursuant to this Category.
In the event of an oversubscription for shares under the provisions of this
subparagraph, the shares available shall be allocated first to permit each
subscribing Supplemental Eligible Account Holder, to the extent possible, to
purchase a number of shares sufficient to make his total allocation (including
the number of shares, if any, allocated in accordance with Category No. 1) equal
to 100 shares, and thereafter among each subscribing Supplemental Eligible
Account Holder pro rata in the same proportion that his qualifying deposit bears
to the total qualifying deposits of all subscribing Supplemental Eligible
Account Holders whose subscriptions remain unsatisfied.
Category No. 4 provides, to the extent that shares are then available after
satisfying the subscriptions of Eligible Account Holders, Tax-Qualified Employee
Plans and Supplemental Eligible Account Holders, for the issuance of
Subscription Rights to each such Other Member to purchase shares in an amount
equal to the greater $100,000 of Common Stock or one-tenth of one percent (.10%)
of the total offering of shares offered in the Conversion based on the Estimated
Valuation Range subject to the overall purchase limitation and to the extent
Common Stock is available. In the event of an oversubscription for shares, the
shares available shall be allocated among the subscribing Other Members pro rata
in the same proportion that his number of votes on the Voting Record Date bears
to the total number of votes on the Voting Record Date of all subscribing Other
Members on such date. Such number of votes shall be determined based on the
Bank's mutual charter and bylaws in effect on the date of approval by members of
this Plan of Conversion.
Category No. 5 provides for the issuance of Subscription Rights to
officers, directors and employees of the Bank, to purchase up to a maximum of
$100,000 individually of Common Stock to the extent that shares are available
after satisfying the subscriptions of eligible subscribers in preference
Categories 1, 2, 3 and 4. In the event of an oversubscription, the available
shares will be allocated pro rata among all subscribers in this Category.
The Bank and the Holding Company will make reasonable efforts to comply
with the securities laws of all states in the United States in which persons
entitled to subscribe for shares pursuant to the Plan of Conversion reside.
However, no shares will be offered or sold under the Plan of Conversion to any
such person who (1) resides in a foreign country or (2) resides in a state of
the United States in which a small number of persons otherwise eligible to
subscribe for shares under the Plan of Conversion reside or as to which the Bank
and the Holding Company determine that compliance with the securities laws of
such state would be impracticable for reasons of cost or otherwise, including,
but not limited to, a requirement that the Bank or the Holding Company or any of
their officers, directors or employees register, under the securities laws of
such state, as a broker, dealer, salesman or agent. No payments will be made in
lieu of the granting of Subscription Rights to any such person.
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COMMUNITY OFFERING. To the extent that shares are available for purchase,
the Holding Company and the Bank have determined to offer shares pursuant to the
Plan to certain members of the general public to whom the Holding Company
delivers a copy of this Prospectus and a stock order form in the Community
Offering, with preference given to natural persons residing in Clay and Ray
Counties, Missouri (the "Local Community"). Such persons, together with
associates of and persons acting in concert with such persons, may purchase up
to $100,000 of Common Stock. The Community Offering, if any, may terminate at
any time without notice, but may not terminate later than _________, 1996,
unless extended with the approval of the OTS. THE OPPORTUNITY TO SUBSCRIBE FOR
SHARES OF COMMON STOCK IN THE COMMUNITY OFFERING CATEGORY IS SUBJECT TO THE
RIGHT OF THE COMPANY AND THE BANK, IN THEIR SOLE DISCRETION, TO ACCEPT OR REJECT
ANY SUCH ORDERS IN WHOLE OR IN PART EITHER AT THE TIME OF RECEIPT OF AN ORDER OR
AS SOON AS PRACTICABLE THEREAFTER.
If there are not sufficient shares available to fill orders in the
Community Offering, such stock will be allocated first to each natural person
residing in the Local Community whose order is accepted by the Company, in an
amount equal to the lesser of 1,000 shares or the number of shares subscribed
for by each such subscriber in the Local Community, if possible. Thereafter,
unallocated shares will be allocated among the subscribers in the Local
Community whose orders remain unsatisfied in the same proportion that the
unfilled subscription of each bears to the total unfilled subscriptions of all
subscribers in the Local Community whose subscription remains unsatisfied. If
there are any shares remaining, shares will be allocated to other members of the
general public who subscribe in the Community Offering applying the same
allocation described above for subscribers in the Local Community.
SYNDICATED COMMUNITY OFFERING. As part of the Community Offering, all
shares of Common Stock not purchased in the Subscription and Community
Offerings, if any, may be offered for sale to the general public in a Syndicated
Community Offering through a syndicate of registered broker-dealers to be formed
and managed by Trident Securities. The Holding Company and the Bank expect to
market any shares which remain unsubscribed after the Subscription and Community
Offerings through a Syndicated Community Offering. The Holding Company and the
Bank have the right to reject orders in whole or part in their sole discretion
in the Syndicated Community Offering. Neither Trident Securities nor any
registered broker-dealer shall have any obligation to take or purchase any
shares of Common Stock in the Syndicated Community Offering; however, Trident
Securities has agreed to use its best efforts in the sale of shares in the
Syndicated Community Offering.
The price at which Common Stock is sold in the Syndicated Community
Offering will be the same price as in the Subscription and Community Offerings.
Subject to overall purchase limitations, no person will be permitted to
subscribe in the Syndicated Community Offering for more than $100,000 or 10,000
shares of Common Stock.
Trident Securities may enter into agreements with broker-dealers ("Selected
Dealers") to assist in the sale of the shares in the Syndicated Community
Offering. No orders may be placed or filled by or for a Selected Dealer during
the Subscription Offering. After the close of the Subscription Offering, Trident
Securities will instruct Selected Dealers as to the number of shares to be
allocated to each Selected Dealer. Only after the close of the Subscription
Offering and upon allocation of shares to Selected Dealers may Selected Dealers
take orders from their customers. During the Subscription and Community
Offerings, Selected Dealers may only solicit indications of interest from their
customers to place orders with the Holding Company as of a certain date ("Order
Date") for the purchase of shares of Common Stock. When and if Trident
Securities and the Holding Company believe that enough indications of interest
and orders have not been received in the Subscription and Community Offerings to
consummate the Conversion, Trident Securities will request, as of the Order
Date, Selected Dealers to submit orders to purchase shares for which they have
previously received indications of interest from their customers. Selected
Dealers will send confirmations of the orders to such customers on the next
business day after the Order Date. Selected Dealers will debit the accounts of
their customers on the "Settlement Date" which date will be three business days
from the Order Date. Customers who authorize Selected Dealers to debit their
brokerage accounts are required to have the funds for payment in their account
on but not before the Settlement Date. On the Settlement Date, Selected Dealers
will remit funds to the account established by the Bank for each Selected
Dealer. Each customer's funds so forwarded to the Bank, along with all other
accounts held in the same title, will be insured by the FDIC up to $100,000 in
accordance with applicable FDIC regulations. After payment has been received by
the Bank from Selected Dealers, funds will earn interest at the Bank's passbook
rate until the consummation or
92
termination of the Conversion. Funds will be promptly returned, with interest,
in the event the Conversion is not consummated as described above.
The Syndicated Community Offering will terminate no more than 45 days
following the Subscription Expiration Date, unless extended by the Holding
Company and the Bank with the approval of the OTS.
LIMITATIONS ON PURCHASE OF SHARES. The Plan also provides for certain
additional limitations to be placed upon the purchase of shares in the
Conversion. Specifically, no person (other than a Tax-Qualified Employee Plan)
by himself or herself or with an associate, and no group of persons acting in
concert, may subscribe for or purchase more than $200,000 of Common Stock
offered in the Conversion. Officers and directors and their associates may not
purchase, in the aggregate, more than 35% of the shares to be sold in the
Conversion. For purposes of the Plan, the members of the Board of Directors are
not deemed to be acting in concert solely by reason of their Board membership.
For purposes of this limitation, an associate of a person does not include a
Tax-Qualified Employee Plan or Non-Tax-Qualified Employee Plan. Also, for
purposes of this limitation, an associate of an officer or director does not
include a Tax-Qualified Employee Plan or a recognition and retention plan, such
as the RRP. Moreover, any shares attributable to the officers and directors and
their associates, but held by a Tax-Qualified Employee Plan (other than that
portion of a plan which is self-directed) shall not be included in calculating
the number of shares which may be purchased under the limitations in this
paragraph. Shares purchased by employees who are not officers or directors of
the Bank, or their associates, are not subject to this limitation. The term
"associate" is used above to indicate any of the following relationships with a
person: (i) any corporation or organization (other than the Holding Company or
the Bank or a majority-owned subsidiary of the Holding Company or the Bank) of
which a person is an officer or partner or is, directly or indirectly, the
beneficial owner of 10% or more of any class of equity security; (ii) any trust
or other estate in which such person has a substantial beneficial interest or as
to which such person serves as trustee or in a similar fiduciary capacity; and
(iii) 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 the Holding
Company or the Bank or any subsidiary of the Holding Company or the Bank.
The Boards of Directors of the Holding Company and the Bank may, in their
sole discretion, decrease the maximum purchase limitation referred to above or
increase the maximum purchase limitation up to 9.99% of the shares being offered
in the Conversion, provided that orders for shares exceeding 5.0% of the shares
being offered in the Conversion shall not exceed, in the aggregate, 10% of the
shares being offered in the Conversion. Requests to purchase additional shares
of Holding Company Common Stock under this provision will be allocated by the
Boards of Directors on a pro rata basis giving priority in accordance with the
priority rights set forth above. DEPENDING UPON MARKET AND FINANCIAL CONDITIONS,
AND SUBJECT TO CERTAIN REGULATORY LIMITATIONS, THE BOARDS OF DIRECTORS OF THE
HOLDING COMPANY AND THE BANK, WITH THE APPROVAL OF THE OTS AND WITHOUT FURTHER
APPROVAL OF THE MEMBERS, MAY INCREASE OR DECREASE ANY OF THE ABOVE PURCHASE
LIMITATIONS AT ANY TIME. To the extent that shares are available, each
subscriber must subscribe for a minimum of 25 shares. In computing the number of
shares to be allocated, all numbers will be rounded down to the next whole
number.
Common Stock purchased in the Conversion will be freely transferable except
for shares purchased by executive officers and directors of the Bank or the
Holding Company and except as described below. See "- Restrictions on
Transferability." In addition, under National Association of Securities Dealers,
Inc. ("NASD") guidelines, members of the NASD and their associates are subject
to certain restrictions on transfer of securities purchased in accordance with
Subscription Rights and to certain reporting requirements upon purchase of such
securities.
MARKETING ARRANGEMENTS
The Holding Company and the Bank have engaged Trident Securities as a
financial advisor and marketing agent in connection with the offering of the
Common Stock, and Trident Securities has agreed to use its best efforts to
solicit subscriptions and purchase orders for shares of Common Stock in the
Offerings. Trident Securities is a member of the NASD and an SEC-registered
broker-dealer. Trident Securities is headquartered in Raleigh, North Carolina,
and its telephone number is (919) 781-8900. Trident Securities will provide
various services including, but not limited to, (i) training and educating the
Bank's directors, officers and employees regarding the mechanics
93
and regulatory requirements of the stock sales process; (2) providing its
employees to staff the Stock Information Center to assist the Bank's customers
and internal stock purchasers and to keep records of orders for shares of Common
Stock; and (3) targeting the Holding Company's sales efforts, including
preparation of marketing materials. Based upon negotiations between the Holding
Company and the Bank concerning fee structure, Trident Securities will receive a
fee of $150,000. In the event that a selected dealers agreement is entered into
in connection with a Syndicated Community Offering, the Bank will pay a fee to
be determined to such selected dealers, for shares sold by an NASD member firm
pursuant to a selected dealers agreement. Fees to Trident Securities and to any
other broker-dealer may be deemed to be underwriting fees, and Trident
Securities and such broker-dealers may be deemed to be underwriters. Trident
Securities will also be reimbursed for its reasonable out of pocket expenses in
an amount not to exceed $10,000 and reasonable legal fees and expenses not to
exceed $25,000 without the prior approval of the Bank. Trident Securities has
been paid $10,000 as an advance against these expenses. The Holding Company and
the Bank have agreed to indemnify Trident Securities for reasonable costs and
expenses in connection with certain claims or liabilities, including certain
liabilities under the Securities Act.
In addition, directors and executive officers of the Holding Company and
the Bank, may to a limited extent and subject to applicable state law,
participate in the solicitation of offers to purchase Common Stock. Other
employees of the Bank may participate in the Subscription and Community Offering
in administrative capacities, providing clerical work in effecting a sales
transaction or answering questions of a potential purchaser provided that the
content of the employee's responses is limited to information contained in the
Prospectus or other offering document. Other questions of prospective purchasers
will be directed to registered representatives of Trident Securities. Such other
employees have been instructed not to solicit offers to purchase Common Stock or
provide advice regarding the purchase of Common Stock. Sales of Common Stock by
directors, executive officers and registered representatives will be made from
the Stock Information Center. The Holding Company will rely on Rule 3a4-1 under
the Exchange Act, and sales of Common Stock will be conducted within the
requirements of Rule 3a4-1, so as to permit officers, directors and employees to
participate in the sale of Common Stock except in some states where only
registered broker-dealers may sell. No officer, director or employee of the
Holding Company or the Bank will be compensated in connection with his
participation by the payment of commissions or other remuneration based either
directly or indirectly on the transactions in the Common Stock.
PARTICIPATION BY MANAGEMENT
The following table sets forth information regarding intended Common Stock
purchases by each of the directors of the Bank and the Holding Company, by Mr.
Hermreck, and by all directors and officers as a group. This table excludes
shares to be purchased by the ESOP or proposed Restricted Stock Awards under the
proposed RRP or proposed option grants pursuant to the proposed Stock Option
Plan. See "Management - Benefit Plans." The directors and officers of the Bank
have indicated their intention to purchase in the Conversion an aggregate of
$1,100,000 of Common Stock, equal to 12.3%, 10.5%, 9.1%, and 7.9% of the number
of shares to be issued in the Subscription and Community Offering, at the
minimum, midpoint, maximum and 15% above the maximum of the Estimated Valuation
Range, respectively. For information regarding options and restricted stock
intended to be awarded to management pursuant to the proposed Stock Option Plan
and the proposed RRP, see "Management - Benefit Plans."
94
Aggregate Number Percent
Purchase of at
Name Title Price Shares Midpoint
- -------------------- ------------------------------------ ---------- -------- ---------
Robert E. McCrorey Chairman of the Board and President $ 200,000 20,000 1.9%
Edgar L. Radley Director 70,000 7,000 0.6%
Rodney G. Rounkles Director 60,000 6,000 0.6%
Cecil E. Lamb Director 60,000 6,000 0.6%
Richard N. Cox Director 200,000 20,000 1.9%
Robert L. Lalumondier Director 10,000 1,000 0.1%
Larry E. Hermreck Chief Executive Officer 200,000 20,000 1.9%
Other officers (8 persons) 300,000 30,000 2.9%
--------- ------
All directors and officers as a group (15 persons) $1,100,000 110,000 10.5%
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED
Federal regulations require that the aggregate Purchase Price of the
securities of a thrift institution sold in connection with its conversion must
be based on an appraised aggregate market value of the institution as converted
(i.e., taking into account the expected receipt of proceeds from the sale of the
securities in the conversion), as determined by an independent valuation. RP
Financial, which is experienced in the valuation and appraisal of business
entities, including thrift institutions involved in the conversion process, was
retained by the Bank to prepare an appraisal of the estimated pro forma market
value of the Common Stock.
RP Financial will receive a fee of $25,000 for its appraisal and assistance
in preparation of the Bank's business plan plus reasonable out-of-pocket
expenses not to exceed $5,000. The Holding Company has agreed to indemnify RP
Financial, under certain circumstances against liabilities and expenses
(including legal fees) arising out of, related to, or based upon the Conversion.
RP Financial has prepared an appraisal of the estimated pro forma market
value of the Common Stock taking into account market conditions for initial
public offerings of thrift stocks and the formation of Holding Company as the
holding company for the Bank. RP Financial's appraisal concluded that at June
14, 1996, an appropriate range for the estimated pro forma market value of the
Holding Company and the Bank, as converted, ranges from a minimum of $8,925,000
to a maximum of $12,075,000, with a midpoint of $10,500,000. Assuming that the
shares are sold at $10.00 per share in the Conversion, the estimated number of
shares to be issued in the Conversion is expected to be between 892,500 and
1,207,500. The appraisal involved a comparative evaluation of the operating and
financial statistics of the Bank with those of other thrift institutions. The
appraisal also took into account such other factors as the market for thrift
institution stocks generally, prevailing economic conditions, both nationally
and in Missouri, which affect the operations of thrift institutions, the
competitive environment within which the Bank operates and the effect of the
Bank becoming a subsidiary of the Holding Company. No detailed individual
analysis of the separate components of the Holding Company's and the Bank's
assets and liabilities was performed in connection with the evaluation. The Plan
of Conversion requires that all of the shares subscribed for in the Subscription
and Community Offering be sold at the same price per share. The Board of
Directors of the Holding Company and the Bank have reviewed the appraisal of RP
Financial and in determining the reasonableness and adequacy of such appraisal
consistent with OTS regulations and policies, have reviewed the methodology and
reasonableness of the assumptions utilized by RP Financial in the preparation of
such appraisal.
No sale of the shares will take place unless, prior thereto, RP Financial
confirms to the Bank, the Holding Company and the OTS that, to the best of RP
Financial's knowledge and judgment, nothing of a material nature has occurred
which would cause RP Financial to conclude that the actual aggregate Purchase
Price was incompatible with its estimate of the total pro forma market value of
the Common Stock at the time of the sale. If, however, the facts do not justify
such a statement, a new Estimated Valuation Range and price per share may be
set. Under such circumstances, the Holding Company will be required to
resolicit, and subscribers would have the right to modify or rescind their
subscriptions and to have their subscription funds returned promptly with
interest and holds on funds authorized for withdrawal from deposit accounts
would be released or reduced; provided that if the pro forma market value of the
Bank upon Conversion has not decreased below $8,925,000 or increased to an
amount
95
which does not exceed $13,886,250 (15% above the maximum of the Estimated
Valuation Range), the Holding Company and the Bank do not intend to resolicit
subscriptions unless it is determined after consultation with the OTS that a
resolicitation is required.
Depending upon market and financial conditions, the number of shares issued
may be more or less than the range in number of shares shown above. A decrease
in the number of shares to be issued in the Conversion would increase a
purchaser's ownership interest and both pro forma net income and net worth on a
per share basis while decreasing these amounts on an aggregate basis. In the
event of a resolicitation, subscribers will be afforded the opportunity to
increase, decrease or maintain their previously submitted order. In the event a
new valuation range is established by RP Financial, such new range will be
subject to approval by the OTS and the Holding Company will be required to
resolicit. The Holding Company will also be required to resolicit if the
aggregate Purchase Price of Common Stock sold in the Conversion is less than the
minimum of the Estimated Valuation Range or above 15% above the maximum of the
Estimated Valuation Range.
If purchasers can not be found for an insignificant residue of unsubscribed
shares from the general public, other purchase arrangements will be made by the
Boards of Directors of the Bank and the Holding Company, if possible. Such other
purchase arrangements will be subject to the approval of the OTS and may provide
for purchases by directors, officers, their associates and other persons in
excess of the limitations discussed herein. If such other purchase arrangements
cannot be made, the Subscription and Community Offering will terminate.
In preparing its valuation of the pro forma market value of the Holding
Company and the Bank, as converted, RP Financial relied upon and assumed the
accuracy and completeness of all financial and statistical information provided
by the Bank and the Holding Company. RP Financial also considered information
based upon other publicly available sources which it believes are reliable.
However, RP Financial does not guarantee the accuracy and completeness of such
information and did not independently verify the financial statements and other
data provided by the Bank and the Holding Company or independently value the
assets or liabilities of the Bank and the Holding Company. THE VALUATION BY RP
FINANCIAL IS NOT INTENDED AND MUST NOT BE CONSTRUED AS A RECOMMENDATION OF ANY
KIND AS TO THE ADVISABILITY OF VOTING TO APPROVE THE CONVERSION OR OF PURCHASING
SHARES OF COMMON STOCK. MOREOVER, BECAUSE THE VALUATION IS NECESSARILY BASED
UPON ESTIMATES OF AND PROJECTIONS AS TO A NUMBER OF MATTERS (INCLUDING CERTAIN
ASSUMPTIONS AS TO EXPENSE FACTORS AFFECTING THE NET PROCEEDS FROM THE SALE OF
COMMON STOCK IN THE CONVERSION AND AS TO THE NET EARNINGS ON SUCH NET PROCEEDS),
ALL OF WHICH ARE SUBJECT TO CHANGE FROM TIME TO TIME, NO ASSURANCE CAN BE GIVEN
THAT PERSONS WHO PURCHASE SUCH SHARES IN THE CONVERSION WILL BE ABLE TO SELL
SUCH SHARES THEREAFTER AT OR ABOVE THE PURCHASE PRICE.
METHOD OF PAYMENT FOR SUBSCRIPTIONS
Subscribers must, before the Subscription Expiration Date, or such date to
which the Subscription Expiration Date may be extended, return an original stock
order form and certification to the Bank, properly completed, together with
cash, checks or money orders in an amount equal to the Purchase Price ($10.00
per share) multiplied by the number of shares for which subscription is made.
Subscriptions which are returned by mail must be received by the Bank by the
Expiration Date. Payment for stock purchases can also be accomplished through
authorization on the order form of withdrawals from accounts with the Bank.
Until completion or termination of the Conversion, subscribers who elect to make
payment through authorization of withdrawal from accounts with the Bank will not
be permitted to reduce the deposit balance in any such accounts below the amount
required to purchase the shares for which they subscribed. In such cases
interest will continue to be credited on deposits authorized for withdrawal
until the completion of the Conversion. Interest at the Bank's current passbook
rate per annum will be paid on amounts submitted in cash, check, bank draft or
money order. Authorized withdrawals from certificate accounts for the purchase
of Common Stock will be permitted without the imposition of early withdrawal
penalties or loss of interest. However, withdrawals from certificate accounts
that reduce the balance of said accounts below the required minimum for specific
interest rate qualification will cause the cancellation of the certificate
accounts, and the remaining balance will earn interest at the Bank's current
passbook rate per annum.
The beneficiaries of Individual Retirement Accounts ("IRAs") are deemed to
have the same subscription rights as other depositors. However, the IRA accounts
maintained at the Bank do not permit investment in Common Stock. A depositor
interested in using his IRA funds to purchase Common Stock must do so through a
self-directed
96
IRA account. Since the Bank does not offer such accounts, it will allow such a
depositor to make a trustee to trustee transfer or other form of transfer of the
IRA on deposit at the Bank. There will be no early withdrawal or IRS penalties
for such transfers. The new trustee would hold the Common Stock in a self-
directed account in the same manner as the Bank now holds the depositor's IRA
funds. An annual administrative fee might be payable to the new trustee. The
Bank assumes no responsibility as to the selection of, or services performed by,
a new trustee.
Depositors interested in transferring IRA funds on deposit at the Bank to
purchase Common Stock should contact the Stock Information Center at (816)-
____________ as soon as possible so that the necessary forms may be completed
prior to the Expiration Date of the Subscription Offering. THIS PROCESS CANNOT
BE DONE THROUGH THE MAIL AND SUFFICIENT TIME SHOULD BE ALLOWED FOR THE
COMPLETION OF THE TRANSFER.
Stock subscriptions received by the Bank may not be modified, withdrawn or
canceled by the subscriber without the consent of the Bank and, if accepted by
the Bank, are final. Subscriptions which are not received by the Subscription
Expiration Date or are not in compliance with the Plan of Conversion or the
stock order form instructions may be deemed void by the Bank. The Bank and the
Holding Company have the right to extend the Subscription Expiration Date,
unless objected to by the OTS, or to waive or permit correction of incomplete or
improperly executed stock order forms, but does not represent that they will do
so.
If Tax-Qualified Employee Plans subscribe for shares during the
Subscription Offering, such plans will not be required to pay for the shares
subscribed for at the time they subscribe, but may pay for such shares of Common
Stock subscribed for by such plans at the actual Purchase Price upon
consummation of the Conversion, provided that, in the case of the ESOP, there is
a loan commitment to lend to the ESOP the aggregate Purchase Price of the shares
for which it subscribes.
To ensure that each purchaser receives a Prospectus at least 48 hours prior
to the Subscription Expiration Date in accordance with Rule 15c2-8 under 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. The Bank
will accept for processing only orders submitted on original order forms.
Payment by check, money order, bank draft or debit authorization to an existing
account at the Bank must accompany the order form.
RISK OF DELAYED OFFERING
In the event that all shares of the Common Stock are not sold in the
Subscription Offering and concurrent Community Offering, the Bank and the
Holding Company may extend the Community Offering for a period of up to 45 days
from the date of the termination of the Subscription Offering. Further
extensions are subject to OTS approval and may be granted for successive
periods, but not beyond 24 months from the date of the Special Meeting.
A material delay in the completion of the sale of all unsubscribed shares
in the Community Offering may result in a significant increase in the costs in
completing the Conversion. Significant changes in the Bank's operations and
financial condition, the aggregate market value of the shares to be issued in
the Conversion and general market conditions may occur during such material
delay. In the event the Conversion is not consummated within 24 months after the
date of the Special Meeting, the Bank would charge accrued Conversion costs to
then current period operations.
APPROVAL, INTERPRETATION, AMENDMENT AND TERMINATION
All interpretations of the Plan of Conversion, as well as the completeness
and validity of order forms, will be made by the Bank and the Holding Company
and will be final, subject to the authority of the OTS and the requirements of
applicable law. The Plan of Conversion provides that, if deemed necessary or
desirable by the Boards of Directors of the Bank and the Holding Company, the
Plan of Conversion may be substantively amended (including an amendment to
eliminate the formation of the Holding Company as part of the Conversion) by the
Boards of Directors of the Bank and the Holding Company, as a result of comments
from regulatory authorities or otherwise, at any time but only with the
concurrence of the OTS. Moreover, if the Plan of Conversion is amended,
97
subscriptions which have been received prior to such amendment will not be
refunded if such amendment is not material to the transaction or otherwise
required by the OTS.
In the event that a decision is made to eliminate the Holding Company as
part of the Conversion, the Holding Company will withdraw its registration
statement from the SEC and the Bank will take all steps necessary to complete
the Conversion without the Holding Company, including filing any necessary
documents with the OTS. In such event, and provided there is no regulatory
action, directive or other consideration upon which basis the Bank determines
not to complete the Conversion, if permitted by the OTS the Bank will issue and
sell the common stock of the Bank and subscribers will be notified of the
elimination of the Holding Company and resolicited (i.e., permitted to affirm
their orders, in which case they will need affirmatively to reconfirm their
subscriptions prior to the expiration of the resolicitation offering or their
funds will be promptly refunded with interest at the Bank's current passbook
rate per annum; or be permitted to modify or rescind their subscriptions) and
notified of the time period within which they must affirmatively notify the Bank
of their intention to affirm, modify or rescind their subscription. In the event
that a holding company form of organization is not used, all other pertinent
terms of the Plan as described in "- Offering of Holding Company Common Stock"
will apply to the conversion of the Bank from the mutual to stock form of
organization and the sale of the Bank's common stock.
The Plan of Conversion will terminate if the sale of all shares is not
completed within 24 months after the date of the Special Meeting. The Plan of
Conversion may be terminated by the Board of Directors of the Bank with the
concurrence of the OTS at any time. A specific resolution approved by a two-
thirds vote of the Board of Directors would be required to terminate the Plan of
Conversion prior to the end of such 24-month period. See "Risk Factors -Possible
Consequences of Amendment to Plan of Conversion."
RESTRICTIONS ON REPURCHASE OF STOCK
For a period of three years following Conversion, the Holding Company may
not repurchase any shares of its capital stock, except in the case of an offer
to repurchase on a pro rata basis made to all holders of capital stock of the
Holding Company. Any such offer shall be subject to the prior approval of the
OTS. Furthermore, the Holding Company may not repurchase any of its stock (i) if
the result thereof would be to reduce the regulatory capital of the Bank below
the amount required for the liquidation account to be established pursuant to
OTS regulations and (ii) except in compliance with the requirements of the OTS'
capital distribution rule.
The above limitations are subject to the OTS conversion rules which
generally provide that the Holding Company may repurchase its capital stock
provided (i) no repurchases occur within one year following the Conversion
(except with OTS approval), (ii) repurchases during the second and third year
after conversion are part of an open market stock repurchase program that does
not allow for a repurchase of more than 5% of the Holding Company's outstanding
capital stock during a 12-month period, (iii) the repurchases do not cause the
Bank to become undercapitalized, and (iv) the Holding Company provides notice or
an application to the OTS at least ten days prior to the commencement of a
repurchase program and the OTS does not object. In addition, the above
limitations do not preclude repurchases of capital stock by the Holding Company
as otherwise permitted by the OTS or in the event applicable federal regulatory
limitations are subsequently liberalized.
RESTRICTIONS ON TRANSFERABILITY
THE SUBSCRIPTION RIGHTS DESCRIBED IN THIS PROSPECTUS ARE NON-TRANSFERABLE
AND SHALL BE AWARDED TO ELIGIBLE PERSONS WITHOUT PAYMENT. PRIOR TO THE
COMPLETION OF THE CONVERSION, FEDERAL REGULATIONS PROHIBIT ANY PERSON FROM
TRANSFERRING OR ENTERING INTO ANY AGREEMENT OR UNDERSTANDING TO TRANSFER THE
LEGAL OR BENEFICIAL OWNERSHIP OF THE SUBSCRIPTION RIGHTS ISSUED UNDER THE PLAN
OR THE SHARES OF COMMON STOCK TO BE ISSUED UPON THEIR EXERCISE. PERSONS
VIOLATING SUCH PROHIBITION MAY LOSE THEIR RIGHT TO PURCHASE STOCK IN THE
CONVERSION AND MAY BE SUBJECT TO SANCTIONS BY THE OTS. EACH PERSON EXERCISING
SUBSCRIPTION RIGHTS WILL BE REQUIRED TO CERTIFY THAT A PURCHASE OF COMMON STOCK
IS SOLELY FOR THE PURCHASER'S OWN ACCOUNT AND THAT THERE IS NO AGREEMENT OR
UNDERSTANDING REGARDING THE SALE OR TRANSFER OF SUCH SHARES. THE BANK AND THE
HOLDING COMPANY WILL PURSUE ANY AND ALL LEGAL AND EQUITABLE REMEDIES IN THE
EVENT THEY BECOME AWARE OF THE TRANSFER OF SUBSCRIPTION RIGHTS AND WILL NOT
HONOR ORDERS KNOWN BY THEM TO INVOLVE THE TRANSFER OF SUCH RIGHTS.
98
Shares purchased by directors, executive officers or their associates in
the Conversion shall be subject to the restrictions that said shares shall not
be sold during the period of one year following the date of purchase, except in
the event of the death of the stockholder or resulting from an exchange of
securities in a merger or acquisition approved by applicable regulatory
authorities, in which event such restriction shall be released. Accordingly,
stock certificates issued by the Holding Company to directors, executive
officers and associates shall bear a legend giving appropriate notice of such
restriction and, in addition, the Bank and the Holding Company will give
appropriate instructions to the transfer agent for the Holding Company's Common
Stock with respect to the applicable restriction upon transfer of any restricted
shares. Any shares issued at a later date as a stock dividend, stock split or
otherwise, to holders of restricted stock, shall be subject to the same
restrictions that may apply to such restricted stock. Holding Company stock
(like the stock of most companies) is subject to the requirements of the
Securities Act. Accordingly, Holding Company stock may be offered and sold only
in compliance with such registration requirements or pursuant to an applicable
exemption from registration.
OTS regulations provide that for a period of three years following the
Conversion, without prior approval of the OTS, neither directors and officers of
the Holding Company, the Bank nor their associates may purchase shares of the
Holding Company, except from a broker registered with the SEC. This restriction
does not, however, apply to negotiated transactions involving more than one
percent of the Holding Company's outstanding Common Stock or the purchase of
stock made by or held by any one or more employee stock benefit plans which may
be attributable to individual directors or officers.
Holding Company stock received in the Conversion by persons who are not
"affiliates" of the Holding Company may be resold without registration. Shares
received by affiliates of the Holding Company (primarily the directors, officers
and principal stockholders of the Holding Company) will be subject to the resale
restrictions of Rule 144 under the Securities Act, which are discussed below.
Rule 144 generally requires that there be publicly available certain information
concerning the Holding Company, and that sales thereunder be made in routine
brokerage transactions or through a market maker. If the conditions of Rule 144
are satisfied, each affiliate (or group of persons acting in concert with one or
more affiliates) is entitled to sell in the public market, without registration,
in any three-month period, a number of shares which does not exceed the greater
of (i) 1% of the number of outstanding shares of Holding Company stock, or (ii)
if the stock is admitted to trading on a national securities exchange or
reported through the automated quotation system of a registered securities
association the average weekly reported volume of trading during the four weeks
preceding the sale.
INCOME TAX CONSEQUENCES
Consummation of the Conversion is expressly conditioned upon prior receipt
by the Bank of either a ruling from the Internal Revenue Service or an opinion
of Luse Lehman Gorman Pomerenk & Schick, P.C. with respect to federal taxation,
and a ruling of the Missouri taxation authorities or an opinion of KPMG Peat
Marwick LLP with respect to Missouri taxation, to the effect that consummation
of the Conversion will not be taxable to the converted Association or the
Holding Company.
An opinion has been received from Luse Lehman Gorman Pomerenk & Schick,
P.C. with respect to the proposed Conversion of the Bank to the stock form, to
the effect that (i) the Conversion will qualify as a reorganization under
Section 368(a)(1)(F) of the Code, and no gain or loss will be recognized to the
Bank in either its mutual form or its stock form by reason of the proposed
Conversion, (ii) no gain or loss will be recognized to the Bank upon the receipt
of money from the Holding Company for stock of the Bank; and no gain or loss
will be recognized to the Holding Company upon the receipt of money for Common
Stock of the Holding Company; (iii) the assets of the Bank in either its mutual
or its stock form will have the same basis before and after the Conversion; (iv)
the holding period of the assets of the Bank will include the period during
which the assets were held by the Bank in its mutual form prior to conversion;
(v) no gain or loss will be recognized by the deopsitors of the Bank upon the
issuance to them of withdrawable deposit accounts in the Bank after the
Conversion in the same dollar amount as their deposit accounts in the Bank plus
an interest in the Liquidation Account of the Bank, as described above, in
exchange for their deposit account in the Bank; (vi) the basis of the account
holder's deposit accounts in the Bank after the Conversion will be the same as
the basis of his deposit accounts in the Bank prior to the Conversion; (vii) the
basis of each account holder's interest in the Liquidation Account will be zero;
(viii) the basis of the Holding Company Common Stock to its shareholders will be
the Purchase Price thereof plus, in the case
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of stock acquired by account holders, the basis, if any in the Subscription
Rights and a shareholder's holding period for Holding Company Common Stock
acquired through the exercise of Subscription Rights shall begin on the date on
which the Subscription Rights are exercised; (ix) for purposes of Section 381 of
the Code, the Bank will be treated as if there had been no reorganization,
accordingly, the taxable year of the Bank will not end on the effective date of
the Conversion and the tax attributes of the Bank will be taken into account by
the Bank in stock form as if there had been no reorganization; (x) the part of
the taxable year of the Bank before the reorganization and the part of the
taxable year of the Bank after the reorganization will constitute a single
taxable year of the Bank; (xi) the Bank, immediately after Conversion, will
succeed to the bad debt reserve accounts of the Bank, in mutual form, and the
bad debt reserves will have the same character in the hands of the Bank after
Conversion as if no distribution or transfer had occurred; and (xii) the
creation of the liquidation account will have no effect on the Bank's taxable
income, deductions or addition to reserve for bad debts either in its mutual or
stock form.
The opinion from Luse Lehman Gorman Pomerenk & Schick, P.C. is based, among
other things, on certain assumptions, including the assumptions that the
exercise price of the Subscription Rights to purchase Holding Company Common
Stock will be approximately equal to the fair market value of that stock at the
time of the completion of the proposed Conversion. The Holding Company and the
Bank have received a letter issued by RP Financial stating that pursuant to RP
Financial's valuation, RP Financial is of the belief that Subscription Rights
issued in connection with the Conversion will have no value. The letter of RP
Financial and the federal and state tax opinions, respectively, referred to
herein are filed as exhibits to the Registration Statement. See "Additional
Information."
The Bank has also received an opinion of Luse Lehman Gorman Pomerenk &
Schick, P.C. to the effect that, based in part on the RP Financial Letter: (i)
no taxable income will be realized by depositors as a result of the receipt or
exercise of non-transferable Subscription Rights to purchase shares of Holding
Company Common Stock at fair market value; and (ii) no taxable income will be
realized by the Bank or Holding Company on the issuance of Subscription Rights
to eligible subscribers to purchase shares of Holding Company Common Stock at
fair market value.
If it is subsequently established that the Subscription Rights received by
such persons have an ascertainable fair market value, then, in such event, the
Subscription Rights will be taxable to the recipient in the amount of their fair
market value. In this regard, the Subscription Rights may be taxed partially or
entirely at ordinary income tax rates.
With respect to Missouri taxation, the Bank has received an opinion from
KPMG Peat Marwick LLP to the effect that, assuming the Conversion does not
result in any federal taxable income, gain or loss to the Bank in its mutual or
stock form, the Holding Company, the account holders, borrowers, officers,
directors and employees and Tax-Qualified Employee Plans of the Bank, the
Conversion should not result in any Missouri income tax liability to such
entities or persons.
Unlike a private letter ruling, the opinions of Luse Lehman Gorman Pomerenk
& Schick, P.C. and KPMG Peat Marwick LLP, as well as the RP Financial Letter,
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 Missouri tax authorities.
RESTRICTIONS ON ACQUISITIONS OF STOCK AND
RELATED TAKEOVER DEFENSIVE PROVISIONS
Although the Boards of Directors of the Bank and the Holding Company are
not aware of any effort that might be made to obtain control of the Holding
Company after Conversion, the Boards of Directors, as discussed below, believe
that it is appropriate to include certain provisions as part of the Holding
Company's certificate of incorporation to protect the interests of the Holding
Company and its stockholders from takeovers which the Board
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of Directors of the Holding Company might conclude are not in the best interests
of the Bank, the Holding Company or the Holding Company's stockholders.
The following discussion is a general summary of the material provisions of
the Holding Company's certificate of incorporation and bylaws and certain other
regulatory provisions which may be deemed to have an "anti-takeover" effect. The
following description of certain of these provisions is necessarily general and,
with respect to provisions contained in the Holding Company's certificate of
incorporation and bylaws and the Bank's proposed stock charter and bylaws,
reference should be made in each case to the document in question, each of which
is part of the Bank's application to the OTS and the Holding Company's
Registration Statement filed with the SEC. See "Additional Information."
PROVISIONS OF THE HOLDING COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
DIRECTORS. Certain provisions of the Holding Company's certificate of
incorporation and bylaws will impede changes in majority control of the Board of
Directors. The Holding Company's certificate of incorporation provides that the
Board of Directors of the Holding Company will be divided into three classes,
with directors in each class elected for three-year staggered terms except for
the initial directors. Thus, it would take two annual elections to replace a
majority of the Holding Company's Board. The Holding Company's certificate of
incorporation provides that the size of the Board of Directors may be increased
or decreased only by a majority vote of the Board. The certificate of
incorporation also provides that any vacancy occurring in the Board of
Directors, including a vacancy created by an increase in the number of
directors, shall be filled for the remainder of the unexpired term by a majority
vote of the directors then in office. Finally, the certificate and bylaws 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 meeting of
stockholders.
The certificate of incorporation provides that a director may only be
removed for cause by the affirmative vote of 80% of the shares eligible to vote.
Removal for "cause" is limited to the grounds for termination in the federal
regulations that applies to employment contracts of federally insured savings
institutions.
RESTRICTIONS ON CALL OF SPECIAL MEETINGS. The certificate of incorporation
of the Holding Company provides that a special meeting of stockholders may be
called by the Chairman of the Board of the Holding Company or pursuant to a
resolution adopted by a majority of the Board of Directors. Stockholders are not
authorized to call a special meeting.
ABSENCE OF CUMULATIVE VOTING. The Holding Company's certificate of
incorporation provides that there shall be no cumulative voting rights in the
election of directors.
AUTHORIZATION OF PREFERRED STOCK. The certificate of incorporation of the
Holding Company authorizes 500,000 shares of serial preferred stock, without par
value. The Holding Company is authorized to issue preferred stock from time to
time in one or more series subject to applicable provisions of law; and the
Board of Directors is authorized to fix the designations, and relative
preferences, limitations, voting rights, if any, including without limitation,
conversion rights of such shares (which could be multiple or as a separate
class). In the event of a proposed merger, tender offer or other attempt to gain
control of the Holding Company that the Board of Directors does not approve, it
might be possible for the Board of Directors to authorize the issuance of a
series of preferred stock with rights and preferences that would impede the
completion of such a transaction. An effect of the possible issuance of
preferred stock, therefore, may be to deter a future takeover attempt. The Board
of Directors has no present plans or understandings for the issuance of any
preferred stock but it may issue any preferred stock on terms which the Board
deems to be in the best interests of the Holding Company and its stockholders.
LIMITATION ON VOTING RIGHTS. The certificate of incorporation of the
Holding Company provides that (I) no person shall directly or indirectly offer
to acquire or acquire the beneficial ownership of more than 10% of any class of
equity security of the Holding Company (provided that such limitation shall not
apply to the acquisition of equity securities by any one or more tax-qualified
employee stock benefit plans maintained by the Holding Company, if the plan or
plans beneficially own no more than 25% of any class of such equity security of
the
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Holding Company); and that (ii) shares beneficially owned in violation of the
stock ownership restriction described above shall not be entitled to vote and
shall not be voted by any person or counted as voting stock in connection with
any matter submitted to a vote of stockholders. For these purposes, a person
(including management) who has obtained the right to vote shares of the Common
Stock pursuant to revocable proxies shall not be deemed to be the "beneficial
owner" of those shares if that person is not otherwise deemed to be a beneficial
owner of those shares.
The certificate of incorporation of the Holding Company further provides
that the Board of Directors of the Holding Company, when determining to take or
refrain from taking corporate action on any matter, including making or
declining to make any recommendation to the Holding Company's stockholders, may,
in connection with the exercise of its judgment in determining what is in the
best interest of the Holding Company, the Bank and the stockholders of the
Holding Company, give due consideration to all relevant factors, including,
without limitation, the social and economic effects of acceptance of such offer
on the Holding Company's customers and the Bank's present and future account
holders, borrowers and employees; the effect on the communities in which the
Holding Company and the Bank operate or are located; and the effect on the
ability of the Holding Company to fulfill the objectives of a savings and loan
holding company and of the Bank or future subsidiaries to fulfill the objectives
of a stock savings and loan association under applicable statutes and
regulations. The certificate of incorporation of the Holding Company also
authorize the Board of Directors to take certain actions to encourage a person
to negotiate for a change of control of the Holding Company or to oppose such a
transaction deemed undesirable by the Board of Directors including the adoption
of so-called shareholder rights plans. By having these standards and provisions
in the certificate of incorporation of the Holding Company, the Board of
Directors may be in a stronger position to oppose such a transaction if the
Board concludes that the transaction would not be in the best interest of the
Holding Company, even if the price offered is significantly greater than the
then market price of any equity security of the Holding Company.
PROCEDURES FOR CERTAIN BUSINESS COMBINATIONS. The certificate of
incorporation of the Holding Company requires that certain business combinations
between the Holding Company (or any majority-owned subsidiary thereof) and a 10%
or greater stockholder either (I) be approved by at least 80% of the total
number of outstanding voting shares of the Holding Company or (ii) be approved
by a majority of certain directors unaffiliated with such 10% or greater
stockholder or (iii) involve consideration per share generally equal to the
higher of (A) the highest amount paid by such 10% stockholder or its affiliates
in acquiring any shares of the Common Stock or (B) the "Fair Market Value"
(generally, the highest closing bid paid on the Common Stock during the 30 days
preceding the date of the announcement of the proposed business combination or
on the date the 10% or greater stockholder became such, whichever is higher).
AMENDMENT TO CERTIFICATE OF INCORPORATION AND BYLAWS. Amendments to the
Holding Company's certificate of incorporation must be approved by the Holding
Company's Board of Directors and also by a majority of the outstanding shares of
the Holding 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., provisions relating to number, classification, election and removal of
directors, amendment of bylaws, call of special stockholder meetings, criteria
for evaluating certain offers, offers to acquire and acquisitions of control,
director liability, certain business combinations, power of indemnification, and
amendments to provisions relating to the foregoing in the certificate of
incorporation).
The bylaws may be amended by the affirmative vote of the total number of
directors of the Holding Company or the affirmative vote of at least 80% of the
total votes eligible to be voted at a duly constituted meeting of stockholders.
PURPOSE AND TAKEOVER DEFENSIVE EFFECTS OF THE HOLDING COMPANY'S CERTIFICATE
OF INCORPORATION AND BYLAWS. The Board of Directors of the Bank believes that
the provisions described above are prudent and will reduce the Holding Company's
vulnerability to takeover attempts and certain other transactions which have not
been negotiated with and approved by its Board of Directors. These provisions
will also assist the Bank in the orderly deployment of the Conversion proceeds
into productive assets during the initial period after the Conversion. The Board
of Directors believes these provisions are in the best interest of the Bank and
of the Holding Company and its stockholders. In the judgment of the Board of
Directors, the Holding Company's Board will be in the best
102
position to determine the true value of the Holding Company and to negotiate
more effectively for what may be in the best interests of its stockholders.
Accordingly, the Board of Directors believes that it is in the best interests of
the Holding Company and its stockholders to encourage potential acquirors to
negotiate directly with the Board of Directors of the Holding Company and that
these provisions will encourage such negotiations and discourage hostile
takeover attempts. It is also the view of the Board of Directors that these
provisions should not discourage persons from proposing a merger or other
transaction at prices reflective of the true value of the Holding Company and
which is in the best interests of all stockholders.
Attempts to take over financial institutions and their holding companies
have become increasingly common. Takeover attempts which have not been
negotiated with and approved by the Board of Directors present to stockholders
the risk of a takeover on terms which may be less favorable than might otherwise
be available. A transaction which is negotiated and approved by the Board of
Directors, on the other hand, can be carefully planned and undertaken at an
opportune time in order to obtain maximum value for the Holding Company and its
stockholders, with due consideration given to matters such as the management and
business of the acquiring corporation and maximum strategic development of the
Holding Company's assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Although a tender offer
or other takeover attempt may be made at a price substantially above then-
current market prices, such offers are sometimes made for less than all of the
outstanding shares of a target company. As a result, stockholders may be
presented with the alternative of partially liquidating their investment at a
time that may be disadvantageous or retaining their investment in an enterprise
which is under different management and whose objectives may not be similar to
those of the remaining stockholders. The concentration of control, which could
result from a tender offer or other takeover attempt, could also deprive the
Holding Company's remaining stockholders of the benefits of certain protective
provisions of the Exchange Act, if the number of beneficial owners becomes less
than the 300 required for Exchange Act registration.
POTENTIAL ANTI-TAKEOVER EFFECTS. Despite the belief of the Bank and the
Holding Company as to the benefits to stockholders of these provisions of the
Holding Company's certificate of incorporation and bylaws, these provisions may
also have the effect of discouraging a future takeover attempt which would not
be approved by the Holding Company's Board, but pursuant to which stockholders
may receive a substantial premium for their shares over then-current market
prices. As a result, stockholders who might desire to participate in such a
transaction may not have any opportunity to do so. Such provisions will also
render the removal of the Holding Company's Board of Directors and of management
more difficult. The Boards of Directors of the Bank and the Holding Company,
however, have concluded that the potential benefits outweigh the possible
disadvantages.
Pursuant to applicable law, at any annual or special meeting of its
stockholders after the Conversion, the Holding Company may adopt additional
provisions to its certificate of incorporation regarding the acquisition of its
equity securities that would be permitted to a Delaware corporation. The Holding
Company and the Bank do not presently intend to propose the adoption of further
restrictions on the acquisition of the Holding Company's equity securities.
OTHER RESTRICTIONS ON ACQUISITIONS OF STOCK
DELAWARE ANTI-TAKEOVER STATUTE. The State of Delaware has enacted
legislation which provides that subject to certain exceptions a publicly held
Delaware corporation may not engage in any business combination with an
"interested stockholder" for three years after such stockholder became an
interested stockholder, unless, among other things, the interested stockholder
acquired at least 85% of the corporation's voting stock in the transaction that
resulted in the stockholder becoming an interested stockholder. This legislation
generally defines "interested stockholder" as any person or entity that owns 15%
or more of the corporation's voting stock. The term "business combination" is
defined broadly to cover a wide range of corporate transactions, including
mergers, sales of assets, issuances of stock, transactions with subsidiaries and
the receipt of disproportionate financial benefits. Under certain circumstances,
either the board of directors or both the board and two-thirds of the
stockholders other than the acquiror may approve a given business combination
and thereby exempt the corporation from the operation of the statute.
103
However, these statutory provisions do not apply to Delaware corporations
with fewer than 2,000 stockholders or which do not have voting stock listed on a
national exchange or listed for quotation with a registered national securities
association. The Holding Company has applied to have the Common Stock listed on
the Nasdaq SmallCap Market.
FEDERAL REGULATION. A federal regulation prohibits any person prior to the
completion of a conversion from transferring, or entering into any agreement or
understanding to transfer, the legal or beneficial ownership of the Subscription
Rights issued under a plan of conversion or the stock to be issued upon their
exercise. This regulation also prohibits any person prior to the completion of a
conversion from offering, or making an announcement of an offer or intent to
make an offer, to purchase such Subscription Rights or stock. For three years
following conversion, this regulation prohibits any person, without the prior
approval of the OTS, from acquiring or making an offer (if opposed by the
institution) 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.
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 and loan
association at any time without the prior approval of the OTS. "Acting in
concert" is defined very broadly. In addition, federal regulations require that,
prior to obtaining control of a savings and loan association, a person, other
than a company, must give 60 days' prior notice to the OTS and have received no
OTS objection to such acquisition of control. Any company that acquires such
control becomes a "savings and loan holding company" subject to registration,
examination and regulation as a savings and loan holding company. Under federal
law (as well as the regulations referred to below) the term "savings and loan
association" includes state and federally chartered SAIF-insured institutions
and federally chartered savings banks whose accounts are insured by the FDIC's
BIF and holding companies thereof.
Control, as defined under federal law, means ownership, control of or
holding irrevocable proxies representing more than 25% of any class of voting
stock, control in any manner of the election of a majority of the savings and
loan association'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 any class of a savings and loan association's voting stock, if
the acquiror also is subject to any one of eight "control factors," constitutes
a rebuttable determination of control under the regulations. Such control
factors include the acquiror being one of the two largest stockholders. 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 and
loan association's stock 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
HOLDING COMPANY CAPITAL STOCK
The 4,000,000 shares of capital stock authorized by the Holding Company
certificate of incorporation are divided into two classes, consisting of
3,500,000 shares of Common Stock ($.01 par value) and 500,000 shares of serial
preferred stock ($.01 par value). The Holding Company currently expects to issue
between 892,500 and 1,207,500 shares of Common Stock in the Conversion. The
aggregate stated value of the issued shares will constitute the capital account
of the Holding Company on a consolidated basis. The balance of the Purchase
Price of Common Stock, less expenses of Conversion, will be reflected as paid-in
capital on a consolidated basis. See
104
"Capitalization." Upon payment of the Purchase Price for the Common Stock, in
accordance with the Plan, all such stock will be duly authorized, fully paid,
validly issued and nonassessable.
Each share of the Common Stock will have the same relative rights and will
be identical in all respects with each other share of the Common Stock. The
Common Stock of the Holding Company will represent non-withdrawable capital,
will not be of an insurable type and will not be insured by the FDIC.
Under Delaware law, the holders of the Common Stock will possess exclusive
voting power in the Holding Company. Each stockholder will be entitled to one
vote for each share held on all matters voted upon by stockholders, subject to
the limitation discussed under "Restrictions on Acquisitions of Stock and
Related Takeover Defensive Provisions - Provisions of the Holding Company's
Certificate of Incorporation and Bylaws - Limitation on Voting Rights." If the
Holding Company issues preferred stock subsequent to the Conversion, holders of
the preferred stock may also possess voting powers.
LIQUIDATION OR DISSOLUTION. In the unlikely event of the liquidation or
dissolution of the Holding Company, the holders of the Common Stock will be
entitled to receive -- after payment or provision for payment of all debts and
liabilities of the Holding Company (including all deposits in the Bank and
accrued interest thereon) and after distribution of the liquidation account
established upon Conversion for the benefit of Eligible Account Holders and
Supplemental Eligible Account Holders who continue their deposit accounts at the
Bank -- all assets of the Holding Company available for distribution, in cash or
in kind. See "The Conversion - Effects of Conversion to Stock Form on Depositors
and Borrowers of the Bank." If preferred stock is issued subsequent to the
Conversion, the holders thereof may have a priority over the holders of Common
Stock in the event of liquidation or dissolution.
NO PREEMPTIVE RIGHTS. Holders of the Common Stock will not be entitled to
preemptive rights with respect to any shares which may be issued. The Common
Stock will not be subject to call for redemption, and, upon receipt by the
Holding Company of the full purchase price therefor, each share of the Common
Stock will be fully paid and nonassessable.
PREFERRED STOCK. After Conversion, the Board of Directors of the Holding
Company will be authorized to issue preferred stock in series and to fix and
state the voting powers, designations, preferences and relative, participating,
optional or other special rights of the shares of each such series and the
qualifications, limitations and restrictions thereof. Preferred stock may rank
prior to the Common Stock as to dividend rights, liquidation preferences, or
both, and may have full or limited voting rights. The holders of preferred stock
will be entitled to vote as a separate class or series under certain
circumstances, regardless of any other voting rights which such holders may
have.
Except as discussed herein, the Holding Company has no present plans for
the issuance of the additional authorized shares of Common Stock or for the
issuance of any shares of preferred stock. In the future, the authorized but
unissued and unreserved shares of Common Stock will be available for general
corporate purposes including but not limited to possible issuance as stock
dividends or stock splits, in future mergers or acquisitions, under a cash
dividend reinvestment and stock purchase plan, in a future underwritten or other
public offering or under an employee stock ownership plan, stock option or
restricted stock plan. The authorized but unissued shares of preferred stock
will similarly be available for issuance in future mergers or acquisitions, in a
future underwritten public offering or private placement or for other general
corporate purposes. Except as described above or as otherwise required to
approve the transaction in which the additional authorized shares of Common
Stock or authorized shares of preferred stock would be issued, no stockholder
approval will be required for the issuance of these shares. Accordingly, the
Board of Directors of the Holding Company, without stockholder approval, can
issue preferred stock with voting and conversion rights which could adversely
affect the voting power of the holders of Common Stock.
RESTRICTIONS ON ACQUISITIONS. See "Restrictions on Acquisitions of Stock
and Related Takeover Defensive Provisions" for a description of certain
provisions of the Holding Company's certificate of incorporation and bylaws
which may affect the ability of the Holding Company's stockholders to
participate in certain transactions relating to acquisitions of control of the
Holding Company.
105
DIVIDENDS. Upon consummation of the formation of the Holding Company, the
Holding Company's only asset will be the Bank's Common Stock. Although it is
anticipated that the Holding Company will retain approximately 50% of the net
proceeds in the Conversion, dividends from the Bank will be an important source
of income for the Holding Company. Should the Bank elect to retain its income,
the ability of the Holding Company to pay dividends to its own shareholders may
be adversely affected. Furthermore, if at any time in the future the Holding
Company owns less than 80% of the outstanding stock of the Bank, certain tax
benefits under the Code as to inter-company distributions will not be fully
available to the Holding Company and it will be required to pay federal income
tax on a portion of the dividends received from the Bank, thereby reducing the
amount of income available for distribution to the shareholders of the Holding
Company. For further information concerning the ability of the Bank to pay
dividends to the Holding Company, see "Dividends."
LEGAL AND TAX MATTERS
The legality of the Common Stock and the federal income tax consequences of
the Conversion will be passed upon for the Bank and the Holding Company by the
firm of Luse Lehman Gorman Pomerenk & Schick, P.C., Washington, D.C. 20015. The
Missouri state income tax consequences of the Conversion will be passed upon for
the Bank and the Holding Company by KPMG Peat Marwick LLP, Kansas City,
Missouri. Luse Lehman Gorman Pomerenk & Schick, P.C. and KPMG Peat Marwick LLP
have consented to the references herein to their opinions. Certain legal matters
regarding the Conversion will be passed upon for Trident Securities by Breyer &
Aguggia, Washington, D.C.
EXPERTS
The Consolidated Financial Statements of the Bank as of June 30, 1995 and
1994, and for the fiscal years ended June 30, 1995 and 1994 have been included
in this Prospectus in reliance on the report of KPMG Peat Marwick LLP, certified
public accountants, appearing elsewhere herein, and upon the authority of that
firm as experts in accounting and auditing.
RP Financial has consented to the publication herein of the summary of its
report to the Bank and the Holding Company setting forth its opinion as to the
estimated pro forma market value of the Common Stock upon Conversion and its
valuation with respect to Subscription Rights.
ADDITIONAL INFORMATION
The Holding Company has filed with the SEC a registration statement under
the Securities Act, with respect to the Common Stock offered hereby. As
permitted by the rules and regulations of the SEC, this Prospectus does not
contain all the information set forth in the registration statement. Such
information can be examined without charge at the public reference facilities of
the SEC located at 450 Fifth Street, NW, Washington, D.C. 20549, and copies of
such material can be obtained from the SEC at prescribed rates. The statements
contained herein as to the contents of any contract or other document filed as
an exhibit to the registration statement are, of necessity, brief descriptions
thereof and are not necessarily complete but do contain all material information
regarding such documents; each such statement is qualified by reference to such
contract or document.
The 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
Prospectus omits certain information contained in that Application. The
Application may be examined at the principal offices of the OTS, 1700 G Street,
N.W., Washington, D.C. 20552 and at the Midwest Regional Office of the OTS
located at 122 W. John Carpenter Freeway, Suite 600, Irving, Texas 75039.
106
In connection with the Conversion, the Holding Company will register the
Common Stock with the SEC under Section 12(g) of the Exchange Act; and, upon
such registration, the Holding Company and the holders of its Common Stock will
become subject to the proxy solicitation rules, reporting requirements and
restrictions on stock purchases and sales by directors, officers and greater
than 10% stockholders, the annual and periodic reporting and certain other
requirements of the Exchange Act. Under the Plan, the Holding Company has
undertaken that it will not terminate such registration for a period of at least
three years following the Conversion.
A copy of the certificate of incorporation and bylaws of the Holding
Company are available without charge from the Bank.
107
COMMUNITY BANK OF EXCELSIOR SPRINGS, A SAVINGS BANK
EXCELSIOR SPRINGS, MISSOURI
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors..................................................... F-2
Consolidated Balance Sheets as of March 31, 1996 (unaudited) and June 30, 1995
and 1994.......................................................................... F-3
Consolidated Statements of Earnings for the nine months ended March 31, 1996
and 1995 (unaudited) and the years ended June 30, 1995 and 1994................... F-4
Consolidated Statements of Equity for the nine months ended March 31, 1996
(unaudited) and for the years ended June 30, 1995 and 1994........................ F-5
Consolidated Statements of Cash Flows for the nine months ended March 31, 1996
and 1995 (unaudited) and for the years ended June 30, 1995 and 1994............... F-6
Notes to Consolidated Financial Statements......................................... F-7
######
All financial statements of CBES Bancorp, Inc. have been omitted because CBES
Bancorp, Inc. has not yet issued any stock, has no assets and liabilities and
has not conducted any business other than of an organizational nature.
All schedules are omitted as the required information is not applicable or
because the required information is included in the consolidated financial
statements or related notes.
F-1
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors
Community Bank of Excelsior Springs,
a Savings Bank:
We have audited the accompanying consolidated balance sheets of Community Bank
of Excelsior Springs, a Savings Bank, and subsidiary as of June 30, 1995 and
1994 and the related consolidated statements of earnings, equity and cash flows
for the years then ended. These consolidated financial statements are the
responsibility of Community Bank's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Community Bank of
Excelsior Springs, and subsidiary as of June 30, 1995 and 1994 and the results
of their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
August 25, 1995, except for
footnote 13, which is as of May 14, 1996
Kansas City, Missouri
COMMUNITY BANK OF EXCELSIOR SPRINGS, A SAVINGS BANK,
AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
CONSOLIDATED BALANCE SHEETS
March 31, 1996 June 30,
-------------- --------------------
Assets (unaudited) 1995 1994
------ ---- ----
Cash $ 768,211 604,665 692,685
Interest-bearing deposits in other financial institutions 1,316,396 2,469,045 4,194,393
Investment securities available-for-sale (note 2):
U.S. government and agency obligations (amortized cost of
$2,002,625 (unaudited), $2,003,750 and $2,005,250 in 1996
1995 and 1994, respectively) 1,980,820 1,962,320 1,993,610
Mutual fund (amortized cost of $1,078,676 and $1,392,823 in
1995 and 1994, respectively) - 1,078,676 1,038,585
Mortgage-backed securities held-to-maturity (estimated fair value
of $545,869 (unaudited), $3,911,886 and $4,796,508 in
1996, 1995 and 1994, respectively) (note 3) 548,742 3,869,572 4,834,152
Loans held for sale, net 979,260 1,518,908 105,268
Loans receivable, net (note 4) 76,294,107 77,361,061 53,348,212
Accrued interest receivable:
Loans receivable 562,077 504,442 305,369
Investment securities 13,842 34,386 41,486
Mortgage-backed securities 4,173 33,223 41,438
Real estate owned - - 81,053
Stock in Federal Home Loan Bank (FHLB), at cost 810,700 794,700 521,200
Office property and equipment, net (note 5) 1,286,445 1,288,352 1,193,561
Cash surrender value of life insurance and other assets (note 9) 1,602,741 1,581,076 151,761
---------- ---------- ----------
Total assets $ 86,167,514 93,100,426 68,542,773
========== ========== ==========
Liabilities and Equity
----------------------
Liabilities:
Deposits (note 6) $ 67,916,486 68,274,476 60,180,445
FHLB advances (note 7) 9,000,000 15,876,915 -
Accrued expenses and other liabilities 517,027 477,188 449,059
Accrued interest payable on deposits 137,899 104,769 61,836
Advance payments by borrowers for property taxes and
insurance 461,996 864,780 801,869
Income taxes payable (receivable) (note 8):
Current 221,442 (5,560) 51,177
Deferred 30,000 27,000 17,451
---------- ---------- ----------
Total liabilities 78,284,850 85,619,568 61,561,837
Equity:
Retained earnings (notes 10, 11 and 12) 7,895,747 7,505,716 7,342,158
Unrealized (losses) on available-for-sale securities,
net of tax (13,083) (24,858) (361,222)
---------- ---------- ----------
Total equity 7,882,664 7,480,858 6,980,936
Commitments (note 4)
---------- ---------- ----------
Total liabilities and equity $ 86,167,514 93,100,426 68,542,773
========== ========== ==========
See accompanying notes to consolidated financial statements.
COMMUNITY BANK OF EXCELSIOR SPRINGS, A SAVINGS BANK,
AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
Consolidated Statements of Equity
Net loss on
available-for-
Retained sale securities,
earnings net of tax Total
-------- ---------- -----
Balance at June 30, 1993 $ 6,641,448 (332,165) 6,309,283
Initial adoption of Financial Accounting Standards
Board Statement No. 115, on July 1, 1993, net of
taxes - 10,951 10,951
Net earnings 700,710 - 700,710
Increase in unrealized loss on available-for-sale
securities, net of taxes - (40,008) (40,008)
--------- -------- ---------
Balance at June 30, 1994 7,342,158 (361,222) 6,980,936
Net earnings 163,558 - 163,558
Writedown of investment in mutual fund - 314,148 314,148
Decrease in unrealized loss on available-for-sale
securities, net of tax - 22,216 22,216
--------- -------- ---------
Balance at June 30, 1995 7,505,716 (24,858) 7,480,858
Net earnings (unaudited) 390,031 - 390,031
Decrease in unrealized loss on available-for-sale
securities, net of tax (unaudited) - 11,775 11,775
--------- -------- ---------
Balance at March 31, 1996 (unaudited) $ 7,895,747 (13,083) 7,882,664
========= ======== =========
See accompanying notes to consolidated financial statements.
COMMUNITY BANK OF EXCELSIOR SPRINGS, A SAVINGS BANK,
AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended
March 31, Years ended June 30,
----------------- --------------------
1996 1995 1995 1994
---- ---- ---- ----
(unaudited)
Cash flows from operating activities:
Net earnings $ 390,031 27,684 163,558 700,710
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Provision for loan losses 188,341 143,056 171,277 33,590
Depreciation 95,862 84,719 118,250 108,125
Net realized (gain) loss on sale of
securities available-for-sale (54,205) - - 135,933
Writedown of investment in mutual fund - 314,148 314,148 -
Gain on disposition of real estate owned, net - (2,376) (5,822) (14,611)
Proceeds from sale of loans held for sale 12,700,276 1,160,948 4,763,106 15,949,331
Origination of loans held for sale (12,021,352 (1,363,937) (6,134,640) (15,914,268)
Gain on sale of loans, net (139,277) (4,948) (42,106) (140,331)
Premium amortization and accretion of
discounts and deferred loan fees (191,488) (212,910) (301,901) (115,783)
Deferred income taxes (benefit) (4,850) 14,000 21,464 (7,055)
FHLB stock dividends (16,000) - - -
Changes in assets and liabilities:
Accrued interest receivable (8,041) (66,169) (183,758) (9,798)
Other assets (21,663) 7,873 (28,821) 24,540
Accrued expenses and other liabilities 39,839 65,416 180,940 92,240
Accrued interest payable on deposits 33,130 70,832 42,933 (11,234)
Current income taxes payable 227,002 (89,860) (56,737) 20,051
---------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities 1,217,605 148,476 (978,109) 851,440
---------- ----------- ----------- -----------
Cash flows from investing activities:
Net change in loans receivable 1,072,414 (18,731,012) (23,956,731) (6,546,599)
Purchase of FHLB stock - (51,700) (273,500) -
Proceeds from sales of securities available-for-sale 4,046,846 - - 1,430,309
Mortgage-backed securities principal repayments 405,676 753,316 964,384 1,572,064
Change in FHLB time deposits - 1,600,000 1,600,000 (1,600,000)
Purchase of office property and equipment (93,955) (143,604) (213,041) (70,330)
Proceeds from sale of real estate owned - 29,772 29,772 30,000
Purchase of life insurance policies - (1,420,000) (1,420,000) -
---------- ----------- ----------- -----------
Net cash provided by (used in)
investing activities $ 5,430,981 (17,963,228) (23,269,116) (5,184,556)
---------- ----------- ----------- -----------
(Continued)
COMMUNITY BANK OF EXCELSIOR SPRINGS, A SAVINGS BANK,
AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
Nine months ended
March 31, Years ended June 30,
----------------- --------------------
1996 1995 1995 1994
---- ---- ---- ----
(unaudited)
Cash flows from financing activities: $ (357,990) 6,332,707 8,094,031 1,430,668
Net change in deposits
Proceeds from FHLB advances 16,650,000 22,100,000 32,000,000 -
Repayments of FHLB advances (23,526,915) (11,174,143) (16,123,085) -
Increase in advance payments by borrowers for
property taxes and insurance (402,784) (99,586) 62,911 155,265
---------- ---------- ---------- ----------
Net cash (used in) provided by
financing activities (7,637,689) 17,158,978 24,033,857 1,585,933
---------- ---------- ---------- ----------
Net decrease in cash and
cash equivalents (989,103) (655,774) (213,368) (2,747,183)
Cash and cash equivalents at the beginning of the period 3,073,710 3,287,078 3,287,078 6,034,261
---------- ---------- ---------- ----------
Cash and cash equivalents at the end of the period $ 2,084,607 2,631,304 3,073,710 3,287,078
========== ========== ========== ==========
Supplemental disclosure of cash flow information:
(Refunds received) cash paid during the period
for income taxes $ (15,054) 286,510 336,510 339,080
========== ========== ========== ==========
Cash paid during the period for interest $ 3,056,090 2,030,998 3,102,999 2,101,514
========== ========== ========== ==========
Supplemental schedule of noncash investing and
financing activities:
Conversion of loans to real estate owned $ - 10,897 10,897 250,993
========== ========== ========== ==========
Loans made to finance sales of real
estate owned $ - - 68,000 194,500
========== ========= ========== ==========
See accompanying notes to consolidated financial statements.
COMMUNITY BANK OF EXCELSIOR SPRINGS, A SAVINGS BANK,
AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED MARCH 31, 1996 AND 1995 (UNAUDITED)
AND THE YEARS ENDED JUNE 30, 1995 AND 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
(a) Organization
------------
The consolidated financial statements include the accounts of Community
Bank of Excelsior Springs, a Savings Bank, and its wholly-owned
subsidiary, CBES Service Corporation, collectively referred to as
Community Bank. Community Bank of Excelsior Springs is chartered as a
federal mutual savings bank. CBES Service Corporation was formed in
March 1993 to provide insurance services. All significant intercompany
balances and transactions have been eliminated in consolidation.
(b) Unaudited Interim Financial Statements
--------------------------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the requirements for a presentation of
interim financial statements. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, that are
necessary for a fair presentation of the interim periods have been
reflected.
(c) Cash and Cash Equivalents
-------------------------
For purposes of the cash flows, all short-term investments with a maturity
of three months or less at date of purchase are considered cash
equivalents.
(d) Mortgage-backed and Investment Securities
-----------------------------------------
Community Bank classifies securities as either available-for-sale or held-
to-maturity. Held-to-maturity securities are those which Community
Bank has the positive intent and ability to hold to maturity. All
other securities are classified as available-for-sale.
Securities classified as held-to-maturity are recorded at amortized cost.
Securities classified as available-for-sale are recorded at fair value
with unrealized net holding gains and losses, net of the related tax
effect, excluded from earnings and reported as a separate component of
equity until realized. A decline in the market value of any security
below cost that is deemed other than temporary is charged to income,
resulting in the establishment of a new cost basis for the security.
Pursuant to Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," and implementation
guidance issued in November 1995 by the Financial Accounting Standards
Board, Community Bank reclassified certain held-to-maturity mortgage-
backed securities with aggregate cost and fair value of $2,913,965 and
$2,963,159, respectively, to available-for-sale in December 1995.
These securities were disposed of in December 1995.
(Continued)
COMMUNITY BANK OF EXCELSIOR SPRINGS, A SAVINGS BANK,
AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Premiums and discounts on mortgage-backed and investment securities are
amortized using the interest method over the life of the securities.
Realized gains or losses on sales are recognized using the specific
identification method.
(e) Loans Held for Sale
-------------------
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated fair value. Fees received
on such loans are deferred and recognized in income as part of the
gain or loss on sale. At March 31, 1996 and June 30, 1995, all loans
held for sale are committed to be sold to a third party. The
valuation allowance at June 30, 1994 was $4,732. There was no
valuation allowance at March 31, 1996 or June 30, 1995.
(f) Deferred Loan Fees and Costs
----------------------------
Loan fees and certain direct loan origination costs are deferred, and the
net fee or cost is recognized as interest income using the interest
method over the life of the loan for loans generated for Community
Bank's portfolio.
(g) Allowance for Losses
--------------------
A general valuation allowance for losses on loans is established by
management based on its estimate of the amount required to maintain an
adequate allowance for loan losses reflective of the risks in the loan
portfolio. This estimate is based on reviews of the loan portfolio,
including assessment of the estimated net realizable value of the
related underlying collateral of and consideration of past loan loss
experience, current economic conditions and such other factors which,
in the opinion of management, deserve current recognition. Loans are
also subject to periodic examination by regulatory agencies. Such
agencies may require charge-off or additions to the allowance based
upon their judgments about information available at the time of their
examination.
Additionally, accrual of interest on loans is suspended when, in the
opinion of management, such interest will not be collected in the
ordinary course of business.
(h) Real Estate Owned
-----------------
Real estate properties acquired through foreclosure are initially recorded
at the lower of cost or the fair value, less estimated costs to sell,
of the underlying collateral at the time of foreclosure. Subsequent to
foreclosure, further declines in the fair value of such properties are
recorded as a reduction to the carrying value of those assets through
the establishment of an allowance for losses. No loss allowance was
provided by management as of June 30, 1994 because it believed the
recorded values of such properties were less than their respective
fair values.
(Continued)
COMMUNITY BANK OF EXCELSIOR SPRINGS, A SAVINGS BANK,
AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(i) Stock in Federal Home Loan Bank (FHLB)
--------------------------------------
Community Bank is a member of the FHLB system. As a member, it is required
to purchase and hold stock in the FHLB of Des Moines in an amount
equal to the greater of (a) 1% of unpaid residential loans at the
beginning of each year, (b) 5% of FHLB advances, or (c) .3% of total
assets. Community Bank's investment in such stock is recorded at cost.
(j) Office Property and Equipment
-----------------------------
Office property and equipment are stated at cost less accumulated
depreciation. Depreciation is provided using the straight-line method
over the estimated useful lives (three to thirty years) of the
respective assets.
Maintenance and repairs are charged to expense and betterments are
capitalized. Gains and losses on disposition are reflected in current
operations.
(k) Income Taxes
------------
Community Bank accounts for income taxes under the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective income tax bases. The effect on
deferred tax assets and liabilities for a change in tax rate is
recognized in income in the period that includes the enactment dates.
(l) Effect of New Financial Accounting Standards
--------------------------------------------
The Financial Accounting Standards Board has issued SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," and SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition
and Disclosures." SFAS No. 114, as amended by SFAS No. 118, requires
that impaired loans be measured at the present value of expected
future cash flows discounted at the loan's effective interest rate or,
as a practical expedient, at the loan's observable market price or the
fair value of the collateral if the loan is collateral dependent.
Homogeneous loans, such as single-family loans and most categories of
consumer loans, are excluded from this requirement. Adoption of these
statements was effective for the fiscal year beginning July 1, 1995.
The impact of adopting SFAS Nos. 114 and 118 on Community Bank's
consolidated financial statements was not material.
SFAS No. 107 and SFAS No. 119, "Disclosures About Fair Value of Financial
Instruments," was effective for Community Bank for the year beginning
July 1, 1995 and requires disclosure of the fair value of financial
instruments, both assets and liabilities, recognized and not
recognized in the balance sheets.
(Continued)
COMMUNITY BANK OF EXCELSIOR SPRINGS, A SAVINGS BANK,
AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SFAS No. 122, "Accounting for Mortgage Servicing Rights," will be effective
for Community Bank for the year beginning July 1, 1996 and generally
requires entities that sell or securitize loans and retain the
mortgage servicing rights to allocate total cost of the mortgage loans
to the mortgage servicing right and the loan based on their relative
fair value. Costs allocated to mortgage servicing rights should be
recognized as a separate asset and amortized over the period of
estimated net servicing income and evaluated for impairment based on
fair value. The adoption of this statement is not expected to have a
material effect on the consolidated financial statements.
(2) INVESTMENT SECURITIES
---------------------
A summary of investment securities available-for-sale at March 31, 1996 and
June 30, 1995 and 1994 is as follows:
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---- ----- ------ -----
March 31, 1996 (unaudited):
U.S. government and
agency obligations
maturing within one
year $ 1,000,000 - (9,200) 990,800
U.S. government and
agency obligations
maturing after one
year but within five
years 1,002,625 - (12,605) 990,020
---------- ------- -------- ---------
$ 2,002,625 - (21,805) 1,980,820
========== ======= ======== =========
June 30, 1995:
U.S. government and
agency obligations
maturing after one year
but within five years $ 2,003,750 - (41,430) 1,962,320
Mutual fund 1,078,676 - - 1,078,676
---------- ------ -------- ---------
$ 3,082,426 - (41,430) 3,040,996
========== ====== ======== =========
June 30, 1994:
U.S. government and
agency obligations
maturing after one year
but within five years $ 2,005,250 12,700 (24,340) 1,993,610
Mutual fund 1,392,823 - (354,238) 1,038,585
---------- ------ ------- ---------
$ 3,398,073 12,700 (378,578) 3,032,195
========== ====== ======= =========
(Continued)
COMMUNITY BANK OF EXCELSIOR SPRINGS, A SAVINGS BANK,
AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the year ended June 30, 1995, management determined that the decline
in market value of its mutual fund investment below cost was not
temporary and, accordingly, adjusted the cost basis of the investment
downward by $314,148 through a charge to earnings.
During the nine months ended March 31, 1996, Community Bank recognized
gross gains of $5,011 and no gross losses on proceeds of $1,083,687
from the sale of the mutual fund (unaudited). During the year ended
June 30, 1994, Community Bank recognized gross losses of $135,933 and
no gross gains from mutual fund proceeds of $1,430,309. No investment
securities were sold during the year ended June 30, 1995.
(3) MORTGAGE-BACKED SECURITIES
--------------------------
Mortgage-backed securities held-to-maturity consisted of the following at
March 31, 1996, June 30, 1995 and 1994:
Amortized Unrealized Unrealized Estimated
cost gains losses fair value
---- ----- ------ ----------
March 31, 1996 (unaudited):
Federal Home Loan
Mortgage Corporation
(FHLMC) participation
certificates $ 545,787 2,776 (5,687) 542,876
Pass-through certificate
guaranteed by Government
National Mortgage
Association (GNMA) 2,955 38 - 2,993
------- ----- ------ -------
$ 548,742 2,814 (5,687) 545,869
======= ===== ====== =======
June 30, 1995:
FHLMC participation
certificates $3,507,847 21,606 (15,923) 3,513,530
Pass-through certificate
guaranteed by GNMA 361,725 36,631 - 398,356
--------- ------ ------- ---------
$3,869,572 58,237 (15,923) 3,911,886
========= ====== ======= =========
June 30, 1994:
FHLMC participation
certificates $4,357,921 7,368 (88,102) 4,277,187
Pass-through certificate
guaranteed by GNMA 476,231 43,212 (122) 519,321
--------- ------ ------- ---------
$4,834,152 50,580 (88,224) 4,796,508
========= ====== ====== =========
During the nine months ended March 31, 1996, Community Bank recognized
gross gains of $52,722 and gross losses of $3,528 on proceeds of
$2,989,177 from the sale of mortgage-backed securities available for
sale. There were no other sales of mortgage-backed securities.
(Continued)
COMMUNITY BANK OF EXCELSIOR SPRINGS, A SAVINGS BANK,
AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) LOANS RECEIVABLE
----------------
Loans receivable consisted of the following:
March 31, June 30,
----------------
1996 1995 1994
---- ---- ----
(unaudited)
Real estate:
One-to-four family residential $ 51,491,727 53,737,889 38,895,957
Construction 17,887,526 16,221,145 7,857,377
Land 3,641,482 1,991,631 545,384
Commercial 1,025,441 818,371 316,757
Multifamily 321,018 134,412 162,528
Consumer loans 10,675,912 11,296,068 10,052,394
---------- ---------- ----------
85,043,106 84,199,516 57,830,397
Less:
Loans in process 8,142,999 6,390,936 4,068,155
Deferred loan origination fees
and discounts on loans, net 259,000 221,519 251,030
Allowance for loan losses 347,000 226,000 163,000
---------- ---------- ----------
$ 76,294,107 77,361,061 53,348,212
========== ========== ==========
At March 31, 1996 and June 30, 1995, Community Bank was committed to make
first mortgage loans approximating $1,418,000 (unaudited) and $739,000
with $231,000 (unaudited) and $267,000 of these loans committed to be
sold to a third party. Fixed rate loan commitments approximated
$1,153,000 (unaudited) and $363,000 at March 31, 1996 and June 30,
1995, respectively, with rates ranging from 7.25% to 9.38%. Community
Bank services mortgage loans for others amounting to approximately
$30,967,000 (unaudited), $25,743,000 and $25,581,000 at March 31,
1996, June 30, 1995 and 1994, respectively.
At March 31, 1996 and June 30, 1995, Community Bank had loans of
approximately $970,800 (unaudited) and $971,700 to directors, officers
and management employees. During the nine months ended March 31, 1996
and year ended June 30, 1995, approximately $198,300 and $328,100 new
loans were made and repayments totaled approximately $199,200
(unaudited) and $143,200, respectively. Such loans were made in
accordance with Community Bank's normal lending practices.
(Continued)
COMMUNITY BANK OF EXCELSIOR SPRINGS, A SAVINGS BANK,
AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of activity in the allowance for loan losses for the periods
ended March 31, 1996 and June 30, 1995 and 1994 is as follows:
March 31, June 30,
--------------- ---------------
1996 1995 1995 1994
---- ---- ---- ----
(unaudited)
Balance at beginning of period $ 226,000 163,000 163,000 150,000
Provision for loan losses 188,341 143,056 171,277 33,590
Charge-offs (91,679) (157,980) (171,386) (48,399)
Recoveries 24,338 56,924 63,109 27,809
-------- -------- -------- -------
Balance at end of period $ 347,000 205,000 226,000 163,000
======== ======== ======== =======
Community Bank evaluates each customer's creditworthiness on a case-by-case
basis. Residential loans with a loan-to-value ratio exceeding 80% are
required to have private mortgage insurance. Community Bank's
principal lending areas are the economically-diverse communities
northeast of Kansas City, Missouri.
(5) OFFICE PROPERTY AND EQUIPMENT
-----------------------------
Office property and equipment consist of the following:
March 31, June 30,
---------------
1996 1995 1994
---- ---- ----
(unaudited)
Land and land improvements $ 171,130 171,130 171,130
Office buildings 1,310,206 1,281,997 1,270,697
Furniture and equipment 758,756 691,621 492,743
--------- --------- ---------
2,240,092 2,144,748 1,934,570
Less accumulated depreciation 953,647 856,396 741,009
--------- --------- ---------
$ 1,286,445 1,288,352 1,193,561
========= ========= =========
(Continued)
COMMUNITY BANK OF EXCELSIOR SPRINGS, A SAVINGS BANK,
AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) DEPOSITS
--------
Deposit balances are summarized as follows:
March 31, 1996 June 30,
---------------------- -----------------------------------------
(unaudited) 1995 1994
------------------ ------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Balance by interest rate:
Noninterest bearing
demand accounts - $ 1,521,496 2% $ 1,319,904 2% $ 935,738 1%
NOW accounts 2.25 - 2.00 7,919,039 12 7,601,014 11 7,618,888 13
Money market 2.50 - 2.75 5,777,598 9 5,874,186 9 8,178,549 14
Passbook accounts 2.25 - 2.75 3,656,235 5 3,740,235 5 3,951,662 6
---------- --- ---------- --- ---------- ---
18,874,368 28 18,535,339 27 20,684,837 34
---------- --- ---------- --- ---------- ---
Certificate accounts: 2.00 - 2.99 13,385 - 22,732 - 420,829 1
3.00 - 3.99 - - 853,408 1 16,473,626 27
4.00 - 4.99 2,215,415 3 7,548,143 11 11,093,535 18
5.00 - 5.99 35,459,555 52 11,569,757 17 8,718,946 15
6.00 - 6.99 10,709,347 16 22,091,710 33 953,574 2
7.00 - 7.99 159,659 1 7,022,435 10 643,919 1
8.00 - 8.99 484,757 - 628,466 1 865,752 1
9.00 - 9.99 - - 2,486 - 2,258 -
10.00 - 10.99 - - - - 1,411 -
12.00 - 12.99 - - - - 321,758 1
---------- --- ---------- --- ---------- ---
49,042,118 72 49,739,137 73 39,495,608 66
---------- --- ---------- --- ---------- ---
$ 67,916,486 100% $ 68,274,476 100% $ 60,180,445 100%
========== === ========== === ========== ===
Weighted average interest
rate on savings deposits
at period end 4.66% 4.84% 3.56%
==== ==== ====
Contractual maturity of
certificate accounts:
Under 12 months $ 39,370,835 60% $ 39,609,558 80% $ 23,789,567 60%
12 to 24 months 4,453,113 24 5,573,835 10 9,513,214 24
24 to 36 months 1,730,577 7 2,363,905 5 2,780,989 7
36 to 48 months 693,810 6 474,964 1 2,256,752 6
48 to 60 months 683,314 2 435,806 1 606,353 2
Over 60 months 2,110,469 1 1,281,069 3 548,733 1
----------- --- ----------- --- ----------- ---
$ 49,042,118 100% $ 49,739,137 100% $ 39,495,608 100%
=========== === =========== === =========== ===
Deposits of $100,000 or more totaled $3,002,275 (unaudited), $3,132,000 and
$1,991,000 at March 31, 1996 and June 30, 1995 and 1994, respectively.
(Continued)
COMMUNITY BANK OF EXCELSIOR SPRINGS, A SAVINGS BANK,
AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of interest expense on savings deposits for the periods
ended March 31, 1996 and 1995 and June 30, 1995 and 1994 are as
follows:
Nine months ended Year ended
March 31, June 30,
--------------------- --------------------
1996 1995 1995 1994
---- ---- ---- ----
(unaudited)
NOW, passbook and money
market $ 265,279 276,219 397,213 437,993
Certificates of deposit 2,219,700 1,506,297 2,179,936 1,652,287
---------- --------- --------- ---------
$2,484,979 1,782,516 2,577,149 2,090,280
========== ========= ========= =========
(7) FHLB Advances
-------------
Community Bank had the following debt outstanding from the Federal Home
Loan Bank of Des Moines at March 31, 1996 and June 30, 1995:
March 31, June 30,
1996 1995
---- ----
(unaudited)
$3,000,000 advances, interest at 6.14% due
September 2000 $ 3,000,000 -
$3,000,000 advance, interest at 8.00% due
September 2009 - 2,919,860
$2,500,000 advance, interest at 8.03% due
December 2009 - 2,457,055
$2,000,000 advance, interest at 6.78% due
November 1995 - 2,000,000
$1,000,000 advance, interest at 6.65%
due October 1995 - 1,000,000
$2,000,000 advance, interest at 5.81% due
October 1996 2,000,000 -
$1,000,000 advance, interest at 5.78%
due June 1996 2,000,000 2,000,000
$1,000,000 advance, interest at 5.77%
due June 1997 1,000,000 1,000,000
$1,000,000 advance, interest at 5.86%
due June 1998 1,000,000 1,000,000
$10,000,000 line of credit, interest at
approximately 50 basis points above the
U.S. Treasury Bill rate (6.46% at June 30,
1995) maturing May 1996 - 3,500,000
---------- ----------
$ 9,000,000 15,876,915
========== ==========
The advances and lines of credit to the FHLB are collateralized by first
mortgage loans.
(Continued)
COMMUNITY BANK OF EXCELSIOR SPRINGS, A SAVINGS BANK,
AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Scheduled maturities of FHLB advances are as follows:
Year ending
March 31,
---------
(unaudited)
1997 $ 4,000,000
1998 1,000,000
1999 1,000,000
2000 -
2001 3,000,000
----------
$ 9,000,000
==========
(8) Income Taxes
------------
Components of income tax expense are as follows:
Federal State Total
------- ----- -----
Nine months ended March 31, 1996 (unaudited):
Current $ 191,082 13,016 204,098
Deferred (11,000) 14,000 3,000
------- ------ -------
$ 180,082 27,016 207,098
======= ====== =======
Nine months ended March 31, 1995 (unaudited):
Current $ 185,700 24,200 209,920
Deferred 730 - 730
------- ------ -------
$ 186,430 24,220 210,650
======= ====== =======
Year ended June 30, 1995:
Current $ 257,355 34,334 291,689
Deferred 8,883 666 9,549
------- ------ -------
$ 266,238 35,000 301,238
======= ====== =======
Year ended June 30, 1994:
Current $ 303,736 46,000 349,736
Deferred 2,264 - 2,264
------- ------ -------
$ 306,000 46,000 352,000
======= ====== =======
(Continued)
COMMUNITY BANK OF EXCELSIOR SPRINGS, A SAVINGS BANK,
AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income tax expense has been provided at effective rates of 34.7% and 88.4%
(unaudited), and 64.8% and 33.4% (applied to earnings before taxes)
for the nine months ended March 31, 1996 and 1995, and the years ended
June 30, 1995 and 1994, respectively. The reasons for the differences
between the effective tax rates and the corporate federal income tax
rate of 34% are as follows:
Nine months ended Year ended
March 31, June 30,
---------------- ------------------
1996 1995 1995 1994
---- ---- ---- ----
(unaudited)
Federal income tax rate 34.0% 34.0 34.0 34.0
Items affecting federal income tax rate:
Writedown of investment in
mutual fund - 44.8 23.0 -
Capital loss carryforward utilization - - - (.5)
State income tax net of federal benefit 3.0 6.7 5.0 2.9
Other (2.3) 2.9 2.8 (3.0)
---- ---- ---- ----
Effective income tax rate 34.7% 88.4 64.8 33.4
==== ==== ==== ====
Deferred income taxes reflect the impact of "temporary differences" between
amounts of assets and liabilities for financial reporting purposes and
such amounts as measured by tax laws. Temporary differences which give
rise to deferred tax assets and liabilities at March 31, 1996 and June
30, 1995 and 1994 are as follows:
March 31, Year ended June 30,
----------- --------------------
1996 1995 1994
---- ---- ----
(unaudited)
Loan origination fees $ - - 20,000
Allowance for loan losses 106,000 56,000 39,000
Unrealized losses on assets available-for-sale 9,000 17,000 -
Writedown of investment in mutual fund - 129,000 150,000
Other 30,000 17,000 22,549
--------- -------- --------
Deferred income tax asset before valuation
allowance 145,000 219,000 231,549
Valuation allowance for capital losses on
investments - 107,000 120,000
--------- -------- --------
Deferred income tax asset 145,000 112,000 111,549
--------- -------- --------
Loan origination fees (77,000) (49,000) -
Fixed assets (63,000) (51,000) (105,000)
Other (35,000) (39,000) (24,000)
--------- -------- --------
Deferred income tax liability (175,000) (139,000) (129,000)
--------- -------- --------
Net deferred income tax liability $ (30,000) (27,000) (17,451)
========= ======== ========
(Continued)
COMMUNITY BANK OF EXCELSIOR SPRINGS, A SAVINGS BANK,
AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) BENEFIT PLAN
------------
Effective March 1995, Community Bank adopted a supplemental retirement plan
to provide members of the Board of Directors and Officers with
supplemental retirement, disability and death benefits. The Plan
provides benefits for directors and officers, or their beneficiaries
after they have completed service to Community Bank. The benefits are
based on years of service and compensation level and are paid monthly
for ten years following retirement for directors and for fifteen years
following retirement for officers. Expense under the plan for the nine
months ended March 31, 1996 and for the year ended June 30, 1995 was
approximately $31,000 (unaudited) and $14,000. Community Bank
purchased life insurance policies in 1995 to fund its obligations
under the plans for $1,420,000.
(10) RETAINED EARNINGS
-----------------
Retained earnings at March 31, 1996 and June 30, 1995 and 1994 include
approximately $1,700,000 for which no provision for federal income tax
has been made. This amount represents an allocation of income to bad
debt deductions for income tax purposes only. Reduction of amounts
allocated for purposes other than income tax bad debt losses will
create income for tax purposes only, which will be subject to the then
current corporate income tax rate.
(11) REGULATORY CAPITAL REQUIREMENTS
-------------------------------
Financial Institution Reform, Recovery and Enforcement Act of 1989 (FIRREA)
and the capital regulations of the Office of Thrift Supervision (OTS)
promulgated thereunder require institutions to have a minimum
regulatory tangible capital equal to 1.5% of total assets, a minimum 3%
leverage capital ration and a minimum 8% risk-based capital ratio.
These capital standards set forth in the capital regulations must
generally be no less stringent than the capital standards applicable to
banks. FIRREA also specifies the required ratio of housing-related
assets in order to qualify as a savings institution. Community Bank met
the regulatory capital requirements at March 31, 1996 and June 30, 1995
and 1994.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
established additional capital requirements which require regulatory
action against depository institutions in one of the undercapitalized
categories defined in implementing regulations. Institutions such as
Community Bank, which are defined as well capitalized, must generally
have a leverage capital (core) ratio of at least 5%, a tier risk-based
capital ratio of at least 6% and a total risk-based capital ratio of at
least 10%. In November 1994, the OTS revised its regulations whereby
unrealized gains or losses on available-for-sale securities accounted
for under SFAS No. 115 are not considered in the determination of
regulatory capital. FDICIA also provides for increased supervision by
federal regulatory agencies, increased reporting requirements for
insured depository institutions and other changes in the legal and
regulatory environment for institutions.
(Continued)
COMMUNITY BANK OF EXCELSIOR SPRINGS, A SAVINGS BANK,
AND SUBSIDIARY
EXCELSIOR SPRINGS, MISSOURI
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) PLAN OF CONVERSION
------------------
On May 14, Community Bank's Board of Directors approved a plan ("Plan") to
convert from a federally chartered mutual savings bank to a federally
chartered stock savings bank, subject to approval by Community Bank's
members. The Plan, which includes formation of a holding company, is
subject to approval by the OTS and includes the filing of a
registration statement with the Securities and Exchange Commission. As
of March 31, 1996, Community Bank had incurred $10,000 of costs
related to this conversion which is included in other assets. If the
conversion is ultimately successful, actual conversion costs will be
accounted for as a reduction in gross proceeds. If the conversion is
unsuccessful, the conversion costs will be expensed.
The Plan calls for the common stock of the holding company to be offered to
various parties in a subscription offering at a price based on an
independent appraisal. It is anticipated that any shares not purchased
in the subscription offering will be offered in a community offering.
Community Bank may not declare or pay a cash dividend if the effect thereof
would cause its net worth to be reduced below either the amount
required for the liquidation account discussed below or the regulatory
capital requirements imposed by the OTS.
At the time of conversion, Community Bank will establish a liquidation
account in an amount equal to its retained earnings as reflected in the
latest statement of financial condition used in the final conversion
prospectus. The liquidation account will be maintained for the benefit
of eligible account holders who continue to maintain their deposit
accounts in Community Bank after conversion. In the event of a complete
liquidation of Community Bank, and only in such an event, eligible
depositors who continue to maintain accounts shall be entitled to
receive a distribution from the liquidation account before any
liquidation may be made with respect to common stock.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN AS CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE
OFFERING MADE HEREBY, AND, IF GIVEN OR MADE, SUCH OTHER INFORMA TION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE HOLDING
COMPANY OR COMMUNITY BANK. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OF FERED HEREBY TO
ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE HOLDING COMPANY OR COMMUNITY BANK
SINCE ANY OF THE DATES AS OF WHICH INFORMATION IS FURNISHED HEREIN OR SINCE THE
DATE HEREOF.
_____________
TABLE OF CONTENTS
Page
----
Prospectus Summary.....................................................
Selected Consolidated Financial Information
and Other Data........................................................
Recent Financial Data..................................................
Risk Factors...........................................................
Community Bank of Excelsior Springs, A Savings Bank....................
CBES Bancorp, Inc......................................................
Capitalization.........................................................
Pro Forma Data.........................................................
Pro Forma Regulatory Capital...........................................
Use of Proceeds........................................................
Dividends..............................................................
Market for Common Stock................................................
Community Bank of Excelsior Springs, A Savings Bank, Consolidated
Statement of Earnings.................................................
Management's Discussion and Analysis of
Financial Condition and Results of Operations.........................
Business...............................................................
Regulation.............................................................
Management.............................................................
The Conversion.........................................................
Restrictions on Acquisitions of Stock and Related Takeover
Defensive Provisions..................................................
Description of Capital Stock...........................................
Legal and Tax Matters..................................................
Experts................................................................
Additional Information.................................................
Index to Consolidated Financial Statements.............................
UNTIL THE LATER OF SEPTEMBER __, 1996, OR 25 DAYS AFTER COMMENCEMENT OF THE
OFFERING OF COMMON STOCK, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
1,207,500 Shares
CBES
BANCORP, INC.
(Holding Company for Community Bank of Excelsior Springs)
Common Stock
_____________
PROSPECTUS
_____________
TRIDENT SECURITIES, INC.
August __, 1996
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS OF COMMUNITY BANK OF
EXCELSIOR SPRINGS, A SAVINGS BANK
Generally, federal regulations define areas for indemnity coverage for federal
savings associations, 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 savings
association shall be indemnified by the savings association for:
(i) Reasonable costs and expenses, including
reasonable attorneys' 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 June 21,
1996 reasonable attorneys' 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 subsection are
met:
(i) The savings association 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 savings association 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 duty, only if a majority of the
directors of the savings association 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 savings association or its members.
(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.
INDEMNIFICATION OF DIRECTORS AND OFFICERS OF CBES BANCORP, INC.
Article ELEVENTH of CBES Bancorp, Inc.'s (the "Corporation") Certificate of
Incorporation sets forth circumstances under which directors, officers,
employees and agents of the Corporation may be insured or indemnified against
liability which they may incur in their capacities as such.
ELEVENTH:
A. Each person who was or is made a party or is threatened to be made a
party to or is otherwise involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative (hereinafter a "proceeding"),
by reason of the fact that he or she is or was a director or an officer of the
Corporation or is or was serving at the request of the Corporation as a director
or officer of another corporation, including, without limitation, any Subsidiary
(as defined in Article EIGHTH of the Certificate of Incorporation of the
Corporation), partnership, joint venture, trust or other enterprise, including
service with respect to an employee benefit plan (hereinafter an "indemnitee"),
whether the basis of such proceeding is alleged action in an official capacity
as a director or officer or in any other capacity while serving as a director or
officer, shall be indemnified and held harmless by the Corporation to the
fullest extent authorized by the Delaware General Corporation Law, as the same
exists or may hereafter be amended (but, in the case of any such amendment, only
to the extent that such amendment permits the Corporation to provide broader
indemnification rights than such law permitted the Corporation to provide prior
to such amendment), against all expense, liability and loss (including
attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts
paid in settlement) reasonably incurred or suffered by such indemnitee in
connection therewith; provided, however, that, except as provided in Section C
hereof with respect to proceedings to enforce rights to indemnification, the
Corporation shall indemnify any such indemnitee in connection with a proceeding
(or part thereof) initiated by such indemnitee only if such proceeding (or part
thereof) was authorized by the Board of Directors of the Corporation.
B. The right to indemnification conferred in Section A of this Article
ELEVENTH shall include the right to be paid by the Corporation the expenses
incurred in defending any such proceeding in advance of its final disposition
(hereinafter an "advancement of expenses"); provided, however, that, if the
Delaware General Corporation Law requires, an advancement of expenses incurred
by an indemnitee in his or her capacity as a director or officer (and not in any
other capacity in which service was or is rendered by such indemnitee,
including, without limitation, service to an employee benefit plan) shall be
made only upon delivery to the Corporation of an undertaking (hereinafter an
"undertaking"), by or on behalf of such indemnitee, to repay all amounts so
advanced if it shall ultimately be determined by final judicial decision from
which there is no further right to appeal (hereinafter a "final adjudication"),
that such indemnitee is not entitled to be indemnified for such expenses under
this Section or otherwise. The rights to indemnification and to the advancement
of expenses conferred in Sections A and B of this Article ELEVENTH shall be
contract rights and such rights shall continue as to an indemnitee who has
ceased to be a director or officer and shall inure to the benefit of the
indemnitee's heirs, executors and administrators.
C. If a claim under Section A or B of this Article ELEVENTH is not paid
in full by the Corporation within sixty days after a written claim has been
received by the Corporation, except in the case of a claim for an advancement of
expenses, in which case the applicable period shall be twenty days, the
indemnitee may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim. If successful in whole or in part in
any such suit, or in a suit brought by the Corporation to recover an advancement
of expenses pursuant to the terms of an undertaking, the indemnitee shall also
be entitled to be paid the expense of prosecuting or defending such suit. In
(i) any suit brought by the indemnitee to enforce a right to indemnification
hereunder (but not in a suit brought by the indemnitee to enforce a right to an
advancement of expenses) it shall be a defense that, and (ii) in any suit by the
Corporation to recover an advancement of expenses pursuant to the terms of an
undertaking the Corporation shall be entitled to recover such expenses upon a
final adjudication that, the indemnitee has not met any applicable standard for
indemnification set forth in the Delaware General Corporation Law. Neither the
failure of the Corporation (including its Board of Directors, independent legal
counsel, or its stockholders) to have made a determination prior to the
commencement of such suit that indemnification of the indemnitee is proper
in the circumstances because the indemnitee has met the applicable standard of
conduct set forth in the Delaware General Corporation Law, nor an actual
determination by the Corporation (including its Board of Directors, independent
legal counsel, or its stockholders) that the indemnitee has not met such
applicable standard of conduct, shall create a presumption that the indemnitee
has not met the applicable standard of conduct or, in the case of such a suit
brought by the indemnitee, be a defense to such suit. In any suit brought by
the indemnitee to enforce a right to indemnification or to an advancement of
expenses hereunder, or by the Corporation to recover an advancement of expenses
pursuant to the terms of an undertaking, the burden of proving that the
indemnitee is not entitled to be indemnified, or to such advancement of
expenses, under this Article ELEVENTH or otherwise shall be on the Corporation.
D. The rights to indemnification and to the advancement of expenses
conferred in this Article ELEVENTH shall not be exclusive of any other right
which any person may have or hereafter acquire under any statute, the
Corporation's Certificate of Incorporation, Bylaws, agreement, vote of
stockholders or Disinterested Directors or otherwise.
E. The Corporation may maintain insurance, at its expense, to protect
itself and any director, officer, employee or agent of the Corporation or
another corporation, partnership, joint venture, trust or other enterprise
against any expense, liability or loss, whether or not the Corporation would
have the power to indemnify such person against such expense, liability or loss
under the Delaware General Corporation Law.
F. The Corporation may, to the extent authorized from time to time by a
majority vote of the Disinterested Directors, grant rights to indemnification
and to the advancement of expenses to any employee or agent of the Corporation
to the fullest extent of the provisions of this Article with respect to the
indemnification and advancement of expenses of directors and officers of the
Corporation.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Amount
------
* Legal Fees and Expenses.................................. $ 110,000
* Printing, Postage and Mailing............................ 50,000
* Appraisal and Business Plan Fees and Expense............. 32,000
* Accounting Fees and Expenses............................. 75,000
* Blue Sky Filing Fees and Expenses
(including counsel fees)................................ 15,000
Conversion Agent and Proxy Solicitation Fees 6,500
** Marketing Agent Fees and Expenses........................ 160,000
* Marketing Agent Counsel Fees............................. 25,000
* Filing Fees (NASD, OTS and SEC).......................... 19,894
* Other Expenses........................................... 31,606
----------
* Total................................................... $525,000
==========
______________
* Estimated
** CBES Bancorp, Inc. has retained Trident Securities, Inc. ("Trident
Securities") to assist in the sale of common stock on a best efforts basis
in the Offerings. Trident Securities will receive fees of $150,000,
exclusive of estimated expenses of $10,000.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Not Applicable.
ITEM 27. EXHIBITS:
The exhibits filed as part of this registration statement are as
follows:
(a) LIST OF EXHIBITS
1.1 Engagement Letter between Community Bank of Excelsior Springs, A Savings
Bank and Trident Securities, Inc.
1.2 Form of Agency Agreement among CBES Bancorp, Inc., Community Bank of
Excelsior Springs, A Savings Bank and Trident Securities, Inc. *
2 Plan of Conversion
3.1 Certificate of Incorporation of CBES Bancorp, Inc.
3.2 Bylaws of CBES Bancorp, Inc.
3.3 Charter of Community Bank of Excelsior Springs, A Savings Bank
3.4 Bylaws of Community Bank of Excelsior Springs, A Savings Bank
4 Form of Common Stock Certificate of CBES Bancorp, Inc.
5 Opinion of Luse Lehman Gorman Pomerenk & Schick regarding legality of
securities being registered
8.1 Federal Tax Opinion of Luse Lehman Gorman Pomerenk & Schick
8.2 State Tax Opinion of KPMG Peat Marwick LLP*
8.3 Opinion of RP Financial LC. with respect to Subscription Rights
10.1 Proposed Stock Option and Incentive Plan
10.2 Proposed Recognition and Retention Plan
10.3 Form of Employment Agreement for Larry E. Hermreck, Deryl R. Goettling,
Margaret E. Teegarden and Dennis D. Hartman
10.4 Employee Stock Ownership Plan
10.5 Director Emeritus Agreements
10.6 Salary Continuation Agreement with Officer
21 Subsidiaries
23.1 Consent of Luse Lehman Gorman Pomerenk & Schick (contained in Opinions
included on Exhibits 5 and 8.1)
23.2 Consent of KPMG Peat Marwick LLP
23.3 Consent of RP Financial, LC
24 Power of Attorney (set forth on signature page)
27.1 EDGAR Financial Data Schedule
99.1 Appraisal Agreement between Community Bank of Excelsior Springs, A
Savings Bank and RP Financial, LC
99.2 Appraisal Report of RP Financial, LC
99.3 Proxy Statement
99.4 Marketing Materials
99.5 Order and Acknowledgment Form
________________________________
* To be filed supplementally or by amendment.
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(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 after the
effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
duration from the low or high and of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining 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.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
The small business issuer will provide to the underwriter at the
closing specified in the Underwriting Agreement certificates in such
documentation and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 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 Act and will be governed by the final adjudication of such
issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Excelsior Springs, Missouri on June
21, 1996.
CBES BANCORP, INC.
By: /s/ Larry E. Hermreck
-----------------------------------
Larry E. Hermreck
Chief Executive Officer
(Duly Authorized Representative)
POWER OF ATTORNEY
We, the undersigned directors and officers of CBES Bancorp, Inc. (the
"Company") hereby severally constitute and appoint Larry E. Hermreck as our true
and lawful attorney and agent, to do any and all things in our names in the
capacities indicated below which said Larry E. Hermreck may deem necessary or
advisable to enable the Company to comply with the Securities Act of 1933, and
any rules, regulations and requirements of the Securities and Exchange
Commission, in connection with the registration statement on Form S-1 or Form
SB-2 relating to the offering of the Company's Common Stock, including
specifically, but not limited to, power and authority to sign for us in our
names in the capacities indicated below the registration statement and any and
all amendments (including post-effective amendments) thereto; and we hereby
approve, ratify and confirm all that said Larry E. Hermreck shall do or cause to
be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and as of the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ Larry E. Hermreck Chief Executive Officer June 21, 1996
- --------------------------- (Principal Executive Officer)
Larry E. Hermreck
/s/ Dennis Hartman Controller (Principal June 21, 1996
- --------------------------- Accounting
Dennis Hartman and Financial Officer)
/s/ Richard Cox Director June 21, 1996
- ---------------------------
Richard Cox
/s/ Robert R. Lalumondier Director June 21, 1996
- ---------------------------
Robert R. Lalumondier
___________________________ Director ___________________
Cecil E. Lamb
/s/ Robert McCrorey Director June 21, 1996
- ---------------------------
Robert McCrorey
/s/ Edgar Radley Director June 21, 1996
- ---------------------------
Edgar Radley
/s/ Rodney Rounkles Director June 21, 1996
- ---------------------------
Rodney Rounkles
EXHIBIT INDEX
1.1 Engagement Letter between Community Bank of Excelsior Springs, A Savings
Bank and Trident Securities, Inc.
1.2 Form of Agency Agreement among CBES Bancorp, Inc., Community Bank of
Excelsior Springs, A Savings Bank and Trident Securities, Inc. *
2 Plan of Conversion
3.1 Certificate of Incorporation of CBES Bancorp, Inc.
3.2 Bylaws of CBES Bancorp, Inc.
3.3 Charter of Community Bank of Excelsior Springs, A Savings Bank
3.4 Bylaws of Community Bank of Excelsior Springs, A Savings Bank
4 Form of Common Stock Certificate of CBES Bancorp, Inc.
5 Opinion of Luse Lehman Gorman Pomerenk & Schick regarding legality of
securities being registered
8.1 Federal Tax Opinion of Luse Lehman Gorman Pomerenk & Schick
8.2 State Tax Opinion of KPMG Peat Marwick LLP*
8.3 Opinion of RP Financial, LC. with respect to Subscription Rights
10.1 Proposed Stock Option and Incentive Plan
10.2 Proposed Recognition and Retention Plan
10.3 Form of Employment Agreement for Larry E. Hermreck, Deryl R. Goettling,
Margaret E. Teegarden and Dennis D. Hartman
10.4 Employee Stock Ownership Plan
10.5 Director Emeritus Agreements
10.6 Salary Continuation Agreement with Officer
21 Subsidiaries
23.1 Consent of Luse Lehman Gorman Pomerenk & Schick (contained in Opinions
included on Exhibits 5 and 8.1)
23.2 Consent of KPMG Peat Marwick, L.L.P.
23.3 Consent of RP Financial, LC.
27.1 EDGAR Financial Data Schedule
24 Power of Attorney (set forth on signature page)
99.1 Appraisal Agreement between Community Bank of Excelsior Springs, A
Savings Bank and RP Financial, LC.
99.2 Appraisal Report of RP Financial, LC.
99.3 Proxy Statement
99.4 Marketing Materials
99.5 Order and Acknowledgment Form
_______________________________
* To be filed supplementally or by amendment.