SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________ COMMISSION FILE NUMBER 0-21163 ------------ CBES BANCORP,INC. ----------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) DELAWARE 43-1753244 -------------------------------------------------------------- (State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.) 1001 N. JESSE JAMES ROAD, EXCELSIOR SPRINGS, MO 64024 ----------------------------------------------------- (Address of principal executive offices) (816 630-6711) --------------------------- (Issuer's telephone number) NOT APPLICABLE ---------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common equity, as of the last practicable date: Class Outstanding at February 5, 1998 --------------------------- ------------------------------- Common stock, .01 par value 1,012,851 CBES BANCORP, INC. AND SUBSIDIARIES TABLE OF CONTENTS PART I - FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Statements of Financial Condition at December 31, 1997 and June 30, 1997.......................................... 1 Consolidated Statements of Earnings for the three months and six months ended December 31, 1997 and 1996......................... 2 Consolidated Statements of Stockholders' Equity for the six months ended December 31, 1997.................................. 3 Consolidated Statements of Cash Flows for the six months ended December 31, 1997 and 1996...................................... 4 Notes to Consolidated Financial Statements........................ 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................. 7 PART II - OTHER INFORMATION...............................................11 SIGNATURES................................................................12 1 CBES BANCORP,INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION DECEMBER 31, 1997 AND JUNE 30, 1997 December 31, June 30, Assets 1997 1997 ------ ------------ ------------ (unaudited) Cash $ 821,830 588,056 Interest-bearing deposits in other financial institutions 5,360,526 3,544,294 Investment securities available-for-sale (amortized cost of $1,000,750 at June 30, 1997) - 996,320 Investment securities held-to-maturity 100,000 100,000 Mortgage-backed securities held-to-maturity (estimated fair value of $98,702 and $156,176 respectively) 97,011 154,352 Loans held-for-sale, net 1,089,502 696,617 Loans receivable, net 98,591,969 90,320,430 Accrued interest receivable: Loans receivable 791,844 688,408 Investment securities 2,167 20,028 Mortgage-backed securities 1,295 1,697 Real Estate Owned 242,418 168,204 Stock in Federal Home Loan Bank (FHLB), at cost 810,700 810,700 Office property and equipment, net 1,405,098 1,237,823 Deferred income tax benefit - 7,000 Cash surrender value of life insurance and other assets 1,812,982 1,742,557 ------------ ----------- Total assets $111,127,342 101,076,486 ============ =========== Liabilities and Stockholders' Equity ------------------------------------ Liabilities: Deposits $ 80,094,860 70,692,900 FHLB advances and other borrowings 12,250,000 10,750,000 Accrued expenses and other liabilities 768,575 741,009 Accrued interest payable on deposits 94,645 97,966 Advance payments by borrowers for property taxes and insurance 213,372 725,518 Current income taxes payable 152,579 294,604 Deferred income taxes 15,517 - ------------ ----------- Total liabilities 93,589,548 83,301,997 ------------ ----------- Stockholders' equity: Preferred stock, $.01 par, 500,000 shares authorized, none issued or outstanding - - Common stock, $.01 par; 3,500,000 shares authorized, 1,031,851 and 1,024,958 shares issued, respectively 10,319 10,250 Additional paid-in capital 9,845,579 9,728,357 Retained earnings, substantially restricted 9,105,499 8,777,980 Unrealized losses on available-for-sale securities, net of tax - (2,658) Treasury stock, 10,000 shares at cost (218,000) - Unearned recognition and retention plan shares (532,643) - Unearned employee ESOP shares (672,960) (739,440) ------------ ----------- Total stockholders' equity 17,537,794 17,774,489 ------------ ----------- Total liabilities and stockholders' equity $111,127,342 101,076,486 ============ =========== See accompanying notes to unaudited consolidated financial statements. 2 CBES BANCORP,INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) Three Months Ended Six Months Ended December 31 December 31 ---------------------------- ---------------------------- 1997 1996 1997 1996 ------------ ------------ ------------ ------------ Interest income: Loans receivable $ 2,208,037 1,773,371 4,308,848 3,520,745 Mortgage-backed securities 1,961 5,688 3,899 11,633 Investment securities 8,178 15,696 19,576 42,462 Loans held-for-sale 26,710 9,754 42,654 23,435 Other 46,373 15,938 84,248 36,339 ------------ ------------ ------------ ------------ Total interest income 2,291,259 1,820,447 4,459,225 3,634,614 ------------ ------------ ------------ ------------ Interest expense: Deposits 945,511 729,842 1,828,401 1,490,897 FHLB advances 156,318 91,264 291,813 270,698 ------------ ------------ ------------ ------------ Total interest expense 1,101,829 821,106 2,120,214 1,761,595 ------------ ------------ ------------ ------------ Net interest income 1,189,430 999,341 2,339,011 1,873,019 Provision for loan losses 41,588 13,934 121,566 32,273 ------------ ------------ ------------ ------------ Net interest income after provision for loan losses 1,147,842 985,407 2,217,445 1,840,746 ------------ ------------ ------------ ------------ Noninterest income: Gain on sale of loans, net 91,109 38,992 147,844 87,370 Customer service charges 54,461 55,305 116,277 107,166 Loan servicing fees 17,224 20,684 35,003 41,477 Other 29,478 28,679 64,026 60,898 ------------ ------------ ------------ ------------ Total noninterest income 192,272 143,660 363,150 296,911 ------------ ------------ ------------ ------------ Noninterest expense: Compensation and benefits 675,872 351,130 1,093,879 658,197 Office property and equipment 86,912 76,287 166,405 147,432 Data processing 43,138 38,768 81,811 84,269 Federal insurance premiums 11,585 18,874 22,998 511,143 Advertising 18,194 24,460 29,161 34,072 Real estate owned and repossessed assets 249 2,441 28,181 9,319 Other 171,632 126,850 329,510 239,689 ------------ ------------ ------------ ------------ Total noninterest expense 1,007,582 638,810 1,751,945 1,684,121 ------------ ------------ ------------ ------------ Earnings before income taxes 332,532 490,257 828,650 453,536 Income tax expense 121,066 189,149 312,322 170,229 ------------ ------------ ------------ ------------ Net earnings $ 211,466 301,108 516,328 283,307 ============ ============ ============ ============ Earnings per share-basic and diluted $ .22 .32 .54 .30 ============ ============ ============ ============ Basic weighted average shares 975,533 944,282 964,215 943,622 Common stock equivalents-stock options 5,630 - 401 - ------------ ------------ ------------ ------------ Diluted weighted average shares 981,163 944,282 964,616 943,622 ============ ============ ============ ============ See accompanying notes to unaudited consolidated financial statements. 3 CBES BANCORP,INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED) Additional Issued Common paid-in Retained Treasury shares stock capital earnings stock ------------- ------------- ------------- ------------- ------------- Balance at June 30, 1997 1,024,958 $ 10,250 9,728,357 8,777,980 - Net earnings - - - 516,328 - Dividends declared - - - (188,809) - ($.10 per share payable January 22, 1998) Change in unrealized loss on securities available- for-sale, net of tax - - - - - Purchase of 40,000 shares of Treasury Stock - - - - (875,750) Adoption of recogntion and retention plan (RRP) 6,893 69 52,371 - 657,750 Amortization of RRP - - - - - Allocation of ESOP shares - - 64,851 - - ------------- ------------- ------------- ------------- ------------- Balance at December 31, 1997 1,031,851 $ 10,319 9,845,579 9,105,499 (218,000) ============= ============= ============= ============= ============= Unearned Unearned Net employee recognition unrealized stock & retention Total gain (loss) ownership plan stockholders' on securities shares shares equity ------------- ------------- ------------- ------------- Balance at June 30, 1997 (2,658) (739,440) - 17,774,489 Net earnings - - - 516,328 Dividends declared - - - (188,809) ($.10 per share payable January 22, 1998) Change in unrealized loss on securities available- for-sale, net of tax 2,658 - - 2,658 Purchase of 40,000 shares of Treasury Stock - - - (875,750) Adoption of recogntion and retention plan (RRP) - - (710,190) - Amortization of RRP - - 177,547 177,547 Allocation of ESOP shares - 66,480 - 131,331 ------------- ------------- ------------- ------------- Balance at December 31, 1997 - (672,960) (532,643) 17,537,794 ============= ============= ============= ============= See accompanying notes to unaudited consolidated financial statements. 4 CBES BANCORP,INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996 (UNAUDITED) 1997 1996 ----------- ----------- Cash flows from operating activities: Net earnings $ 516,328 283,307 Adjustments to reconcile net earnings to net cash provided by operating activities: Provision for loan losses 121,566 32,273 Depreciation 86,386 71,859 Amortization of RRP 177,547 - Allocation of ESOP shares 131,331 36,010 Proceeds from sale of loans held for sale 8,322,405 6,423,880 Originations of loans held for sale (8,567,446) (6,169,485) Gain on sale of loans, net (147,844) (87,370) Premium amortization and accretion of discounts and deferred loan fees (235,855) (160,540) Deferred income taxes 20,745 24,061 Changes in assets and liabilities: Accrued interest receivable (85,173) (1,525) Other assets (70,425) 102,179 Accrued expenses and other liabilities 27,566 (156,048) Accrued interest payable on deposits (3,321) (20,908) Current income taxes payable (142,025) 82,347 ----------- ----------- Net cash provided by operating activities 151,785 460,040 ----------- ----------- Cash flows from investing activities: Net increase in loans receivable (8,230,714) (3,526,800) Mortgage-backed securities principal repayments 57,341 43,180 Maturing securities 1,000,000 1,000,000 Purchase of office property equipment (253,661) (56,150) ----------- ----------- Net cash used in investing activities $(7,427,034) (2,539,770) ----------- ----------- Cash flows from financing activities: Decrease in deposits $ 9,401,960 (3,385,508) Proceeds from FHLB advances 6,000,000 16,500,000 Repayments of FHLB advances (4,500,000) (20,000,000) Decrease in advance payments by borrowers for property taxes and insurance (512,146) (439,502) Issuance of common stock, net of issuance costs of $512,500 - 8,917,120 Dividends paid (188,809) - Treasury stock purchased (875,750) - ----------- ----------- Net cash provided by financing activities 9,325,255 1,592,110 ----------- ----------- Net increase (decrease) in cash and cash equivalents 2,050,006 (487,620) Cash and cash equivalents at the beginning of the period 4,132,350 3,459,359 ----------- ----------- Cash and cash equivalents at the end of the period $ 6,182,356 2,971,739 =========== =========== Supplemental disclosure of cash flow information: Cash paid during the period for income taxes $ 433,602 63,821 =========== =========== Cash paid during the period for interest $ 2,123,535 1,782,503 =========== =========== See accompanying notes to unaudited consolidated financial statements. 5 CBES BANCORP,INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) DECEMBER 31, 1997 (1) CBES BANCORP,INC. AND SUBSIDIARIES ---------------------------------- CBES Bancorp, Inc. (the Company) was incorporated under the laws of the state of Delaware for the purpose of becoming the savings and loan holding company of Community Bank of Excelsior Springs, a Savings Bank (the Bank) in connection with the Bank's conversion from a federally chartered mutual savings bank to a federally chartered stock savings bank, pursuant to its Plan of Conversion. On August 12, 1996, the Company commenced a Subscription and Community Offering of its shares in connection with the conversion of the Bank (the Offering). The Offering was consummated and the Company acquired the Bank on September 27, 1996. The Company had no assets prior to the conversion and acquisition on September 27, 1996. (2) BASIS OF PREPARATION -------------------- The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-QSB. To the extent that information and footnotes required by generally accepted accounting principles for complete financial statements are contained in or consistent with the audited financial statements incorporated by reference in the Company's Annual Report on Form 10- KSB for the year ended June 30, 1997, such information and footnotes have not been duplicated herein. In the opinion of management, all adjustments, consisting only of normal recurring accruals, which are necessary for the fair presentation of the interim financial statements have been included. The statement of earnings for the three month and six month periods ended December 31, 1997 are not necessarily indicative of the results which may be expected for the entire year. The June 30, 1997 consolidated balance sheet has been derived from the audited consolidated financial statements as of that date. (3) EARNINGS PER SHARE ------------------ Effective for the quarter ending December 31, 1997, the Company adopted the provisions of Statement of Financial Accounting Standards No. 128. Under this statement basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. (5) EMPLOYEE STOCK OWNERSHIP PLAN ----------------------------- All employees meeting age and service requirements are eligible to participate in an ESOP established on September 27, 1996. Contributions made by the Bank to the ESOP are allocated to participants by a formula based on compensation. Participant benefits become 100% vested after five years. The ESOP purchased 81,996 shares in the Bank's conversion. The ESOP expense for the three months and six months ended December 31, 1997 was $77,911 and $131,331 respectively. (6) CAPITAL STOCK TRANSACTIONS -------------------------- In December 1997, the Company completed the purchase of 40,000 shares for $875,750. This purchase was the first purchase in the Company's plan to acquire 92,244 shares in a buyback program to be completed by December 1, 1998. 6 (7) STOCK OPTION AND RECOGNITION AND RETENTION PLAN ----------------------------------------------- Stock Option and Recognition and Retention Plan The shareholders approved the adoption of a stock option plan and a recognition and retention plan (RRP) in October 1997. Under the RRP, common stock aggregating 40,998 shares may be awarded to certain officers and directors of the Company. In October 1997, the Company awarded 36,893 shares with a market value of $710,190. These shares have been reflected as unearned employee benefits in the accompanying consolidated balance sheet. Under the provisions of the RRP, the participants immediately vested in twenty percent of the shares and vest in the remaining shares in twenty percent increments over the next four years. As the awards vest, they are reflected as compensation expense. The amortization of the RRP awards during the quarter ended December 31, 1997 was $177,547. The unamortized cost of the RRP awards at December 31, 1997 was $532,643. Under the stock option plan, options to acquire 102,495 shares of the Company's common stock may be granted to certain officers and directors of the Company. In October 1997, the Company awarded options to acquire 92,247 shares of stock. The options enable the recipients to purchase stock at an excercise price equal to the fair market value of the stock at the date of grant ($19.25). Under provisions of the stock option plan, the participants immediately vested in twenty percent of the options and vest in the remaining shares in twenty percent increments over the next four years. No stock options have been excercised by the recipients during the quarter ended December 31, 1997. SFAS No. 123, "Accounting for Stock-Based Compensation" requires pro forma disclosures for companies that do not adopt its fair value method for stock- based employee compensation. Accordingly, the following pro forma information presents net income and earnings per share had the Standard's fair value method been used to measure compensation cost for stock options granted during the six months ended December 31, 1997. No compensation cost was actually recognized for stock options for the six months ended December 31, 1997. Net income as reported $516,328 Pro forma net income $474,138 Basic earnings per share as reported $ 0.54 Basic pro forma earnings per share $ 0.49 The fair value of options granted of $92,247 was estimated using the following weighted-average information: risk-free interest rate of 5.51%, expected life of 8 years, expected volatility of stock price of 5.07%, and expected dividends of 2.24% per year. 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion compares the financial condition of CBES Bancorp,Inc. (the Company) and its wholly-owned subsidiary, Community Bank of Excelsior Springs, a Savings Bank, (the Bank) at December 31, 1997 to the financial condition at June 30, 1997, its fiscal year-end, and the results of operations for the three months and six months ended December 31, 1997, with the same periods in 1996. This discussion should be read in conjunction with the interim financial statements and notes which are included herein. GENERAL - ------- CBES Bancorp,Inc. was organized as a Delaware corporation in June 1996 to acquire all of the capital stock issued by Community Bank of Excelsior Springs, a Savings Bank upon its conversion from the mutual to stock form of ownership. Community Bank of Excelsior Springs, a Savings Bank was founded in 1931 as a Missouri chartered savings and loan association located in Excelsior Springs, Missouri. In 1995, its members voted to convert to a federal charter. The business of the holding company consists primarily of the business of the Bank. The Bank conducts its business through its main office in Excelsior Springs, Clay County, Missouri and its full service branch office located in Kearney, Clay County, Missouri. The Bank plans to open a full service branch in Liberty, Missouri in early 1998. The Bank has been, and intends to continue to be, a community oriented financial institution offering selected financial services to meet the needs of the community 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. The most significant outside factors influencing the operations of the Bank and other financial institutions include general economic conditions, competition in the local market place and the related monetary and fiscal policies of agencies that regulate financial institutions. More specifically, the cost of funds primarily consisting of insured deposits is influenced by interest rates on competing investments and general market rates of interest, while lending activities are influenced by the demand for real estate financing and other types of loans, which in turn is affected by the interest rates at which such loans may be offered and other factors affecting loan demand and funds availability. The deposits of the Bank are presently insured by the Savings Association Insurance Fund ("SAIF"), which together with the Bank Insurance Fund ("BIF") are the two insurance funds administered by the FDIC. Legislation enacted on September 30, 1996 provided for a one-time special assessment of .657% of the Bank's SAIF insured deposits at March 31, 1995. The purpose of the assessment was to bring the SAIF to its statutory reserve ratio. Based on the above formula, the Bank charged $441,000 against earnings for the quarter ended September 30, 1996. Although the special one-time assessment significantly increased noninterest expense for that quarter, the reduction in the premium schedule is reducing the Bank's federal insurance premiums for the future periods. Congress may consider legislation requiring all federal thrift institutions, such as the Bank, to either convert to a national bank or a state depository institution by January 1, 1999. In addition, the Company might no longer be regulated as a thrift holding company, but rather as a bank holding company. The Office of Thrift Supervision (OTS) also might be abolished and its functions transferred among the federal banking regulators. Certain aspects of the legislation remain to be resolved and, therefore, no assurance can be given as to whether or in what form the legislation will be enacted or its effect on the Company and the Bank. 8 FINANCIAL CONDITION - ------------------- Total assets increased $10.1 million, or 9.9%, to $111.1 at December 31, 1997 from $101.1 million at June 30, 1997. This was primarily due to an increase in loans receivable, net of $8.7 million, which were funded primarily with deposits. Loans receivable, net increased by $8.7 million, or 9.6%, to $99.7 million at December 31, 1997 from $91.0 million at June 30, 1997 due to increases in one- to-four family portfolio loans of $2.0 million and an increase in one-to-four family construction loans of $6.7 million. Deposits increased $9.4 million, or 13.3%, to $80.1 million at December 31, 1997 from $70.7 million at June 30, 1997. The increase in deposits is primarily due to $8.7 million in new certificates of deposit. FHLB advances increased $1.5 million, or 13.9%, to $12.3 million at December 31, 1997 from $10.8 million at June 30, 1997. The increase in FHLB advances was primarily used to increase liquidity. COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 AND - -------------------------------------------------------------------------------- 1996 - ---- Performance Summary. In the quarter ended December 31, 1997, the Company had net earnings of $211,000 compared to net earnings of $301,000 for the quarter ended December 31, 1996. The decrease in earnings was primarily due to an increase in interest income of $471,000, an increase in gain on the sale of loans of $52,000, a decrease in income taxes of $68,000, offset by an increase in interest expense of $281,000, an increase in provision for loan loss of $28,000, an increase in compensation of $325,000, and an increase in other non- interest expense of $45,000. Net Interest Income. For the three months ended December 31, 1997, net interest income increased by $190,000, or 19.0%, to $1,189,000 from $999,000 for the three months ended December 31, 1996. The increase reflected an increase of $471,000 in interest income, to $2,291,000 from $1,820,000 and an increase of $281,000 in interest expense to $1,102,000 from $821,000. Provision for Loan Losses. During the three months ended December 31, 1997, the Bank charged $42,000 against earnings as a provision for loan losses compared to a provision of $14,000 for the three months ended December 31, 1996. The increase in provision for loan losses is a result of an overall increase in the loan portfolio, and in particular one-to-four family construction loans, and one-to-four family portfolio loans. This provision resulted in an allowance for loan losses of $544,000 or .55% of loans receivable, net at December 31, 1997 compared to $436,000, or .48% of loans receivable, net at June 30, 1997. The allowance for loan losses is based on a detailed review of nonperforming 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 three months ended December 31, 1997, noninterest income increased $48,000 to $192,000 from $144,000 for the prior year period primarily due to an increase in gain on the sale of loans of $52,000, offset by a decrease in loan servicing fees of $3,000. 9 Non-Interest Expense. Noninterest expense increased by $369,000 to $1,008,000 for the three months ended December 31, 1997 from $639,000 for the three months ended December 31, 1996. Of this increase, $325,000 was attributable to compensation, of which $43,000 was due to the ESOP plan, $183,000 was due to the adoption of the Recognition and Retention plan, of which $146,000 was due to the immediate vesting and $37,000 was an accrual for vesting for the upcoming year, and $98,000 was due to an increase in the number of employees and general wage increases. The increase in employees is due to staffing associated with opening the new branch in Liberty, Missouri in early 1998. COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 AND - ------------------------------------------------------------------------------ 1996 - ---- Performance Summary. In the six months ended December 31, 1997, the Company had net income of $516,000 compared to net earnings of $283,000 for the six months ended December 31, 1996. The increase in earnings was primarily due to an increase in interest income of $825,000, an increase in gain on the sale of loans of $60,000, a decrease in Federal Insurance premiums of $488,000, primarily due to the one-time special assessment of $441,000 to recapitalize SAIF charged in September of 1996, offset by an increase in interest expense of $359,000, an increase in the provision for loan loss of $89,000, an increase in compensation of $436,000, an increase in office property and equipment of $19,000, an increase in other non-interest expense of $90,000, and an increase in income taxes of $142,000. Net Interest Income. For the six months ended December 31, 1997, net interest income increased by $466,000, or 24.9%, to $2,339,000 from $1,873,000 for the six months ended December 31, 1996. The increase reflected an increase of $825,000 in interest income, to $4,459,000 from $3,635,000, offset by an increase of $359,000 in interest expense to $2,120,000 from $1,761,000. Provision for Loan Losses. During the six months ended December 31, 1997, the Bank charged $122,000 against earnings as a provision for loan losses compared to a provision of $32,000 for the six months ended December 31, 1996. The increase in provision for loan losses is a result of an overall increase in the loan portfolio, and in particular one-to-four family construction loans, and one-to-four family portfolio loans. This provision resulted in an allowance for loan losses of $544,000 or .55% of loans receivable, net at December 31, 1997 compared to $436,000, or .48% of loans receivable, net at June 30, 1997. Noninterest Income. For the six months ended December 31, 1997, noninterest income increased $66,000 to $363,000 from $297,000 for the prior year period primarily due to an increase in gain on the sale of loans of $60,000. Noninterest Expense. Noninterest expense increased by $68,000 to $1,752,000 for the six months ended December 31, 1997 from $1,684,000 for the six months ended December 31, 1996. Of this increase, $436,000 was attributable to compensation, of which $98,000 was due to the ESOP plan, $183,000 was due to the adoption of the Recognition and Retention plan, and $151,000 was due to an increase in the number of employees and general wage increases. The increase in employees is due to staffing associated with opening the new branch in Liberty, Missouri in early 1998. NONPERFOMING ASSETS - ------------------- On December 31, 1997, nonperforming assets were $600,000 compared to $1,157,000 on June 30, 1997. The balance of the Bank's allowance for loan losses was $544,000 or 90.6% of nonperforming assets. Loans are considered nonperforming when the collection of principal and/or interest is not probable, or in the event payments are more than ninety days delinquent. 10 CAPITAL RESOURCES - ----------------- The Bank is subject to three capital to asset requirements in accordance with Office of Thrift Supervision regulations. The following table is a summary of the Bank's regulatory capital requirements versus actual capital as of December 31, 1997: Actual Required Excess amount/percent amount/percent amount/percent --------------- -------------- --------------- (Dollars in thousands) Tangible capital $13,347 12.01% $1.667 1.50% $11,680 10.51% Core leverage capital 13,347 12.01% 3,333 3.00% 10,014 9.01% Risk-based capital 13,730 14.89% 7,376 8.00% 6,354 6.89% LIQUIDITY - --------- The Bank's principal sources of funds are deposits, principal and interest payments on loans, deposits in other insured institutions and investment securities classified as available-for-sale. While scheduled loan repayments and maturing investments are relatively predictable, deposit flows and early loan prepayments are more influenced by interest rates, general economic conditions and competition. Additional sources of funds may be obtained from the Federal Home Loan Bank of Des Moines by utilizing numerous available products to meet funding needs. The Bank is required to maintain levels of liquid assets as defined by regulations. The required percentage is currently 4% of net withdrawable savings deposits and borrowings payable on demand or in one year or less. The eligible liquidity ratios at December 31, 1997 and June 30, 1997 were 6.68% and 6.37%, respectively. In light of the competition for deposits, the Bank may utilize the funding sources of the Federal Home Loan Bank to meet demand in accordance with the Bank's growth plans. The wholesale funding sources may allow the Bank to obtain a lower cost of funding and create a more efficient liability match to the respective assets being funded. Given the current strong loan demand, it may be necessary for the Bank to continue to use advances. For purposes of the cash flow statements, all short-term investments with a maturity of three months or less at date of purchase are considered cash equivalents. Cash and cash equivalents at December 31, 1997 and 1996 were $6,182,356 and $2,971,739 respectively. Cash flows from operating activities. Net cash provided by operating activities decreased to $152,000 for the six months ended December 31, 1997 from $460,000 for the six months ended December 31, 1996. The decrease was primarily due to an increase in net earnings of $233,000, an increase in the proceeds from the sale of loans held for sale of $1,899,000, amortization of the recognition and retention plan of $178,000 adopted October 28, 1998, and an increase in the change of accrued expenses and other liabilities of $184,000, offset by an increase in the originations of loans held for sale of $2,398,000, a decrease in the change in other assets of $173,000, and a decrease in the change in current income taxes payable of $224,000. Cash flows from investing activities. Net cash of $7.4 million was used in investing activities for the six months ended December 31, 1997 versus $2.5 million for the six months ended December 31, 1996. The decrease was primarily due to an increase in loans receivable of $8.2 million during the six months ended December 31, 1997 versus a $3.5 million increase during the same period in 1996. Cash flows from financing activities. Net cash provided by financing activities was $9.3 million for the six months ended December 31, 1997 compared to $1.6 million during the same period in 1996. The increase in cash flows from financing activities is primarily due to an increase in deposits of $9.4 million for the six months ended December 31, 1997 versus a decrease of $3.4 million for the same period in 1996. 11 PART II - OTHER INFORMATION Item 1. Legal Proceedings ----------------- The holding company and the Bank are not involved in any pending legal proceedings incident to the business of the holding company and the Bank, which involve amounts in the aggregate which management believes are material to the financial condition and results of operation. Item 2. Changes in Securities --------------------- Not applicable. Item 3. Defaults Upon Senior Securities ------------------------------- Not applicable. Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- On October 28, 1997 the Company held its annual meeting of stockholders to consider the election of two directors of the Company, to ratify the adoption of the 1997 Stock Option and Incentive Plan, to ratify the adoption of the Recognition and Retention Plan, and to ratify the appointment of KPMG Peat Marwick LLP as the auditors of the Company for the fiscal year ending June 30, 1998. The results of the meeting were as follows: Edgar L. Radley was elected to serve as a director of the Company with 870,219 votes for and 11,100 votes withheld. Rodney G. Rounkles was elected to serve as a director of the Company with 870,294 votes for and 11,025 votes withheld. The CBES Bancorp, Inc. 1997 Stock Option and Incentive Plan was approved with 563,356 votes for, 36,538 votes against, 1,000 votes abstaining, and 280,425 broker non-votes. The CBES Bancorp, Inc. Recognition and Retention Plan was approved with 555,855 votes for, 45,413 votes against, 1,025 votes abstaining, and 279,826 broker non-votes. The appointment of KPMG Peat Marwick LLP to act as the Company's auditors for the fiscal year ending June 30, 1998 was ratified with 858,619 votes for and 22,500 votes against. Item 5. Other Information ----------------- None. Item 6. Exhibits and Reports on Form 8-K -------------------------------- Exhibits 27-Financial Data Schedule 12 SIGNATURES ---------- Pursuant to the requirement of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CBES Bancorp, Inc. and Subsidiaries ---------------------------------------------------- (Registrant) Date: February 11, 1998 ---------------------------------------------------- By: /s/ Larry E. Hermreck ---------------------------------------------------- Larry E. Hermreck, Chief Executive Officer and Secretary (Duly Authorized Officer) Date: February 11, 1998 ---------------------------------------------------- By: /s/ Dennis D. Hartman ---------------------------------------------------- Dennis D. Hartman, Controller and Chief Financial Officer (Principal Finacial Officer)