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 March 31, 1998 [ ] 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 Section13 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 May 5, 1998 --------------------------- -------------------------- Common stock, .01 par value 969,607 CBES BANCORP, INC. AND SUBSIDIARIES Table of Contents PART I - FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Statements of Financial Condition at March 31, 1998 (unaudited) and June 30, 1997 .....................................1 Consolidated Statements of Earnings for the three months months ended March 31, 1998 and 1997 (unaudited) ..........................2 Consolidated Statements of Stockholders' Equity for the nine months ended March 31, 1998 (unaudited) .................................3 Consolidated Statements of Cash Flows for the nine months ended March 31, 1998 and 1997 (unaudited) .................................4 Notes to Consolidated Financial Statements (unaudited) ............................5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ....................................7 PART II - OTHER INFORMATION ......................................................................12 SIGNATURES .......................................................................................13 1 CBES BANCORP, INC. AND SUBSIDIARIES Consolidated Statements of Financial Condition March 31, 1998 and June 30, 1997 March 31, June 30, Assets 1998 1997 ------ ---- ---- (unaudited) Cash $ 703,987 588,056 Interest-bearing deposits in other financial institutions 5,519,743 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 98,000 100,000 Mortgage-backed securities held-to-maturity (estimated fair value of $91,663 and $156,176 respectively) 89,812 154,352 Loans held-for-sale, net 2,072,845 696,617 Loans receivable, net 102,695,984 90,320,430 Accrued interest receivable: Loans receivable 875,869 688,408 Investment securities 531 20,028 Mortgage-backed securities 1,199 1,697 Real Estate Owned 30,723 168,204 Stock in Federal Home Loan Bank (FHLB), at cost 810,700 810,700 Office property and equipment, net 1,650,685 1,237,823 Deferred income tax benefit - 7,000 Cash surrender value of life insurance and other assets 1,876,982 1,742,557 ------------ ----------- Total assets $116,427,060 101,076,486 ============ =========== Liabilities and Stockholders' Equity ------------------------------------ Liabilities: Deposits $ 82,942,951 70,692,900 FHLB advances and other borrowings 15,250,000 10,750,000 Accrued expenses and other liabilities 914,544 741,009 Accrued interest payable on deposits 118,602 97,966 Advance payments by borrowers for property taxes and insurance 454,039 725,518 Current income taxes payable 162,011 294,604 Deferred income taxes 15,517 - ------------ ----------- Total liabilities 99,857,664 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 9,881,061 9,728,357 Retained earnings, substantially restricted 9,255,486 8,777,980 Unrealized losses on available-for-sale securities, net of tax - (2,658) Treasury stock, 92,244 shares at cost (1,433,157) - Unearned employee ESOP shares (647,180) (739,440) Unearned recognition and retention plan shares (497,133) - ------------ ----------- Total stockholders' equity 16,569,396 17,774,489 ------------ ----------- Total liabilities and stockholders' equity $116,427,060 101,076,486 ============ =========== See accompanying notes to unaudited consolidated financial statements. 2 CBES BANCORP, INC. AND SUBSIDIARIES Consolidated Statements of Earnings (Unaudited) Three Months Ended Nine Months Ended March 31 March 31 ------------------ ----------------- 1998 1997 1998 1997 ------ ------ ------ ------ Interest income: Loans receivable $ 2,262,201 1,855,820 6,571,049 5,376,565 Mortgage-backed securities 1,811 3,955 5,710 15,588 Investment securities 135 12,331 19,711 54,793 Loans held-for-sale 36,112 (44,581) 78,766 (21,146) Other 53,850 29,972 138,098 66,311 --------- --------- --------- --------- Total interest income 2,354,109 1,857,497 6,813,334 5,492,111 --------- --------- --------- --------- Interest expense: Deposits 966,353 760,454 2,794,754 2,251,351 FHLB advances 188,383 98,914 480,196 369,612 --------- --------- - -------- --------- Total interest expense 1,154,736 859,368 3,274,950 2,620,963 --------- --------- --------- --------- Net interest income 1,199,373 998,129 3,538,384 2,871,148 Provision for loan losses 43,901 18,627 165,467 50,900 --------- --------- --------- --------- Net interest income after provision for loan losses 1,155,472 979,502 3,372,917 2,820,248 --------- --------- --------- --------- Non-interest income: Gain on sale of loans, net 100,822 38,223 248,666 125,593 Customer service charges 52,115 49,364 168,392 156,530 Loan servicing fees 8,476 39,316 43,479 80,793 Other 33,564 34,681 97,590 95,579 --------- --------- --------- --------- Total non-interest income 194,977 161,584 558,127 458,495 --------- --------- --------- --------- Non-interest expense: Compensation and benefits 551,282 396,373 1,645,161 1,054,570 Office property and equipment 108,263 72,342 274,668 219,774 Data processing 41,150 40,445 122,961 124,714 Federal insurance premiums 12,416 10,904 35,414 522,047 Advertising Real estate owned and repossessed assets 38,972 17,472 68,133 51,544 28,485 3,888 56,666 13,207 Other 194,675 164,422 524,275 404,111 --------- --------- --------- --------- Total non-interest expense 975,333 705,846 2,727,278 2,389,967 --------- --------- --------- --------- Earnings before income taxes 375,116 435,240 1,203,766 888,776 Income tax expense 137,691 178,511 450,013 348,740 --------- --------- --------- --------- Net earnings $ 237,425 256,729 753,753 540,036 ========= ========= ========= ========= Earnings per share-basic $ .26 .27 .79 .57 ========= ========= ========= ========= Earnings per share-diluted $ .25 .27 .79 .57 ========= ========= ========= ========= Basic weighted average shares 927,182 946,877 952,051 944,707 Common stock equivalents-stock options 17,352 - 4,051 - --------- --------- --------- --------- Diluted weighted average shares 944,534 946,877 956,102 944,707 ========= ========= ========= ========= See accompanying notes to unaudited consolidated financial statements. 3 CBES BANCORP, INC. AND SUBSIDIARIES Consolidated Statement of Stockholders' Equity For the nine months ended March 31, 1998 (Unaudited) Additional Issued Common paid-in Retained Treasury shares stock capital earnings stock ---------- ----------- --------- -------- ------ Balance at June 30, 1997 1,024,958 $10,250 9,728,357 8,777,980 - Net earnings - - - 753,753 - Dividends declared - - - (276,247) - ($.10 per share payable April 24, 1998) Change in unrealized loss on securities available- for-sale, net of tax - - - - - Purchase of 92,244 shares of Treasury Stock - - - - (2,090,907) Adoption of recognition and retention plan (RRP) 6,893 69 52,371 - 657,750 Amortization of RRP - - - - - Allocation of ESOP shares - - 100,333 - - --------- -------- --------- -------- ----------- Balance at March 31, 1998 1,031,851 $ 10,319 9,881,061 9,255,486 (1,433,157) ========= ======== ========= ======== =========== 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 - - - 753,753 Dividends declared - - - (276,247) ($.10 per share payable April 24, 1998) Change in unrealized loss on securities available- for-sale, net of tax 2,658 - - 2,658 Purchase of 92,244 shares of Treasury Stock - - - (2,090,907) Adoption of recognition and retention plan (RRP) - - (710,190) - Amortization of RRP - - 213,057 213,057 Allocation of ESOP shares - 92,260 - 192,593 --------- -------- --------- ---------- Balance at March 31, 1998 - (647,180) (497,133) 16,569,396 ========= ======== ========= ========== See accompanying notes to unaudited consolidated financial statements. 4 CBES BANCORP, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows For the nine months ended March 31, 1998 and 1997 (Unaudited) 1998 1997 ---- ---- Cash flows from operating activities: Net earnings $ 753,753 540,036 Adjustments to reconcile net earnings to net cash provided by operating activities: Provision for loan losses 165,467 50,900 Depreciation 138,193 109,545 Amortization of RRP 213,057 - Allocation of ESOP shares 192,593 76,593 Proceeds from sale of loans held for sale 13,967,050 8,915,671 Originations of loans held for sale (15,094,612) (8,723,678) Gain on sale of loans, net (248,666) (125,593) Premium amortization and accretion of discounts and deferred loan fees (350,178) (245,616) Deferred income taxes 20,745 27,417 Changes in assets and liabilities: Accrued interest receivable (167,466) (56,540) Other assets (134,425) 114,119 Accrued expenses and other liabilities 173,535 4,546 Accrued interest payable on deposits 20,636 5,157 Current income taxes payable (132,593) 231,473 ----------- ----------- Net cash (used in) provided by operating activities (482,911) 924,030 ----------- ----------- Cash flows from investing activities: Net increase in loans receivable (12,052,612) (5,971,792) Mortgage-backed securities principal repayments 64,540 192,495 Maturing securities 1,002,000 1,000,000 Purchase of office property equipment (551,055) (78,565) ----------- ----------- Net cash used in investing activities $(11,537,127) (4,857,862) ----------- ----------- Cash flows from financing activities: Increase in deposits $ 12,250,051 2,819,806 Proceeds from FHLB advances 9,000,000 20,000,000 Repayments of FHLB advances (4,500,000) (27,000,000) Decrease in advance payments by borrowers for property taxes and insurance (271,479) (230,633) Issuance of common stock, net of issuance costs of $512,500 - 8,917,120 Dividends paid (276,247) - Treasury stock purchased (2,090,907) - ----------- ----------- Net cash provided by financing activities 14,111,418 4,506,293 ----------- ----------- Net increase (decrease) in cash and cash equivalents 2,091,380 572,461 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 $ 6,223,730 4,031,820 =========== =========== Supplemental disclosure of cash flow information: Cash paid during the period for income taxes $ 561,861 89,850 =========== =========== Cash paid during the period for interest $ 3,254,314 2,615,806 =========== =========== Supplemental schedule of noncash activities: Conversion of loans to real estate owned $ 166,684 19,671 =========== =========== Conversion of real estate owned to loans $ 304,165 - =========== =========== See accompanying notes to unaudited consolidated financial statements. 5 CBES BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) March 31, 1998 (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 nine month periods ended March 31, 1998 are not necessarily indicative of the results which may be expected for the entire year. The Company plans to adopt the provisions of Statement of Financial Accounting Standards Number 130 (Comprehensive Income), effective July 1, 1998. The Company anticipates that the only component of other comprehensive income will be the unrealized gain/loss on Available-For-Sale securities. (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 (Earnings Per Share). 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 nine months ended March 31, 1998 was $61,262 and $192,593 respectively. (6) Capital Stock Transactions -------------------------- The Company completed the purchase of 40,000 shares of Treasury stock for $875,750 in December 1997, 9,000 shares of Treasury stock for $195,750 in January 1998, 41,000 shares of Treasury stock for 961,344 in February 1998, and 2,444 shares of Treasury stock for $58,063 in March 1998. These purchases complete the Company's plan to acquire 92,244 shares in a buyback program. 6 (7) 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 for the three months and the nine months ended March 31, 1998 was $35,510 and 213,057 respectively. The unamortized cost of the RRP awards at March 31, 1998 was $497,133. 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 exercise 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 exercised by the recipients during the quarter ended March 31, 1998. 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 March 31, 1998 to the financial condition at June 30, 1997, its fiscal year-end, and the results of operations for the three months and nine months ended March 31, 1998, with the same periods in 1997. 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 opened a full service branch in Liberty, Missouri on March 16, 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 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. 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 $15.3 million, or 15.1%, to $116.4 at March 31, 1998 from $101.1 million at June 30, 1997. This was primarily due to an increase in net loans receivable and loans held for sale of $13.8 million, which were funded primarily with deposits. Net loans receivable and loans held for sale increased by $13.8 million, or 15.2%, to $104.8 million at March 31, 1998 from $91.0 million at June 30, 1997 primarily due to increases in one-to-four family portfolio loans of $2.3 million, one-to-four family construction loans of $8.5 million, non-residential loans of $1.2 million, and land loans of $1.5 million. Deposits increased $12.2 million, or 17.3%, to $82.9 million at March 31, 1998 from $70.7 million at June 30, 1997. The increase in deposits is primarily due to $11.3 million in new certificates of deposit. FHLB advances increased $4.5 million, or 41.7%, to $15.3 million at March 31, 1998 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 March 31, 1998 and - ----------------------------------------------------------------------------- 1997 - ---- Performance Summary. In the three months ended March 31, 1998, the Company had net earnings of $237,000 compared to net earnings of $257,000 for the three months ended March 31, 1997. The most significant items causing the decrease in earnings were an increase in interest income of $497,000 offset by an increase in interest expense of $295,000, and an increase in non-interest expense of $269,000. Net Interest Income. For the three months ended March 31, 1998, net interest income increased by $201,000, or 20.1%, to $1,199,000 from $998,000 for the three months ended March 31, 1997. The increase reflected an increase of $497,000 in interest income, to $2,354,000 from $1,857,000 and an increase of $295,000 in interest expense to $1,155,000 from $860,000. Provision for Loan Losses. During the three months ended March 31, 1998, the Bank charged $44,000 against earnings as a provision for loan losses compared to a provision of $19,000 for the three months ended March 31, 1997. 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 $569,000 or .55% of loans receivable, net at March 31, 1998 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 March 31, 1998, non-interest income increased $33,000 to $195,000 from $162,000 for the prior year period primarily due to an increase in gain on the sale of loans of $63,000, offset by a decrease in loan servicing fees of $31,000. 9 Non-Interest Expense. Non-interest expense increased by $269,000 to $975,000 for the three months ended March 31, 1998 from $706,000 for the three months ended March 31, 1997. Of this increase, $155,000 was attributable to compensation, of which $22,000 was due to the ESOP plan, $ 39,000 was due to the adoption of the Recognition and Retention plan, and $102,000 was due to an increase in the number of employees and general wage increases, $36,000 was due to office property and equipment expense, $22,000 was due to advertising, and $25,000 was due to REO and Repossessed Asset expense. The increase is primarily due to the Company pursuing its plan of controlled growth, part of that being the opening of the branch office in Liberty, Missouri. Comparison of Operating Results for the Nine Months Ended March 31, 1998 and - ---------------------------------------------------------------------------- 1997 - ---- Performance Summary. In the nine months ended March 31, 1998, the Company had net income of $754,000 compared to net earnings of $540,000 for the nine months ended March 31, 1997. The most significant items causing the increase in earnings were an increase in interest income of $1,321,000 and a decrease in Federal Insurance premiums of $487,000, 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 $654,000, and an increase in non-interest expense of $337,000. Net Interest Income. For the nine months ended March 31, 1998, net interest income increased by $667,000, or 23.2%, to $3,538,000 from $2,871,000 for the nine months ended March 31, 1997. The increase reflected an increase of $1,321,000 in interest income, to $6,813,000 from $5,492,000, offset by an increase of $654,000 in interest expense to $3,275,000 from $2,621,000. Provision for Loan Losses. During the nine months ended March 31, 1998, the Bank charged $165,000 against earnings as a provision for loan losses compared to a provision of $51,000 for the nine months ended March 31, 1997. 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 $569,000 or .55% of loans receivable, net at March 31, 1998 compared to $436,000, or .48% of loans receivable, net at June 30, 1997. Non-interest Income. For the nine months ended March 31, 1998, non-interest income increased $100,000 to $558,000 from $458,000 for the prior year period primarily due to an increase in gain on the sale of loans of $123,000, and an increase in customer service charges of $12,000, offset by a decrease in loan servicing fees of $37,000. Non-interest Expense. Non-interest expense increased by $337,000 to $2,727,000 for the nine months ended March 31, 1998 from $2,390,000 for the nine months ended March 31, 1997. Of this increase, $591,000 was attributable to compensation, of which $121,000 was due to the ESOP plan, $222,000 was due to the adoption of the Recognition and Retention plan, and $253,000 was due to an increase in the number of employees and general wage increases, $55,000 was due to office property and equipment expense, $17,000 was due to advertising, $43,000 was due to REO and Repossessed Asset expense, and $120,000 was due to other non-interest expense, offset by a decrease in federal insurance premiums of $487,000. The increase is primarily due to the Company pursuing its plan of controlled growth, part of that being the opening of the branch office in Liberty, Missouri. Non-performing Assets - --------------------- On March 31, 1998, nonperforming assets were $618,000 compared to $1,157,000 on June 30, 1997. The balance of the Bank's allowance for loan losses was $569,000 at March 31, 1998, or 92.1% 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 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 March 31, 1998: Actual Required Excess amount/percent amount/percent amount/percent -------------- -------------- -------------- (Dollars in thousands) FIRREA REQUIREMENTS ------------------- Tangible capital $13,675 11.75% 1,746 1.50% 11,929 10.25% Core leverage capital $13,675 11.75% 4,656 4.00% 9,019 7.75% Risk-based capital $14,065 14.32% 7,859 8.00% 6,206 6.32% Liquidity - --------- The Bank's principal sources of funds are deposits, principal and interest payments on loans, and deposits in other insured institutions. 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 March 31, 1998 and June 30, 1997 were 6.48% 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 March 31, 1998 and 1997 were $6,223,730 and $4,031,820 respectively. Cash flows from operating activities. Net cash used in operating activities was $483,000 during the nine months ended March 31, 1998 compared to $924,000 provided by operating activities during the same period in 1997. The change was primarily due to an increase in net earnings of $214,000, an increase in the proceeds from the sale of loans held for sale of $5,051,000, and amortization of the recognition and retention plan of $213,000 adopted October 28, 1998, offset by an increase in the originations of loans held for sale of $6,371,000, a decrease in the change in other assets of $249,000, and a decrease in the change in current income taxes payable of $364,000. Cash flows from investing activities. Net cash of $11.5 million was used in investing activities for the nine months ended March 31, 1998 versus $4.9 million for the nine months ended March 31, 1997. The decrease was primarily due to an increase in loans receivable of $12.1 million during the nine months ended March 31, 1998 versus a $6.0 million increase during the same period in 1997. Cash flows from financing activities. Net cash provided by financing activities was $14.1 million for the nine months ended March 31, 1998 compared to $4.5 million during the same period in 1997. The increase in cash flows from financing activities is primarily due to an increase in deposits of $12.3 million for the nine months ended March 31, 1998 versus an increase of $2.8 million for the same period in 1997. 11 Capability of the Bank's Data Processing Hardware to Accommodate the Year 2000 Like many financial institutions the Bank relies upon computers for the daily conduct of its business and for data processing generally. There is concern among industry experts that on January 1, 2000 computers will be unable to "read" the new year and there may be widespread computer malfunctions. The Bank generally relies on independent third parties to provide data processing services to the Bank, and has been advised by its data processing service center that the issue has been addressed. The Bank recognized that a comprehensive and coordinated plan of action was needed to ensure complete readiness to perform Year 2000 processing. A Year 2000 Committee has been formed to initiate and implement the Year 2000 project, policies, document readiness of the Bank to accommodate Year 2000 processing, and to track and test progress towards full compliance. The Bank contracts with service bureaus to provide the majority of its data processing. The Bank is in the process of ensuring that external vendors and servicers are adequately addressing the system and software issues related to the Year 2000 by obtaining written system certifications that the system is fully Year 2000 compliant or that the vendor has a plan to become fully compliant in the very near future. In the evaluation, the Bank will ensure that critical operations will continue if servicers or vendors are unable to achieve the Year 2000 requirements. Any changes are scheduled to be implemented by December 31, 1998. 12 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 --------------------------------------------------- None. Item 5. Other Information ----------------- None. Item 6. Exhibits and Reports on Form 8-K -------------------------------- Exhibits 27-Financial Data Schedule 13 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 there unto duly authorized. CBES Bancorp, Inc. and Subsidiaries ----------------------------------- (Registrant) Date: May 12, 1998 ---------------------------------- By: /s/ Larry E. Hermreck ---------------------------------------------- Larry E. Hermreck, Chief Executive Officer and Secretary (Duly Authorized Officer) Date: May 12, 1998 --------------------------------- By: /s/ Dennis D. Hartman ----------------------------------------------- Dennis Hartman, Controller and Chief Financial Officer (Principal Financial Officer)