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 SEPTEMBER 30, 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 November 10, 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 September 30, 1998 (unaudited) and June 30, 1998................................................................... 1 Consolidated Statements of Earnings for the three months ended September 30, 1998 and 1997 (unaudited)........................................................ 2 Consolidated Statements of Stockholders' Equity for the three months ended September 30, 1998 (unaudited)........................................................... 3 Consolidated Statements of Cash Flows for the three months ended September 30, 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 SEPTEMBER 30, 1998 AND JUNE 30, 1998 September 30, June 30, Assets 1998 1998 ------ ---- ---- (unaudited) Cash $ 1,017,129 675,906 Interest-bearing deposits in other financial institutions 6,518,606 2,424,192 Investment securities held-to-maturity 96,000 98,000 Mortgage-backed securities held-to-maturity (estimated fair value of $75,000 and $82,000 respectively) 73,409 81,066 Loans held-for-sale, net 7,143,916 1,579,569 Loans receivable, net 125,349,134 113,242,706 Accrued interest receivable: Loans receivable 996,233 908,793 Investment securities 520 2,123 Mortgage-backed securities 983 1,084 Real Estate Owned 293,766 48,741 Stock in Federal Home Loan Bank (FHLB), at cost 1,775,000 1,025,000 Office property and equipment, net 1,750,788 1,743,503 Deferred income tax benefit - 146,000 Cash surrender value of life insurance and other assets 1,868,924 1,878,936 ------------ ----------- Total assets $146,884,408 123,855,619 ============ =========== Liabilities and Stockholders' Equity ------------------------------------ Liabilities: Deposits $ 90,697,697 85,776,785 FHLB advances 35,500,000 19,500,000 Accrued expenses and other liabilities 1,799,548 679,789 Accrued interest payable on deposits 118,187 107,761 Advance payments by borrowers for property taxes and insurance 1,456,288 751,199 Current income taxes payable 175,501 182,978 Deferred income taxes 15,517 - ------------ ----------- Total liabilities 129,762,738 106,998,512 ------------ ----------- Stockholders' equity: Preferred stock, $.01 par, 500,000 shares authorized, none issued or outstanding - - Common stock, $.01 par; 3,500,000 shares authorized and 1,031,851 shares issued 10,319 10,319 Additional paid-in capital 9,940,701 9,912,731 Retained earnings, substantially restricted 9,618,191 9,447,698 Treasury stock, 92,244 shares at cost (1,433,157) (1,433,157) Unearned employee benefits (1,014,384) (1,080,484) ------------ ----------- Total stockholders' equity 17,121,670 16,857,107 ------------ ----------- Total liabilities and stockholders' equity $146,884,408 123,855,619 ============ =========== See accompanying notes to unaudited consolidated financial statements. 2 CBES BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) Three Months Ended September 30 ------------------------ 1998 1997 -------- -------- Interest income: Loans receivable $2,719,863 2,116,754 Mortgage-backed securities 1,459 1,938 Investment securities 22 11,398 Other 72,147 37,876 ---------- --------- Total interest income 2,793,491 2,167,966 ---------- --------- Interest expense: Deposits 1,079,793 882,891 FHLB advances 362,190 135,494 ---------- --------- Total interest expense 1,441,983 1,018,385 ---------- --------- Net interest income 1,351,508 1,149,581 Provision for loan losses 75,150 79,978 ---------- --------- Net interest income after provision for loan losses 1,276,358 1,069,603 ---------- --------- Non-interest income: Gain on sale of loans, net 140,441 56,735 Customer service charges 57,885 61,816 Loan servicing fees 12,100 17,780 Other 32,473 34,547 ---------- --------- Total non-interest income 242,899 170,878 ---------- --------- Non-interest expense: Compensation and benefits 661,021 418,007 Office property and equipment 142,336 79,494 Data processing 55,220 38,673 Federal insurance premiums 12,868 11,413 Advertising 19,015 10,967 Real estate owned and repossessed assets (46,264) 27,931 Other 232,252 157,878 ---------- --------- Total non-interest expense 1,076,448 744,363 ---------- --------- Earnings before income taxes 442,809 496,118 Income tax expense 164,039 191,256 ---------- --------- Net earnings $ 278,770 304,862 ========== ========= Earnings per share: Basic and Diluted $ .31 .32 ========== ========= Basic weighted average shares 910,394 952,357 Common stock equivalents-stock options 287 - ---------- --------- Diluted weighted average shares 910,681 952,357 ========== ========= See accompanying notes to unaudited consolidated financial statements. 3 CBES BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED) Unearned Unearned employee recognition Additional stock & retention Total Issued Common paid-in Retained Treasury ownership plan stockholders' shares stock capital earnings stock shares shares equity --------- ----------- --------- ---------- ----------- ---------- ------------ -------------- Balance at June 30, 1998 1,031,851 $10,319 9,912,731 9,447,698 (1,433,157) (618,860) (461,624) 16,857,107 Net earnings - - - 278,770 - - - 278,770 Dividends declared - - - (108,277) - - - (108,277) ($.12 per share payable October 24, 1998) Amortization of RRP - - - - - - 35,510 35,510 Allocation of ESOP shares - - 27,970 - - 30,590 - 58,560 --------- ------- --------- --------- ---------- -------- -------- ---------- Balance at September 30, 1998 1,031,851 $10,319 9,940,701 9,618,191 (1,433,157) (588,270) (426,114) 17,121,670 ========= ======= ========= ========= ========== ======== ======== ========== See accompanying notes to unaudited consolidated financial statements. 4 CBES BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED) 1998 1997 ---- ---- Cash flows from operating activities: Net earnings $ 278,770 304,862 Adjustments to reconcile net earnings to net cash provided by operating activities: Provision for loan losses 75,150 79,978 Depreciation 77,557 41,050 Amortization of RRP 35,510 - Allocation of ESOP shares 58,560 53,421 Proceeds from sale of loans held for sale 5,205,505 3,098,557 Originations of loans held for sale (10,629,411) (3,190,877) Gain on sale of loans, net (140,441) (56,735) Premium amortization and accretion of discounts and deferred loan fees (152,591) (108,706) Deferred income taxes 161,517 20,745 Changes in assets and liabilities: Accrued interest receivable (85,736) (24,573) Other assets 10,012 53,981 Accrued expenses and other liabilities 1,119,759 66,782 Accrued interest payable on deposits 10,426 (272) Current income taxes payable (7,477) 85,511 ------------ ---------- Net cash (used in) provided by operating activities (3,982,890) 423,724 ------------ ---------- Cash flows from investing activities: Net increase in loans receivable (12,274,012) (4,992,108) Purchase of FHLB Stock (750,000) - Mortgage-backed securities principal repayments 7,657 49,156 Maturing securities 2,000 - Purchase of office property equipment (84,842) (77,728) ------------ ---------- Net cash used in investing activities $(13,099,197) (5,020,680) ------------ ---------- Cash flows from financing activities: Increase in deposits $ 4,920,912 5,888,046 Proceeds from FHLB advances 16,000,000 2,500,000 Repayments of FHLB advances - (3,500,000) Increase in advance payments by borrowers for property taxes and insurance 705,089 238,969 Dividends paid (108,277) (94,559) ------------ ---------- Net cash provided by financing activities 21,517,724 5,032,456 ------------ ---------- Net increase in cash and cash equivalents 4,435,637 435,500 Cash and cash equivalents at the beginning of the period 3,100,098 4,132,350 ------------ ---------- Cash and cash equivalents at the end of the period $ 7,535,735 4,567,850 ============ ========== Supplemental disclosure of cash flow information: Cash paid during the period for income taxes $ 10,000 85,000 ============ ========== Cash paid during the period for interest $ 1,431,557 1,018,113 ============ ========== Supplemental schedule of noncash activities: Conversion of loans to real estate owned $ 645,244 99,724 ============ ========== Conversion of real estate owned to loans $ 400,219 - ============ ========== See accompanying notes to unaudited consolidated financial statements. 5 CBES BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 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, 1998, 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 period ended September 30, 1998 are not necessarily indicative of the results which may be expected for the entire year. The balance sheet information as of June 30, 1998 has been derived from the audited balance sheet as of that date. The Company adopted 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. The Company had no securities classified as Available-For-Sale during the quarter ended September 30, 1998. (3) EARNINGS PER SHARE ------------------ The Company has 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. Per share information for the quarter ended September 30, 1997 has been restated to conform to SFAS 128. (4) 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 ended September 30, 1998 was $35,510. The unamortized cost of the RRP awards at September 30, 1998 was $426,114. 6 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 September 30, 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 September 30, 1998 to the financial condition at June 30, 1998, its fiscal year-end, and the results of operations for the three months ended September 30, 1998, with the same period in 1997. This discussion should be read in conjunction with the interim financial statements and notes which are included herein. GENERAL - ------- The Company was organized as a Delaware corporation in June 1996 to acquire all of the capital stock issued by The Bank upon its conversion from the mutual to stock form of ownership. The 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 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. The Bank conducts its business through its main office in Excelsior Springs, Clay County, Missouri and its full service branch offices located in Kearney and Liberty, both in Clay County, Missouri. The Liberty office opened 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. 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. 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. There can be no assurance as to whether or in what form such legislation will be enacted or, if enacted, its effect on the Company and the Bank. 8 FINANCIAL CONDITION - ------------------- Total assets increased $23.0 million, or 18.6%, to $146.9 at September 30, 1998 from $123.9 million at June 30, 1998. This was primarily due to an increase in net loans receivable and loans held for sale of $17.7 million, which were funded primarily with FHLB advances. Net loans receivable and loans held for sale increased by $17.7 million, or 15.4%, to $132.5 million at September 30, 1998 from $114.8 million at June 30, 1998 primarily due to increases in one-to-four family portfolio loans of $11.9 million and loans held for sale of $5.6 million. Loans held for sale are loans that have been sold in the secondary market but have not been funded. The increase in net loans receivable is attributable to increased loan originations since the opening of the Liberty branch office. Quarterly mortgage loan originations have increased to $43.8 million during the quarter ended September 30, 1998, compared to $20.5 million for the corresponding quarter of 1997. Of the $11.9 million increase in one-to-four family portfolio loans, approximately $5.7 million were a special 5/1 adjustable rate loan primarily available to first time home buyers, approximately $4.7 million in one year adjustable rate loans that had a minor variance from conforming standards, such as, the number of acres on the loan or a minor credit requirement variance, and approximately $1.7 million in one year adjustable rate loans that have a loan-to-value ratio greater than 80%, with no private mortgage insurance, to facilitate other short term loans to investors and builders. Deposits increased $4.9 million, or 5.7%, to $90.7 million at September 30, 1998 from $85.8 million at June 30, 1998. The increase in deposits is primarily due to $6.3 million in new certificates of deposit. FHLB advances increased $16.0 million, or 82.1%, to $35.5 million at September 30, 1998 from $19.5 million at June 30, 1998. The increase in FHLB advances was primarily used to fund loans. COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 - ----------------------------------------------------------------------------- AND 1997 - -------- Performance Summary. In the three months ended September 30, 1998, the Company had net earnings of $279,000 compared to net earnings of $305,000 for the three months ended September 30, 1997. The most significant items causing the decrease in earnings were an increase in interest income of $626,000 offset by an increase in interest expense of $424,000, and an increase in non-interest expense of $332,000. Net Interest Income. For the three months ended September 30, 1998, net interest income increased by $202,000, or 17.6%, to $1,352,000 from $1,150,000 for the three months ended September 30, 1997. The increase reflected an increase of $625,000 in interest income, to $2,793,000 from $2,168,000 and an increase of $424,000 in interest expense to $1,442,000 from $1,018,000. Provision for Loan Losses. During the three months ended September 30, 1998, the Bank charged $75,000 against earnings as a provision for loan losses compared to a provision of $80,000 for the three months ended September 30, 1997. This provision resulted in an allowance for loan losses of $719,000 or .54% of loans receivable, net at September 30, 1998 compared to $669,000, or .58% of loans receivable, net at June 30, 1998. 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. 9 Non-Interest Income. For the three months ended September 30, 1998, non-interest income increased $72,000 to $243,000 from $171,000 for the prior year period primarily due to an increase in gain on the sale of loans of $84,000, offset by a decrease in loan servicing fees of $6,000 and a decrease in customer service charges of $4,000. Non-Interest Expense. Non-interest expense increased by $332,000 to $1,076,000 for the three months ended September 30, 1998 from $744,000 for the three months ended September 30, 1997. Of this increase, $243,000 was attributable to compensation, of which $5,000 was due to the ESOP plan, $ 36,000 was due to the adoption of the Recognition and Retention plan, and $157,000 was due to an increase in the number of employees and general wage increases, $63,000 was due to office property and equipment expense, $8,000 was due to advertising, and $74,000 was due to other non-interest expense, primarily due to office supplies, professional fees and other areas, offset by a decrease in real estate owned and repossessed asset expense of $74,000, primarily due to a gain on the sale of real estate owned of $53,000 for the quarter ended September 30, 1998, compared to a $2,000 gain on the sale of real estate owned for the quarter ended September 30, 1997. The increase in Non-interest expense 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 September 30, 1998, nonperforming assets were $1,276,000 compared to $732,000 on June 30, 1998. The balance of the Bank's allowance for loan losses was $701,000 at September 30, 1998, or 54.9% 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. 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 September 30, 1998: Actual Required Excess amount/percent amount/percent amount/percent -------------- -------------- -------------- (Dollars in thousands) FIRREA REQUIREMENTS ------------------- Tangible capital $13,397 9.12% 2,203 1.50% 11,194 7.62% Core leverage capital $13,397 9.12% 5,875 4.00% 7,522 5.12% Risk-based capital $13,373 10.74% 9,964 8.00% 3,409 2.74% 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 September 30, 1998 and June 30, 1998 were 4.74% and 4.01%, respectively. 10 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 September 30, 1998 and 1997 were $7,535,735 and $4,567,850 respectively. Cash flows from operating activities. Net cash used in operating activities was $3,983,000 during the three months ended September 30, 1998 compared to $424,000 provided by operating activities during the same period in 1997. The change was primarily due to an increase in the proceeds from the sale of loans held for sale of $2,107,000, and an increase in the change in accrued expenses and other liabilities of $1,053,000, offset by an increase in the originations of loans held for sale of $7,439,000. Cash flows from investing activities. Net cash of $13.1 million was used in investing activities for the three months ended September 30, 1998 versus $5.0 million for the three months ended September 30, 1997. The increase was primarily due to an increase in loans receivable of $12.3 million during the three months ended September 30, 1998 versus a $5.0 million increase during the same period in 1997. Cash flows from financing activities. Net cash provided by financing activities was $21.5 million for the three months ended September 30, 1998 compared to $5.0 million during the same period in 1997. The increase in cash flows from financing activities is primarily due to an increase in FHLB advances of $16.0 million for the three months ended September 30, 1998 versus a decrease of $1,000,000 for the same period in 1997, and an increase in deposits of $4.9 million for the three months ended September 30, 1998 versus an increase of $5.9 million for the same period in 1997. IMPACT OF ACCOUNTING STANDARDS The Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", in June 1998. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This Statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Management believes adoption of SFAS No. 133 will not have a material effect on the Company's financial position or results of operations, nor will adoption require additional capital resources. YEAR 2000 ISSUE 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's year 2000 implementation process was established using a standard framework set forth by the Office of Thrift Supervision. The process includes separate phases for awareness, assessment, renovation, validation, and implementation. The Bank's year 2000 plan also includes the development and implementation of a contingency plan for each of the Bank's critical automated systems if they should fail to become year 2000 compliant by certain target dates. Such contingency plans should be completed by the end of the fourth calendar quarter in 1998. Since the Bank does not develop any of the software programs that are utilized, the process is focused on follow-up and testing of software provided by third party vendors and data centers to ensure their renovation. Also, the process attends to pre-packaged computer software, personal computer and server hardware, and other electronic equipment. The data processing of the Bank's core operations is provided by a third party service bureau. Management has received assurances from the Bank's service bureau that it is progressing toward its goal of making their software and data center hardware year 2000 compliant. The Bank is participating in testing procedures and it continues to prudently monitor the progress reports received from the vendor. In the year 2000 process, the Bank has evaluated the hardware and software on its wide-area network ("WAN"). To date, the Bank has completed the awareness and 11 assessment phases of the year 2000 process. The plan's renovation was started in the third calendar quarter of 1998 and will be finished in the fourth calendar quarter of 1998, with validation and implementation phases to occur by March 31, 1999. Management estimates that the year 2000 implementation process will cost between $100,000 and $150,000, which includes the cost of capitalized computer hardware for the WAN and other costs to perform testing and validation of services provided by the Bank's service bureau and other third parties. 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: 11-10-98 --------------------------------------------- By: /s/ Larry E. Hermreck ----------------------------------------------- Larry E. Hermreck, Chief Executive Officer and Secretary (Duly Authorized Officer) Date: 11-10-98 --------------------------------------------- By: /s/ Dennis D. Hartman ----------------------------------------------- Dennis D. Hartman, Controller and Chief Financial Officer (Principal Financial Officer)