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, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR15(D) OF
THE SECURITIES EXCHANGE ACT OFc 1934
FOR THE TRANSITION PERIOD FROM ________ TO _______
COMMISSION FILE NUMBER 0-21163
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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 fisccal 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 10, 1999
---------------- --------------------------------
Common stock, .01 par value 921,127
CBES BANCORP, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Financial Condition at December 31,
1998 (unaudited) and June 30, 1998................................. 1
Consolidated Statements of Earnings for the three months and six
months ended December 31, 1998 and 1997 (unaudited)................ 2
Consolidated Statements of Stockholders' Equity for the six
months ended December 31, 1998 (unaudited)......................... 3
Consolidated Statements of Cash Flows for the six months ended
December 31, 1998 and 1997 (unaudited)............................. 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...............................................13
SIGNATURES................................................................14
1
CBES BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1998 AND JUNE 30, 1998
December 31, June 30,
Assets 1998 1998
------ ---- ----
(unaudited)
Cash $ 939,570 675,906
Interest-bearing deposits in other financial 4,927,567 2,424,192
institutions
Investment securities held-to-maturity 96,000 98,000
Mortgage-backed securities held-to-maturity estimated
fair value of $71,381 and $82,000 respectively) 69,457 81,066
Loans held for sale, net 2,752,851 1,579,569
Loans receivable, net 132,215,121 113,242,706
Accrued interest receivable:
Loans receivable 992,645 908,793
Investment securities 2,080 2,123
Mortgage-backed securities 930 1,084
Real estate owned 580,960 48,741
Stock in Federal Home Loan Bank (FHLB), at cost 1,775,000 1,025,000
Office property and equipment, net 2,726,167 1,743,503
Current income taxes receivable 171,580 -
Deferred income tax benefit - 146,000
Cash surrender value of life insurance & other assets 1,973,076 1,878,936
------------ -----------
Total assets $149,223,004 123,855,619
============ ===========
Liabilities & Stockholders' Equity
----------------------------------
Liabilities:
Deposits $ 97,581,563 85,776,785
FHLB advances 33,950,000 19,500,000
Accrued expenses and other liabilities 780,838 679,789
Accrued interest payable on deposits 125,254 107,761
Advance payments by borrowers for property taxes
and insurance 382,007 751,199
Current income taxes payable - 182,978
Deferred income taxes 15,517 -
------------ -----------
Total Liabilities 132,835,179 106,998,512
------------ -----------
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 9,964,251 9,912,731
Retained earnings, substantially restricted 9,623,160 9,447,698
Treasury stock, 140,724 and 92,244 shares at (2,267,740) (1,433,157)
cost, respectively
Unearned employee benefits (942,165) (1,080,484)
------------ -----------
Total stockholders' equity 16,387,825 16,857,107
------------ -----------
Total liabilities and stockholders' $149,223,004 123,855,619
equity ============ ===========
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
--------------------------------------- -----------------------------------------
1998 1997 1998 1997
-------------------- ----------------- ---------------------- -----------------
Interest income:
Loans receivable $2,824,860 2,234,748 5,544,723 4,351,502
Mortgage-backed securities 1,404 1,961 2,863 3,899
Investment securities 105 8,178 127 19,576
Other 96,615 46,372 168,762 84,248
---------- ---------- ---------- ----------
Total interest income 2,922,984 2,291,259 5,716,475 4,459,225
---------- ---------- ---------- ----------
Interest expense:
Deposits 1,179,132 945,510 2,258,925 1,828,401
FHLB Advances 524,444 156,319 886,634 291,813
---------- ---------- ---------- ----------
Total interest expense 1,703,576 1,101,829 3,145,559 2,120,214
---------- ---------- ---------- ----------
Net interest income 1,219,408 1,189,430 2,570,916 2,339,011
Provision for loan losses 176,615 41,588 251,765 121,566
---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 1,042,793 1,147,842 2,319,151 2,217,445
---------- ---------- ---------- ----------
Non-interest income:
Gain on sale of loans, net 305,094 91,109 445,535 147,844
Customer service charges 57,456 54,461 115,341 116,277
Loan servicing fees 12,113 17,223 24,213 35,003
Other 33,023 29,479 65,496 64,026
---------- ---------- ---------- ----------
Total non-interest income 407,686 192,272 650,585 363,150
---------- ---------- ---------- ----------
Non-interest expense:
Compensation and benefits 654,858 675,872 1,275,226 1,093,879
Office property and equipment 244,923 86,911 427,912 166,405
Data processing 53,923 43,138 109,143 81,811
Federal insurance premiums 12,666 11,585 25,534 22,998
Advertising 35,111 18,194 54,126 29,161
Real estate owned and repossessed assets 4,954 250 (41,310) 28,181
Other 248,920 171,632 481,172 329,510
---------- ---------- ---------- ----------
Total non-interest expense 1,255,355 1,007,582 2,331,803 1,751,945
---------- ---------- ---------- ----------
Earnings before income taxes 195,124 332,532 637,933 828,650
Income tax expense 68,919 121,066 232,958 312,322
---------- ---------- ---------- ----------
Net earnings $ 126,205 211,466 404,975 516,328
========== ========== ========== ==========
Earnings per share:
Basic and diluted $ 0.14 $ 0.22 $ 0.45 $ 0.54
========== ========== ========== ==========
Basic weighted average shares 887,757 975,533 898,694 964,215
Common stock equivalents-stock options - 5,630 - 401
---------- ---------- ---------- ----------
Diluted weighted average shares 887,757 981,163 898,694 964,616
========== ========== ========== ==========
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, 1998
(UNAUDITED)
Additional Unearned Total
Issued Common paid-in Retained Treasury employee stockholders'
shares stock capital earnings stock benefits equity
------ ----- ------- -------- ----- -------- ------
Balance at June 30, 1998 1,031,851 $10,319 9,912,731 9,447,698 (1,433,157) (1,080,484) 16,857,107
Net earnings - - - 404,975 - - 404,975
Dividends declared - - - (229,513) - - (229,513)
($.14 per share payable
January 25, 1999)
Purchase of 48,480 shares of - - - - (834,583) - (834,583)
treasury stock
Amortization of RRP - - - - - 71,019 71,019
Allocation of ESOP shares - - 51,520 - - 67,300 118,820
--------- ------- ---------- --------- ---------- ---------- ----------
Balance at
December 31, 1998 1,031,851 $10,319 9,964,251 9,623,160 (2,267,740) (942,165) 16,387,825
========= ======= ========== ========= ========== ========== ==========
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, 1998 AND 1997
(UNAUDITED)
1998 1997
---- ----
Cash flows from operating activities:
Net earnings $ 404,975 516,328
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Provision for loan losses 251,765 121,566
Depreciation 162,201 86,386
Amortization of RRP 71,019 177,547
Allocation of ESOP shares 118,820 131,331
Proceeds from sale of loans held for sale 20,837,028 8,322,405
Origination of loans held for sale (21,564,775) (8,567,446)
Gain on sale of loans, net (445,535) (147,844)
Premium amortization and accretion of discounts and
deferred loan fees (312,871) (235,855)
Deferred income taxes 161,517 20,745
Changes in assets and liabilities:
Accrued interest receivable (83,655) (85,173)
Other assets (94,140) (70,425)
Accrued expenses and other liabilities 101,049 27,566
Accrued interest payable on deposits 17,493 (3,321)
Current income taxes payable (354,558) (142,025)
------------- ----------
Net cash (used in) provided by operating activities (729,667) 151,785
------------- ----------
Cash flows from investing activities:
Net increase in loans receivable (19,443,528) (8,230,714)
Purchase FHLB Stock (750,000) -
Mortgage-backed securities principal repayments 11,609 57,341
Maturing investment securities 2,000 1,000,000
Purchase of office property equipment (1,144,865) (253,661)
------------- ----------
Net cash used in investing activities $(21,324,784) (7,427,034)
------------- ----------
Cash flows from financing activities:
Increase in deposits $ 11,804,778 9,401,960
Proceeds from FHLB advances 24,950,000 6,000,000
Repayments of FHLB advances (10,500,000) (4,500,000)
Increase in advance payments by borrowers for property taxes
and insurance (369,192) (512,146)
Dividends Paid (229,513) (188,809)
Treasury stock purchased (834,583) (875,750)
------------- ----------
Net cash provided by financing activities 24,821,490 9,325,255
------------- ----------
Net increase in cash and cash equivalents 2,767,039 2,050,006
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 $ 5,867,137 6,182,356
============= ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $ 426,000 433,602
============= ==========
Cash paid during the period for interest $ 3,128,066 2,123,535
============= ==========
Supplemental schedule of noncash activities:
Conversion of loans to real estate owned $ (940,527) -
============= ==========
Loans made to finance sale of real estate owned $ 408,308 -
============= ==========
See accompanying notes to unaudited consolidated financial statements.
5
CBES BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DECEMBER 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.
This Quarterly Report on Form 10-Q may contain certain forward-looking
statements consisting of estimates with respect to the financial condition,
results of operations and business of the Company that are subject to various
factors which could cause actual results to differ materially from these
estimates. These factors include, but are not limited to, general economic
conditions, changes in interest rates, deposit flows, loan demand, real estate
values, and competition; changes in accounting principles, policies, or
guidelines; changes in legislation or regulation; and other economic,
competitive, governmental, regulatory, and technical factors affecting the
Company's operations, pricing, products and services.
(2) BASIS OF PREPARATION
--------------------
The accompanying unaudited consolidated financial statements were prepared in
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 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
had no components of comprehensive income other than net income.
(3) 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 as of the date of the award . 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 and six
month periods ended December 31, 1998 was $35,509 and $71,019 respectively.
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.
6
No stock options have been exercised by the recipients during the quarter ended
December 31, 1998.
(4) CAPITAL STOCK TRANSACTIONS
--------------------------
In November 1998, the Company completed the purchase of 48,480 shares of the
Company's common stock, in a previously announced stock repurchase plan, for an
aggregate purchase price of $834,583.
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, 1998 to the financial
condition at June 30, 1998, its fiscal year-end, and the results of operations
for the three months and six months ended December 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. This Quarterly Report
on Form 10-Q may contain certain forward-looking statements consisting of
estimates with respect to the financial condition, results of operations and
business of the Company that are subject to various factors which could cause
actual results to differ materially from these estimates. These factors include,
but are not limited to, general economic conditions, changes in interest rates,
deposit flows, loan demand, real estate values, and competition; changes in
accounting principles, policies, or guidelines; changes in legislation or
regulation; and other economic, competitive, governmental, regulatory, and
technological factors affecting the Company's operations, pricing, products and
services.
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. On December 30, 1998 the Bank purchased a building in Kearney, Missouri
from another financial institution. The Bank intends to relocate its Kearney
office from the current leased facility to the new location in March 1999. The
purchase price of the building, together with furniture, fixtures, and
equipment, was $1.0 million. 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 $25.3 million, or 20.4%, to $149.2 at December 31, 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 $20.2 million, which were funded
primarily with FHLB advances and deposit accounts.
Net loans receivable and loans held for sale increased by $20.2 million, or
17.6%, to $135.0 million at December 31, 1998 from $114.8 million at June 30,
1998 primarily due to increases in one-to-four family portfolio loans of $13.9
million, land loans of $2.2 million, consumer loans of $1.5 million, and loans
held for sale of $1.1 million. Loans held for sale are loans that are contracted
to be 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. Mortgage loan originations have increased
to $75.2 million during the six months ended December 31, 1998, compared to
$38.3 million for the corresponding six months of 1997. Of the $13.9 million
increase in one-to-four family portfolio loans, approximately $6.4 million were
a special 5/1 adjustable rate loan primarily available to first time home
buyers, approximately $2.0 million were 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 $0.8 million were
one year adjustable rate loans that have a loan-to-value ratio greater than 80%,
with no private mortgage insurance.
Deposits increased $11.8 million, or 13.8%, to $97.6 million at December 31,
1998 from $85.8 million at June 30, 1998. The increase in deposits is primarily
due to $12.1 million in new certificates of deposit.
FHLB advances increased $14.5 million, or 74.4%, to $34.0 million at December
31, 1998 from $19.5 million at June 30, 1998. These advances ranged in term from
one to three years, and approximately half were callable advances. The FHLB
advances were primarily used to fund loans.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND
- --------------------------------------------------------------------------------
1997
- ----
Performance Summary. In the three months ended December 31, 1998, the Company
had net earnings of $126,000 compared to net earnings of $211,000 for the three
months ended December 31, 1997. The most significant items causing the decrease
in earnings were an increase in net interest income of $30,000 an increase in
non-interest income of $215,000, offset by an increase in non-interest expense
of $248,000, and an increase in the provision for loan loss of $135,000.
Net Interest Income. For the three months ended December 31, 1998, net interest
income increased $30,000, or 2.5%, to $1,219,000 from $1,189,000 for the three
months ended December 31, 1997. The increase reflected an increase of $632,000
in interest income, to $2,923,000 from $2,291,000 offset by an increase of
$602,000 in interest expense to $1,704,000 from $1,102,000.
Provision for Loan Losses. During the three months ended December 31, 1998, the
Bank charged $177,000 against earnings as a provision for loan losses compared
to a provision of $42,000 for the three months ended December 31, 1997. This
provision resulted in an allowance for loan losses of $876,000 or .64% of loans
receivable, net at December 31, 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.
Approximately $100,000 of the increased provision was due to increased loans
receivable. The remainder of the increase was attributable to specific
multifamily and construction loans which, based upon analysis by management and
application of the Company's methodology for establishing the allowance,
required additional reserves.
9
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, 1998, non-interest
income increased $215,000 to $408,000 from $192,000 for the prior year period
primarily due to an increase in gain on the sale of loans of $214,000.
Non-Interest Expense. Non-interest expense increased by $248,000 to $1,255,000
for the three months ended December 31, 1998 from $1,008,000 for the three
months ended December 31, 1997. Of this increase, $158,000 was due to office
property and equipment expense, of which $166,000 was attributable to Year 2000
expenses, including capitalized computer hardware of $63,000, $17,000 was due
to advertising, and $77,000 was due to other non-interest expense, consisting of
mortgage loan expenses, professional fees and telephone expense. The increase
in non-interest expense is primarily due to Year 2000 costs and 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 SIX MONTHS ENDED DECEMBER 31, 1998 AND
- ------------------------------------------------------------------------------
1997
- ----
Performance Summary. In the six months ended December 31, 1998, the Company had
net earnings of $405,000 compared to net earnings of $516,000 for the six months
ended December 31, 1997. The most significant items causing the decrease in
earnings were an increase in net interest income of $232,000 and an increase in
non-interest income of $287,000, offset by an increase in non-interest expense
of $580,000, and an increase in provision for loan loss of $130,000.
Net Interest Income. For the six months ended December 31, 1998, net interest
income increased by $232,000, or 9.9%, to $2,571,000 from $2,339,000 for the six
months ended December 31, 1997. The increase reflected an increase of
$1,257,000 in interest income, to $5,716,000 from $4,459,000 and an increase of
$1,025,000 in interest expense to $3,145,000 from $2,120,000.
Provision for Loan Losses. During the six months ended December 31, 1998, the
Bank charged $252,000 against earnings as a provision for loan losses compared
to a provision of $122,000 for the six months ended December 31, 1997.
Non-Interest Income. For the six months ended December 31, 1998, non-interest
income increased $288,000 to $651,000 from $363,000 for the prior year period
primarily due to an increase in gain on the sale of loans of $298,000.
Non-Interest Expense. Non-interest expense increased by $580,000 to $2,332,000
for the six months ended December 31, 1998 from $1,752,000 for the six months
ended December 31, 1997. Of this increase, $307,000 was attributable to
compensation expense due to an increase in the number of employees and general
wage increases, offset by a decrease in the ESOP plan expense of $13,000, and a
decrease in the Recognition and Retention Plan expense of $107,000. $262,000
was due to office property and equipment expense, of which $227,000 was
attributable to Year 2000 expenses, including capitalized computer hardware of
$97,000, $25,000 was due to advertising, and $152,000 was due to other non-
interest expense, consisting of mortgage loan expenses, professional fees and
telephone expense. The six months ended December 31, 1997 included $146,000
expense due to the immediate vesting of one year of the RRP.
NON-PERFORMING ASSETS
- ---------------------
On December 31, 1998, nonperforming assets were $3,436,000 compared to $732,000
on June 30, 1998. The balance of the Bank's allowance for loan losses was
$876,000 at December 31, 1998, or 25.5% of nonperforming assets. Loans are
considered nonperforming when the collection of principal and/or interest is not
probable, or in the event payments
10
are more than ninety days delinquent.
The $2,704,000 increase in nonperforming assets was primarily due to an increase
in one-to-four family non-accruing construction loans of $763,000, an increase
in non-accruing land loans of $535,000, an increase in accruing construction
loans greater than ninety days delinquent of $921,000, and an increase in
foreclosed assets of $297,000.
Part of the increase is due to the Bank having shifted to monthly interest
payments on construction loans, $1,684,000 of which were delinquent at December
31, 1998. The Bank has increased its collection efforts on these loans, and such
efforts have resulted in seven construction loans with balances of $921,000
being current as of February 2, 1999.
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 December 31,
1998:
Actual Required Excess
amount/percent amount/percent amount/percent
-------------- -------------- --------------
(Dollars in thousands)
FIRREA EQUIREMENTS
-------------------
Tanible capital $13,629 9.13% 2,238 1.50% 11,391 7.63%
Core leverage capital $13,629 9.13% 5,968 4.00% 7,661 5.13%
Risk-based capital $14,452 13.82% 8,367 8.00% 6,085 5.82%
- ---------
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 December 31, 1998 and June 30, 1998 were 4.90% and 4.01%,
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, 1998 and 1997 were
$5,867,137 and $6,182,356 respectively.
Cash flows from operating activities. Net cash used in operating activities was
$730,000 during the six months ended December 31, 1998 compared to $152,000
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 $12,515,000, and an increase in the gain on sale of loans, net of
$298,000, offset by an increase in the originations of loans held for sale of
$12,997,000.
11
Cash flows from investing activities. Net cash of $21.3 million was used in
investing activities for the six months ended December 31, 1998 versus $7.4
million for the six months ended December 31, 1997. The increase was primarily
due to an increase in loans receivable of $19.4 million during the six months
ended December 31, 1998 versus a $8.2 million increase during the same period
in 1997.
Cash flows from financing activities. Net cash provided by financing activities
was $24.8 million for the six months ended December 31, 1998 compared to $9.3
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 $14.5
million for the six months ended December 31, 1998 versus an increase of $1.5
million for the same period in 1997, and an increase in deposits of $11.8
million for the six months ended December 31, 1998 versus an increase of $9.4
million for the same period in 1997.
IMPACT OF RECENTLY ISSUED 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 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
The Board of Directors and the Management of the Bank have established a formal
process for the implementation of a plan to evaluate and correct the problems
that the Year 2000 could cause to the Bank's critical automated systems. The
Year 2000 problem exists because many automated systems use only two digit
fields to represent the year, such as "98" representing 1998. However, with the
two digit format, the Year 2000 is indistinguishable from 1900, 2001 from 1901,
and so on. Should these critical systems fail in the year 2000, the Bank would
have difficulty in processing transactions for loans and deposit customers,
which could cause significant damage to the Bank's important customer
relationships. 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 compliance with
the Year 2000 issue.
In calendar year 1997, Management implemented a Year 2000 process using the
standard framework set forth by the Federal Financial Institutions Examination
Council, which includes separate phases for awareness, assessment, renovation,
validation, and implementation. In the awareness phase, Management committed
resources and established a Year 2000 committee consisting of managers from all
departments of the Bank. This committee proceeded through the assessment phase,
which included an analysis of the Year 2000 impact on all hardware, software,
electronic equipment; identifying the Bank's critical business processes;
developing priorities by risk; gaining commitment from vendors and service
providers; and evaluating the impact on the Bank's customers. The renovation
phase is currently underway and will include the replacement or elimination of
non-compliant software, hardware, and vendors. In the validation phase, the
committee will test all renovated systems and test all data exchanges with
outside organizations. In the implementation phase, all renovated systems will
be put into service. To date, the Bank has completed the awareness and
assessment phases, and is nearing the end of the renovation phase. The
validation and implementation phases are scheduled to be complete by March 31,
1999. For the six months ended December 31, 1998 Year 2000 costs are $227,000,
including $97,000 in capitalized computer hardware. Management estimates
additional Year 2000 costs of $80,000, including $30,000 in capitalized computer
hardware.
Data processing of the Bank's core operations is provided by a third party
service bureau. The Bank has actively participated in testing procedures, and
it continues to prudently monitor the progress reports from the vendor. The
Bank's Year 2000 process also includes the evaluation of phone systems, alarm
systems, funds transfer providers, and all hardware and software on its wide-
area network ("WAN").
12
The company is in the process of finalizing its Year 2000 contingency plan for
each of the Bank's critical automated systems. The contingency plan will be
implemented if any of the critical systems should fail to become Year 2000
compliant by certain target dates. Management expects the plan to be completed
by February 28, 1999, but it also plans to make updates to the contingency plans
on an ongoing basis. The third party service bureau has also formulated a
contingency plan, which Management is incorporating into the Bank's overall
contingency plan.
The Board of Directors is updated on the status of the Year 2000 process on
regular intervals. Management believes that the Bank's Year 2000 process is
adequate to ensure that all mission critical systems will be Year 2000
compliant.
13
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 22, 1998 the Company held its annual meeting of
stockholders to consider the election of two directors of the Company
and to ratify the appointment of KPMG LLP as the auditors of the
Company for the fiscal year ending June 30, 1999. The results of the
meeting were as follows:
Robert L. Lalumondier was elected to serve as a director of the
Company with 806,818 votes for and 8,050 votes withheld.
Cecil E. Lamb was elected to serve as a director of the Company with
806,793 votes for and 8,075 votes withheld.
The appointment of KPMG LLP to act as the Company's auditors for the
fiscal year ending June 30, 1999 was ratified with 799,618 votes for,
14,200 votes against, and 1,050 votes withheld.
Item 5. Other Information
-----------------
None.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
Exhibits
27-Financial Data Schedule
14
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: 2/12/99
--------------------------------
By: /s/ Larrey E. Hermreck
----------------------------------
Larry E. Hermreck, Chief Executive
Officer and Secretary (Duly Authorized
Officer)
Date: 2/12/99
--------------------------------
By: /s/ Dennis D. Hartman
----------------------------------
Dennis D. Hartman, Controller and Chief
Financial Officer (Principal Financial
Officer)