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, 1999
[ ] 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
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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)
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(Issuer's telephone number)
NOT APPLICABLE
--------------
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO ___
---
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the last practicable date:
Class Outstanding at May 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 March 31,
1999 (unaudited) and June 30, 1998................................ 1
Consolidated Statements of Earnings for the three months
and nine months ended March 31, 1999 and 1998 (unaudited)......... 2
Consolidated Statements of Stockholders' Equity for the nine
months ended March 31, 1999 (unaudited)........................... 3
Consolidated Statements of Cash Flows for the nine months ended
March 31, 1999 and 1998 (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
MARCH 31, 1999 AND JUNE 30, 1998
March 31, June 30,
Assets 1999 1998
------ ---- ----
(unaudited)
Cash $ 1,046,821 675,906
Interest-bearing deposits in other financial institutions 5,614,817 2,424,192
Investment securities held-to-maturity (estimated
fair value of $93,000 and $98,000 respectively) 93,000 98,000
Mortgage-backed securities held-to-maturity (estimated fair value
of $65,000 and $82,000 respectively) 63,382 81,066
Loans held for sale, net 2,492,608 1,579,569
Loans receivable, net 141,522,247 113,242,706
Accrued interest receivable:
Loans receivable 1,106,107 908,793
Investment securities 504 2,123
Mortgage-backed securities 850 1,084
Real Estate Owned 527,645 48,741
Stock in Federal Home Loan Bank (FHLB), at cost 2,122,500 1,025,000
Office property and equipment, net 2,671,981 1,743,503
Current income taxes receivable 98,311 -
Deferred income tax benefit - 146,000
Cash surrender value of life insurance & other assets 2,057,637 1,878,936
------------ ------------
Total Assets $159,418,410 123,855,619
============ ============
Liabilities & Stockholders' Equity
----------------------------------
Liabilities:
Deposits $ 98,945,378 85,776,785
FHLB advances 42,450,000 19,500,000
Accrued expenses and other liabilities 656,770 679,789
Accrued interest payable on deposits 117,550 107,761
Advance payments by borrowers for property 635,521 751,199
taxes and insurance
Current income taxes payable - 182,978
Deferred income taxes 15,517 -
------------ ------------
Total Liabilities 142,820,736 106,998,512
------------ ------------
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 9,977,482 9,912,731
Retained earnings, substantially restricted 9,758,628 9,447,698
Treasury stock, 140,724 and 92,244 shares at cost, respectively (2,267,740) (1,433,157)
Unearned employee benefits (881,015) (1,080,484)
------------ ------------
Total stockholders' equity 16,597,674 16,857,107
------------ ------------
Total liabilities and stockholders' equity $159,418,410 123,855,619
============ ============
See accompanying notes to unaudited consolidated financial statements.
2
CBES BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
Three Months Ended Nine Months Ended
March 31 March 31
-------------------------------- --------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
Interest income:
Loans receivable $ 3,060,394 2,298,313 8,605,117 6,649,815
Mortgage-backed securities 1,276 1,811 4,139 5,710
Investment securities 57 135 184 19,711
Other 79,934 53,850 248,696 138,098
------------- ------------- ------------- -------------
Total interest income 3,141,661 2,354,109 8,858,136 6,813,334
------------- ------------- ------------- -------------
Interest expense:
Deposits 1,165,342 966,353 3,424,267 2,794,754
FHLB Advances 497,125 188,383 1,383,759 480,196
------------- ------------- ------------- -------------
Total interest expense 1,662,467 1,154,736 4,808,026 3,274,950
------------- ------------- ------------- -------------
Net interest income 1,479,194 1,199,373 4,050,110 3,538,384
Provision for loan losses 45,995 43,901 297,760 165,467
------------- ------------- ------------- -------------
Net interest income after
provision for loan losses 1,433,199 1,155,472 3,752,350 3,372,917
------------- ------------- ------------- -------------
Non-interest income:
Gain on sale of loans, net 161,181 100,822 606,716 248,666
Customer service charges 52,362 52,115 167,703 168,392
Loan servicing fees (15,540) 8,476 8,673 43,479
Other 52,405 33,564 117,901 97,590
------------- ------------- ------------- -------------
Total non-interest income 250,408 194,977 900,993 558,127
------------- ------------- ------------- -------------
Non-interest expense:
Compensation and benefits 639,592 551,282 1,914,818 1,645,161
Office property and equipment 206,576 108,263 634,488 274,668
Data processing 80,636 41,150 189,779 122,961
Federal insurance premiums 13,990 12,416 39,524 35,414
Advertising 31,320 38,972 85,446 68,133
Real estate owned and repossessed assets 32,129 28,485 (9,181) 56,666
Other 246,569 194,765 727,741 524,275
------------- ------------- ------------- -------------
Total non-interest expense 1,250,812 975,333 3,582,615 2,727,278
------------- ------------- ------------- -------------
Earnings before income taxes 432,795 375,116 1,070,728 1,203,766
Income tax expense 158,747 137,691 391,705 450,013
------------- ------------- ------------- -------------
Net earnings $ 274,048 237,425 679,023 753,753
============= ============= ============= =============
Earnings per share-basic $ 0.32 $ 0.26 $ 0.75 $ 0.79
============= ============= ============= =============
Earnings per share-diluted $ 0.32 $ 0.25 $ 0.75 $ 0.79
============= ============= ============= =============
Basic weighted average shares 867,635 927,182 904,416 952,051
Common stock equivalents-stock options - 17,352 - 4,051
Diluted weighted average shares 867,635 944,534 904,416 956,102
============= ============= ============= =============
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, 1999
(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 $10,319 9,912,731 9,447,698 (1,433,157) (1,080,484) 16,857,107
Net earnings - - - 679,023 - - 679,023
Dividends declared - - - (368,023) - - (368,023)
($.16 per share payable
April 23, 1999)
Purchase of 48,480 shares of - - - - (834,583) - (834,583)
treasury stock
Amortization of RRP - - - - - 106,529 106,529
Allocation of ESOP shares - - 64,751 - - 92,940 157,691
--------- ------- --------- --------- ---------- ---------- ----------
Balance at
March 31, 1999 1,031,851 $10,319 9,977,482 9,758,628 (2,267,740) (881,015) 16,597,674
========= ======= ========= ========= ========== ========== ==========
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, 1999 AND 1998
(UNAUDITED)
1999 1998
------------ -------------
Cash flows from operating activities:
Net earnings $ 679,023 753,753
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Provision for loan losses 297,760 165,467
Depreciation 253,860 138,193
Amortization of RRP 106,529 213,057
Allocation of ESOP shares 157,691 192,593
Proceeds from sale of loans held for sale 30,525,152 13,967,050
Origination of loans held for sale (30,831,475) (15,094,612)
Gain on sale of loans, net (606,716) (248,666)
Premium amortization and accretion of discounts and
deferred loan fees, net (482,508) (350,178)
Deferred income taxes 161,517 20,745
Changes in assets and liabilities:
Accrued interest receivable (194,107) (167,466)
Other assets (178,701) (134,425)
Accrued expenses and other liabilities (23,019) 173,535
Accrued interest payable on deposits 9,789 20,636
Current income taxes payable (281,289) (132,593)
------------ -------------
Net cash (used in) provided by operating activities (406,494) (482,911)
------------ -------------
Cash flows from investing activities:
Net increase in loans receivable (28,573,697) (12,052,612)
Purchase FHLB Stock (1,097,500) -
Mortgage-backed securities principal repayments 17,684 64,540
Maturing securities 5,000 1,002,000
Purchase of office property equipment (1,182,338) (551,055)
------------ -------------
Net cash used in investing activities $(30,830,851) (11,537,127)
------------ -------------
Cash flows from financing activities:
Increase in deposits $ 13,168,593 12,250,051
Proceeds from FHLB advances 37,450,000 9,000,000
Repayments of FHLB advances (14,500,000) (4,500,000)
Increase in advance payments by borrowers for property taxes
and insurance (115,678) (271,479)
Dividends Paid (368,093) -
Treasury stock purchased (834,583) (2,090,907)
------------ -------------
Net cash provided by financing activities 34,800,239 14,111,418
------------ -------------
Net increase in cash and cash equivalents 3,562,894 2,091,380
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 $ 6,662,992 6,223,730
============= =============
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $ 431,000 561,861
============ =============
Cash paid during the period for interest $ 4,798,237 3,254,314
============ =============
Supplemental schedule of noncash activities:
Conversion of loans to real estate owned $ (1,075,058) (166,684)
============ =============
Conversion of real estate owned to loans $ 596,154 304,165
============ =============
See accompanying notes to unaudited consolidated financial statements.
5
CBES BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1999
(1) CBES BANCORP, INC. AND SUBSIDIARIES
-----------------------------------
This Quarterly Report on Form 10-QSB 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
accordance with instructions for Form 10-QSB. To the extent that information and
footnotes required by generally accepted accounting principles for complete
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 and nine month periods ended March 31,
1999 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
has 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 nine
month periods ended March 31, 1999 was $35,510 and $106,529 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. No stock options have been exercised by the
recipients during the quarter ended March 31, 1999.
6
(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.
(5) NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS
--------------------------------------
The Financial Accounting Standards Board ("FASB") issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", in June 1998.
SFAS No. 133 established 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 in the
Company's financial position or results of operation, nor will adoption require
additional capital resources.
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, 1999 to the financial
condition at June 30, 1998, its fiscal year-end, and the results of operations
for the three months and nine months ended March 31, 1999, with the same periods
in 1998. This discussion should be read in conjunction with the interim
financial statements and notes which are included herein. This Quarterly Report
on Form 10-QSB 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 relocated its Kearney office from a
leased facility to the new location on March 22, 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 $35.6 million, or 28.7%, to $159.4 at March 31, 1999 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 $29.2 million, which were funded
primarily with FHLB advances and deposit accounts.
Net loans receivable and loans held for sale increased by $29.2 million, or
25.4%, to $144.0 million at March 31, 1999 from $114.8 million at June 30, 1998
primarily due to increases in one-to-four family portfolio loans of $19.3
million, construction loans of $2.9 million, land loans of $2.6 million,
consumer loans of $2.2 million, non-residential loans of $1.8 million, and loans
held for sale of $0.9 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 $110.1 million during the nine months ended March 31, 1999, compared to $60.5
million for the corresponding nine months of 1998. Of the $19.3 million increase
in one-to-four family portfolio loans, approximately $6.3 million were a special
5/1 adjustable rate loan primarily available to first time home buyers,
approximately $2.4 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 $3.2 million were one year
adjustable rate loans that have a loan-to-value ratio greater than 80%, with no
private mortgage insurance.
Deposits increased $13.2 million, or 15.4%, to $98.9 million at March 31, 1999
from $85.8 million at June 30, 1998. The increase in deposits is primarily due
to $11.8 million in new certificates of deposit.
FHLB advances increased $23.0 million, or 118.0%, to $42.5 million at March 31,
1999 from $19.5 million at June 30, 1998. These advances ranged in term from one
to three years, and approximately one-third were callable advances. The FHLB
advances were primarily used to fund loans.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND
- -----------------------------------------------------------------------------
1998
- ----
Performance Summary. In the three months ended March 31, 1999, the Company had
net earnings of $274,000 compared to net earnings of $237,000 for the three
months ended March 31, 1998. The most significant items causing the increase in
earnings were an increase in net interest income of $280,000 and an increase in
non-interest income of $55,000, offset by an increase in non-interest expense of
$275,000.
Net Interest Income. For the three months ended March 31, 1999, net interest
income increased $280,000, or 23.4%, to $1,479,000 from $1,199,000 for the three
months ended March 31, 1998. The increase reflected an increase of $788,000 in
interest income, to $3,142,000 from $2,354,000 offset by an increase of $508,000
in interest expense to $1,662,000 from $1,155,000. The increase in interest
income was primarily due to an increase in average balances of loans receivable,
net, primarily one-to-four family loans and construction loans. The increase in
interest expense was primarily due to an increase in the average balances of
certificates and FHLB advances.
Provision for Loan Losses. During the three months ended March 31, 1999, the
Bank charged $46,000 against earnings as a provision for loan losses compared to
a provision of $44,000 for the three months ended March 31, 1998. This provision
resulted in an allowance for loan losses of $930,000 or .65% of loans
receivable, net at March 31, 1999 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.
The Bank's methodology for determining allowance for loan losses focuses
primarily on the application of specific reserve percentages to the various
categories of loans. Those percentages are based upon management's estimate of
the exposure to loss in the various categories. Percentages generally range from
0.05% for single family residential
9
loans to 2.00% for some consumer loans; higher percentages may be applied to
problem loans. In addition, management continues to review specifically
identified problem, or potential problem loans. On a case by case basis, where
considered necessary, reserves are increased. For this purpose, problem loans
include non-accruing loans and accruing loans delinquent more than 90 days. In
addition, pursuant to the Bank's methodology, the reserve is replenished for net
charge-offs, which are charged against the reserve.
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, 1999, non-interest
income increased $55,000 to $250,000 from $195,000 for the prior year period
primarily due to an increase in gain on the sale of loans of $60,000. The
increase was primarily due to an increase in gains on the sale of mortgage loans
of $60,000 offset by a decrease in loan servicing fees of $24,000, primarily due
to a write-down of mortgage servicing rights of $27,000.
Non-Interest Expense. Non-interest expense increased by $275,000 to $1,251,000
for the three months ended March 31, 1999 from $975,000 for the three months
ended March 31, 1998. Of this increase, $88,000 was due to compensation expense,
due to an increase in the number of employees and general wage increases, 98,000
was due to office property and equipment expense, of which $35,000 was
attributable to Year 2000 expenses, including capitalized computer hardware of
$3,000, $39,000 was due to data processing, and $52,000 was due to other non-
interest expense, consisting of mortgage loan expenses, telephone expense, and
postage expense, offset by a decrease in advertising of $8,000. 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 and the purchase of the new office building
in Kearney, Missouri.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND
- ----------------------------------------------------------------------------
1998
- ----
Performance Summary. In the nine months ended March 31, 1999, the Company had
net earnings of $679,000 compared to net earnings of $754,000 for the nine
months ended March 31, 1998. The most significant items causing the decrease in
earnings were an increase in net interest income of $512,000 and an increase in
non-interest income of $343,000, offset by an increase in non-interest expense
of $855,000, and an increase in provision for loan loss of $132,000.
Net Interest Income. For the nine months ended March 31, 1999, net interest
income increased by $512,000, or 14.5%, to $4,050,000 from $3,538,000 for the
nine months ended March 31, 1998. The increase reflected an increase of
$2,045,000 in interest income, to $8,858,000 from $6,813,000 and an increase of
$1,533,000 in interest expense to $4,808,000 from $3,275,000. The increase in
interest income was primarily due to an increase in average balances of loans
receivable, net, primarily one-to-four family loans and construction loans,
offset by a reduction in the yields on interest-earning assets to 8.53% for the
nine month period ending March 31, 1999 from 8.73% for the comparable period in
1998. The increase in interest expense was primarily due to an increase in the
average balances of certificates and FHLB advances, offset by an increase in the
rates on interest-bearing liabilities to 5.10% for the nine month period ending
March 31, 1999 from 4.89% for the comparable period in 1998.
Provision for Loan Losses. During the nine months ended March 31, 1999, the Bank
charged $298,000 against earnings as a provision for loan losses compared to a
provision of $165,000 for the nine months ended March 31, 1998. The increase in
the provision for loan loss for the nine months ended March 31, 1999 compared to
the same period in 1998, is reflective of our continued growth and mix in loans
receivable, net, and an increase in nonperforming loans to $1,088,000 at March
31, 1999 from$587,000 at March 31, 1998. Net loans receivable and loans held for
sale increased $29.2 million, or 25.4% to $144.0 million at March 31, 1999 from
$114.8 million at June 30, 1998, compared to an increase of $13.8 million, or
15.2%, to $104.8 million at March 31, 1998 from $91.0 million at June 30, 1997.
10
Non-Interest Income. For the nine months ended March 31, 1999, non-interest
income increased $343,000 to $901,000 from $558,000 for the prior year period
primarily due to an increase in gain on the sale of loans of $358,000, offset by
a decrease in loan servicing fees of $35,000, primarily due to a write-down of
mortgage servicing rights of $27,000.
Non-Interest Expense. Non-interest expense increased by $855,000 to $3,582,000
for the nine months ended March 31, 1999 from $2,727,000 for the nine months
ended March 31, 1998. Of this increase, $270,000 was attributable to increased
compensation expense, due to an increase in the number of employees and general
wage increases, practically offset by a decrease in the ESOP plan expense of
$35,000, and a decrease in the Recognition and Retention Plan expense of
$107,000. $360,000 was due to office property and equipment expense, of which
$262,000 was attributable to Year 2000 expenses, including capitalized computer
hardware of $100,000, $17,000 was due to advertising, and $203,000 was due to
other non-interest expense, consisting of mortgage loan expenses, professional
fees, telephone expense, and postage. The nine months ended March 31, 1998
included $146,000 expense due to the immediate vesting of one year of the RRP.
NON-PERFORMING ASSETS
- ---------------------
On March 31, 1999, nonperforming assets were $1,636,000 compared to $3,436,000
on December 31, 1998, and $732,000 on June 30, 1998. The balance of the Bank's
allowance for loan losses was $930,000 at March 31, 1999, or 56.9% of
nonperforming assets compared to $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 are more
than ninety days delinquent.
The $904,000 increase in nonperforming assets, from June 30, 1998 to March 31,
1999, was primarily due to an increase in one-to-four family non-accruing
construction loans of $331,000, and an increase in foreclosed assets of
$493,000. Part of the increase is due because the Bank shifted to monthly
interest payments on construction loans, $331,000 of which were delinquent at
March 31, 1999. Nonperforming assets decreased $1,800,000 at March 31, 1999 from
December 31, 1998. The decrease was primarily due to a decrease of $921,000 in
accruing construction loans delinquent 90 days or more, a decrease of $496,000
in non-accruing land loans, and a decrease of $432,000 in non-accruing
construction loans.
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,
1999:
Actual Required Excess
amount/percent amount/percent amount/percent
-------------- -------------- --------------
(Dollars in thousands)
FIRREA REQUIREMENTS
- -------------------
Tangible capital $13,959 8.75% 2,392 1.50% 11,567 7.25%
Core leverage capital $13,959 8.75% 6,378 4.00% 7,581 4.75%
Risk-based capital $14,844 13.10% 9,064 8.00% 5,780 5.10%
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
11
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, 1999 and June 30, 1998 were 4.54% 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
$406,000 during the nine months ended March 31, 1999 compared to $483,000 during
the same period in 1998. The change was primarily due to an increase in the
proceeds from the sale of loans held for sale of $16,558,000, and an increase in
the gain on sale of loans, net of $358,000, offset by an increase in the
originations of loans held for sale of $16,558,000.
Cash flows from investing activities. Net cash of $30.8 million was used in
investing activities for the nine months ended March 31, 1999 versus $11.5
million for the nine months ended March 31, 1998. The increase was primarily due
to an increase in loans receivable of $28.6 million during the nine months ended
March 31, 1999 versus a $12.1 million increase during the same period in 1998.
Cash flows from financing activities. Net cash provided by financing activities
was $34.8 million for the nine months ended March 31, 1999 compared to $14.1
million during the same period in 1998. The increase in cash flows from
financing activities is primarily due to an increase in FHLB advances of $22.9
million for the nine months ended March 31, 1999 versus an increase of $4.5
million for the same period in 1998, and an increase in deposits of $13.2
million for the nine months ended March 31, 1999 versus an increase of $12.3
million for the same period in 1998.
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.
12
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 April 30,
1999. For the nine months ended March 31, 1999 Year 2000 costs are $262,000,
including $100,000 in capitalized computer hardware. Management estimates
additional Year 2000 costs of $45,000, including $27,000 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").
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 June 30, 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
---------------------------------------------------
None
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: May 12, 1999
----------------------------------------
By: /s/ Larry E. Hermreck
----------------------------------------
Larry E. Hermreck, Chief Executive Officer
and Secretary (Duly Authorized Officer)
Date: May 12, 1999
----------------------------------------
By: /s/ Dennis D. Hartman
----------------------------------------
Dennis D. Hartman, Controller and Chief
Financial Officer (Principal Financial
Officer)