<PAGE>
 
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                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
                               ----------------
                                  FORM 10-KSB
 
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
    ACT OF 1934
 
    FOR THE FISCAL YEAR ENDED JUNE 30, 1998
    
                                      OR
 
[_] 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.
                (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
 
               DELAWARE                              43-1753244
     (STATE OR OTHER JURISDICTION                 (I.R.S. EMPLOYER
   OF INCORPORATION OR ORGANIZATION)             IDENTIFICATION NO.)
 
     1001 NORTH JESSE JAMES ROAD,                       64024
      EXCELSIOR SPRINGS, MISSOURI                    (ZIP CODE)
 
    (ADDRESS OF PRINCIPAL EXECUTIVE
               OFFICES)
 
      REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (816) 630-6711
 
                               ----------------
          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
 
                                     NONE
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
 
                    COMMON STOCK, PAR VALUE $.01 PER SHARE
                               (TITLE OF CLASS)
 
                               ----------------
  Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 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 [_]
 
  Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained herein, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
 
  The Registrant's revenues for the fiscal year ended June 30, 1998 were $10.1
million.
 
  As of September 16, 1998, there were issued and outstanding 1,031,851 and
1,024,958 shares respectively, of the Registrant's Common Stock. The aggregate
market value of the voting stock held by non-affiliates of the registrant,
computed by reference to the closing bid price of such stock on the Nasdaq
Small Cap Market as of September 16, 1998, was $14.5 million. (The exclusion
from such amount of the market value of the shares owned by any person shall
not be deemed an admission by the registrant that such person is an affiliate
of the registrant.)
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
  Parts II and III of Form 10-KSB--Portions of Annual Report to Stockholders
for the fiscal year ended June 30, 1998.
 
  Part III of Form 10-KSB--Portions of Proxy Statement for 1998 Annual Meeting
of Stockholders.
 
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<PAGE>
 
                                    PART I
 
ITEM 1. DESCRIPTION OF BUSINESS
 
GENERAL
 
  CBES Bancorp, Inc. ("CBES Bancorp" and, with its subsidiaries, the
"Company") was formed in June 1996 at the direction of Community Bank of
Excelsior Springs, a Savings Bank ("Community Bank" or the "Bank") for the
purpose of owning all of the outstanding stock of the Bank issued upon the
conversion of the Bank from the mutual to stock form (the "Conversion"). On
September 27, 1996, CBES Bancorp acquired all of the shares of the Bank in
connection with the completion of the Conversion. All references to the
Company, unless otherwise indicated, at or before September 27, 1996 refer to
the Bank. The Company's common stock is quoted on the NASDAQ SmallCap Market
under the symbol "CBES".
 
  Community Bank is a federally chartered savings bank headquartered in
Excelsior Springs, Missouri. Community Bank was originally chartered as a
Missouri savings and loan association in 1931 under the name Excelsior Springs
Savings and Loan Association. In 1991, the Bank changed its name to its
current form, and in 1995 the Bank amended its charter to become a federal
mutual savings bank. Its deposits are insured up to the maximum allowable
amount by the Savings Association Insurance Fund ("SAIF") of the Federal
Deposit Insurance Corporation (the "FDIC"). Through its main office in
Excelsior Springs and its branch offices in Kearney and Liberty, Community
Bank primarily serves communities located in Clay and Ray Counties and to a
lesser extent in surrounding counties in the State of Missouri. The Liberty
office commenced operations in March 1998. This office gives the Bank
visibility in the Kansas City northland area, which is experiencing good
growth and we expect to continue for the next few years. At June 30, 1998, the
Company had total assets of $123.9 million, deposits of $85.8 million and
stockholders' equity of $16.9 million.
 
  Community 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. At June 30, 1998, the Bank's
total loan portfolio was $134.6 million, of which 48.5% were one- to four-
family residential mortgage loans, 39.4% were construction and land loans (the
vast majority of which related to single-family residential properties), and
8.8% were consumer loans. During the fiscal year ended June 30, 1998, the Bank
originated $31.2 million of fixed-rate one- to four-family residential
mortgage loans, of which $22.8 million, or 73.1%, were sold in the secondary
market. See "Lending Activities." To a substantially lesser extent, the Bank
invests in various investment securities, including mortgage-backed
securities.
 
  The executive office of the Company and the Bank is located at 1001 North
Jesse James Road, Excelsior Springs, Missouri 64024 and their telephone number
is (816) 630-6711.
 
MARKET AREA AND COMPETITION
 
  Community Bank serves communities located in Clay and Ray Counties and in
surrounding counties in Missouri from its main office in Excelsior Springs and
its branch offices in Kearney and Liberty. Excelsior Springs, Kearney, and
Liberty are located in Clay County, which is part of the Kansas City
Metropolitan Statistical Area. Excelsior Springs, Kearney, and Liberty are
small towns with 1990 populations estimated at 11,000, 2,000, and 20,000
respectively. Clay County has a relatively large population (estimated at
166,000 as of 1995), and the northern portion of Clay County is a combination
of suburban and rural areas containing a number of small towns, including
Excelsior Springs and Kearney. Southern Clay County is a rapidly developing
suburban market, and is home to a large number of people who commute to jobs
in areas closer to Kansas City.
 
                                       2
<PAGE>
 
  Most of the employment in Clay County is provided by light manufacturing,
services and retail trade. Included among the largest employers in Clay County
are a number of hospitals (Liberty Hospital, Excelsior Springs Medical Center,
North Kansas City Hospital, and St. Luke's Northland Hospital), local school
districts and two community colleges. Employers in the manufacturing sector
include Ford Motor Company, Farmland Industries and Wilcox Electric. In the
immediate Excelsior Springs area, the largest employers are American Italian
Pasta, Precise Technology Incorporated, Douglas & Lomason, The Elms Hotel, and
Gilmour Manufacturing.
 
  The Bank's business and operating results are significantly affected by the
general economic conditions present in the Bank's market area. As of June 30,
1998, the twelve-month average unemployment rate in Clay County was 2.7% and
the twelve-month average unemployment rate in Ray County was 4.5%.
 
  The Bank faces significant competition in attracting deposits from
commercial banks, other savings institutions and credit unions. The Bank faces
additional competition for deposits from short-term money market funds, from
other corporate and government securities funds and from brokerage funds and
insurance companies. The Bank also faces significant competition in the
origination of loans from savings institutions, mortgage banking companies,
credit unions and commercial banks. In Clay County alone, where the Bank's
three offices are located, there are 36 commercial banks, 44 credit unions,
and 10 savings institutions.
 
LENDING ACTIVITIES
 
  GENERAL. The Bank has emphasized and will continue to emphasize the
origination of one- to four-family residential mortgage loans. In recent
years, subject to market conditions, the Bank has emphasized the origination
for portfolio of ARM loans and the origination and sale of fixed-rate
residential mortgage loans. Due to the high level of construction activity in
southern Clay County in recent years, and in an effort to improve the yield on
overall interest-earning assets, the Bank has increased its portfolio of
residential construction loans. The Bank also originates land loans secured by
vacant land or building lots for which the borrower intends to ultimately
construct a residential property. The Bank also originates commercial real
estate and multi-family residential loans, which are generally offered on a
case-by-case basis as an accommodation to existing Bank customers. The Bank's
non-mortgage loans consist primarily of automobile loans, which are originated
on a direct and on an indirect basis.
 
  Under OTS regulations, a thrift institution's loans-to-one borrower limit is
generally limited to the greater of 15% of unimpaired capital and surplus or
$500,000. See "Regulation--Federal Regulation of Savings Associations." At
June 30, 1998, the maximum amount which the Bank could have lent under this
limit to any one borrower and the borrower's related entities was
approximately $4.1 million. At June 30, 1998, the Bank had no loans or groups
of loans to related borrowers with outstanding balances in excess of this
amount. The Bank's largest lending relationship at June 30, 1998 was
approximately $3.2 million in loans to a residential builder for the
construction of single-family residences and was secured by real estate
located in Clay County, Missouri. At June 30, 1998, all of these loans were
performing in accordance with their terms.
 
                                       3
<PAGE>
 
  LOAN PORTFOLIO COMPOSITION. Set forth below is data relating to the
composition of the Bank's loan portfolio by type of loan as of the dates
indicated.
 
<TABLE>
<CAPTION>
                                                 AT JUNE 30,
                              ---------------------------------------------------
                                    1998              1997             1996
                              ----------------  ----------------  ---------------
                               AMOUNT  PERCENT   AMOUNT  PERCENT  AMOUNT  PERCENT
                              -------- -------  -------- -------  ------- -------
                                           (DOLLARS IN THOUSANDS)
<S>                           <C>      <C>      <C>      <C>      <C>     <C>
Real estate loans:
  One- to four-family
   residential............... $ 65,502  48.65%  $ 57,260  54.98%  $52,661  57.81%
  Multi-family...............    1,602   1.19        748   0.72       315   0.35
  Commercial.................    2,768   2.06      1,520   1.46     1,082   1.19
  Land.......................    4,243   3.15      3,393   3.26     4,006   4.40
  Construction...............   48,641  36.12     30,332  29.12    22,461  24.66
                              -------- ------   -------- ------   ------- ------
    Total real estate loans..  122,756  91.17     93,253  89.54    80,525  88.39
                              -------- ------   -------- ------   ------- ------
Consumer loans:
  Direct automobile loans....    7,166   5.32      6,585   6.32     6,527   7.16
  Indirect automobile loans..    2,348   1.75      2,034   1.95     2,114   2.32
  Deposit accounts...........      616   0.46        548   0.53       499   0.55
  Home improvement...........       19   0.01         69   0.07       218   0.24
  Commercial loans...........      286   0.21        213   0.20         0   0.00
  Other......................    1,455   1.08      1,451   1.39     1,214   1.33
                              -------- ------   -------- ------   ------- ------
    Total consumer loans.....   11,890   8.83     10,900  10.46    10,572  11.61
                              -------- ------   -------- ------   ------- ------
    Total loan portfolio.....  134,646 100.00%   104,153 100.00%   91,097 100.00%
                                       ======            ======           ======
Less:
  Loans in process...........   18,661            12,350           11,015
  Deferred loan origination
   fees and discounts on
   loans, net................      494               350              284
  Allowance for loan losses..      669               436              388
                              --------          --------          -------
    Total loans receivable,
     net..................... $114,822          $ 91,017          $79,410
                              ========          ========          =======
</TABLE>
 
                                       4
<PAGE>
 
  The following table shows the composition of the Bank's loan portfolio by
fixed- and adjustable-rates at the dates indicated.
 
<TABLE>
<CAPTION>
                                                 AT JUNE 30,
                              ---------------------------------------------------
                                    1998              1997             1996
                              ----------------  ----------------  ---------------
                               AMOUNT  PERCENT   AMOUNT  PERCENT  AMOUNT  PERCENT
                              -------- -------  -------- -------  ------- -------
                                           (DOLLARS IN THOUSANDS)
<S>                           <C>      <C>      <C>      <C>      <C>     <C>
Fixed Rate Loans:
Real estate:
  One- to four-family........ $ 15,634  11.61%  $ 10,263   8.24%  $ 7,509   8.24%
  Multi-family...............      --     --         --     --         31   0.03
  Commercial.................    1,630   1.21        509   0.49       147   0.16
  Land.......................      800   0.59        180   0.17       678   0.74
  Construction...............   48,641  36.13     27,898  26.79    22,461  24.66
                              -------- ------   -------- ------   ------- ------
    Total real estate loans..   66,705  49.54     38,850  37.30    30,826  33.83
                              -------- ------   -------- ------   ------- ------
Consumer loans...............   11,609   8.62     10,670  10.25    10,323  11.33
                              -------- ------   -------- ------   ------- ------
    Total fixed-rate loans...   78,314  58.16     49,520  47.55    41,149  45.16
                              -------- ------   -------- ------   ------- ------
Adjustable Rate Loans:
Real estate:
  One- to four-family........ $ 49,868  37.04%  $ 46,997  45.12%  $45,152  49.57%
  Multi-family...............    1,602   1.19        748   0.72       284   0.31
  Commercial.................    1,138   0.84      1,011   0.97       935   1.03
  Land.......................    3,443   2.56      3,213   3.08     3,328   3.65
  Construction...............      --     --       2,434   2.34       --     --
                              -------- ------   -------- ------   ------- ------
    Total real estate loans..   56,051  41.63     54,403  52.23    49,699  54.56
                              -------- ------   -------- ------   ------- ------
Consumer loans...............      281   0.21        230   0.22       249   0.27
                              -------- ------   -------- ------   ------- ------
    Total adjustable-rate
     loans...................   56,332  41.84     54,633  52.45    49,948  54.83
                              -------- ------   -------- ------   ------- ------
    Total loan portfolio.....  134,646 100.00%   104,153 100.00%   91,097 100.00%
                                       ======            ======           ======
Less:
  Loans in process...........   18,661            12,350           11,015
  Deferred fees and
   discounts.................      494               350              284
  Allowance for losses.......      669               436              388
                              --------          --------          -------
    Total loans receivable,
     net..................... $114,822          $ 91,017          $79,410
                              ========          ========          =======
</TABLE>
 
  ONE- TO FOUR-FAMILY MORTGAGE LOANS. The Bank's primary lending activity is
the origination of one- to four-family, owner-occupied, residential mortgage
loans secured by property located in the Bank's market area. Loans are
generated through the Bank's marketing efforts, its existing customers and
referrals, real estate brokers, builders and local businesses. The Bank also
employs its Chairman of the Board as a full-time loan originator to solicit
loans. The Bank generally has limited its real estate loan originations to the
financing of properties located within its market area and will not make out-
of-state loans. At June 30, 1998, the Bank had $65.5 million, or 48.6% of its
loan portfolio, invested in mortgage loans secured by one- to four-family
residences.
 
  The Bank originates fixed-rate residential one- to four-family loans with
terms of 15 and 30 years. Such loans may either be retained in portfolio or
sold in the secondary mortgage market depending on the yield on such loans and
the Bank's asset/liability management objectives. Currently, the Bank's policy
is to sell into the secondary market longer-term fixed-rate residential real
estate loans. During fiscal 1998, the Bank retained in portfolio certain
fixed-rate mortgage loan originations which provided for a 30-year
amortization schedule with a 5-year balloon payment feature and certain second
mortgage loans with terms to maturity from two to 15 years. As of June 30,
1998, $15.6 million, or 11.6% of the Bank's loan portfolio, consisted of
fixed-rate residential
 
                                       5
<PAGE>
 
one- to four-family loans. The Bank's fixed-rate mortgage loans amortize
monthly with principal and interest due each month. Residential real estate
loans often remain outstanding for significantly shorter periods than their
contractual terms because borrowers may refinance or prepay loans at their
option.
 
  Fixed-rate residential one- to four-family loans originated for sale in the
secondary mortgage market are underwritten in conformity with the criteria
established by the Federal Home Loan Mortgage Corporation ("FHLMC") for sale
primarily to FHLMC. Such loans are sold on a non-recourse basis. The Bank
retains servicing rights on a portion of such loans, depending upon customer
preferences and competitive conditions. For the fiscal year ended June 30,
1998, of the $31.2 million in fixed-rate residential one- to four-family loans
originated by the Bank, $22.8 million of such loans, or 73.1%, were sold in the
secondary mortgage market.
 
  The Bank also offers ARM loans for terms ranging up to 30 years. The Bank
currently offers ARM loans that adjust every year, with interest rate
adjustment limitations up to two percentage points per year and with a cap of
up to six percentage points on total interest rate increases over the life of
the loan, although a majority of the ARM loans in the Bank's portfolio have
adjustment limitations of one percentage point and five percentage point
interest rate caps. In a rising interest rate environment, such rate
limitations may prevent ARM loans from repricing to market interest rates,
which would have an adverse effect on net interest income. The Bank has used
different interest indices for ARM loans in the past, and currently uses the
one year U.S. Treasury Index adjusted to a constant maturity, with margins of
275 basis points for agency-conforming ARM loans and 300 basis points for non-
conforming ARM loans. ARM loans secured by residential one- to four-family real
estate totaled $49.9 million, or 37.0% of the Bank's total loan portfolio at
June 30, 1998. The origination of fixed-rate mortgage loans versus ARM loans is
monitored on an ongoing basis and is affected significantly by the level of
market interest rates, customer preference, the Bank's interest rate gap
position and loan products offered by the Bank's competitors. Particularly in a
relatively low interest rate environment, borrowers may prefer fixed-rate loans
to ARM loans. During the fiscal year ended June 30, 1998, the Bank originated
$31.2 million in fixed-rate residential mortgage loans and $16.4 million of ARM
loans. During fiscal 1997, the Bank originated $15.4 million of fixed-rate
residential mortgage loans and $11.1 million of ARM loans.
 
  The primary purpose of offering ARM loans is to make the Bank's loan
portfolio more interest rate sensitive. However, as the interest income earned
on ARM loans varies with prevailing interest rates, such loans do not offer the
Bank predictable cash flows as would long-term, fixed-rate loans. ARM loans
carry increased credit risk associated with potentially higher monthly payments
by borrowers as general market interest rates increase. It is possible,
therefore, during periods of rising interest rates, that the risk of
delinquencies and defaults on ARM loans may increase due to the upward
adjustment of interest costs to the borrower, resulting in increased loan
losses.
 
  The Bank's residential first mortgage loans customarily include due-on-sale
clauses, which are provisions giving the Bank the right to declare a loan
immediately due and payable in the event, among other things, that the borrower
sells or otherwise disposes of the underlying real property serving as security
for the loan. Due-on-sale clauses are a means of imposing assumption fees and
increasing the interest rate on the Bank's mortgage portfolio during periods of
rising interest rates.
 
  Regulations limit the amount that a savings association may lend relative to
the appraised value of the real estate securing the loan, as determined by an
appraisal at the time of loan origination. Such regulations permit a maximum
loan-to-value ("LTV") ratio of 95% for residential property (and 100% for loans
guaranteed by the Veterans Administration) and 90% for all other real estate
loans. The Bank's lending policies, however, generally limit the maximum LTV
ratio on fixed-rate and ARM loans to 80% of the lesser of the appraised value
or the purchase price of the property securing the loan in the case of loans
secured by one- to four-family owner-occupied properties. On conventional one-
to four-family loans, the Bank will lend up to a 95% LTV ratio; however, any
loans with LTV ratios in excess of 80% require private mortgage insurance. The
maximum LTV ratio on other types of real estate loans is generally the lesser
of 80% of the appraisal value or the purchase price of the property.
 
                                       6
<PAGE>
 
  When underwriting residential real estate loans, the Bank reviews and
verifies each loan applicant's employment, income and credit history. The
Bank's policy is to obtain credit reports and financial statements on all
borrowers and guarantors, and to verify references. Properties securing real
estate loans are appraised by Bank-approved independent appraisers. Appraisals
are subsequently reviewed by the Bank's Loan Committee, as applicable.
Management believes that stability of income, past credit history and adequacy
of the proposed security are integral parts in the underwriting process.
Generally, the applicant's total monthly mortgage payment, including all
escrow amounts, is limited to 28% of the applicant's total monthly income. In
addition, total monthly obligations of the applicant, including mortgage
payments, should not generally exceed 36% of total monthly income. Written
appraisals are always required on real estate property offered to secure an
applicant's loan. The Bank requires fire and casualty insurance on all
properties securing real estate loans, as well as title insurance.
 
  CONSTRUCTION AND LAND LENDING. The Bank invests a significant proportion of
its loan portfolio in construction and land loans. Prompted by increased
residential development in Clay County in recent years, such lending has been
a growing part of the Bank's loan portfolio. Construction lending has been
very    , particularly since the opening of the branch office in Liberty,
Missouri in March 1998. Through the Liberty office, the Bank has received
construction loan requests from several new builders active in the Liberty
area. Substantially all of the Bank's construction and land loans are secured
by residential properties located in Clay County.
 
  The Bank originates four basic types of construction and land loans:
 
    1."Speculative" construction loans are made to home builders for the
  construction principally of one- to four-family residences and residential
  development projects and, to a lesser extent, multi-family residences
  (primarily duplexes). Speculative construction loans generally do not have
  a sale contract or permanent loan in place for the finished home, and the
  purchasers for the finished homes may be identified either during or
  following the construction period.
 
    2."Contract" construction loans are made to builders who have a signed
  contract to build a new home.
 
    3."Construction" loans are made to individuals who have contracted with a
  builder to construct their personal residence.
 
    4."Land acquisition" loans and "land development" loans ("land loans")
  are made by the Bank to individuals and builders for the acquisition and/or
  development of land upon which the borrower can then build.
 
  The table below presents information on the Bank's construction and land
loans at June 30, 1998:
 
<TABLE>
<CAPTION>
                                                        OUTSTANDING   PERCENT OF
                                                      LOAN BALANCE(1)   TOTAL
                                                      --------------- ----------
                                                        (MILLIONS)
<S>                                                   <C>             <C>
Speculative--1-4 Family..............................     $37,039        70.1%
Speculative--Multifamily.............................       1,600         3.0
Contract.............................................       2,275         4.3
Construction--Commercial.............................         704         1.3
Construction--1-4 Family.............................       4,526         8.6
                                                          -------       -----
  Total construction.................................      46,144        87.3
Land Development.....................................       2,496         4.7
Land.................................................       4,243         8.0
                                                          -------       -----
  Total construction and land........................     $52,883       100.0%
                                                          =======       =====
</TABLE>
--------
(1) Includes loans in process.
 
  At June 30, 1998, the Bank's $46.1 million of construction loans and $6.8
million of land and land development loans represented 34.3% and 5.0%,
respectively, of total loans receivable. At the same time, the Bank's $38.6
million of speculative construction loans represented 28.7% of total loans
receivable.
 
 
                                       7
<PAGE>
 
  Construction and land lending affords the Bank the opportunity to achieve
higher interest rates and fees with shorter terms to maturity than does its
single-family permanent mortgage lending. Construction and land lending,
however, is generally considered to involve a higher degree of risk than
single-family permanent mortgage lending due to (i) the concentration of
principal among relatively few borrowers and development projects, (ii) the
increased difficulty at the time the loan is made of estimating building costs
and the selling price of the residence to be built, (iii) the increased
difficulty and costs of monitoring the loan, (iv) the higher degree of risk
associated with residential sales activity in changing real estate market
conditions, and (v) the increased difficulty of working out problem loans.
Speculative construction loans have the added risk associated with identifying
an end-purchaser for the finished home. The Bank has sought to address these
risks by developing and adhering to underwriting policies, disbursement
procedures, and monitoring practices.
 
  The Bank seeks to make construction loans to those builders with which it
has a long-standing history of satisfactory performance. New builders
typically borrow from the Bank in limited amounts and may borrow additional
amounts based on proven experience with the Bank. The Bank's process when
reviewing a loan request from a new builder is to evaluate the builder's
financial strength, verify the number of years he has been building, analyze
the subdivision that the houses will be built in, review the appraisal value
against the loan amount, verify that the building cost estimates are
reasonable, determine the reputation of the builder and verify that the
builder pays its subcontractors promptly for the work they have performed. At
June 30, 1998, the Bank had 12 borrowers for which speculative construction
loans outstanding totaled more than $1.0 million.
 
  While substantially all of the Bank's construction and land loans are
secured by properties located in southern Clay County, the Bank also seeks to
diversify its construction and land lending risks among several subdivisions.
At June 30, 1998, the Bank had speculative construction loans secured by
properties in 115 subdivisions of which 4 represented an exposure to a single
subdivision of more than $1.0 million.
 
  One- to Four-Family Construction Loans. Loans for the construction of one-
to four-family residences are generally made for terms of 12 months. The
Bank's loan policy includes maximum loan-to-value ratios of up to 85% for
speculative construction loans and up to 80% for construction loans. Prior to
preliminary approval of a construction loan application, Bank personnel
inspect the site, review the existing or proposed improvements, identify the
market for the proposed project, analyze the pro forma data and assumptions on
the project, and satisfy themselves with the experience and expertise of the
builder. After preliminary approval has been given, the application is
processed. Processing includes obtaining credit reports, financial statements
and tax returns on the borrowers and guarantors, if any, an independent
appraisal of the project, and any other expert reports necessary to evaluate
the proposed project.
 
  The Bank requires that construction loan proceeds be disbursed in increments
as construction progresses based upon inspections by Bank personnel. To
control the disbursement process, the Bank requires that builders and their
subcontractors and vendors submit invoices to the Bank for payment. In the
event of cost overruns, depending on the circumstances (i.e., whether due to
"add-ons" not included in the original plans or due to unanticipated changes
in building costs) the Bank may seek to require the borrower to deposit funds
with the Bank for additional disbursements, increase the loan amount on the
basis of an increased appraisal and disburse additional loan proceeds
consistent with the original loan-to-value ratio, or become more active in the
monitoring and progress of the project.
 
  The Bank regularly monitors the accuracy of assumptions made in its
construction loan business over time. In particular, the Bank tracks the
accuracy of its independent appraisers by comparing actual selling prices with
the appraised value estimated in connection with the loan approval.
Additionally, the Bank tracks the performance of its builder customers by
comparing actual costs with those estimated in the loan application. The Bank
monitors each subdivision where the Bank has speculative loans each month to
see that houses are selling promptly and to assure that the Bank does not get
too much of a loan concentration in any one subdivision. The Bank also adheres
to a very strict policy of inspecting each construction site prior to payment
of construction bills to reduce the Bank's risk during the construction
process.
 
                                       8
<PAGE>
 
  Commercial and Multi-family Construction Loans. Occasionally, the Bank
originates loans for the construction of commercial buildings and multi-family
residences on terms similar to those on one- to four-family construction loans.
At June 30, 1998, the Bank had $1.6 million of speculative construction loans
secured by multi-family properties.
 
  Land Loans. At June 30, 1998, the Bank had total land loans of $4.2 million
and land development loans of $2.5 million. In making land loans and land
development loans, the Bank follows similar underwriting policies as for
construction loans. The Bank originates land loans and land development loans
with similar terms and at similar rates as construction loans, except that the
initial term on conventional land loans is typically five to ten years (not to
exceed 30 years) as opposed to the term of up to 12 months that is typical of
construction loans.
 
  MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING. The Bank also originates
loans secured by multi-family and commercial real estate. At June 30, 1998,
$4.4 million, or 3.2%, of the Bank's loan portfolio consisted of multi-family
loans and commercial real estate loans.
 
  Multi-family and commercial real estate loans originated by the Bank may be
either fixed- or adjustable-rate loans with terms to maturity and amortization
schedules of up to 30 years. Rates on such ARM loans generally adjust annually
to specified spreads over the one-year U.S. Treasury securities index adjusted
to a constant maturity of one year, subject to annual and life-of-loan interest
rate caps. Multi-family and commercial real estate loans are written in amounts
of up to 80% of the lesser of the appraised value of the property or the sales
price.
 
  The Bank's commercial real estate portfolio consists primarily of loans on
small office buildings located in the Bank's primary market area. Multi-family
loans generally are secured by duplexes. Appraisals on properties which secure
multi-family and commercial real estate loans are performed by an independent
appraiser designated by the Bank before the loan is made. All appraisals on
multi-family and commercial real estate loans are reviewed by the Bank's
management. In underwriting such loans, the Bank primarily considers the cash
flows generated by the real estate to support the debt service, the financial
resources and income level of the borrower and the Bank's experience with the
borrower. In addition, the Bank's underwriting procedures require verification
of the borrower's credit history, an analysis of the borrower's income,
financial statements and banking relationships, a review of the borrower's
property management experience and references, and a review of the property,
including cash flow projections and historical operating results. The Bank
seeks to ensure that the property securing the loans will generate sufficient
cash flow to adequately cover operating expenses and debt service payments.
 
  Multi-family and commercial real estate lending affords the Bank an
opportunity to receive interest at rates higher than those generally available
from one- to four-family residential lending. Nevertheless, loans secured by
such properties are generally larger, more difficult to evaluate and monitor
and, therefore generally, involve a greater degree of risk than one- to four-
family residential mortgage loans. Because payments on loans secured by
commercial real estate and multi-family properties are often dependent on the
successful operation or management of the properties, repayment of such loans
may be subject to adverse conditions in the real estate market or the economy.
If the cash flow from the project is reduced, the borrower's ability to repay
the loan might be impaired. The Bank has attempted to minimize these risks by
lending primarily to the ultimate user of the property or on existing income-
producing properties.
 
  CONSUMER LENDING. Community Bank offers a variety of consumer loans,
including automobile and home improvement loans, second mortgage home equity
loans, lines of credit secured by first or second mortgage loans, and loans
secured by deposits. The Bank currently originates substantially all of its
consumer loans in its primary market area generally to its existing customers.
At June 30, 1998, the Bank's consumer loan portfolio totaled $11.9 million, or
8.8% of its loan portfolio.
 
  The primary component of the Bank's consumer loan portfolio consists of
automobile loans secured by both new and used cars and light trucks. The Bank
originates automobile loans on a direct basis, where the Bank extends credit
directly to the borrower, and on an indirect basis through automobile
dealerships. Although
 
                                       9
<PAGE>
 
applications for indirect automobile loans are taken by employees of the
dealer, the loans are made pursuant to the Bank's underwriting standards using
the Bank's documentation. All such indirect automobile loans must be approved
by a Bank loan officer before disbursement of loan proceeds. The Bank seeks to
limit the credit risk of indirect automobile lending by doing business with
local dealers with which it has had a satisfactory prior relationship, and
through strict adherence to its underwriting standards.
 
  The Bank's automobile loans generally have terms that do not exceed five
years and carry a fixed-rate of interest. Generally, loans on new vehicles are
made in amounts up to 80% of dealer cost and loans on used vehicles are made
in amounts up to 80% of the vehicle's published NADA value. Collision and
comprehensive insurance and vendor single-interest coverage is required on all
automobile loans. At June 30, 1998, the Bank's indirect automobile loans
totaled $2.3 million, or 1.7% of the Bank's loan portfolio and direct
automobile loans totaled $7.2 million, or 5.3% of the Bank's loan portfolio.
 
  Community Bank also originates Federal Housing Administration ("FHA") Title
I home improvement loans. Generally, such loans have a maximum term of ten
years, have fixed rates and may be originated up to a 100% loan-to-value
ratio. While the Bank retains a portion of such loans in portfolio, the
majority of its FHA Title I home improvement loans are originated for sale in
the secondary market. At June 30, 1998, the Bank's FHA Title I home
improvement loans totaled $122,000, or 0.1% of the Bank's loan portfolio.
 
  The Bank also originates for portfolio second mortgage/home equity loans.
These loans are generally limited to 80% or less of the appraised value of the
property securing the loan. These loans are originated as fixed-rate loans and
generally have maximum terms of 15 years. At June 30, 1998, the Bank's second
mortgage/home equity loans totaled $2,331,000, or 1.7% of the Bank's loan
portfolio.
 
  The Bank also originates for portfolio lines of credit secured by first or
second mortgages. These loans are primarily adjustable-rate loans, adjust
annually, and may be originated up to an 80% loan-to-value ratio, with a
maximum term of five years. At June 30, 1998, the Bank's lines of credit
secured by first or second mortgages totaled $1.7 million, or 1.2% of the
Bank's loan portfolio.
 
  Consumer loan terms vary according to the type and value of collateral,
length of contract and creditworthiness of the borrower. The underwriting
standards employed by the Bank for consumer loans include an application, a
determination of the applicant's payment history on other debts and an
assessment of ability to meet existing obligations and payments on the
proposed loan. Although creditworthiness of the applicant is a primary
consideration, the underwriting process also includes a comparison of the
value of the security, if any, in relation to the proposed loan amount.
 
  Consumer loans entail greater credit risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured or are
secured by rapidly depreciable assets, such as automobiles. Further, any
repossessed collateral for a defaulted consumer loan may not provide an
adequate source of repayment of the outstanding loan balance as a result of
the greater likelihood of damage, loss or depreciation. In addition, consumer
loan collections are dependent on the borrower's continuing financial
stability, and thus are more likely to be affected by adverse personal
circumstances. Furthermore, the application of various federal and state laws,
including bankruptcy and insolvency laws, may limit the amount which can be
recovered on such loans. At June 30, 1998, $93,000 in consumer loans were non-
performing. See "Asset Quality--Delinquent Loans and Non-performing Assets."
There can be no assurances, however, that delinquencies will not increase in
the future.
 
                                      10
<PAGE>
 
LOAN MATURITY SCHEDULE
 
  The following schedule illustrates the contractual maturity and weighted
average rates of the Bank's total loan portfolio at June 30, 1998. Mortgages
which have adjustable or renegotiable interest rates are shown as maturing in
the period during which the contract is due. The schedule does not reflect the
effects of scheduled payments, possible prepayments or enforcement of due-on-
sale clauses. The total amount of loans due after June 30, 1998 that have
predetermined interest rates is $25.4 million, and that have floating or
adjustable rates is $56.1 million.
 
<TABLE>
<CAPTION>
                                             REAL ESTATE
                  -----------------------------------------------------------------
                      ONE- TO       MULTI-FAMILY
                    FOUR-FAMILY    AND COMMERCIAL       LAND         CONSTRUCTION       CONSUMER           TOTAL
                  ---------------- --------------- --------------- ---------------- ---------------- -----------------
                          WEIGHTED        WEIGHTED        WEIGHTED         WEIGHTED         WEIGHTED          WEIGHTED
                          AVERAGE         AVERAGE         AVERAGE          AVERAGE          AVERAGE           AVERAGE
                  AMOUNT    RATE   AMOUNT   RATE   AMOUNT   RATE   AMOUNT    RATE   AMOUNT    RATE    AMOUNT    RATE
                  ------- -------- ------ -------- ------ -------- ------- -------- ------- -------- -------- --------
                                                         (DOLLARS IN THOUSANDS)
<S>               <C>     <C>      <C>    <C>      <C>    <C>      <C>     <C>      <C>     <C>      <C>      <C>
DUE DURING YEARS
ENDING JUNE 30,
----------------
1999............  $ 1,774   8.43%  $  --     -- %  $  646   8.49%  $48,383   8.00%  $ 2,328   9.38%  $ 53,131   8.08%
2000............      144   8.75        2   7.75      --     --        258   8.00     1,167  10.64      1,571  10.03
2001............      478   9.28      179   9.29      478   8.76       --     --      2,382  10.31      3,517   9.91
2002 and 2003...    3,534   9.15    1,170   8.86       16   8.35       --     --      5,911   9.90     10,631   9.53
2004 to 2008....    3,898   8.60      627   8.24      273   8.52       --     --         99   9.18      4,897   8.56
2009 to 2023....   14,951   8.31      885   8.51      721   8.51       --     --          3   9.00     16,560   8.33
2024 and
following.......   40,723   8.08    1,507   8.55    2,109   8.46       --     --        --     --      44,339   8.12
                  -------   ----   ------   ----   ------   ----   -------   ----   -------  -----   --------  -----
                  $65,502   8.24%  $4,370   8.61%  $4,243   8.51%  $48,641   8.00%  $11,890   9.94%  $134,646   8.33%
                  =======   ====   ======   ====   ======   ====   =======   ====   =======  =====   ========  =====
</TABLE>
 
                                       11
<PAGE>
 
ORIGINATION OF LOANS
 
  Loan originations are developed from continuing business with depositors and
borrowers, soliciting realtors, builders, walk-in customers and third-party
sources. The Bank also employs its Chairman of the Board as a full-time loan
originator to solicit loans. The Board of Directors of the Bank has authorized
certain officers to originate loans within specified underwriting limits. Each
of the Chief Executive Officer and the Mortgage Lending Officer have authority
to make secured real estate loans up to $203,000 and secured installment loans
up to $30,000. Unsecured installment loans may be approved by the Chief
Executive Officer up to $15,000 and by the Mortgage Lending Officer up to
$10,000. All loans in excess of these limitations must be approved by the
Board of Directors. The Bank has established a Loan Audit Committee which
reviews loans made or denied by officers of the Bank. The Loan Audit Committee
meets monthly and consists of the Chief Executive Officer as well as three
members of the Board of Directors.
 
  While the Bank originates both adjustable-rate and fixed-rate loans, its
ability to originate loans to a certain extent is dependent upon the relative
customer demand for loans in its market, which is affected by the interest
rate environment, among other factors. For the fiscal year ended June 30,
1998, the Bank originated $87.8 million in fixed-rate loans and $19.5 million
in adjustable-rate loans. For the year ended June 30, 1997, the Bank
originated $56.1 million in fixed-rate loans and $13.8 million in adjustable-
rate loans.
 
  In recent years, the Bank has not purchased loans. For the fiscal years
ended June 30, 1998, 1997, and 1996, the Bank purchased no loans. The Bank has
expanded its mortgage banking operations during the past year. As currently
structured, longer term, fixed rate loans which don't meet the Bank's asset
and liability requirements are sold to investors on either a servicing
released or servicing retained basis. Such loans are preapproved by investors
with interest rates locked prior to loan funding. The Bank originates both
conforming and non-conforming (subprime) loans for sale to investors. The
expansion of the mortgage banking operations has contributed significantly to
the growth of the bank's non-interest income, and it is expected that this
growth will continue in 1999. For the year ended June 30, 1998, the Bank sold
$22.8 million in conforming residential one- to four-family loans, compared to
$11.2 million and $16.1 million for the years ended June 30, 1997 and 1996,
respectively. Virtually all of the residential loans sold by the Bank are
fixed-rate residential loans with maturities of 15 and 30 years.
 
                                      12
<PAGE>
 
  Set forth below is a table showing the Bank's loan originations, sales and
repayments for the periods indicated.
 
<TABLE>
<CAPTION>
                                                      YEAR ENDED JUNE 30,
                                                    --------------------------
                                                      1998     1997     1996
                                                    --------  -------  -------
                                                         (IN THOUSANDS)
<S>                                                 <C>       <C>      <C>
Originations by type:
Adjustable rate:
 Real estate--
  One- to four-family residential.................. $ 16,390  $11,103  $ 6,253
  Multi-family.....................................      765      488       52
  Commercial.......................................      202      243      399
  Land.............................................    1,491    1,257    2,592
  Consumer.........................................      626      751      232
                                                    --------  -------  -------
    Total adjustable rate..........................   19,474   13,842    9,528
                                                    --------  -------  -------
Fixed rate:
 Real estate--
  One- to four-family residential..................   31,195   15,370   19,083
  Commercial.......................................    1,148      366       67
  Land.............................................      655      244      452
  Construction.....................................   44,627   30,596   27,460
  Consumer.........................................   10,186    9,329    8,680
                                                    --------  -------  -------
  Commercial Business..............................      --       213      --
    Total fixed rate...............................   87,811   56,118   55,742
                                                    --------  -------  -------
    Total loans originated.........................  107,285   69,960   65,270
Sales and Repayments:
 Real Estate--
  One- to four-family residential..................   22,758   11,201   16,091
                                                    --------  -------  -------
    Total loans sold...............................   22,758   11,201   16,091
  Principal repayments.............................   67,410   48,407   53,692
                                                    --------  -------  -------
    Total sales and repayments.....................   90,168   59,608   69,783
Decrease (increase) in other items, net............   (6,688)  (1,449)  (4,849)
                                                    --------  -------  -------
Net (decrease) increase............................ $ 10,429  $ 8,903  $(9,362)
                                                    ========  =======  =======
</TABLE>
 
ASSET QUALITY
 
  The Bank's collection procedures provide that when a loan is past due, a
first notice is sent to the borrower requesting payment ten days (for consumer
loans) and 16 days (for real estate loans) after the due date. A second notice
is sent 16 days (for consumer loans) and 30 days (for real estate) after the
due date. At the time of the second notice, phone calls are made by the Bank
with personal letter backups. If the loan remains delinquent for 30 days, a
telephone contact is made. If the loan becomes 60 days delinquent, a right-to-
cure letter generally is sent and the borrower is notified of the availability
of financial or counseling aid. If consumer loans are not resolved by 90 days,
the account is put on non-accrual status and repossession and/or legal action
is normally initiated. If a real estate loan is past due 60 days or more, the
loan is presented to the Board of Directors for future disposition. In most
cases, the Board of Directors authorizes the initiation of foreclosure
proceedings. At June 30, 1998, 1997 and 1996, the percentage of total loans
delinquent 90 days or more to net loans receivable were 0.33%, 0.54% and
0.47%, respectively.
 
  DELINQUENT LOANS AND NON-PERFORMING ASSETS. Loans are reviewed on a regular
basis and are placed on a non-accrual status when, in the opinion of
management, the collection of additional interest is doubtful.
 
                                      13
<PAGE>
 
Mortgage loans are placed on non-accrual status when principal is 90 days or
more past due. Interest accrued and unpaid at the time a loan is placed on non-
accrual status is charged against interest income. The loan will remain on non-
accrual status until the loan is brought current.
 
  Real estate acquired through foreclosure or by deed-in-lieu of foreclosure is
classified as real estate owned until such time as it is sold. When real estate
owned is acquired, it is recorded at the lower of the unpaid principal balance
of the related loan, or its fair value, less estimated selling expenses. Any
further write-down of real estate owned is charged against earnings. At June
30, 1998, the Bank has $49,000 in property classified as real estate owned.
 
  The following table sets forth information with respect to the Bank's
delinquent loans at June 30, 1998.
 
<TABLE>
<CAPTION>
                                     LOANS DELINQUENT FOR
                         ---------------------------------------------
                               60-89 DAYS          90 DAYS AND OVER    TOTAL DELINQUENT LOANS
                         ---------------------- ---------------------- ----------------------
                                       PERCENT                PERCENT                PERCENT
                                       OF LOAN                OF LOAN                OF LOAN
                         NUMBER AMOUNT CATEGORY NUMBER AMOUNT CATEGORY NUMBER AMOUNT CATEGORY
                         ------ ------ -------- ------ ------ -------- ------ ------ --------
<S>                      <C>    <C>    <C>      <C>    <C>    <C>      <C>    <C>    <C>
Real Estate:
One- to four-family.....    6    $304    0.46%     5    $182    0.28%    11    $486    0.74%
Multi-family............    0       0       0      1     120    7.49      1     120    7.49
Consumer................    6      43    0.36     11      73    0.62     17     116    0.98
                          ---    ----    ----    ---    ----    ----    ---    ----    ----
 Total..................   12    $347    0.30%    17    $375    0.33%    29    $722    0.63%
                          ===    ====    ====    ===    ====    ====    ===    ====    ====
</TABLE>
 
  The following table sets forth information regarding non-performing loans and
real estate owned by the Bank at the dates indicated. As of the dates
indicated, the Bank had no material restructured loans within the meaning of
SFAS No. 15.
 
<TABLE>
<CAPTION>
                                                          AT JUNE 30,
                                                     -------------------------
                                                      1998     1997     1996
                                                     ------- --------  -------
                                                     (DOLLARS IN THOUSANDS)
<S>                                                  <C>     <C>       <C>
Non-accruing loans:
  One- to four-family............................... $  465  $    806  $  324
  Consumer..........................................    120       110      88
                                                     ------  --------  ------
    Total...........................................    678       916     412
                                                     ------  --------  ------
Accruing loans delinquent more than 90 days:(1)
  One- to four-family...............................    --        --      232
  Consumer..........................................    --        --      --
                                                     ------  --------  ------
    Total...........................................    --        --      232
                                                     ------  --------  ------
Foreclosed assets:
  One- to four-family...............................     10       168     --
  Commercial real estate............................     39       --      --
  Land..............................................    --        --      --
  Consumer..........................................      5        73      11
                                                     ------  --------  ------
    Total...........................................     54       241      11
                                                     ------  --------  ------
Total non-performing assets......................... $  732  $  1,157  $  655
                                                     ======  ========  ======
Total loans delinquent 90 days or more to net loans
 receivable.........................................   0.33%     0.54%   0.47%
                                                     ======  ========  ======
</TABLE>
--------
(1) These loans are not currently delinquent 90 days or more with respect to
    principal, but are delinquent with respect to late fees or interest.
 
  For the fiscal year ended June 30, 1998, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to $34,000. The amount that was included in
interest income on such loans was $39,000 for the fiscal year ended June 30,
1998.
 
                                       14
<PAGE>
 
  CLASSIFIED ASSETS. Federal regulations provide for the classification of
loans and other assets, such as debt and equity securities, considered by the
OTS to be of lesser quality, as "substandard," "doubtful" or "loss." An asset
is considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard" with the added characteristic that
the weaknesses present make "collection or liquidation in full" on the basis of
currently existing facts, conditions and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted.
 
  When an insured institution classifies problem assets as either substandard
or doubtful, it may establish general allowances for losses in an amount deemed
prudent by management. General allowances represent loss allowances which have
been established to recognize the inherent risk associated with lending
activities, but which, unlike specific allowances, have not been allocated to
particular problem assets. When an insured institution classifies problem
assets as "loss," it is required either to establish a specific allowance for
losses equal to 100% of that portion of the asset so classified or to charge-
off such amount. An institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
regulatory authorities, who may order the establishment of additional general
or specific loss allowances.
 
  In connection with the filing of its periodic reports with the OTS and in
accordance with its classification of assets policy, the Bank reviews loans in
its portfolio monthly to determine whether such assets require classification
in accordance with applicable regulations. On the basis of management's review
of its assets, at June 30, 1998, the Bank had classified a total of $406,977 of
its assets as substandard. At June 30, 1998, the Bank had $20,560 of its assets
classified as doubtful and had $1,386 of its assets classified as loss. At June
30, 1998, total classified assets comprised $428,923, or 2.54% of the Bank's
capital and 0.35% of the Bank's total assets.
 
  OTHER LOANS OF CONCERN. In addition to the non-performing loans set forth in
the tables above, as of June 30, 1998, there were no loans classified by the
Bank with respect to which known information about the possible credit problems
of the borrowers or the cash flows of the security properties have caused
management to have some doubts as to the ability of the borrowers to comply
with present loan repayment terms and which may result in the future inclusion
of such items in the non-performing asset categories.
 
  ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
risk inherent in its loan portfolio and changes in the nature and volume of its
loan activity, including those loans which are being specifically monitored by
management. Such evaluation, which includes a review of loans for which full
collectibility may not be reasonably assured, considers among other matters,
the loan classifications discussed above, the estimated fair value of the
underlying collateral, economic conditions, historical loan loss experience,
the amount of loans outstanding and other factors that warrant recognition in
providing for an adequate loan loss allowance.
 
  Real estate properties acquired through foreclosure are recorded at the lower
of cost or fair value minus estimated cost to sell. If fair value at the date
of foreclosure is lower than the balance of the related loan, the difference
will be charged-off to the allowance for loan losses at the time of transfer.
Valuations are periodically updated by management and if the value declines, a
specific provision for losses on such property is established by a charge to
operations. At June 30, 1998, the Bank had $49,000 in properties which were
acquired through foreclosure.
 
  Although management believes that it uses the best information available to
determine the allowance, unforeseen market conditions could result in
adjustments and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in making the final
determination. Future additions to the Bank's allowance for loan losses will be
the result of periodic loan, property and collateral reviews and
 
                                       15
<PAGE>
 
thus cannot be predicted in advance. In addition, federal regulatory agencies,
as an integral part of the examination process, periodically review the Bank's
allowance for loan losses. Such agencies may require the Bank to increase the
allowance based upon their judgment of the information available to them at
the time of their examination. At June 30, 1998, the Bank had a total
allowance for loan losses of $669,000, representing 91.4% of total non-
performing loans and .61% of the Bank's loans receivable, net.
 
  The following table sets forth the allocation for loan losses by category
for the periods indicated.
 
<TABLE>
<CAPTION>
                                                               AT JUNE 30,
                          -------------------------------------------------------------------------------------
                                      1998                         1997                        1996
                          ---------------------------- ---------------------------- ---------------------------
                                              PERCENT                      PERCENT                     PERCENT
                                              OF LOANS                     OF LOANS                    OF LOANS
                                      LOAN    IN EACH              LOAN    IN EACH              LOAN   IN EACH
                          AMOUNT OF  AMOUNTS  CATEGORY AMOUNT OF  AMOUNTS  CATEGORY AMOUNT OF AMOUNTS  CATEGORY
                          LOAN LOSS    BY     TO TOTAL LOAN LOSS    BY     TO TOTAL LOAN LOSS    BY    TO TOTAL
                          ALLOWANCE CATEGORY   LOANS   ALLOWANCE CATEGORY   LOANS   ALLOWANCE CATEGORY  LOANS
                          --------- --------- -------- --------- --------- -------- --------- -------- --------
                                                     (DOLLARS IN THOUSANDS)
<S>                       <C>       <C>       <C>      <C>       <C>       <C>      <C>       <C>      <C>
One- to four-family.....    $ 63    $  65,502   48.65%   $  41   $  57,260   54.98%   $  44   $ 52,661   57.81%
Multi-family............       8        1,602    1.19        3         748    0.72        2        315    0.34
Commercial real estate..      16        2,768    2.06        9       1,520    1.46        6      1,082    1.19
Land....................      42        4,243    3.15       30       3,393    3.26       23      4,006    4.40
Construction or
 development............     372       48,641   36.12      208      30,332   29.12      172     22,461   24.66
Consumer................     168       11,890    8.83      145      10,900   10.46      141     10,572   11.60
                            ----    ---------  ------    -----   ---------  ------    -----   --------  ------
 Total..................    $669    $ 134,646  100.00%   $ 436   $ 104,153  100.00%   $ 388   $ 91,097  100.00%
                            ====    =========  ======    =====   =========  ======    =====   ========  ======
</TABLE>
 
  The following table sets forth information with respect to the Bank's
allowance for loan losses for the periods indicated.
 
<TABLE>
<CAPTION>
                                                           YEARS ENDED JUNE 30,
                                                           --------------------
                                                           1998   1997    1996
                                                           -----  -----   -----
                                                            (IN THOUSANDS)
<S>                                                        <C>    <C>    <C>
Balance at beginning of period...........................  $ 436  $ 388  $ 226
                                                           -----  -----  -----
Charge-offs:
  One- to four-family....................................    --     --     --
  Consumer...............................................     83     53    107
                                                           -----  -----  -----
                                                              83     53    107
Recoveries:
  Consumer...............................................     50     41     33
                                                           -----  -----  -----
                                                              50     41     33
                                                           -----  -----  -----
Net charge-offs..........................................     33     12     74
Provision for loan losses................................    266     60    236
                                                           -----  -----  -----
Balance at end of period.................................  $ 669  $ 436  $ 388
                                                           =====  =====  =====
Ratio of net charge-offs during the period to average
 loans outstanding during the period.....................   0.03%  0.01%  0.09%
                                                           =====  =====  =====
Ratio of allowance for loan loss to ending loans
 receivable, net.........................................   0.58%  0.48%  0.49%
                                                           =====  =====  =====
Ratio of allowance for loan loss to non-performing assets
 at end of period........................................  91.39% 37.68% 59.24%
                                                           =====  =====  =====
</TABLE>
 
                                      16
<PAGE>
 
INVESTMENT ACTIVITIES
 
  GENERAL. Community Bank must maintain minimum levels of investments that
qualify as liquid assets under OTS regulations. Liquidity may increase or
decrease depending upon the availability of funds and comparative yields on
investments in relation to the return on loans. Historically, the Bank has
generally maintained liquid assets at levels above the minimum requirements
imposed by the OTS regulations and at levels believed adequate to meet the
requirements of normal operations, including repayments of maturing debt and
potential deposit outflows. Cash flows projections are regularly reviewed and
updated to assure that adequate liquidity is maintained. At June 30, 1998, the
Bank's average liquidity ratio (liquid assets as a percentage of net
withdrawable savings deposits and current borrowings) was 4.01%.
See"Regulation--Liquidity."
 
  Federally chartered savings institutions have the authority to invest in
various types of liquid assets, including U.S. Treasury obligations, securities
of various federal agencies, certain certificates of deposit of insured banks
and savings institutions, certain bankers' acceptances, repurchase agreements
and federal funds. Subject to various restrictions, federally chartered savings
institutions may also invest their assets in commercial paper, investment grade
corporate debt securities and mutual funds whose assets conform to the
investments that a federally chartered savings institution is otherwise
authorized to make directly.
 
  Generally, the investment policy of the Bank, as established by the Board of
Directors, is to invest funds among various categories of investments and
maturities based upon the Bank's liquidity needs, asset/liability management
policies, investment quality, marketability and performance objectives.
 
  MORTGAGE-BACKED SECURITIES. The Bank purchases mortgage-backed securities to
supplement residential loan production and as part of its asset/liability
strategy. The type of securities purchased is based upon the Bank's
asset/liability management strategy and balance sheet objectives. The Bank has
invested primarily in federal agency securities, principally FHLMC and
Government National Mortgage Association ("GNMA") obligations. At June 30,
1998, the Bank's investment in mortgage-backed securities totaled $81,066, or
0.07% of its total assets. At June 30, 1998 and 1997, all of the Bank's
mortgage-backed securities were classified as held-to-maturity.
 
  The FHLMC and GNMA certificates are modified pass-through mortgage-backed
securities that represent undivided interests in underlying pools of fixed-
rate, or certain types of adjustable-rate, single-family residential mortgages
issued by these government-sponsored entities. As a result, the interest rate
risk characteristics of the underlying pool of mortgages, i.e., fixed rate or
adjustable rate, as well as prepayment risk, are passed on to the certificate
holder. FHLMC provides the certificate holder a guarantee of timely payments of
interest and ultimate collection of principal, whether or not they have been
collected. GNMA's guarantee to the holder of timely payments of principal and
interest is backed by the full faith and credit of the U.S. Government.
 
  While mortgage-backed securities carry a reduced credit risk as compared to
whole loans, such securities remain subject to the risk that a fluctuating
interest rate environment, along with other factors such as the geographic
distribution of the underlying mortgage loans, may alter the prepayment rate of
such mortgage loans and so affect both the prepayment speed, and value, of such
securities.
 
  Set forth below is a table showing the Bank's purchases, sales and repayments
of mortgage-backed securities for the periods indicated.
 
<TABLE>
<CAPTION>
                                                         YEAR ENDED JUNE 30,
                                                         ---------------------
                                                         1998   1997    1996
                                                         -----  -----  -------
                                                           (IN THOUSANDS)
<S>                                                      <C>    <C>    <C>
Purchases............................................... $ --   $ --   $   --
Sales...................................................   --     --    (2,914)
Repayments..............................................   (73)  (246)    (554)
                                                         -----  -----  -------
Net increase (decrease)................................. $ (73) $(246) $(3,468)
                                                         =====  =====  =======
</TABLE>
 
                                       17
<PAGE>
 
  OTHER INVESTMENTS. At June 30, 1998, the Bank's investment securities other
than mortgage-backed securities consisted of federal agency obligations, FHLB
stock and other FHLB interest-earning assets.
 
  OTS regulations restrict investments in corporate debt and equity securities
by the Bank. These restrictions include prohibitions against investments in
the debt securities of any one issuer in excess of 15% of the Bank's
unimpaired capital and unimpaired surplus as defined by federal regulations,
plus an additional 10% if the investments are fully secured by readily
marketable collateral. At June 30, 1998, the Bank was in compliance with this
regulation. See "Regulation--Federal Regulation of Savings Associations" for a
discussion of additional restrictions on the Bank's investment activities.
 
  The following table sets forth the composition of the Bank's investment
securities, net of premiums and discounts, at the dates indicated.
 
<TABLE>
<CAPTION>
                                               JUNE 30,
                           ---------------------------------------------------
                               1998             1997               1996
                           -------------  -----------------  -----------------
                            BOOK   % OF               % OF               % OF
                           VALUE  TOTAL   BOOK VALUE TOTAL   BOOK VALUE TOTAL
                           ------ ------  ---------- ------  ---------- ------
                                        (DOLLARS IN THOUSANDS)
<S>                        <C>    <C>     <C>        <C>     <C>        <C>
Investment securities
 available-for-sale:
  Federal agency obliga-
   tions.................  $  --     --   $      996  18.27% $    1,974  34.87%
                           ------ ------  ---------- ------  ---------- ------
  Subtotal...............     --     --          996  18.27       1,974  34.87
Investment securities
 held-to-maturity........  $   98   2.77% $      100   1.83% $      100   1.77%
                           ------ ------  ---------- ------  ---------- ------
  Subtotal...............  $   98   2.77% $      100   1.83% $      100   1.77%
  FHLB stock.............   1,025  28.94         811  14.88         811  14.32
                           ------ ------  ---------- ------  ---------- ------
    Total investment
     securities and FHLB
     stock...............   1,123  31.71       1,907  34.98       2,885  50.96
                           ------ ------  ---------- ------  ---------- ------
Other interest-earning
 assets:
  FHLB checking..........   2,419  68.29       3,544  65.02       2,776  49.04
                           ------ ------  ---------- ------  ---------- ------
    Total other interest-
     earnings assets.....   2,419  68.29       3,544  65.02       2,776  49.04
                           ------ ------  ---------- ------  ---------- ------
    Total investment
     portfolio...........  $3,542 100.00% $    5,451 100.00% $    5,661 100.00%
                           ====== ======  ========== ======  ========== ======
Average remaining life of
 investment securities
 available for sale......     --          0.50 years         0.91 years
</TABLE>
 
  INVESTMENT PORTFOLIO MATURITIES. The following table sets forth the
scheduled maturities, carrying values, market values and average yields for
the Bank's investment securities excluding FHLB stock at June 30, 1998.
 
<TABLE>
<CAPTION>
                                            JUNE 30, 1998
                          -----------------------------------------------------
                          LESS THAN 1 TO 5  5 TO 10   OVER   TOTAL INVESTMENT
                           1 YEAR   YEARS    YEARS  10 YEARS    SECURITIES
                          --------- ------  ------- -------- ------------------
                            BOOK     BOOK    BOOK     BOOK    BOOK      MARKET
                            VALUE   VALUE    VALUE   VALUE    VALUE     VALUE
                          --------- ------  ------- -------- --------  --------
                                        (DOLLARS IN THOUSANDS)
<S>                       <C>       <C>     <C>     <C>      <C>       <C>
Investment Securities...    $   3   $  12    $  19   $  64   $     98  $     98
                            -----   -----    -----   -----   --------  --------
Federal agency
 obligations............    $ --    $ --     $ --    $ --    $    --   $    --
                            -----   -----    -----   -----   --------  --------
Total investment
 securities.............    $   3   $  12    $  19   $  64   $     98  $     98
                            =====   =====    =====   =====   ========  ========
Weighted average yield..     6.50%   6.50%    6.50%   6.50%      6.50%     6.50%
</TABLE>
 
                                      18
<PAGE>
 
SOURCES OF FUNDS
 
  GENERAL. The Bank's primary sources of funds are deposits, receipt of
principal and interest on loans and securities, FHLB advances, and other funds
provided from operations.
 
  FHLB advances are used to support lending activities and to assist in the
Bank's asset/liability management strategy. Typically, the Bank does not use
other forms of borrowings. At June 30, 1998, the Bank had $19.5 million in
FHLB advances.
 
  DEPOSITS. Community Bank offers a variety of deposit accounts having a wide
range of interest rates and terms. The Bank's deposits consist of passbook,
demand, NOW, money market deposit and certificate accounts. The certificate
accounts currently range in terms from 91 days to seven years.
 
  The Bank relies primarily on advertising, competitive pricing policies and
customer service to attract and retain these deposits. Currently, Community
Bank solicits deposits from its market area only, and does not use brokers to
obtain deposits. The flow of deposits is influenced significantly by general
economic conditions, changes in money market and prevailing interest rates and
competition.
 
  The Bank has become more susceptible to short-term fluctuations in deposit
flows as customers have become more interest-rate conscious. The Bank
endeavors to manage the pricing of its deposits in keeping with its
profitability objectives giving consideration to its asset/liability
management. Notwithstanding the foregoing, a significant percentage of the
Bank's deposits are for terms of less than one year. At June 30, 1998, $38.8
million, or 59.6% of the Bank's certificates of deposit were in certificates
of deposit with terms of 12 months or less. The Bank believes that upon
maturity most of these deposits will remain at the Bank. The ability of the
Bank to attract and maintain savings accounts and certificates of deposit, and
the rates paid on these deposits, has been and will continue to be
significantly affected by market conditions.
 
  The Bank's total deposits increased from $70.7 million at June 30, 1997 to
$85.8 million at June 30, 1998. This increase resulted from the Bank's
concerted efforts during the year to market selected term certificates of
deposit to fund the Bank's lending programs.
 
SAVINGS PORTFOLIO
 
  The following table sets forth the dollar amount of savings deposits with
various types of deposit programs offered by the Bank at the periods
indicated.
 
<TABLE>
<CAPTION>
                                                  AT JUNE 30,
                                -------------------------------------------------
                                     1998             1997             1996
                                ---------------  ---------------  ---------------
                                BALANCE PERCENT  BALANCE PERCENT  BALANCE PERCENT
                                ------- -------  ------- -------  ------- -------
                                            (DOLLARS IN THOUSANDS)
<S>                             <C>     <C>      <C>     <C>      <C>     <C>
Transactions and Savings
Deposits:
  Passbook savings............. $ 3,680   4.29%  $ 3,726   5.27%  $ 3,978   5.84%
  NOW accounts.................   8,853  10.32     8,328  11.78     7,968  11.68
  Money market accounts........   5,709   6.66     5,394   7.63     6,235   9.15
  Noninterest-bearing demand
   accounts....................   2,392   2.79     1,658   2.35     1,380   2.02
                                ------- ------   ------- ------   ------- ------
    Total non-certificates.....  20,634  24.06%   19,106  27.03%   19,561  28.69%
                                ------- ------   ------- ------   ------- ------
Certificates:
   2.00 -- 3.99%...............       1   0.00         2   0.00        13   0.02
   4.00 -- 5.99%...............  36,237  42.25    34,331  48.56    44,704  65.58
   6.00 -- 7.99%...............  28,905  33.70    17,254  24.41     3,606   5.29
   8.00 -- 9.99%...............     --     --        --     --        287   0.42
  10.00% & over................     --     --        --     --        --     --
                                ------- ------   ------- ------   ------- ------
    Total certificates.........  65,143  75.94%   51,587  72.97%   48,610  71.31%
                                ------- ------   ------- ------   ------- ------
    Total...................... $85,777 100.00%  $70,693 100.00%  $68,171 100.00%
                                ======= ======   ======= ======   ======= ======
</TABLE>
 
                                      19
<PAGE>
 
DEPOSIT ACTIVITY
 
  The following table sets forth the deposit activities of the Bank for the
periods indicated:
 
<TABLE>
<CAPTION>
                                                     YEARS ENDED JUNE 30,
                                                  ----------------------------
                                                    1998      1997      1996
                                                  --------  --------  --------
                                                    (DOLLARS IN THOUSANDS)
<S>                                               <C>       <C>       <C>
Opening balance.................................. $ 70,693  $ 68,170  $ 68,274
Deposits(1)......................................  221,802   225,732   164,947
Withdrawals......................................  210,450   225,691   167,702
Interest credited................................    3,732     2,482     2,651
                                                  --------  --------  --------
Ending balance................................... $ 85,777  $ 70,693  $ 68,170
                                                  ========  ========  ========
Net (decrease) increase.......................... $ 15,084  $  2,523  $   (104)
                                                  ========  ========  ========
Percent (decrease) increase......................    21.34%     3.70%    (0.15)%
                                                  ========  ========  ========
</TABLE>
--------
(1) Does not reflect the rollover of certificates of deposit.
 
TIME DEPOSIT MATURITY SCHEDULE
 
  The following table shows weighted average rate and maturity information for
the Bank's certificates of deposit as of June 30, 1998.
 
<TABLE>
<CAPTION>
                                                           WEIGHTED
                                                           AVERAGE  PERCENT OF
                                        TOTAL BALANCE        RATE     TOTAL
                                    ---------------------- -------- ----------
                                    (DOLLARS IN THOUSANDS)
<S>                                 <C>                    <C>      <C>
CERTIFICATE ACCOUNTS MATURING IN
 QUARTER ENDING:
September 30, 1998.................        $ 6,748           5.25%     10.36%
December 31, 1998..................          7,357           5.40      11.29
March 31, 1999.....................         17,426           5.92      26.75
June 30, 1999......................          7,318           5.57      11.23
September 30, 1999.................          6,635           5.91      10.19
December 31, 1999..................          4,043           5.90       6.21
March 31, 2000.....................          2,700           6.11       4.14
June 30, 2000......................          1,263           5.90       1.94
September 30, 2000.................          1,456           5.95       2.24
December 31, 2000..................            730           5.79       1.12
March 31, 2001.....................            263           5.76       0.40
June 30, 2001......................            685           6.22       1.05
Thereafter.........................          8,519           6.26      13.08
                                           -------                    ------
  Total............................        $65,143                    100.00%
                                           =======                    ======
</TABLE>
 
  The following table indicates the amount of the Bank's certificates of
deposit and other deposits by time remaining until maturity as of June 30,
1998.
 
<TABLE>
<CAPTION>
                                             MATURITY
                            -------------------------------------------
                            3 MONTHS OVER 3 TO 6 OVER 6 TO 12   OVER
                            OR LESS    MONTHS       MONTHS    12 MONTHS  TOTAL
                            -------- ----------- ------------ --------- -------
                                          (DOLLARS IN THOUSANDS)
<S>                         <C>      <C>         <C>          <C>       <C>
Certificates of deposit
 less than $100,000.......   $6,592    $6,491      $21,565     $23,672  $58,320
Certificates of deposit of
 $100,000 or more.........      156       866        3,179       2,622    6,823
                             ------    ------      -------     -------  -------
Total certificates of
 deposit..................   $6,748    $7,357      $24,744     $26,294  $65,143
                             ======    ======      =======     =======  =======
</TABLE>
 
 
                                      20
<PAGE>
 
  BORROWINGS. Community Bank's borrowings historically have consisted of
advances from the FHLB of Des Moines. Such advances may be made pursuant to
different credit programs, each of which has its own interest rate and range
of maturities. Federal law limits an institution's borrowings from the FHLB to
20 times the amount paid for capital stock in the FHLB, subject to regulatory
collateral requirements. At June 30, 1998, the Bank had $19.5 million in
advances from the FHLB. The Bank has the ability to purchase additional
capital stock from the FHLB. For additional information regarding the term to
maturity on FHLB advances, see Note 7 of the Notes to Consolidated Financial
Statements.
 
  The following tables set forth the maximum month-end balance and average
balance of FHLB advances for the periods indicated, as well as the amount of
such advances and the weighted average interest rate at the dates indicated.
 
<TABLE>
<CAPTION>
                                                       YEARS ENDED JUNE 30,
                                                      -------------------------
                                                       1998     1997     1996
                                                      -------  -------  -------
                                                          (IN THOUSANDS)
<S>                                                   <C>      <C>      <C>
MAXIMUM BALANCE:
  FHLB advances...................................... $19,500  $10,750  $14,360
AVERAGE BALANCE:
  FHLB advances...................................... $12,672  $ 9,154  $12,039
<CAPTION>
                                                            AT JUNE 30,
                                                      -------------------------
                                                       1998     1997     1996
                                                      -------  -------  -------
                                                          (IN THOUSANDS)
<S>                                                   <C>      <C>      <C>
FHLB advances........................................ $19,500  $12,000  $15,877
                                                      =======  =======  =======
Weighted average interest rate.......................    5.65%    5.75%    5.80%
</TABLE>
 
SERVICE CORPORATION ACTIVITIES
 
  As a federally chartered savings association, Community Bank is permitted by
OTS regulations to invest up to 2% of its assets, or approximately $2.5
million at June 30, 1998, in the stock of, or loans to, service corporation
subsidiaries. Community Bank may invest an additional 1% of its assets in
service corporations where such additional funds are used for inner-city or
community development purposes and up to 50% of its total capital in
conforming loans to service corporations in which it owns more than 10% of the
capital stock. In addition to investments in service corporations, federal
associations are permitted to invest an unlimited amount in operating
subsidiaries engaged solely in activities in which a federal association may
engage. At June 30, 1998, Community Bank had one subsidiary, CBES Service
Corporation ("CBES"). CBES was established in March 1993 for the purpose of
offering credit life, health and accident insurance to its customers. At June
30, 1998, the Bank's investment in CBES was $1,000. Also, for the fiscal year
ended June 30, 1998, CBES had no pre-tax income.
 
                                  REGULATION
 
GENERAL
 
  Community Bank is a federally chartered savings bank, the deposits of which
are federally insured and backed by the full faith and credit of the U.S.
Government. Accordingly, the Bank is subject to broad federal regulation and
oversight extending to all its operations. The Bank is a member of the FHLB of
Des Moines and is subject to certain limited regulation by the Federal Reserve
Board. As the savings and loan holding company of the Bank, the Company also
is subject to federal regulation and oversight. The purpose of the regulation
of the Company and other holding companies is to protect subsidiary savings
and loan associations. The Bank is a member of the SAIF. The deposits of the
Bank are insured by the SAIF of the FDIC. As a result, the FDIC has certain
regulatory and examination authority over the Bank.
 
  Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
 
                                      21
<PAGE>
 
FEDERAL REGULATION OF SAVINGS ASSOCIATIONS
 
  The OTS has extensive authority over the operations of savings and loan
associations. As part of this authority, the Bank is required to file periodic
reports with the OTS and is subject to periodic examinations by the OTS and the
FDIC. The last regular OTS and FDIC examinations of the Bank were as of March
1998 and April 1991, respectively. Such examinations did not result in any
material changes to the operations, personnel or finances of the Bank. When
these examinations are conducted by the OTS and the FDIC, the examiners may
require the Bank to provide for higher general or specific loan loss reserves.
 
  All savings associations are subject to a semi-annual assessment, based upon
the savings and loan association's total assets. The Bank's OTS assessment for
the fiscal year ended June 30, 1998, was approximately $35,695.
 
  The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including the Bank and the Holding
Company. This enforcement authority includes, among other things, the ability
to assess civil money penalties, to issue cease-and-desist or removal orders
and to initiate injunctive actions. In general, these enforcement actions may
be initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
 
  In addition, the investment, lending and branching authority of the Bank is
prescribed by federal laws, and regulations, and it is prohibited from engaging
in any activities not permitted by such laws and regulations. For example, no
savings institution may invest in non-investment grade corporate debt
securities. In addition, the permissible level of investment by federal
associations in loans secured by non-residential real property may not exceed
400% of total capital, except with approval of the OTS. Federal savings and
loan associations are also generally authorized to branch nationwide. The Bank
is in compliance with the noted restrictions.
 
  OTS regulations limit a thrift institution's loans to one borrower to the
greater of $500,000 or 15% of unimpaired capital and surplus (except for loans
fully secured by certain readily marketable collateral, in which case this
limit is increased to 25% of unimpaired capital and surplus). At June 30, 1998,
the Bank's lending limit under this restriction was approximately $4.1 million.
 
  The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, internal controls and audit systems, interest
rate risk exposure and compensation and other employee benefits. Any
institution which fails to comply with these standards must submit a capital
compliance plan. A failure to submit a plan or to comply with an approved plan
will subject the institution to further enforcement action. The OTS and the
other federal banking agencies have also adopted additional guidelines on asset
quality and earnings standards, which are designed to enhance early
identification and resolution of problems and problem assets.
 
INSURANCE OF DEPOSITS
 
  Deposit Insurance. The FDIC is an independent federal agency that insures
deposits of banks and thrift institutions up to certain specified limits and
regulates such institutions for safety and soundness. The FDIC administers two
separate insurance funds, the Bank Insurance Fund ("BIF") for commercial banks
and state savings banks, and the SAIF for savings associations such as the Bank
and banks that have acquired deposits from savings associations. The FDIC is
required to maintain designated levels of reserves in each fund.
 
                                       22
<PAGE>
 
  Assessments. The FDIC is authorized to establish separate annual assessment
rates for deposit insurance for members of the BIF and members of the SAIF.
The FDIC may increase assessment rates for either fund if necessary to restore
the fund's ratio of reserves to insured deposits to the target level within a
reasonable time, and may decrease these rates if the target level has been
met. The FDIC has established a risk-based assessment system for both SAIF and
BIF members. Under this system, assessments vary depending on the risk the
institution poses to its deposit insurance fund. An institution's risk level
is determined based on its capital levels, and the FDIC's level of supervisory
concern about the institution.
 
  In 1996, federal legislation was enacted to recapitalize the SAIF and
eliminate the significant premium disparity between the BIF and the SAIF.
Under that law, the Bank and other institutions with SAIF-insured deposits
were charged a one-time special assessment equal to $0.657 per $100 of
assessable deposits at March 31, 1995. The Bank recognized this special
assessment as a charge to noninterest expense of $441,000 (or $282,240 when
adjusted for taxes) during the three-month period ended September 30, 1996.
The assessment was fully deductible for both federal and state income tax
purposes. Assessment rates for regular ongoing, deposit insurance premiums
currently range from 0.0% of deposits for an institution in the highest
category (i.e., well-capitalized and financially sound, with no more than a
few minor weaknesses) to 0.27% of deposits for an institution in the lowest
category (i.e., undercapitalized and substantial supervisory consent). The
Association's assessment rate for deposit insurance was 0.23% of deposits for
1996, and it was reduced to 0.0% of deposits beginning on January 1, 1997. The
FDIC is authorized to raise the assessment rates as necessary to maintain the
required reserve ratio of 1.25%, and both the BIF and the SAIF currently
satisfy the reserve ratio requirement. The annual rate of assessments on SAIF-
assessable deposits for the payments on the FICO bonds was 0.0648% for the
semi-annual period beginning on January 1, 1997; 0.0630% for the semi-annual
period beginning on July 1, 1997; and 0.0622% currently. The 1996 law also
provides for the merger of the SAIF and the BIF by 1999, but not until such
time as bank and thrift charters are combined. Until the charters are
combined, savings associations with SAIF deposits may no transfer deposits to
the BIF without paying various exit and entrance fees, and SAIF institutions
will continue to pay higher FICO assessments. Such exit and entrance fees need
not be paid if a SAIF institution converts to a bank charter or merges with a
bank, as long as the resulting bank continues to pay applicable insurance
assessments to the SAIF, and as long as certain other conditions are met.
 
CAPITAL REQUIREMENTS
 
  The OTS capital regulations require savings institutions to meet three
capital standards: a 1.5% tangible capital standard, a 3.0% leverage (core
capital) standard, and an 8.0% risk-based capital standard. Core capital is
defined as common stockholders' equity (including retained earnings), certain
noncumulative perpetual preferred stock and related surplus, minority
interests in equity accounts of consolidated subsidiaries less intangibles
other than certain mortgage servicing rights ("MSRs") and purchased credit
card relationships. The OTS regulations require that, in meeting the tangible,
core and risk-based capital standards, institutions generally must deduct
investments in and loans to subsidiaries engaged in activities not permissible
for a national bank. In addition, the OTS prompt corrective action regulation
provides that a savings institution that has a leverage capital ratio of less
than 4.0% (3.0% for institutions receiving the highest CAMELS examination
rating) will be deemed to be "undercapitalized" and may be subject to certain
restrictions.
 
  The risk-based capital standard for savings institutions requires the
maintenance of total capital (which is defined as core capital and
supplementary capital) to risk-weighted assets of 8.0%. In determining the
amount of risk-weighted assets, assets and certain off-balance sheet assets
items are multiplied by a risk-weight of 0% to 100%, as assigned by the OTS
capital regulation based on the risks OTS believes are inherent in the type of
asset. The components of core capital are equivalent to those discussed
earlier under the 3.0% leverage standard. The components of supplementary
capital currently include cumulative preferred stock, long-term perpetual
preferred stock, mandatory convertible securities, subordinated debt and
intermediate preferred stock and, within specified limits, the allowance for
loan losses. Overall, the amount of supplementary capital included as part of
total capital cannot exceed 100% of core capital.
 
  The OTS has incorporated an interest rate risk component into its regulatory
capital rule. The final interest rate risk rule also adjusts the risk-
weighting for certain mortgage derivative securities. Under the rule, savings
associations with "above normal" interest rate risk exposure would be subject
to a deduction from total capital
 
                                      23
<PAGE>
 
for purposes of calculating their risk-based capital requirements. A savings
association's interest rate risk is measured by the decline in the net
portfolio value of its assets (i.e., the difference between incoming and
outgoing discounted cash flows from assets, liabilities and off-balance sheet
contracts) that would result from a hypothetical 200-basis point increase or
decrease in market rates divided by the estimated economic value of the
association's assets, as calculated in accordance with guidelines set forth by
the OTS. A savings association whose measured interest rate risk exposure
exceeds 2% must deduct an interest rate component in calculating its total
capital under the risk-based capital rule. The interest rate risk component is
an amount equal to one-half of the difference between the institution's
measured interest rate risk and 2%, multiplied by the estimated economic value
of the association's assets. That dollar amount is deducted from an
association's total capital in calculating compliance with its risk-based
capital requirement. Under the rule, there is a two quarter lag between the
reporting date of an institution's financial data and the effective date for
the new capital requirement based on that data. The rule also provides that the
Director of the OTS may waive or defer an association's interest rate risk
component on a case-by-case basis. The OTS has postponed the effective date of
the capital component in order to provide it with an opportunity to review the
interest rate risk approaches taken by the other federal banking agencies.
 
  At June 30, 1998, the Bank had tangible capital of $13.0 million, or 10.5% of
adjusted total assets, which is approximately $11.1 million above the minimum
requirement of 1.5% of adjusted total assets in effect on that date; core
capital equal to $13.0 million, or 10.5% of adjusted total assets, which is
$9.3 million above the minimum leverage ratio requirement of 3% as in effect on
that date; total capital of $13.5 million (including approximately $13.0
million in core capital, $669,000 in qualifying supplementary capital and
reduced by $161,000 for exclusions from capital) and risk-weighted assets of
$111.8 million (with no converted off-balance sheet assets); or total capital
of 12.1% of risk-weighted assets. This amount was $4.6 million above the 8%
requirement in effect on that date.
 
  Thrift Charter. Congress has been considering legislation in various forms
that would require federal thrifts, such as the Bank, to convert their charters
to national or state bank charters. Legislation enacted in 1996 required the
Treasury Department to prepare for Congress a comprehensive study on
development of a common charter for federal savings associations and commercial
banks; and provided for the merger of the BIF and the SAIF into a single
deposit insurance fund on January 1, 1999 provided the thrift charter was
eliminated. The Bank cannot determine whether, or in what form, such
legislation may eventually be enacted and there can be no assurance that any
legislation that is enacted would not adversely affect the Bank and the
Company.
 
PROMPT CORRECTIVE REGULATORY ACTION
 
  Under the OTS Prompt Corrective Action regulations, the OTS is required to
take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of capitalization.
Generally, a savings institution that has total risk-based capital of less than
8.0% or a leverage ratio or a Tier 1 core capital ratio that is less than 4.0%
is considered to be undercapitalized. A savings institution that has total
risk-based capital of less than 6.0%, a Tier 1 core risk-based capital ratio of
less than 3.0% or a leverage ratio that is less than 3.0% is considered to be
"significantly undercapitalized," and a savings institution that has a tangible
capital to assets ratio equal to or less than 2.0% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the banking regulator is
required to appoint a receiver or conservator for an institution that is
"critically undercapitalized." The regulation also provides that a capital
restoration plan must be filed with the OTS within 45 days of the date an
institution receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." In addition, numerous
mandatory supervisory actions become immediately applicable to the institution,
including, but not limited to, restrictions on growth, investment activities,
capital distributions, and affiliate transactions. The OTS may also take any
one of a number of discretionary supervisory actions, including the issuance of
a capital directive and the replacement of senior executive officers and
directors.
 
                                       24
<PAGE>
 
  At June 30, 1998, the Bank was categorized as "well capitalized," meaning
that the Bank's total risk-based capital ratio exceeded 10.0%, Tier I risk-
based capital ratio exceeded 6.0%, leverage capital ratio exceeded 5.0%, and
the Bank was not subject to a regulatory order, agreement or directive to meet
and maintain a specific capital level for any capital measure.
 
DIVIDEND LIMITATIONS
 
  An OTS regulation imposes limitations upon all "capital distributions" by
savings associations, including cash dividends, payments by an association to
repurchase or otherwise acquire its shares, payments to shareholders of
another institution in a cash-out merger and other distributions charged
against capital. The regulation establishes a three-tiered system of
regulation, with the greatest flexibility given to well-capitalized
associations. A savings association which has total capital (immediately prior
to and after giving effect to the capital distribution) that is at least equal
to its fully phased-in capital requirements would be a Tier 1 institution
("Tier 1 Institution"). An association that has total capital at least equal
to its minimum capital requirements, but less than its capital requirements,
would be a Tier 2 institution ("Tier 2 Institution"). An institution having
total capital that is less than its minimum capital requirements would be a
Tier 3 institution ("Tier 3 Institution"). However, an institution which
otherwise qualifies as a Tier 1 Institution may be designated by the OTS as a
Tier 2 or Tier 3 Institution if the OTS determines that the institution is "in
need of more than normal supervision." The Bank is currently a Tier 1
Institution.
 
  A Tier 1 Institution may, after prior notice but without the approval of the
OTS, make capital distributions during a calendar year up to the greater of
(a) 100% of its net income to date during the calendar year plus the amount
that would reduce by one-half its "surplus capital ratio" at the beginning of
the calendar year (the smallest excess over its capital requirements), or (b)
75% of its net income over the most recent four-quarter period. Any additional
amount of capital distributions would require prior regulatory approval.
 
  The OTS has proposed revisions to these regulations which would permit
savings associations to declare dividends in amounts which would assure that
they remain adequately capitalized following the dividend declaration. Savings
associations in a holding company system which are rated Camel 1 or 2 and
which are not in troubled condition would need to file a prior notice with the
OTS concerning such dividend declaration.
 
LIQUIDITY
 
  All savings and loan associations, including the Bank, are required to
maintain an average daily balance of liquid assets equal to a certain
percentage of the sum of its average daily balance of net withdrawable deposit
accounts and borrowings payable in one year or less. For a discussion of what
the Bank includes in liquid assets, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources." This liquid asset ratio requirement may vary from time to time
(between 4% and 10%) depending upon economic conditions and savings flows of
all savings and loan associations. At the present time, the minimum liquid
asset ratio is 4%.
 
  Penalties may be imposed upon associations for violations of the liquid
assets ratio requirement. At June 30, 1998, the Bank was in compliance with
the requirement, with an overall average liquid assets ratio of 4.01%.
 
ACCOUNTING
 
  An OTS policy statement applicable to all savings and loan associations
clarifies and re-emphasizes that the investment activities of a savings and
loan association must be in compliance with approved and documented investment
policies and strategies, and must be accounted for in accordance with
generally accepted accounting principles. Under the policy statement,
management must support its classification of and accounting for loans and
securities (i.e., whether held for investment, sale or trading) with
appropriate documentation.
 
                                      25
<PAGE>
 
  The OTS has adopted an amendment to its accounting regulations, which may be
made more stringent than generally accepted accounting principles by the OTS,
to require that transactions be reported in a manner that best reflects their
underlying economic substance and inherent risk and that financial reports must
incorporate any other accounting regulations or orders prescribed by the OTS.
The Bank is in compliance with these amended rules.
 
QUALIFIED THRIFT LENDER TEST
 
  In general, savings associations are required to maintain at least 65% of
their portfolio assets in certain qualified thrift investments (which consist
primarily of loans and other investments related to residential real estate and
certain other assets). A savings association that fails the qualified thrift
lender test is subject to substantial restrictions on activities and to other
significant penalties.
 
  Recent legislation also expands the QTL test to provide savings associations
with greater authority to lend and diversify their portfolios. In particular,
credit card and education loans may now be made by savings associations without
regard to any percentage-of-assets limit, and commercial loans may be made in
an amount up to 10% of total assets, plus an additional 10% for small business
loans. Loans for personal, family and household purposes (other than credit
card, small business and educational loans) are now included without limit with
other assets that, in the aggregate, may account for up to 20% of total assets.
The Bank exceeded the applicable requirements at June 30, 1998.
 
  A savings association that fails to meet the QTL test must either convert to
a bank (but its deposit insurance assessments and payments will be those of and
paid to the SAIF) or be subject to the following penalties : (i) it may not
enter into any new activity except for those permissible for a national bank
and for a savings association; (ii) its branching activities will be limited to
those of a national bank; (iii) it will not be eligible for any new FHLB
advances; and (iv) it will be bound by regulations applicable to national banks
regarding the payment of dividends. Three years after failing the QTL test, the
association must (i) dispose of any investment or activity not permissible for
a national bank and a savings association, and (ii) repay all outstanding FHLB
advances. If such a savings association is controlled by a savings and loan
holding company, then such holding company must, within a prescribed time
period, become registered as a bank holding company and become subject to all
rules and regulations applicable to bank holding companies (including
restrictions as to the scope of permissible business activities).
 
COMMUNITY REINVESTMENT ACT
 
  Under the Community Reinvestment Act ("CRA"), every FDIC insured institution
has a continuing and affirmative obligation consistent with safe and sound
banking practices to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does
it limit an institution's discretion to develop the types of products and
services that it believes are best suited to its particular community,
consistent with the CRA. The CRA requires the OTS, in connection with the
examination of the Bank, to assess the institution's record of meeting the
credit needs of its community and to take such record into account in its
evaluation of certain applications, such as a merger or the establishment of a
branch, by the Bank. An unsatisfactory rating may be used as the basis for the
denial of an application by the OTS.
 
  The federal banking agencies, including the OTS, have recently revised the
CRA regulations and the methodology for determining an institution's compliance
with the CRA. Due to the heightened attention being given to the CRA in the
past few years, the Bank may be required to devote additional funds for
investment and lending in its local community. The Bank was examined for CRA
compliance in March 1998 and received a rating of "outstanding."
 
TRANSACTIONS WITH AFFILIATES
 
  Generally, transactions between a savings and loan association or its
subsidiaries and its affiliates are required to be on terms as favorable to the
Bank as transactions with non-affiliates. In addition, certain of these
 
                                       26
<PAGE>
 
transactions, such as loans to an affiliate, are restricted to a percentage of
the Bank's capital. Affiliates of the Bank include the Company and any company
which is under common control with the Bank. In addition, a savings and loan
association may not lend to any affiliate engaged in activities not
permissible for a bank holding company or acquire the securities of most
affiliates.
 
  Certain transactions with directors, officers or controlling persons are
also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions
on loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to
unaffiliated individuals. However, recent regulations now permit executive
officers and directors to receive the same terms through benefit or
compensation plans that are widely available to other employees, as long as
the director or executive officer is not given preferential treatment compared
to the other participating employees.
 
HOLDING COMPANY REGULATION
 
  The Company is a unitary savings and loan holding company subject to
regulatory oversight by the OTS. As such, the Company is required to register
and file reports with the OTS and is subject to regulation and examination by
the OTS. In addition, the OTS has enforcement authority over the Company and
its non-savings and loan association subsidiaries which also permits the OTS
to restrict or prohibit activities that are determined to be a serious risk to
the subsidiary savings and loan association.
 
  As a unitary savings and loan holding company, the Company generally is not
subject to activity restrictions. If the Company acquires control of another
savings and loan association as a separate subsidiary, it would become a
multiple savings and loan holding company, and the activities of the Company
and any of its subsidiaries (other than the Bank or any other SAIF-insured
savings and loan association) would become subject to such restrictions unless
such other associations each qualify as a QTL and were acquired in a
supervisory acquisition.
 
  If the Bank fails the QTL test, the Company must obtain the approval of the
OTS prior to continuing after such failure, directly or through its other
subsidiaries, any business activity other than those approved for multiple
savings and loan holding companies or their subsidiaries. In addition, within
one year of such failure the Company must register as, and will become subject
to, the restrictions applicable to bank holding companies. The activities
authorized for a bank holding company are more limited than are the activities
authorized for a unitary or multiple savings and loan holding company. See "--
Qualified Thrift Lender Test."
 
  The Company must obtain approval from the OTS before acquiring control of
any other SAIF-insured association. Such acquisitions are generally prohibited
if they result in a multiple savings and loan holding company controlling
savings and loan associations in more than one state. However, such interstate
acquisitions are permitted based on specific state authorization or in a
supervisory acquisition of a failing savings and loan association.
 
FEDERAL SECURITIES LAW
 
  The stock of the Company will be registered with the Securities and Exchange
Commission ("SEC") under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). The Company will be subject to the information, proxy
solicitation, insider trading restrictions and other requirements of the SEC
under the Exchange Act.
 
  Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
the Company meets specified current public information requirements, each
affiliate of the Company is able to sell in the public market, without
registration, a limited number of shares in any three-month period.
 
                                      27
<PAGE>
 
FEDERAL RESERVE SYSTEM
 
  The Federal Reserve Board requires all depository institutions to maintain
noninterest-bearing reserves at specified levels against their transaction
accounts (primarily checking, NOW and Super NOW checking accounts). At June
30, 1998, the Bank was in compliance with these reserve requirements. The
balances maintained to meet the reserve requirements imposed by the Federal
Reserve Board may be used to satisfy liquidity requirements that may be
imposed by the OTS. See "--Liquidity."
 
  Savings and loan associations are authorized to borrow from the Federal
Reserve Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds,
including FHLB borrowings, before borrowing from the Federal Reserve Bank.
 
FEDERAL HOME LOAN BANK SYSTEM
 
  The Bank is a member of the FHLB of Des Moines, which is one of 12 regional
FHLBs, that administers the home financing credit function of savings and loan
associations. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures
established by the board of directors of the FHLB. These policies and
procedures are subject to the regulation and oversight of the Federal Housing
Finance Board. All advances from the FHLB are required to be fully secured by
sufficient collateral as determined by the FHLB. In addition, all long-term
advances are required to provide funds for residential home financing.
 
  As a member, the Bank is required to purchase and maintain stock in the FHLB
of Des Moines. At June 30, 1998, the Bank had $1,025,000 (at cost) of FHLB
stock, which was in compliance with this requirement. In past years, the Bank
has received substantial dividends on its FHLB stock. Over the past five
fiscal years such dividends have averaged 7.3% and were 6.8% for fiscal 1998.
For the fiscal year ended June 30, 1998, dividends paid by the FHLB of Des
Moines to the Bank totaled approximately $56,000, which constitutes a $1,435
decrease over the amount of dividends received in fiscal year 1997. No
assurance can be given that such dividends will continue in the future at such
levels.
 
  Under federal law, the FHLBs are required to provide funds for the
resolution of troubled savings and loan associations and to contribute to low-
and moderately priced housing programs through direct loans or interest
subsidies on advances targeted for community investment and low- and moderate-
income housing projects. These contributions have affected adversely the level
of FHLB dividends paid and could continue to do so in the future. These
contributions could also have an adverse effect on the value of FHLB stock in
the future. A reduction in value of the Bank's FHLB stock may result in a
corresponding reduction in the Bank's capital.
 
FEDERAL AND STATE TAXATION
 
  FEDERAL TAXATION. Savings associations such as the Bank that meet certain
definitional tests relating to the composition of assets and other conditions
prescribed by the Internal Revenue Code of 1986, as amended (the "Code"), are
permitted to establish reserves for bad debts and to make annual additions
thereto which may, within specified formula limits, be taken as a deduction in
computing taxable income for federal income tax purposes. The amount of the
bad debt reserve deduction for "non-qualifying loans" is computed under the
experience method. For tax years beginning before December 31, 1995, the
amount of the bad debt reserve deduction for "qualifying real property loans"
(generally, loans secured by improved real estate) may be computed under
either the experience method or the percentage of taxable income method (based
on an annual election). If a savings association elected the latter method, it
could claim, each year, a deduction based on a percentage of taxable income,
without regard to actual bad debt experience.
 
  Under the experience method, the bad debt reserve deduction is an amount
determined under a formula based generally upon the bad debts actually
sustained by the savings association over a period of years.
 
                                      28
<PAGE>
 
  Under recently enacted legislation, the percentage of taxable income method
has been repealed for years beginning after December 31, 1995, and "large"
associations, i.e., the quarterly average of the association's total assets or
of the consolidated group of which it is a member, exceeds $500 million for
the year, may no longer be entitled to use the experience method of computing
additions to their bad debt reserve. A "large" association must use the direct
write-off method for deducting bad debts, under which charge-offs are deducted
and recoveries are taken into taxable income as incurred. If the Bank is not a
"large" association, the Bank will continue to be permitted to use the
experience method. The Bank will be required to recapture (i.e., take into
income) over a six-year period its applicable excess reserves, i.e, the
balance of its reserves for losses on qualifying loans and nonqualifying
loans, as of the close of the last tax year beginning before January 1, 1996,
over the greater of (a) the balance of such reserves as of December 31, 1987
(pre-1988 reserves) or (b) in the case of a bank which is not a "large"
association, an amount that would have been the balance of such reserves as of
the close of the last tax year beginning before January 1, 1996, had the bank
always computed the additions to its reserves using the experience method.
Postponement of the recapture is possible for a two-year period if an
association meets a minimum level of mortgage lending for 1996 and 1997. As of
June 30, 1998, the Bank's bad debt reserve subject to recapture over a six-
year period totaled approximately $97,000.
 
  If an association ceases to qualify as a "bank" (as defined in Code Section
581) or converts to a credit union, the pre-1988 reserves and the supplemental
reserve are restored to income ratably over a six-year period, beginning in
the tax year the association no longer qualifies as a bank. The balance of the
pre-1988 reserves are also subject to recapture in the case of certain excess
distributions to (including distributions on liquidation and dissolution), or
redemptions of, shareholders.
 
  In addition to the regular federal income tax, corporations, including
savings associations such as the Bank, generally are subject to a minimum tax.
An alternative minimum tax is imposed at a minimum tax rate of 20% on
alternative minimum taxable income, which is the sum of a corporation's
regular taxable income (with certain adjustments) and tax preference items,
less any available exemption. The alternative minimum tax is imposed to the
extent it exceeds the corporation's regular income tax and net operating
losses can offset no more than 90% of alternative minimum taxable income. For
taxable years beginning after 1986 and before 1996, corporations, including
savings associations such as the Bank, are also subject to an environmental
tax equal to 0.12% of the excess of alternative minimum taxable income for the
taxable year (determined without regard to net operating losses and the
deduction for the environmental tax) over $2 million.
 
  To the extent earnings appropriated to a savings association's bad debt
reserves for "qualifying real property loans" and deducted for federal income
tax purposes exceed the allowable amount of such reserves computed under the
experience method and to the extent of the Bank's supplemental reserves for
losses on loans ("Excess"), such Excess may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad
debt losses). As of June 30, 1998, the Bank's excess for tax purposes totaled
approximately $1,700,000.
 
  The Bank and its subsidiary file consolidated federal income tax returns on
a fiscal year basis using the accrual method of accounting. The Company
intends to file consolidated federal income tax returns with the Bank. Savings
and loan associations, such as the Bank, that file federal income tax returns
as part of a consolidated group are required by applicable Treasury
regulations to reduce their taxable income for purposes of computing the
percentage bad debt deduction for losses attributable to activities of the
non-savings and loan association members of the consolidated group that are
functionally related to the activities of the savings association member.
 
  The Bank has not been audited by the IRS recently with respect to federal
income tax returns. In the opinion of management, any examination of still
open returns would not result in a deficiency which could have a material
adverse effect on the financial condition of the Bank.
 
 
                                      29
<PAGE>
 
  STATE TAXATION. The Missouri Corporation Income Tax Act provides for an
exemption from the Missouri Corporation Income Tax for mutual savings banks
and for banking corporations, which includes stock associations (e.g., the
Bank). However, this exemption does not extend to non-banking entities such as
the Company. The non-banking subsidiaries of the Bank (as well as the Company)
are subject to the Missouri Corporate Income Tax based on their Missouri
taxable income, as well as franchise taxes. The Missouri Corporation Income
Tax applies at graduated rates from 4% upon the first $25,000 of Missouri
taxable income to 8% on all Missouri taxable income in excess of $200,000. For
these purposes, "Missouri taxable income" means net income which is earned
within or derived from sources within the State of Missouri, after adjustments
permitted under Missouri law including a federal income tax deduction and an
allowance for net operating losses, if any. In addition, the Bank became
subject to the Missouri Shares Tax after the Conversion, which will be imposed
on the assessed value of the Bank's stock. The formula for deriving the
assessed value is to calculate 15% of the sum of (i) 20% of a corporation's
capitalized earnings, plus (ii) 80% of a corporation's taxable stockholders'
equity, and to subtract from that amount 50% of a corporation's real and
personal property assessment. Other various items may also be subtracted in
calculating a corporation's capitalized earnings.
 
  DELAWARE TAXATION. As a Delaware holding company, the Company is exempted
from Delaware corporate income tax but is required to file an annual report
with and pay an annual fee to the State of Delaware. The Company is also
subject to an annual franchise tax imposed by the State of Delaware.
 
EMPLOYEES
 
  At June 30, 1998, the Bank had a total of 55 full-time and 11 part-time
employees. The Bank's employees are not represented by any collective
bargaining group. Management considers its employee relations to be excellent.
 
 Executive Officers of the Bank and the Company Who Are Not Directors
 
  LARRY E. HERMRECK. Mr. Hermreck, age 58, has been with the Bank for the past
25 years and has served as Chief Executive Officer for 20 years. In that
capacity, he is responsible for overseeing the day to day operations of the
Bank.
 
  DERYL R. GOETTLING. Mr. Goettling, age 49, is the Manager of the Bank's
Mortgage Loan Department and is responsible for the supervision of all
mortgage lending operations of the Bank. Mr. Goettling joined the Bank in 1986
and served in various capacities prior to being promoted to his current
position in 1992.
 
  MARGARET E. TEEGARDEN. Ms. Teegarden, age 49, is the Manager of the Bank's
Savings Department, responsible for managing the Bank's savings department.
Ms. Teegarden joined the Bank in 1978.
 
  DENNIS D. HARTMAN. Mr. Hartman, age 44, is the Controller and Manager of the
Bank's Accounting Department. He is responsible for the supervision of the
Accounting Department and reporting to the regulatory authorities. He is also
responsible for overseeing the Bank's asset/liability management program. Mr.
Hartman joined the Bank in 1978.
 
  JAMES V. ALDERSON. Mr. Alderson, age 52, has served as the Manager of the
Consumer Loan Department since June 1994, responsible for supervision of the
Bank's consumer lending operations. Mr. Alderson has been with the Bank since
1990 and served as a loan officer until June 1994.
 
ITEM 2. DESCRIPTION OF PROPERTY
 
  The Bank conducts its business through its main office, located in Excelsior
Springs, Missouri and two branch offices , one located in Kearney, Missouri,
and the other in Liberty, Missouri. The Bank's Kearney branch and Liberty
branch office space is leased. The following table sets forth information
relating to the Bank's offices as of June 30, 1998. The total net book value
of the Bank's premises and equipment (including land, buildings and leasehold
improvements and furniture, fixtures and equipment) at June 30, 1998 was
approximately $1.7 million.
 
                                      30
<PAGE>
 
<TABLE>
<CAPTION>
                                                     TOTAL
                                                  APPROXIMATE
                                                    SQUARE    NET BOOK VALUE AT
         LOCATION              DATE ACQUIRED        FOOTAGE     JUNE 30, 1998
         --------          ---------------------  ----------- -----------------
                                                               (IN THOUSANDS)
<S>                        <C>                    <C>         <C>
Main Office:
  1001 North Jesse James
   Road...................         1983             10,000         $1,205
  Excelsior Springs,
   Missouri 64024
Branch Offices:
  178 West 6th Street.....        Leased             2,725         $  121
  Kearney, Missouri 64020  (Expires January 2000)
 
  913 Liberty Drive.......        Leased             7,150         $  418
  Liberty, Missouri 64068   (Expires March 2003)
</TABLE>
 
  Community Bank believes that its current facilities are adequate to meet the
present and foreseeable needs of the Bank and the Holding Company.
 
ITEM 3. LEGAL PROCEEDINGS
 
  The Company is involved, from time to time, as plaintiff or defendant in
various legal actions arising in the normal course of their businesses. While
the ultimate outcome of these proceedings cannot be predicted with certainty,
it is the opinion of management, after consultation with counsel representing
the Company in the proceedings, that the resolution of these proceedings
should not have a material effect on the Company's financial position or
results of operations on a consolidated basis.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
  No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended June 30, 1998.
 
                                    PART II
 
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
 
  Page 40 of the attached 1998 Annual Report to Shareholders is herein
incorporated by reference.
 
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
 
  Pages 5 to 15 of the attached 1998 Annual Report to Shareholders are herein
incorporated by reference.
 
ITEM 7. FINANCIAL STATEMENTS
 
  Pages 16 to 39 of the attached 1998 Annual Report to Shareholders are herein
incorporated by reference.
 
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
 
  There has been no Current Report on Form 8-K filed within 24 months prior to
the date of the most recent financial statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting
principle or financial statement disclosure.
 
                                      31
<PAGE>
 
                                   PART III
 
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
  Information concerning Directors of the Registrant is incorporated herein by
reference from the Company's definitive Proxy Statement for the Annual Meeting
of Shareholders scheduled to be held on October 22, 1998.
 
ITEM 10. EXECUTIVE COMPENSATION
 
  Information concerning executive compensation is incorporated herein by
reference from the Company's definitive Proxy Statement for the Annual Meeting
of Shareholders scheduled to be held on October 22, 1998.
 
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
  Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from the Company's definitive
Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on
October 22, 1998.
 
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
  Information concerning certain relationships and transactions is
incorporated herein by reference from the Company's definitive Proxy Statement
for the Annual Meeting of Shareholders scheduled to be held on October 22,
1998.
 
ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K
 
  (a)(1) Financial Statements:
 
  The following information appearing in the Registrant's Annual Report to
Shareholders for the year ended June 30, 1998, is incorporated by reference in
this Form 10-KSB Annual Report as Exhibit 13.
 
<TABLE>
<CAPTION>
                                                                        PAGE IN
                                                                        ANNUAL
ANNUAL REPORT SECTION                                                   REPORT
---------------------                                                   -------
<S>                                                                     <C>
Report of Independent Auditors........................................     16
Consolidated Balance Sheets at June 30, 1998 and 1997.................     17
Consolidated Statements of Earnings for the Years ended June 30, 1998,
 1997 and 1996........................................................     18
Consolidated Statements of Stockholders' Equity for the Years ended
 June 30, 1998, 1997 and 1996.........................................     19
Consolidated Statements of Cash Flows for the Years ended June 30,
 1998, 1997 and 1996..................................................     20
Notes to Consolidated Financial Statements............................     22
</TABLE>
 
  (a)(2) Financial Statement Schedules--All financial statement schedules have
been omitted as the information is either inapplicable or not required under
the related instructions.
 
                                      32
<PAGE>
 
  (a)(3) Exhibits--The following exhibits are either filed or attached as part
of this report or are incorporated herein by reference.
<TABLE>
<CAPTION>
                                                                 REFERENCE TO
  REGULATION                                                    PRIOR FILING OR
 S-B  EXHIBIT                                                   EXHIBIT NUMBER
    NUMBER                        DOCUMENT                      ATTACHED HERETO
 ------------                     --------                      ---------------
 <C>          <S>                                               <C>
  2           Plan of acquisition, reorganization,                   None
               arrangement, liquidation or succession
 
  3.1         Certificate of Incorporation                             *
 
  3.2         Bylaws                                                   *
 
  4           Instruments defining the rights of security              *
               holders, including indentures
 
  9           Voting trust agreement                                 None
 
 10.1         Proposed Stock Option and Incentive Plan                 *
 
 10.2         Proposed Recognition and Retention Plan                  *
 
 10.3         Employment Agreement with Larry E. Hermreck,             *
               Deryl R. Goettling, Margaret E. Teegarden and
               Dennis D. Hartman
 
 10.4         Employee Stock Ownership Plan                            *
 
 10.5         Director Emeritus Agreements                             *
 
 10.6         Salary Continuation Agreement                            *
 
 10.7         Severance Agreements with Larry E. Hermreck,             *
               Deryl R. Goettling, Margaret E. Teegarden and
               Dennis D. Hartman
 
 11           Statement re: computation of per share earnings        None
 
 12           Statement re: computation or ratios                Not required
 
 13           Annual Report to Security Holders                       13
 
 16           Letter re: change in certifying accountant             None
 
 18           Letter re: change in accounting principles             None
 
 21           Subsidiaries of Registrant                              21
 
 22           Published report regarding matters submitted to        None
               vote of security holders
 
 23           Consent of experts and counsel                         None
 
 24           Power of Attorney                                  Not required
 
 27           Financial Data Schedule                                 27
 
 28           Information from reports furnished to State            None
               insurance regulatory authorities
 
 99           Additional exhibits                                    None
</TABLE>
--------
*   Filed on June 21, 1996, as exhibits to the Registrant's Form SB-2
    registration statement (Registration No. 333-6649), pursuant to the
    Securities Act of 1933. All of such previously filed documents are hereby
    incorporated herein by reference in accordance with Item 601 of Regulation
    S-B.
 
  (b) Reports on Form 8-K--No Form 8-K was filed during the last quarter of
the year covered by this Form 10-KSB.
 
 
                                      33
<PAGE>
 
                                  SIGNATURES
 
  PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
 
                                          CBES Bancorp, Inc.
 
                                                 /s/ Larry E. Hermreck
Date: September 25, 1998                  By: _________________________________
                                                     LARRY E. HERMRECK
                                                  CHIEF EXECUTIVE OFFICER
 
                               POWER OF ATTORNEY
 
  PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT
AND IN THE CAPACITIES AND ON THE DATES INDICATED.
 
<TABLE>
<CAPTION>
              SIGNATURE                          TITLE                   DATE
              ---------                          -----                   ----
 
<S>                                    <C>                        <C>
      /s/ Larry E. Hermreck            Chief Executive Officer    September 25, 1998
--------------------------------------  (Principal Executive
          LARRY E. HERMRECK             Officer)
 
        /s/ Dennis Hartman             Controller (Principal      September 25, 1998
--------------------------------------  Accounting and Financial
            DENNIS HARTMAN              Officer)
 
         /s/ Richard Cox               Director                   September 25, 1998
--------------------------------------
             RICHARD COX
 
    /s/ Robert L. Lalumondier          Director                   September 25, 1998
--------------------------------------
        ROBERT L. LALUMONDIER
 
        /s/ Cecil E. Lamb              Director                   September 25, 1998
--------------------------------------
            CECIL E. LAMB
 
       /s/ Robert McCrorey             Director                   September 25, 1998
--------------------------------------
           ROBERT MCCROREY
 
         /s/ Edgar Radley              Director                   September 25, 1998
--------------------------------------
             EDGAR RADLEY
 
       /s/ Rodney Rounkles             Director                   September 25, 1998
--------------------------------------
           RODNEY ROUNKLES
</TABLE>
 
                                      34
<PAGE>
 
                               INDEX TO EXHIBITS
 
<TABLE>
 <C>        <S>
 Exhibit 13 1998 Annual Report to Stockholders
 Exhibit 21 Subsidiaries of the Registrant
 Exhibit 27 Financial Data Schedule
</TABLE>
 
                                       35