UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
Pursuant to Section 13 or 15 (d) of
The Securities Exchange Act of 1934
For the Quarter Ended: September 30, 1997
Commission File Number: 0-18609
CFSB BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 38-2920051
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
112 East Allegan
Lansing, Michigan 48933
(Address of Principal Executive Officer)
Registrant's telephone number, including area code (517)371-2911
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 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 ___
There were 5,080,056 shares of the Registrant's $0.01 par value
common stock outstanding as of October 31, 1997.
CFSB Bancorp, Inc. and Subsidiary
Contents
Pages
-----
PART I - FINANCIAL INFORMATION
Consolidated Statements of Condition at
September 30, 1997 and December 31, 1996 (Unaudited) 1
Consolidated Statements of Operations for the
three months ended September 30, 1997 and
1996 (unaudited) and for the nine months ended
September 30, 1997 and 1996 (unaudited) 2
Consolidated Statements of Stockholders' Equity
for the nine months ended September 30, 1997
(unaudited) 3
Consolidated Statements of Cash Flows for the
nine months ended September 30, 1997 and 1996
(unaudited) 4-5
Notes to Consolidated Financial Statements
(unaudited) 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-15
PART II - OTHER INFORMATION 16
SIGNATURES 17
CFSB BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Condition
September 30, December 31,
1997 1996
------------ -----------
(unaudited)
ASSETS
Cash and amounts due from depository institutions $ 4,420,714 $ 7,479,722
Interest-earning deposits with Federal Home
Loan Bank and other depository institutions,
at cost which approximates market 17,552,018 15,270,241
Investment securities available for sale, at
fair value 26,096,000 31,093,494
Mortgage-backed securities available for sale,
at fair value 23,320,738 27,220,567
Loans receivable, net 756,595,253 717,714,636
Accrued interest receivable, net 4,922,648 4,349,240
Premises and equipment, net 10,497,618 10,985,199
Stock in Federal Home Loan Bank of Indianapolis,
at cost 11,423,100 10,632,000
Deferred federal income tax benefit 284,001 317,270
Other assets 4,849,678 4,737,177
------------ ------------
Total assets $859,961,768 $829,799,546
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $555,766,519 $553,574,001
Advances from Federal Home Loan Bank 223,460,674 202,639,323
Advance payments by borrowers for taxes
and insurance 4,928,164 1,356,507
Accrued interest payable 3,792,370 4,233,799
Federal income taxes payable 796,163 740,242
Other liabilities 4,946,470 4,785,647
------------ ------------
Total liabilities 793,690,360 767,329,519
------------ ------------
Stockholders' equity:
Serial preferred stock, $0.01 par value; authorized
2,000,000 shares; issued - none -- --
Common stock, $0.01 par value; authorized
10,000,000 shares; issued 5,103,843 shares - 1997
and 4,849,611 shares - 1996 51,038 48,496
Additional paid-in capital 48,409,958 41,422,898
Retained income - substantially restricted 18,257,114 23,863,600
Net unrealized gains on available-for-sale securities,
net of tax expense of $143,817 - 1997 and
$110,548 - 1996 279,176 214,594
Employee Stock Ownership Plan (285,494) (459,408)
Treasury stock, at cost; 16,952 shares - 1997 and
157,927 shares - 1996 (440,384) (2,620,153)
------------ ------------
Total stockholders' equity 66,271,408 62,470,027
------------ ------------
Total liabilities and stockholders' equity $859,961,768 $829,799,546
============ ============
See accompanying notes to consolidated financial statements.
1
CFSB BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Operations
Three Month Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1997 1996 1997 1996
------- ------- ------- --------
(Unaudited) (Unaudited)
INTEREST INCOME:
Loans receivable $14,699,198 $13,210,181 $42,798,137 $37,917,785
Mortgage-backed securities 454,107 558,653 1,439,714 1,805,991
Investment securities 373,900 488,415 1,297,583 1,750,868
Other 351,769 291,991 973,451 925,741
----------- ----------- ----------- -----------
Total interest income 15,878,974 14,549,240 46,508,885 42,400,385
INTEREST EXPENSE:
Deposits, net 6,180,450 5,914,510 18,251,699 17,765,238
Federal Home Loan Bank advances 3,232,682 2,769,005 9,232,576 7,681,194
----------- ----------- ----------- -----------
Total interest expense 9,413,132 8,683,515 27,484,275 25,446,432
Net interest income before provision
for loan losses 6,465,842 5,865,725 19,024,610 16,953,953
Provision for loan losses 90,000 60,000 270,000 180,000
----------- ----------- ----------- -----------
Net interest income after provision 6,375,842 5,805,725 18,754,610 16,773,953
OTHER INCOME(LOSS):
Service charges and other fees 1,132,743 916,359 3,129,257 2,498,687
Loan servicing income 67,042 95,755 228,661 309,699
Losses on sales of investment securities
available for sale, net -- (52,769) (31,372) (64,188)
Gains on sale of loans, net 137,747 7,711 279,430 109,532
Real estate operations, net (15,000) (15,000) (45,000) (45,000)
Gains on sales of branches, net 153,958 -- 505,698 --
Other, net 151,114 131,676 476,571 203,045
----------- ----------- ----------- -----------
Total other income 1,627,604 1,083,732 4,543,245 3,011,775
GENERAL AND ADMINISTRATIVE EXPENSES:
Compensation, payroll taxes, and fringe
benefits 2,100,271 1,977,330 6,198,376 5,993,279
Office occupancy and equipment 530,980 747,841 1,872,660 1,888,377
Federal insurance premiums 88,009 305,871 265,296 908,898
FDIC special assessment -- 3,355,000 -- 3,355,000
Data processing 107,516 99,325 319,504 272,411
Marketing 220,241 196,304 668,906 589,300
Other, net 818,248 738,235 2,406,117 2,064,925
----------- ----------- ----------- -----------
Total general and administrative
expenses 3,865,265 7,419,906 11,730,859 15,072,190
----------- ----------- ----------- -----------
Income before federal income tax
expense (benefit) 4,138,181 (530,449) 11,566,996 4,713,538
Federal income tax expense (benefit) 1,337,000 (237,000) 3,663,000 1,441,000
----------- ----------- ----------- -----------
Net income (loss) $ 2,801,181 $ (293,449)$ 7,903,996 $ 3,272,538
=========== =========== =========== ===========
EARNINGS (LOSS) PER SHARE:
Primary $ 0.53 $ (0.05)$ 1.48 $ 0.59
=========== =========== =========== ===========
Fully diluted $ 0.53 $ (0.05)$ 1.48 $ 0.59
=========== =========== =========== ===========
DIVIDENDS PAID PER SHARE $ 0.15 $ 0.10 $ 0.40 $ 0.28
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
2
CFSB BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Nine Months Ended September 30, 1997
(unaudited)
Net Unrealized
Additional Gains (Losses) Commitment Total
Common Paid-in Retained On Available-For- for ESOP Treasury Stockholders'
Stock Capital Income Sale Securities Debt Stock Equity
------- ----------- --------- ----------------- ---------- --------- -------------
Balance at
December 31, 1996 $48,496 $41,422,898 $23,863,600 $214,594 $(459,408) $(2,620,153) $62,470,027
Net income - - 7,903,996 - - - 7,903,996
Stock options exercised - - (112,425) - - 172,993 60,568
Repayment of ESOP debt - - - - 173,914 - 173,914
Cash dividends on common
stock - $0.46 per share - - (2,334,639) - - - (2,334,639)
10% common stock dividend 2,542 6,987,060 (11,063,418) - - 4,062,759 (11,057)
Treasury stock purchased - - - - - (2,055,983) (2,055,983)
Change in market value of
available-for-sale
securities, net - - - 64,582 - - 64,582
------- ----------- ----------- -------- --------- ----------- -----------
Balance at
September 30, 1997 $51,038 $48,409,958 $18,257,114 $279,176 $(285,494) $ (440,384) $66,271,408
======= =========== =========== ======== ========= =========== ===========
See accompanying notes to consolidated financial statements.
3
CFSB BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Nine Months Ended
September 30
-----------------------
1997 1996
-------- ---------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,903,996 $ 3,272,538
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,107,367 1,137,092
Provision for loan losses 270,000 180,000
Provision for real estate losses 45,000 45,000
Net amortization of premiums and accretion
of discounts 67,582 319,541
Loans originated for sale (12,459,892) (20,321,373)
Proceeds from sales of loans originated for sale 12,929,525 19,355,877
Net gains on sales of loans and securities (248,058) (45,344)
Net (gains) losses on sales and disposals of premises
and equipment (479,626) 27,616
Decrease (increase) in deferred loan fees (202,741) 48,092
Decrease (increase) in accrued interest receivable (573,408) 90,144
Increase (decrease) in accrued interest payable (441,429) 491,250
Increase (decrease) in federal income taxes payable 55,921 (1,009,000)
Increase in other liabilities 33,779 3,043,977
Increase in other assets (39,158) (1,320,940)
------------ ------------
Net cash provided by operating activities 7,968,858 5,314,470
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities available for sale (24,018,281) (20,060,266)
Proceeds from sales of investment securities available
for sale 20,037,696 23,135,173
Principal repayments and maturities of investment
securities available for sale 9,000,000 19,420,000
Loan originations (net of undisbursed loans in
process) (137,351,506) (145,998,355)
Loans purchased (13,125,669) (31,733,987)
Proceeds from sales of loans 8,580,493 2,440,356
Principal repayments on loans 101,971,285 86,525,047
Principal repayments and maturities on mortgage-
backed securities available for sale 3,876,805 609,993
Principal repayments and maturities on mortgage-
backed securities held to maturity -- 5,967,777
Proceeds from sales, redemptions, and settlements
of real estate owned, net 684,954 391,589
Capitalized additions to real estate owned, net of
recoveries (15,979) (29,370)
Purchase of premises and equipment (1,494,371) (1,056,443)
Proceeds from sales and disposals of premises and
equipment 1,354,211 4,724
Purchases of Federal Home Loan Bank stock (791,100) (1,245,600)
------------ ------------
Net cash used by investing activities (31,291,462) (61,629,362)
4
CFSB BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
Nine Months Ended
September 30
-----------------------
1997 1996
-------- ---------
(Unaudited)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits $ 2,192,518 $ 14,648,350
Stock options exercised 60,568 99,094
Purchases of treasury stock (2,055,983) (1,833,537)
Net increase in advance payments by borrowers
for taxes and insurance 3,571,657 3,094,707
Federal Home Loan Bank advance repayments (89,118,030) (70,342,701)
Federal Home Loan Bank advances 109,939,381 100,340,801
Dividends paid on common stock (2,044,738) (1,528,333)
------------ ------------
Net cash provided by financing activities 22,545,373 44,478,381
------------ ------------
Net decrease in cash and cash equivalents (777,231) (11,836,511)
Cash and cash equivalents at beginning of period 22,749,963 29,724,175
------------ ------------
Cash and cash equivalents at end of period 21,972,732 17,887,664
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest expense $ 27,925,704 $ 24,955,182
Federal income taxes 3,650,000 2,450,000
Transfers of loans to real estate owned 656,491 152,418
Transfers of loans to repossessed assets 130,827 51,226
Loans charged-off 242,552 58,020
Loans to facilitate the sale of real estate owned -- 279,700
Transfer of mortgage-backed securities to available
for sale classifications -- 28,553,035
See accompanying notes to consolidated financial statements.
5
CFSB BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements
(unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements are
prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions to Form 10-Q. Accordingly, they do not include all
of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation
are included. The results of operations for the three and nine
months ended September 30, 1997 are not necessarily indicative
of the results to be expected for the full year. These
Consolidated Financial Statements should be read in conjunction
with the Consolidated Financial Statements and Notes thereto,
for the year ended December 31, 1996, included in the
Corporation's 1996 Annual Report.
2. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts and
transactions of CFSB Bancorp, Inc. (Corporation) and its wholly-
owned subsidiary, Community First Bank (Bank), and the Bank's
wholly-owned subsidiary, Capitol Consolidated Financial
Corporation (Capitol Consolidated), and Capitol Consolidated's
wholly-owned subsidiary, Community First Insurance and
Investment Services. Intercompany transactions and account
balances are eliminated in consolidation.
3. EARNINGS PER SHARE
Earnings per share of common stock are based on the weighted
average number of common shares and common share equivalents
outstanding during the period.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following sections are designed to provide a more thorough
discussion of the Corporation's financial condition and results
of operations as well as to provide additional information on
the Corporation's asset quality, management strategies, sources
of liquidity, and capital resources. Management's discussion
and analysis should be read in conjunction with the consolidated
financial statements and supplemental data contained elsewhere
in this report.
GENERAL
CFSB Bancorp, Inc. (Corporation) is the holding company for
Community First Bank (Bank). Substantially all of the
Corporation's assets are currently held in, and operations
conducted through its sole subsidiary, Community First Bank.
The Bank is a community-oriented financial institution offering
a variety of financial services to meet the needs of the
communities it serves. The Bank's primary market area is the
greater Lansing area, which is composed of the tri-county area
of Clinton, Eaton, and Ingham counties, the western townships of
Shiawassee County, and the southwest corner of Ionia County.
The Bank's business consists primarily of attracting deposits
from the general public and using such deposits, together with
Federal Home Loan Bank (FHLB) advances, to make loans for the
purchase and construction of residential properties. To a
lesser extent, the Bank also makes income-producing property
loans, commercial business loans, home equity loans, and various
types of consumer loans. The Bank's revenues are derived
principally from interest income on mortgage and other loans,
mortgage-backed securities, investment securities, and to a
lesser extent, from fees and commissions. The operations of the
Bank, and the financial services industry generally, are
significantly influenced by general economic conditions and
related monetary and fiscal policies of financial institution
regulatory agencies. Deposit flows and cost of funds are
impacted by interest rates on competing investments and market
rates of interest. Lending activities are affected by the
demand for financing of real estate and other types of loans,
which in turn is affected by the interest rates at which such
financing is offered.
FINANCIAL CONDITION
The Corporation's total assets increased to $860.0 million at
September 30, 1997 from $829.8 million at December 31, 1996.
Most of the growth occurred in loans, which was funded by
Federal Home Loan Bank (FHLB) advances.
Net loans receivable increased to $756.6 million at September
30, 1997 from $717.7 million at December 31, 1996. This net
growth of $38.9 million occurred primarily through growth in
mortgages of $26.8 million, income-producing property loans of
$3.5 million, consumer loans of $7.8 million, and commercial
loans of $.8 million. Mortgage loan originations for the nine
months ended September 31, 1997 were $103.3 million, compared to
$124.6 million for the same period a year ago. As rates fell
during the second quarter, loan demand began to increase with
originations of $35.5 million and $41.3 million in the second
and third quarters of 1997, respectively.
7
Deposits increased $2.2 million to $555.8 million at September
30, 1997 from $553.6 million at December 31, 1996. This growth
occurred in checking accounts, partially offset by a decline in
certificates of deposit of $1.1 million.
FHLB advances increased $20.9 million to $223.5 million at
September 30, 1997 from $202.6 million at December 31, 1996.
The net increase was composed of an increase in fixed rate
advances of $57.5 million, partially offset by a decline in
adjustable rate advances of $36.6 million. The use of fixed
rate advances increased as management continues to take steps to
reduce interest rate risk. The Corporation's one-year gap, one-
to-three year gap, and three-to-five year gap was a negative 4.2
percent, positive .8 percent, and negative .2 percent,
respectively, at September 30, 1997, compared to a negative 9.3
percent, negative 5.6 percent, and negative 1.9 percent,
respectively, at December 31, 1996.
Total stockholders' equity was $66.3 million at September 30,
1997, a $3.8 million increase, compared to the 1996 year-end
total of $62.5 million. The increase was primarily the result
of net income for the first nine months of 1997 offset in part
by dividend declarations and treasury stock purchases.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
1997, COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1996
Net income for the three months ended September 30, 1997 was
$2,801,000, or $0.53 per fully diluted share, compared to net
loss of $293,000, or $0.05 per fully diluted share for the
corresponding period in 1996. Net loss for the 1996 period was
significantly impacted by a nonrecurring pre-tax charge of
$3,355,000 resulting from legislation to recapitalize the
Federal Deposit Insurance Corporation's (FDIC) Savings
Association Insurance Fund (SAIF). The Corporation's strong
financial performance for the current quarter reflected an
improved net interest margin, increased fee income, and a
nonrecurring gain generated from the sale of one branch. Net
income for the 1997 third quarter represented a return on
average assets of 1.31 percent, an increase from (0.15) percent
for the 1996 third quarter and a return on average stockholders'
equity of 16.94 percent compared to (1.81) percent in 1996. The
Corporation's return on assets and return on
stockholders' equity, excluding the gain on the sale of a
branch, was 1.26 percent and 16.32 percent, respectively, for
the quarter ended September 30, 1997, compared to .95 percent
and 11.84 percent, respectively, in the 1996 period, excluding
the FDIC special assessment.
Net Interest Income
- -------------------
The most significant component of the Corporation's earnings is
net interest income, which is the difference between interest
earned on loans, mortgage-backed securities, investment
securities and other earning assets, and interest paid on
deposits and FHLB advances. This amount, when annualized and
divided by average earning assets, is referred to as the net
interest margin. Net interest income and net interest margin
are directly impacted by changes in volume and mix of earning
assets and interest-bearing liabilities, market rates of
interest, the level of nonperforming assets, demand for loans,
and other market forces.
8
The following table presents the yields on the Corporation's
earning assets and costs of the Corporation's interest-bearing
liabilities, the interest rate spread, and the net interest
margin for the three and nine months ended September 30, 1997
and 1996, and at September 30, 1997 and December 31, 1996. The
1996 costs include the annualized effect of the Corporation's
interest rate exchange agreement.
For the For the
Three Months Nine Months
Ended Ended At At
September 30, September 30, September 30, December 31,
1997 1996 1997 1996 1997 1996
---- ---- ---- ---- ---- ----
Weighted average yield:
Loans receivable, net 7.77% 7.61% 7.69% 7.66% 7.75% 7.60%
Mortgage-backed securities 7.73 7.56 7.72 7.59 7.76 7.82
Investment securities 5.76 5.91 5.91 5.65 6.02 5.89
Interest-earning deposits 3.03 2.01 2.79 3.23 3.52 4.93
Other 7.86 7.49 7.62 7.43 7.94 7.55
---- ---- ---- ---- ---- ----
Total earning assets 7.63 7.41 7.55 7.46 7.60 7.47
Weighted average cost:
Savings, checking, and money
market accounts 2.48 2.46 2.52 2.50 2.47 2.65
Certificates of deposit 5.76 5.70 5.72 5.78 5.81 5.73
FHLB advances 6.20 6.00 6.10 6.03 6.06 5.97
---- ---- ---- ---- ---- ----
Total interest-bearing
liabilities 4.85 4.80 4.83 4.84 4.88 4.86
---- ---- ---- ---- ---- ----
Interest rate spread 2.78% 2.61% 2.72% 2.62% 2.72% 2.61%
==== ==== ==== ==== ==== ====
Net interest margin 3.16% 2.98% 3.08% 2.98% 3.09% 2.95%
==== ==== ==== ==== ==== ====
Net interest income before provision for loan losses was $6.5
million for the third quarter of 1997, representing a $600,000
increase compared to the third quarter of 1996. Net interest
income was positively affected by strong growth in earning
assets. The Corporation's net interest margin was 3.16 percent
for the three months ended September 30, 1997, an improvement
from 2.98 percent for the comparable quarter of 1996. A shift
in the composition of average earning assets from lower yielding
more liquid assets toward higher-earning, longer-term assets
also contributed to an improved net interest margin during 1997.
Average loans receivable were $755.9 million in the third
quarter of 1997 representing growth of $62.5 million, or 9.0
percent, over average loans receivable of $693.4 million in the
same quarter a year earlier. Net interest margin at September
30, 1997 was 3.09 percent, an improvement from 3.08 percent at
June 30, 1997 and 2.95 percent at December 31, 1996.
9
The future trend of the Corporation's net interest margin and
net interest income may be impacted by the level of mortgage
loan originations, purchases, repayments, and refinancings and a
resulting change in the composition of the Corporation's earning
assets. As the slope of the yield curve steepened in the first
quarter, customer preferences in the Corporation's local market
favored adjustable-rate mortgage loans. During the second
quarter (and into the third quarter) the yield curve began to
flatten, in response, customer's demand for fixed rate loans
increased. Additional factors affecting the Corporation's net
interest income will continue to be the volatility of interest
rates, slope of the yield curve, asset size, maturity/repricing
activity, and competition. Because the Corporation is liability
sensitive, pressure may be felt on the Corporation's net
interest margin if short-term market interest rates rise.
Provision for Loan Losses
- -------------------------
During the third quarter of 1997, the provision for loan losses
was $90,000 compared to $60,000 during the year-ago period.
Increasing the provision resulted from management's evaluation
of the adequacy of the allowance for loan losses including
consideration of the growth in the loan portfolio, perceived
risk exposure among all loan types, actual loss experience,
delinquency rates, borrower circumstances, current and projected
economic conditions, and other relevant factors. Management
believes the current provision and related allowance for loan
losses is adequate to meet current and potential credit risks in
the current loan portfolio (for more information, see "Asset
Quality.)"
Other Income
- ------------
Other income totaled $1.6 million for the three months ended
September 30, 1997, up from $1.1 million for the three months
ended September 30, 1996. During the third quarter of 1997 the
Bank had increased gains on sales of loans and a nonrecurring
gain on the sale of a branch of $154,000. Increased deposit
fees assessed on a higher level of transaction account activity
also favorably impacted other income.
General and Administrative Expenses
- -----------------------------------
Total general and administrative expenses were $3.9 million for
the three months ended September 30, 1997, a decrease of $3.5
million compared to $7.4 million for the same period a year ago.
The decrease in general and administrative expenses was due
primarily to a nonrecurring charge of $3.4 million in the third
quarter of 1996 to recapitalize the FDIC's SAIF. Compensation
and fringe benefits expense rose between periods as a result of
upward merit-based salary adjustments partly offset by the
effect of fewer full-time equivalent employees. Decreased
office occupancy and equipment expense resulted from equipment
becoming fully depreciated in the second quarter of 1997. FDIC
insurance, $217,000 lower in 1997, reflects the lower premium of
6.3 cents per $100 of domestic deposits versus 23 cents per $100
of domestic deposits in 1996.
10
Federal Income Tax Expense
- --------------------------
Federal income tax expense was $1.3 million for the three months
ended September 30, 1997, compared to a benefit of $237,000 for
the comparable 1996 quarter. The increase in federal income tax
expense resulted primarily from a higher level of pre-tax
earnings. The Corporation's federal income tax expense is, for
the most part, recorded at the federal statutory rate of 34
percent less a pro rata portion of the anticipated low-income
housing tax credits expected to be available based upon the
Corporation's limited partnership investments.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1997, COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996
Net income for the nine months ended September 30, 1997 was $7.9
million, compared to $3.3 million for the same period in 1996, a
net increase of $4.6 million. The 1996 period was significantly
impacted by a nonrecurring pre-tax charge of $3.4 million in the
third quarter of 1996 resulting from legislation to recapitalize
the FDIC's SAIF. The increase in net income between years was
also due to significant growth in the Corporation's 1997 net
interest margin, gains generated from the sales of three
branches, improved fee income, and reduced FDIC insurance
premiums. Net income for the nine months ended September 30,
1997 represented a return on average stockholders' equity of
16.40 percent, an increase from 6.81 percent in the 1996 period
and a return on average assets of 1.26 percent, an increase from
0.56 percent in the 1996 period. The Corporation's return on
stockholders' equity, excluding the gains on the sales of
branches, was 15.72 percent for the nine months ended September
30, 1997, compared to 11.42 percent in the 1996 period,
excluding the FDIC special assessment. The Corporation's
efficiency ratio, or operating expenses over recurring operating
revenues, was 51.4 percent for the nine months ended September
30, 1997, an improvement from 58.8 percent, excluding the FDIC
special assessment, in the year earlier period.
Net Interest Income
- -------------------
Net interest income before provision for loan losses was $19.0
million during the first nine months of 1997, representing a
$2.1 million increase compared to the same period in 1996. Net
interest income was positively affected by higher yields on
loans in 1997 and strong growth in loans. The Corporation's net
yield on average earning assets was 3.08 percent for the nine
months ended September 30, 1997, an improvement from 2.98
percent for the comparable nine month period in 1996. A shift
in the composition of average earning assets from lower yielding
more liquid assets toward higher earning longer term assets also
contributed to an improved net interest margin.
Provision for Loan Losses
- -------------------------
The provision for loan losses was $270,000 during the nine
months ended September 30, 1997, compared to $180,000 for the
1996 period. Management believes the current provision and
related allowance for loan losses is adequate to meet current
and potential credit risks in the current loan portfolio.
11
Other Income
- ------------
Other income was $4.5 million for the nine months ended
September 30, 1997, an increase of $1.5 million, compared to
$3.0 million for the nine months ended September 30, 1996.
Growth in other income resulted primarily from increased deposit
fees assessed on a higher level of transaction account activity.
Also contributing to the higher level of other income were
nonrecurring gains on the sales of three branches and increased
gains on the sales of loans.
General and Administrative Expenses
- -----------------------------------
General and administrative expenses were $11.7 million for the
nine months ended September 30, 1997, a decrease of $3.4
million, compared to $15.1 million for the same period a year
ago. The decrease in general and administrative expenses was
due primarily to a nonrecurring charge of $3.4 million in the
third quarter of 1996 to recapitalize the FDIC's SAIF. As a
result of the recapitalization, FDIC insurance premium rates
were reduced, which reduced premiums $644,000 in 1997, compared
to the same period in 1996. Compensation rose between periods
by $205,000 as a result of upward merit-based salary
adjustments, partly offset by the effect of fewer full-time
equivalent employees. An increase in single business tax also
contributed to an increase in general and administrative
expense.
Federal Income Tax Expense
- --------------------------
Federal income tax expense was $3.7 million for the nine months
ended September 30, 1997, an increase of $2.3 million from $1.4
million for the comparable 1996 period. The increase in federal
income tax expense resulted from a higher level of pre-tax
earnings plus a higher tax rate applied to annualized taxable
income in excess of $10 million.
12
ASSET QUALITY
The following table presents the Corporation's nonperforming
assets. Management normally considers loans to be nonperforming
when payments are 90 days or more past due, when credit terms
are renegotiated below market levels, or when an analysis of an
individual loan indicates repossession of the collateral may be
necessary to satisfy the loan.
September 30, December 31,
1997 1996
---- ----
(dollars in thousands)
Nonaccruing loans:
One- to four-family
residential mortgages $ 1,135 $ 892
Income-producing property - 359
FHA-partially insured
and VA-partially guaranteed 219 183
Commercial - 195
Consumer installment 71 158
------- ------
Total $ 1,425 $1,787
======= ======
Percentage of total assets 0.17% 0.21%
======= ======
Real estate owned:(1)
One-to four-family
residential mortgages $ 214 $ 205
Construction and development - 7
------- ------
Total $ 214 $ 212
======= ======
Percentage of total assets 0.02% 0.03%
======= ======
Total nonaccruing loans
and real estate owned $ 1,639 $1,999
======= ======
Percentage of total assets 0.19% 0.24%
======= ======
<FN>
(1) Real estate owned includes properties in redemption and acquired through
foreclosure.
</FN>
The Corporation continues to demonstrate strong credit quality.
The Corporation's ratio of nonperforming assets to total assets
was 0.19 percent and 0.24 percent at September 30, 1997, and
December 31, 1996, respectively, both well below the industry
average. In addition, at September 30, 1997, the Corporation's
allowances for loan and real estate losses represent 283 percent
of its nonperforming assets, significantly above the industry
average.
13
Management believes the current provisions and related
allowances for loan and real estate owned losses are adequate to
meet current and potential credit risks in the current loan and
real estate owned portfolios, although there can be no
assurances the related allowances may not have to be increased
in the future.
LIQUIDITY
The Bank has no regulatory mandated minimum liquidity
requirements. Management's intention is to maintain average
short-term liquid assets each quarter of three percent of net
withdrawable deposit accounts plus borrowings payable in one
year or less. The Bank's short-term liquidity ratio was 4.97
percent and 4.01 percent at September 30, 1997 and December 31,
1996, respectively.
CAPITAL RESOURCES
The Bank is subject to capital asset requirements in accordance
with Bank regulations. Community First Bank's regulatory
capital ratios are well in excess of minimum capital
requirements specified by federal banking regulations. The
Bank's tangible, core and risk-based capital ratios were 7.46
percent, 7.46 percent, and 13.46 percent at September 30, 1997,
respectively.
The Corporation's Board of Directors declared a cash dividend of
$0.17 per share in the third quarter of 1997, an increase of
54.5 percent over the $0.11 per share dividend declared in the
third quarter of 1996. The Corporation's cash dividend policy
is continually reviewed by management and the Board of
Directors. The Corporation currently intends to continue its
policy of paying quarterly dividends, however, such payments
will depend upon a number of factors, including capital
requirements, regulatory limitations, the Corporation's
financial condition and results of operations, and the Bank's
ability to pay dividends to the Corporation. Presently, the
Corporation has no significant source of income other than
dividends from the Bank. Consequently, the Corporation depends
upon dividends from the Bank to accumulate earnings for payment
of cash dividends to its stockholders.
The Corporation's Board of Directors also declared a 10 percent
stock dividend on May 20, 1997. The additional shares as a
result of the dividend were distributed on June 16, 1997 to
stockholders of record as of May 30, 1997. Although the stock
dividend represents a component of the Corporation's established
dividend practices and the Corporation intends to issue similar
dividends in the future, such declarations will depend on
several factors similar to the cash dividend.
During April 1997, the Corporation's Board of Directors approved
a stock repurchase program pursuant to which the Corporation may
repurchase up to 5 percent or 258,500 shares of CFSB Bancorp,
Inc. common stock. Through September 30, 1997, the Corporation
repurchased 72,690 shares of CFSB Bancorp, Inc. common stock on
the open market for $1.6 million, or an average purchase price
of $21.55 per share. The program has a one-year term.
14
ACCOUNTING STANDARDS
In February 1997, the FASB issued Statement of Financial
Accounting Standards No. 128, Earnings Per Share (SFAS 128).
The statement specifies the computation, presentation, and
disclosure requirements for earnings per share (EPS) for
entities with publicly held common stock. SFAS 128 was issued
to simplify the computation of EPS and to make the U.S. standard
more compatible with the EPS standards of other countries and
that of the International Accounting Standards Committee. It
replaces Primary EPS and Fully Diluted EPS with Basic EPS and
Diluted EPS, respectively. It also requires dual presentation
of Basic EPS and Diluted EPS on the face of the income statement
for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the Basic EPS
computation to the numerator and denominator of the Diluted EPS
computation. The Corporation currently reports Primary EPS and
Fully Diluted EPS. SFAS 128 is effective for financial
statements for both interim and annual periods ended after
December 15, 1997. Earlier application is not permitted. The
impact of implementation is not quantified; however, the
Corporation expects upon adoption, Basic EPS will be slightly
higher than Primary EPS and Diluted EPS will be approximately
the same as Fully Diluted EPS.
15
CFSB BANCORP, INC.
Part II
Other Information
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults in Senior Securities
None
Item 4. Submission of Matters to a Vote of Security
Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
16
CFSB BANCORP, INC.
Signatures
Pursuant to the requirements 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.
CFSB BANCORP, INC.
(Registrant)
Date: November 10, 1997
By: /s/ Robert H. Becker
___________________________
Robert H. Becker
President and
Chief Executive Officer
(Duly Authorized Officer)
By: /s/ John W. Abbott
__________________________
John W. Abbott
Executive Vice President,
Chief Operating Officer,
and Secretary
By: /s/ Rick L. Laber
___________________________
Rick L. Laber
Vice President and Treasurer,
Chief Financial Officer,
(Principal Financial and
Accounting Officer)
17