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: March 31, 1998 Commission File No. 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 7,437,853 shares of the Registrant's $0.01 par value
common stock outstanding as of April 30, 1998.
CFSB Bancorp, Inc. and Subsidiary
Contents
Pages
-----
PART I - FINANCIAL INFORMATION
Consolidated Statements of Condition at
March 31, 1998 and December 31, 1997 (unaudited) 1
Consolidated Statements of Operations for the
three months ended March 31, 1998 and 1997
(unaudited) 2
Consolidated Statements of Stockholders' Equity
and Comprehensive Income for the three months
ended March 31, 1998 and 1997 (unaudited) 3
Consolidated Statements of Cash Flows for the
three months ended March 31, 1998 and 1997
(unaudited) 4-5
Notes to Consolidated Financial Statements
(unaudited) 6-7
Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-14
PART II - OTHER INFORMATION 15
SIGNATURES 16
CFSB BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Condition
March 31, December 31,
1998 1997
------------ -----------
(unaudited)
ASSETS
Cash and amounts due from depository institutions $ 3,848,037 $ 5,188,951
Interest-earning deposits with Federal Home
Loan Bank and other depository institutions,
at cost which approximates market 39,757,989 13,300,543
Investment securities available for sale, at
fair value 16,073,438 26,079,688
Mortgage-backed securities available for sale,
at fair value 19,912,680 21,597,690
Loans receivable, net 733,915,422 754,806,061
Accrued interest receivable, net 4,494,888 4,910,200
Real estate, net 5,188 -
Premises and equipment, net 10,398,626 10,457,180
Stock in Federal Home Loan Bank of Indianapolis,
at cost 11,423,100 11,423,100
Deferred federal income tax benefit 567,000 266,784
Other assets 5,745,893 4,857,716
------------ ------------
Total assets $846,142,261 $852,887,913
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $576,481,390 $562,412,067
Advances from Federal Home Loan Bank 189,046,811 212,692,934
Advance payments by borrowers for taxes
and insurance 3,542,988 1,454,316
Accrued interest payable 2,881,651 3,043,923
Federal income taxes payable 2,110,003 556,315
Due to broker 497,875 -
Other liabilities 6,221,100 5,193,568
------------ ------------
Total liabilities 780,781,818 785,353,123
------------ ------------
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 7,655,466 shares 76,555 76,555
Additional paid-in capital 48,377,350 48,377,350
Retained income - substantially restricted 21,800,247 20,011,874
Accumulated other comprehensive income,
net of tax expense of $130,507 - 1998 and
$161,035 - 1997 253,932 312,597
Employee Stock Ownership Plan (169,551) (227,522)
Treasury stock, at cost; 182,694 shares - 1998 and
47,988 shares - 1997 (4,978,090) (1,016,064)
------------ ------------
Total stockholders' equity 65,360,443 67,534,790
------------ ------------
Total liabilities and stockholders' equity $846,142,261 $852,887,913
============ ============
See accompanying notes to consolidated financial statements.
1
CFSB BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Operations
Three Month Ended
March 31,
---------------------
1998 1997
------- -------
(Unaudited)
INTEREST INCOME:
Loans receivable $14,338,377 $13,902,372
Mortgage-backed securities 403,967 511,188
Investment securities 297,650 455,659
Other 508,380 301,501
----------- -----------
Total interest income 15,548,374 15,170,720
INTEREST EXPENSE:
Deposits, net 6,196,215 6,036,114
Federal Home Loan Bank advances 2,946,399 2,919,262
----------- -----------
Total interest expense 9,142,614 8,955,376
----------- -----------
Net interest income before provision
for loan losses 6,405,760 6,215,344
Provision for loan losses 97,500 90,000
----------- -----------
Net interest income after provision
for loan losses 6,308,260 6,125,344
OTHER INCOME(LOSS):
Service charges and other fees 1,125,744 927,159
Loan servicing income 72,230 80,039
Gains on sales of loans, net 449,069 69,857
Gains on sales of investment securities
available for sale, net - 19,659
Gains on sales of mortgage-backed securities
available for sale, net 2,362 -
Real estate operations, net 9,658 (15,000)
Other, net 211,797 112,439
----------- -----------
Total other income 1,870,860 1,194,153
GENERAL AND ADMINISTRATIVE EXPENSES:
Compensation, payroll taxes, and fringe
benefits 2,180,922 2,046,076
Office occupancy and equipment 498,296 708,578
Federal insurance premiums 87,020 87,734
Marketing 202,269 212,573
Data processing 113,356 101,674
Other, net 908,612 789,258
----------- -----------
Total general and administrative
expenses 3,990,475 3,945,893
----------- -----------
Income before federal income tax
expense 4,188,645 3,373,604
Federal income tax expense 1,359,000 1,066,000
----------- -----------
Net income $ 2,829,645 $ 2,307,604
=========== ===========
EARNINGS PER SHARE:
Basic $ 0.37 $ 0.30
=========== ===========
Diluted $ 0.36 $ 0.29
=========== ===========
DIVIDENDS PAID PER SHARE $ 0.12 $ 0.07
=========== ===========
See accompanying notes to consolidated financial statements.
2
CFSB BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity and
Comprehensive Income
For the Three Months Ended March 31, 1998 and 1997
(Unaudited)
Accumulated
Additional Commitment Other Total
Common Paid-in Retained for ESOP Treasury Comprehensive Stockholders'
Stock Capital Income Debt Stock Income Equity
------- ----------- --------- ----------- ---------- ------------- -------------
Balance at
December 31, 1996 $72,744 $41,398,650 $23,863,600 $(459,408) $(2,620,153) $ 214,594 $62,470,027
Net income - - 2,307,604 - - - 2,307,604
Change in unrealized
gain on securities,
net (see disclosure) - - - - - (232,322) (232,322)
-----------
Comprehensive income - - - - - - 2,075,282
Stock options exercised - - (65,065) - 100,302 - 35,237
Repayment of ESOP debt - - - 57,971 - - 57,971
Cash dividends on common
stock - $0.09 per share - - (704,363) - - - (704,363)
Treasury stock purchased - - - - (294,695) - (294,695)
------- ----------- ----------- --------- ------------ --------- -----------
Balance at
March 31, 1997 $72,744 $41,398,650 $25,401,776 $(401,437) $(2,814,546) $ (17,728) $63,639,459
======= =========== =========== ========= =========== ========= ===========
Balance at
December 31, 1997 $76,555 $48,377,350 $20,011,874 $(227,522) $(1,016,064) $ 312,597 $67,534,790
Net income - - 2,829,645 - - - 2,829,645
Change in unrealized
gain on securities,
net (see disclosure) - - - - - (58,665) (58,665)
-----------
Comprehensive income - - - - - - 2,770,980
Stock options exercised - - (65,275) - 101,922 - 36,647
Repayment of ESOP debt - - - 57,971 - - 57,971
Cash dividends on common
stock - $0.13 per share - - (975,997) - - - (975,997)
Treasury stock purchased - - - - (4,063,948) - (4,063,948)
------- ----------- ----------- --------- ------------ --------- -----------
Balance at
March 31, 1998 $76,555 $48,377,350 $21,800,247 $(169,551) $(4,978,090) $ 253,932 $65,360,443
======= =========== =========== ========= =========== ========= ===========
See accompanying notes to consolidated financial statements.
3
CFSB BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Three Months Ended
March 31,
-----------------------
1998 1997
-------- ---------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,829,645 $ 2,307,604
============ ============
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 245,924 441,071
Provision for loan losses 97,500 90,000
Provision for real estate losses - 15,000
Net amortization of premiums and accretion
of discounts - 28,855
Loans originated for sale (10,723,170) (4,207,182)
Proceeds from sales of loans originated for sale 7,834,321 4,744,300
Net gains on sales of loans and securities (451,431) (89,516)
Net losses on sales and disposals of premises
and equipment 34 2,634
Decrease in deferred loan fees (112,267) (13,030)
Decrease (increase) in accrued interest receivable 415,312 (487,369)
Decrease in accrued interest payable (162,272) (13,606)
Increase in deferred Federal income tax benefit (269,688) -
Increase in federal income taxes payable 1,553,688 866,000
Due to Broker 497,875 -
Increase (decrease) in other liabilities 1,022,403 (83,337)
Increase in other assets (826,021) (1,775,251)
------------ ------------
Net cash provided by operating activities 1,951,853 1,826,173
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities available for sale - (9,992,968)
Proceeds from sales of investment securities available
for sale - 10,029,101
Principal repayments and maturities of investment
securities available for sale 10,000,000 -
Loan originations (net of undisbursed loans in
process) (47,129,030) (32,074,366)
Loans purchased (6,807,464) (5,015,292)
Proceeds from sales of loans 25,367,512 856,647
Principal repayments on loans 52,744,962 24,620,695
Principal repayments and maturities on mortgage-
backed securities available for sale 1,604,429 1,340,950
Proceeds from sales, redemptions, and settlements
of real estate owned, net - 63,767
Capitalized additions to real estate owned, net of
recoveries - (5,496)
Purchase of premises and equipment (187,404) (1,005,491)
Proceeds from sales and disposals of premises and
equipment - 3,100
------------ ------------
Net cash provided by (used by) investing activities 35,593,005 (11,179,353)
4
CFSB BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
Three Months Ended
March 31,
-----------------------
1998 1997
-------- ---------
(unaudited)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits $ 14,069,323 $ 6,071,279
Stock options exercised 36,647 35,237
Purchases of treasury stock (4,063,948) (294,695)
Net increase in advance payments by borrowers
for taxes and insurance 2,088,672 2,456,462
Federal Home Loan Bank advance repayments (48,646,123) (9,985,568)
Federal Home Loan Bank advances 25,000,000 3,890,583
Dividends paid on common stock (912,897) (564,629)
------------ ------------
Net cash provided by (used by) financing activities (12,428,326) 1,608,669
------------ ------------
Net increase (decrease) in cash and cash equivalents 25,116,532 (7,744,511)
Cash and cash equivalents at beginning of period 18,489,494 22,749,963
------------ ------------
Cash and cash equivalents at end of period 43,606,026 15,005,452
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest expense $ 9,304,886 $ 8,968,982
Federal income taxes 75,000 200,000
Transfers of loans to real estate owned 2,466 444,294
Transfers of loans to repossessed assets 64,878 48,620
Loans charged-off 58,227 94,779
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 months
ended March 31, 1998 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, 1997, included in the Corporation's 1997
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 subsidiaries, Community First Mortgage Corporation
and 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.
3. EARNINGS PER SHARE
The Corporation has adopted Financial Accounting Standards Board
(FASB) Statement No. 128, Earnings Per Share (SFAS 128),
effective for periods ending after December 15, 1997. SFAS 128
establishes standards for computing and presenting earnings per
share (EPS). Basic EPS is computed by dividing net income by
the weighted average common shares outstanding. Diluted EPS
reflects the dilution if options to issue common stock were
exercised or converted into common stock.
6
3. EARNINGS PER SHARE - CONTINUED
A reconciliation of basic and diluted EPS for the three month
periods ending March 31 follows:
1998 1997
---- ----
Net earnings applicable to common stock
and common stock equivalents $2,829,645 $2,307,604
Average number of shares outstanding 7,552,782 7,757,435
Effect of dilutive securities - stock options 364,902 249,487
---------- ----------
7,917,684 8,006,922
========== ==========
Diluted earnings per share $0.36 $0.29
========== ==========
4. COMPREHENSIVE INCOME
The Corporation adopted FASB Statement No. 130, Reporting
Comprehensive Income (SFAS 130), effective January 1, 1998.
SFAS 130 establishes standards for reporting and displaying
comprehensive income and its components, including but not
limited to unrealized gains or losses on securities available
for sale, in the financial statements. Prior period amounts
have been reclassified in the financial statements.
Amounts reclassified from net income to comprehensive income for
the three month periods ending March 31 are as follows:
1997 1998
------------------------- -------------------------
Tax Tax
Benefit Reclassification Benefit Reclassification
------------------------- -------------------------
Change in unrealized holding
gains arising during period,
net of tax $ 112,471 $(218,327) $30,528 $(58,665)
Add: reclassification adjustment
for realized gain included
in net income, net of tax 7,209 (13,995) - -
--------- --------
Other comprehensive income for
the period $(232,322) $(58,665)
========= ========
7
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, 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, Michigan area, which is composed of the
tri-county area of Clinton, Eaton, and Ingham counties, the
western townships of Shiawassee County, and 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 originate 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 decreased to $846.1 million at
March 31, 1998 from $852.9 million at December 31, 1997. Most
of the decline occurred in loans, which was offset by an
increase in interest earning deposits.
Investment securities decreased to $16.1 million at March 31,
1998 from $26.1 million at December 31, 1997. This decline
resulted from the maturity of a United States Treasury note for
$10 million in January 1998.
Net loans receivable decreased to $733.9 million at March 31,
1998 from $754.8 million at December 31, 1997. This net decline
of $20.9 million occurred primarily through declines in
mortgages of $13.6 million, income-producing property loans of
$9.3 million, partially offset by growth in commercial and
consumer loans of $0.6 million and $1.4 million, respectively.
Mortgage loan originations for the three months ended March 31,
1998 were $43.7 million, compared to $27.0 million for the same
period a year ago. With comparatively low mortgage
8
rates in the first quarter of 1998, consumers continued to
refinance adjustable-rate mortgages into fixed-rate mortgages.
The Corporation continues to sell fixed-rate mortgages with
maturities exceeding 15 years in the secondary market, which has
resulted in a decline in loans receivable.
Deposits increased $14.1 million to $576.5 million at March 31,
1998 from $562.4 million at December 31, 1997. This growth
occurred through an increase in checking accounts of $5.1
million, savings accounts of $3.5 million, and certificates of
deposit of $5.5 million.
FHLB advances decreased $23.7 million to $189.0 million at March
31, 1998 from $212.7 million at December 31, 1997. The decrease
was composed of a decrease in fixed-rate advances of $12.7
million and a decline in adjustable-rate advances of $11.0
million. The Corporation had no adjustable-rate advances at
March 31, 1998. The Corporation's cumulative one-year gap,
one-to-three year gap, and three-to-five year gap was a negative
10.4 percent, negative 1.7 percent, and negative 1.5 percent,
respectively, at December 31, 1997. The Corporation's gap
positions showed a modest trend toward being less liability
sensitive at March 31, 1998.
Total stockholders' equity was $65.4 million at March 31, 1998,
a $2.1 million decrease compared to the 1997 year-end total of
$67.5 million. The decrease was primarily the result of
dividend declarations and treasury stock purchases, partially
offset by net income for the first three months of 1998.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998,
COMPARED TO THE THREE MONTHS ENDED MARCH 31, 1997
Net income for the three months ended March 31, 1998 was
$2,830,000, or $0.36 per diluted share, compared to $2,307,000,
or $0.29 per diluted share for the same 1997 period, a net
increase of $523,000, or 23 percent. Principally accounting for
this increase in net income between years was growth in the
Bank's net interest margin, improved fee income, and an increase
in gains on sales of the Corporation's 30-year fixed-rate
mortgage loan production. The Corporation's solid financial
performance for the first quarter is attributable to strong
mortgage and consumer loan production and a larger deposit base.
Net income for the 1998 first quarter represents a return on
average assets of 1.35 percent, an increase from 1.13 percent
for the 1997 first quarter and a return on average stockholders'
equity of 17.15 percent compared to 14.80 percent in 1997. The
Corporation's efficiency ratio, or operating expenses over
recurring operating revenues, was 51.0 percent for the quarter
ended March 31, 1998, an improvement from 53.9 percent for the
quarter ended March 31, 1997.
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
9
earning assets and interest-bearing liabilities, market rates of
interest, the level of nonperforming assets, demand for loans,
and other market forces.
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 months ended March 31, 1998 and 1997, and
at March 31, 1998 and December 31, 1997.
For the
Three Months
Ended At At
March 31, March 31, December 31,
1998 1997 1998 1997
---- ---- ---- ----
Weighted average yield:
Loans receivable, net 7.68% 7.64% 7.61% 7.71%
Mortgage-backed securities 7.85 7.81 7.95 8.00
Investment securities 6.16 5.87 6.27 6.02
Interest-earning deposits 4.22 2.52 3.83 3.31
Other 7.86 7.50 7.87 7.90
---- ---- ---- ----
Total earning assets 7.54 7.50 7.41 7.57
Weighted average cost:
Savings, checking, and money
market accounts 2.50 2.57 2.42 2.60
Certificates of deposit 5.81 5.70 5.83 5.83
FHLB advances 6.12 6.02 5.99 6.09
---- ---- ---- ----
Total interest-bearing
liabilities 4.84 4.82 4.77 4.91
---- ---- ---- ----
Interest rate spread 2.70% 2.68% 2.64% 2.66%
==== ==== ==== ====
Net interest margin 3.06% 3.02% 3.00% 3.02%
==== ==== ==== ====
Net interest income before provision for loan losses was $6.4
million during the first quarter of 1998 and represented an
$190,000 increase compared to the first quarter of 1997. Net
interest income was positively affected by higher asset yields
in 1998 and growth in earning assets, primarily in loans
receivable. The Corporation's net interest margin was 3.06
percent for the three months ended March 31, 1998, an
improvement from 3.02 percent for the comparable quarter of
1997. Average loans receivable were $748.3 million in the first
quarter of 1998, representing growth of $19.1 million over
average loans receivable of $729.2 million in the same quarter a
year earlier. The increased level of loans outstanding resulted
from originations of adjustable-rate and medium term fixed-
rate mortgage loans and purchases of adjustable- and
10
fixed-rate, medium-term mortgage loans all of which are held in
the Corporation's portfolio. Because the Corporation is
liability sensitive, pressure may be felt on the Corporation's
net interest margin if short-term market interest rates rise.
The future trend of the Corporation's net interest margin and
net interest income may further be impacted by the level of
mortgage loan originations, purchases, repayments, refinancings,
and sales and a resulting change in the composition of
the Corporation's earning assets. The relatively flat yield
curve during late 1997 and early 1998 resulted in a shift toward
more customers exhibiting a preference for fixed-rate mortgage
loans, many of which were originated for sale in the secondary
market. In late 1997, customers began converting adjustable-
rate mortgage loans to 30-year fixed-rate loans, which are sold
in the secondary market. This activity contributed to a decline
in loan balances and yields at March 31, 1998 compared to
December 31, 1997. This also contributed to the decline in net
interest margin from 3.02 percent at December 31, 1997 to 3.00
percent at March 31, 1998. Loans held for sale increased by
$4.4 million during the quarter to $10.6 million at March 31,
1998. A continued high level of refinancings and conversions of
adjustable-rate mortgage loans to 30-year fixed-rate loans could
have a negative impact on future net interest income. 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.
Provision For Loan Losses
- -------------------------
During the first quarter of 1998, the provision for loan losses
was $97,500 compared to $90,000 during the first quarter a year
ago. Increasing the provision resulted from management's
evaluation of the adequacy of the allowance for loan losses
including consideration of growth in the loan portfolio, the
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 $1.9 million for the three months ended
March 31, 1998, up 57 percent from $1.2 million for the three
months ended March 31, 1997. Increased deposit fees assessed on
a higher level of transaction account activity increased other
income $199,000. Gains on sales of the Corporation's 30-year
fixed-rate mortgage loan production increased other income
$379,000.
General and Administrative Expenses
- -----------------------------------
General and administrative expenses were $4.0 million for the
three months ended March 31, 1998, compared to $3.9 million for
the same quarter a year ago. Compensation and fringe benefits
expense rose $135,000 between periods as a result of merit-based
salary increases. Decreased office occupancy and equipment
expense of $210,000 resulted from equipment becoming fully
depreciated in the second quarter of 1997.
11
Federal Income Tax Expense
- --------------------------
Federal income tax expense was $1.4 million for the three months
ended March 31, 1998, compared to $1.1 million for the
comparable 1997 quarter. The increase primarily reflects a
higher level of pre-tax income. The Corporation's federal
income tax expense is, for the most part, recorded at the
federal statutory rate 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.
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.
March 31, December 31,
1998 1997
---- ----
(dollars in thousands)
Nonaccruing loans:
One- to four-family
residential mortgages $ 305 $ 697
FHA-partially insured
and VA-partially guaranteed 109 109
Consumer installment 195 93
----- ------
Total $ 654 $ 899
===== ======
Percentage of total assets 0.08% 0.10%
===== ======
Real estate owned:(1)
One-to four-family
residential mortgages $ 158 $ 11
Construction and development - 141
----- ------
Total $ 158 $ 152
===== ======
Percentage of total assets 0.02% 0.02%
===== ======
Total nonaccruing loans
and real estate owned $ 812 $1,051
===== ======
Percentage of total assets 0.10% 0.12%
===== ======
<FN>
(1) Real estate owned includes properties in redemption and acquired through
foreclosure.
</FN>
12
The Corporation continues to demonstrate strong credit quality.
The Corporation's ratio of nonperforming assets to total assets
was 0.10 percent and 0.12 percent at March 31, 1998 and
December 31, 1997, respectively, all well below the industry
average. In addition, at March 31, 1998, the Corporation's
allowances for loan and real estate losses represent 607 percent
of its nonperforming assets, significantly above the industry
average.
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 6.65 percent and 7.32 percent at March 31, 1998 and December
31, 1997, 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 7.45
percent, 7.45 percent, and 13.46 percent at March 31, 1998,
respectively.
The Corporation's Board of Directors declared a cash dividend of
$0.13 per share in the first quarter of 1998, an increase of 44
percent over the $0.09 per share dividend declared in the first
quarter of 1997. 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.
YEAR 2000
The Corporation has an ongoing program to identify, correct and
test any processing systems that are date driven and are not
Year 2000 compliant. The Corporation's core data processing
software is provided by an outside vendor. The outside vendor
has certified the software is Year 2000 compliant. The
Corporation is scheduled to receive the compliant software in
May 1998. The software will be installed on a redundant
computer for testing, which is anticipated to begin in July
1998. The Corporation anticipates testing the software for
integration with other third party software in 1998. Management
also anticipates testing its remaining systems for Year 2000
compliance in 1998.
13
As of March 31, 1998, no identifiable costs have been incurred
in connection with ensuring the Corporation's systems and
products are Year 2000 compliant. Management anticipates costs
to complete Year 2000 implementation will approximate $700,000
to $900,000. These costs will be primarily for the replacement
of depreciable assets.
ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income (SFAS 130). SFAS 130
establishes standards for reporting and displaying comprehensive
income and its components, including but not limited to
unrealized gains or losses on securities available for sale, in
the financial statements. This statement was effective for both
interim and annual periods beginning after December 15, 1997
with earlier application permitted. SFAS 130 requires
reclassification of all prior period amounts.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise
and Related Information (SFAS 131). SFAS 131 establishes
standards for the way that public entities report information
about operating segments in financial statements. This
statement is effective for annual reporting for 1998 calendar
year entities. Although this statement applies to interim
financial statements, interim disclosures are not required
in the initial year of application.
In February 1998, The FASB issued Statement of Financial
Accounting Standards No. 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits (SFAS 132). SFAS 132
revises employers' disclosures about pension and other
postretirement benefit plans. It does not change the
measurement or recognition of those plans. SFAS 132
standardizes the disclosure requirements for pensions and other
postretirement benefits, requires additional information on
changes in the benefit obligations and fair values of plan
assets, and eliminates certain disclosures. This Statement is
effective for fiscal years beginning after December 15, 1997,
with earlier application encouraged. Restatement of disclosures
for earlier periods provided for comparative purposes is
required.
SUBSEQUENT EVENT
During April 1998, the Corporation's Board of Directors approved
an extension of the April 1997 stock repurchase program pursuant
to which the Corporation may repurchase up to 5 percent or
387,750 shares of CFSB Bancorp, Inc. common stock. Through
April 30, 1998, the Corporation repurchased 319,297 shares of
CFSB Bancorp, Inc. common stock on the open market for $7.4
million, or at an average purchase price of $23.27 per share.
The program has been extended to April 1999 to allow the
Corporation an opportunity to repurchase the remaining 68,453
shares under the 1997 program.
14
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
Exhibit 27.1 Financial Data Schedule for the three
months ended March 31, 1998.
Exhibit 27.2 Restated Financial Data Schedule for
the three months ended March 31, 1997.
15
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: May 11, 1998
By: /s/ Robert H. Becker
___________________________
Robert H. Becker
President and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ John W. Abbott
__________________________
John W. Abbott
Executive Vice President,
Chief Operating Officer,
and Secretary
(Duly Authorized Officer)
By: /s/ Rick L. Laber
___________________________
Rick L. Laber
Vice President, Chief Financial
Officer and Treasurer
(Principal Financial and
Accounting Officer)
16