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: June 30, 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 8,166,983 shares of the Registrant's $0.01 par value
common stock outstanding as of July 31, 1998.
CFSB Bancorp, Inc. and Subsidiary
Contents
Pages
-----
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Consolidated Statements of Financial Condition at
June 30, 1998 and December 31, 1997 (unaudited) 1
Consolidated Statements of Operations for the
three months ended June 30, 1998 and 1997
(unaudited) and for the six months ended
June 30, 1998 and 1997 (unaudited) 2
Consolidated Statements of Stockholders' Equity
and Comprehensive Income for the six months
ended June 30, 1998 and 1997 (unaudited) 3
Consolidated Statements of Cash Flows for the
six months ended June 30, 1998 and 1997
(unaudited) 4-5
Notes to Consolidated Financial Statements
(unaudited) 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 8-17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARK RISK. 17
PART II - OTHER INFORMATION 18
SIGNATURES 19
CFSB BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
June 30, December 31,
1998 1997
------------ -----------
(unaudited)
ASSETS
Cash and amounts due from depository institutions $ 4,062,902 $ 5,188,951
Interest-earning deposits with Federal Home
Loan Bank and other depository institutions,
at cost which approximates market 18,636,927 13,300,543
Investment securities available for sale, at
fair value 16,539,600 26,079,688
Mortgage-backed securities available for sale,
at fair value 18,423,480 21,597,690
Loans receivable, net 749,910,957 754,806,061
Accrued interest receivable, net 4,776,823 4,910,200
Real estate, net 280,571 -
Premises and equipment, net 9,983,065 10,457,180
Stock in Federal Home Loan Bank of Indianapolis,
at cost 11,423,100 11,423,100
Deferred federal income tax benefit 516,000 266,784
Due from broker 4,000,000 -
Other assets 9,215,310 4,857,716
------------ ------------
Total assets $847,768,735 $852,887,913
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $577,910,370 $562,412,067
Advances from Federal Home Loan Bank 189,046,811 212,692,934
Advance payments by borrowers for taxes
and insurance 5,728,411 1,454,316
Accrued interest payable 2,780,573 3,043,923
Federal income taxes payable 818,091 556,315
Due to broker 500,000 -
Other liabilities 5,027,441 5,193,568
------------ ------------
Total liabilities 781,811,697 785,353,123
------------ ------------
Stockholders' equity:
Serial preferred stock, $0.01 par value; authorized
2,000,000 shares; issued - none - -
Common stock, $0.01 par value; authorized
15,000,000 shares; issued 8,173,517 shares 81,735 76,555
Additional paid-in capital 63,720,286 48,377,350
Retained income - substantially restricted 2,254,160 20,011,874
Accumulated other comprehensive income,
net of tax expense of $96,507 - 1998 and
$161,035 - 1997 187,938 312,597
Employee Stock Ownership Plan (111,579) (227,522)
Treasury stock, at cost; 6,534 shares - 1998 and
52,787 shares - 1997 (175,502) (1,016,064)
------------ ------------
Total stockholders' equity 65,957,038 67,534,790
------------ ------------
Total liabilities and stockholders' equity $847,768,735 $852,887,913
============ ============
See accompanying notes to consolidated financial statements.
1
CFSB BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Operations
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
------------ ------------ ----------- -----------
(Unaudited) (Unaudited)
INTEREST INCOME:
Loans receivable $14,424,980 $14,196,567 $28,763,357 $28,098,939
Mortgage-backed securities 362,936 474,419 766,903 985,607
Investment securities 250,775 468,024 548,425 923,683
Other 512,949 320,181 1,021,329 621,682
----------- ----------- ----------- -----------
Total interest income 15,551,640 15,459,191 31,100,014 30,629,911
INTEREST EXPENSE:
Deposits, net 6,203,371 6,035,135 12,399,586 12,071,249
Federal Home Loan Bank advances 2,805,060 3,080,632 5,751,399 5,999,894
----------- ----------- ----------- -----------
Total interest expense 9,008,431 9,115,767 18,150,985 18,071,143
Net interest income before provision
for loan losses 6,543,329 6,343,424 12,949,089 12,558,768
Provision for loan losses 97,500 90,000 195,000 180,000
----------- ----------- ----------- -----------
Net interest income after provision
for loan losses 6,445,829 6,253,424 12,754,089 12,378,768
OTHER INCOME (LOSS):
Service charges and other fees 1,269,928 1,069,355 2,395,672 1,996,514
Loan servicing income (6,694) 81,580 65,536 161,619
Losses on sales of investment securities
available for sale, net - (51,031) - (31,372)
Gains on sales of loans, net 360,195 71,826 809,264 141,683
Gains on sales of mortgage-backed
securities available for sale, net - - 2,362 -
Real estate operations, net (2,388) (15,000) 7,270 (30,000)
Gains on sale of branches, net 272,793 351,740 272,793 351,740
Other, net 360,213 213,018 572,010 325,457
----------- ----------- ----------- -----------
Total other income 2,254,047 1,721,488 4,124,907 2,915,641
GENERAL AND ADMINISTRATIVE EXPENSES:
Compensation, payroll taxes, and fringe
benefits 2,219,372 2,052,029 4,400,294 4,098,105
Office occupancy and equipment 509,619 633,102 1,007,915 1,341,680
Federal insurance premiums 87,020 89,553 174,040 177,287
Data processing 105,619 110,314 218,975 211,988
Marketing 204,784 236,092 407,053 448,665
Other, net 756,082 798,611 1,664,694 1,587,869
----------- ----------- ----------- -----------
Total general and administrative
expenses 3,882,496 3,919,701 7,872,971 7,865,594
----------- ----------- ----------- -----------
Income before federal income tax
expense 4,817,380 4,055,211 9,006,025 7,428,815
Federal income tax expense 1,608,000 1,260,000 2,967,000 2,326,000
----------- ----------- ----------- -----------
Net income $ 3,209,380 $ 2,795,211 $ 6,039,025 $ 5,102,815
=========== =========== =========== ===========
EARNINGS PER SHARE:
Basic $ 0.39 $ 0.33 $ 0.73 $ 0.60
=========== =========== =========== ===========
Diluted $ 0.37 $ 0.32 $ 0.70 $ 0.58
=========== =========== =========== ===========
DIVIDENDS PAID PER SHARE $ 0.12 $ 0.09 $ 0.23 $ 0.15
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
2
CFSB BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity and
Comprehensive Income
For the Six Months Ended June 30, 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 - - 5,102,815 - - - 5,102,815
Change in unrealized
gain on securities,
net (see disclosure) - - - - - (39,798) (39,798)
-----------
Comprehensive income - - - - - - 5,063,017
Stock options exercised - - (96,727) - 150,696 - 53,969
Repayment of ESOP debt - - - 115,943 - - 115,943
Cash dividends on common
stock - $0.17 per share - - (1,469,052) - - - (1,469,052)
10% common stock dividend 2,542 6,987,060 (11,063,418) - 4,062,759 - (11,057)
Treasury stock purchased - - - - (1,777,233) - (1,777,233)
------- ----------- ----------- --------- ------------ --------- -----------
Balance at
June 30, 1997 $75,286 $48,385,710 $16,337,218 $(343,465) $ (189,931) $ 174,796 $64,445,614
======= =========== =========== ========= =========== ========= ===========
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 - - 6,039,025 - - - 6,039,025
Change in unrealized
gain on securities,
net (see disclosure) - - - - - (124,659) (124,659)
-----------
Comprehensive income - - - - - - 5,914,366
Stock options exercised - - (231,186) - 340,106 - 108,920
Repayment of ESOP debt - - - 115,943 - - 115,943
Cash dividends on common
stock - $0.25 per share - - (2,034,559) - - - (2,034,559)
10% common stock dividend 5,180 15,300,221 (21,530,994) - 6,210,476 - (15,117)
Treasury stock purchased - - - - (5,710,020) - (5,710,020)
Tax benefit associated
with exercise of stock
options - 42,715 - - - - 42,715
------- ----------- ----------- --------- ------------ --------- -----------
Balance at
June 30, 1998 $81,735 $63,720,286 $ 2,254,160 $(111,579) $ (175,502) $ 187,938 $65,957,038
======= =========== =========== ========= =========== ========= ===========
See accompanying notes to consolidated financial statements.
3
CFSB BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Six Months Ended
June 30,
-----------------------
1998 1997
-------- ---------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,039,025 $ 5,102,815
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 498,174 821,198
Provision for loan losses 195,000 180,000
Provision for real estate losses - 30,000
Net amortization of premiums and accretion
of discounts - 43,274
Loans originated for sale (29,548,926) (7,344,077)
Proceeds from sales of loans originated for sale 28,441,360 7,759,645
Net gains on sales of loans and securities (811,626) (110,311)
Net gains on sales and disposals of premises
and equipment (272,794) (325,667)
Decrease in deferred loan fees (410,741) (90,552)
Decrease (increase) in accrued interest receivable 133,377 (849,416)
(Decrease) increase in accrued interest payable (263,350) 93,550
Increase in deferred Federal income tax benefit (184,688) -
Increase in federal income taxes payable 304,491 173,921
Due to Broker 500,000 -
Due from Broker (4,000,000) -
Decrease in other liabilities (198,162) (276,687)
Increase in other assets (4,230,413) (756,104)
------------ ------------
Net cash provided by (used by) operating
activities (3,809,273) 4,451,589
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities available for sale (500,000) (20,000,781)
Proceeds from sales of investment securities available
for sale - 20,037,696
Principal repayments and maturities of investment
securities available for sale 10,000,000 5,000,000
Loan originations (net of undisbursed loans in
process) (118,549,106) (80,637,802)
Loans purchased (21,970,782) (9,215,305)
Proceeds from sales of loans 36,506,307 2,172,845
Principal repayments on loans 110,633,504 59,358,120
Principal repayments and maturities on mortgage-
backed securities available for sale 3,027,473 2,755,944
Purchases of premises and equipment (438,541) (1,307,387)
Proceeds from sales and disposals of premises
and equipment 687,276 1,047,741
Purchases of Federal Home Loan Bank stock - (134,600)
------------ ------------
Net cash provided by (used by) investing activities 19,396,131 (20,923,529)
4
CFSB BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
Six Months Ended
June 30,
-----------------------
1998 1997
-------- ---------
(unaudited)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits $ 15,498,303 $ 6,779,266
Stock options exercised 108,920 53,969
Purchases of treasury stock (5,710,020) (1,777,233)
Net increase in advance payments by borrowers
for taxes and insurance 4,274,095 5,017,663
Federal Home Loan Bank advance repayments (79,773,632) (46,672,961)
Federal Home Loan Bank advances 56,127,509 48,464,381
Dividends paid on common stock (1,901,698) (1,279,607)
------------ ------------
Net cash provided by (used by) financing activities (11,376,523) 10,585,478
------------ ------------
Net increase (decrease) in cash and cash equivalents 4,210,335 (5,886,462)
Cash and cash equivalents at beginning of period 18,489,494 22,749,963
------------ ------------
Cash and cash equivalents at end of period 22,699,829 16,863,501
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest expense $ 18,414,275 $ 17,977,593
Federal income taxes 2,770,000 2,195,000
Transfers of loans to real estate owned 277,849 583,996
Transfers of loans to repossessed assets 129,903 110,332
Loans charged-off 129,396 225,579
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 six
months ended June 30, 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 and six
month periods ending June 30 follows:
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
-------- ------- --------- --------
Net earnings applicable to common stock
and common stock equivalents $3,209,380 $2,795,211 $6,039,025 $5,102,815
========== ========== ========== ==========
Average number of shares outstanding 8,175,991 8,445,271 8,241,442 8,488,620
Effect of dilutive securities - stock options 398,357 306,407 403,652 291,699
---------- ---------- ---------- ----------
8,574,348 8,751,678 8,645,094 8,780,319
========== ========== ========== ==========
Diluted earnings per share $0.37 $0.32 $0.70 $0.58
========== ========== ========== ==========
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 six month periods ending June 30 are as follows:
1998 1997
------------------------- -------------------------
Tax Tax
Benefit Reclassification Benefit Reclassification
------- ---------------- ------- ----------------
Change in unrealized holding
gains arising during period,
net of tax $ 64,528 $(124,659) $26,084 $(50,634)
Add: reclassification adjustment
for realized gain included
in net income, net of tax -- -- (5,582) 10,836
--------- --------
Other comprehensive income for
the period $(124,659) $(39,798)
========= ========
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 $847.8 million at
June 30, 1998 from $852.9 million at December 31, 1997. Most of
the decline occurred in investment securities, which was
partially offset by smaller increases in other asset categories.
Investment securities decreased to $16.5 million at June 30,
1998 from $26.1 million at December 31, 1997. This decline
resulted from the maturity of a $10 million United States
Treasury note in January 1998.
Net loans receivable decreased to $749.9 million at June 30,
1998 from $754.8 million at December 31, 1997. This net decline
of $4.9 million occurred primarily through declines in mortgages
of $1.9 million and income-producing property loans of $9.4
million, partially offset by growth in commercial and consumer
loans of $1.6 million and $4.8 million, respectively. Mortgage
loan originations for the six months ended June 30, 1998 were
$114.2 million, compared to $88.0 million for the same period a
year ago. With comparatively low mortgage
8
rates in the first half 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 $15.5 million to $577.9 million at June 30,
1998 from $562.4 million at December 31, 1997. This growth
occurred through an increase in checking accounts of $10.6
million, savings accounts of $4.3 million, and certificates of
deposit of $0.6 million.
FHLB advances decreased $23.7 million to $189.0 million at June
30, 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
June 30, 1998. The Corporation's cumulative one-year gap, one-
to-three year gap, and three-to-five year gap was a negative 9.6
percent, positive .4 percent, and positive 1.5 percent,
respectively, at June 30, 1998, compared to a negative 10.4
percent, negative 1.7 percent, and negative 1.5 percent,
respectively, at December 31, 1997.
Total stockholders' equity was $66.0 million at June 30, 1998, a
$1.5 million decrease compared to the 1997 year-end total of
$67.5 million. The decrease was primarily the result of
treasury stock purchases and dividend declarations, partially
offset by net income for the first six months of 1998.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1998,
COMPARED TO THE THREE MONTHS ENDED JUNE 30, 1997
Net income for the three months ended June 30, 1998 was
$3,209,000, or $0.37 per diluted share, compared to $2,796,000,
or $0.32 per diluted share for the same 1997 period, a net
increase of $413,000, or 15 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 favorable financial
performance for the second quarter is attributable to strong
mortgage and consumer loan production and a larger deposit base.
Net income for the 1998 second quarter represents a return on
average assets of 1.53 percent, an increase from 1.34 percent
for the 1997 second quarter and a return on average
stockholders' equity of 19.60 percent compared to 17.46 percent
in 1997. The Corporation's efficiency ratio, or operating
expenses over recurring operating revenues, was 47.55 percent
for the quarter ended June 30, 1998, an improvement from 50.96
percent for the quarter ended June 30, 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 June 30, 1998 and 1997, and at
June 30, 1998 and December 31, 1997.
For the
Three Months
Ended At At
June 30, June 30, December 31,
1998 1997 1998 1997
---- ---- ---- ----
Weighted average yield:
Loans receivable, net 7.68% 7.66% 7.58% 7.71%
Mortgage-backed securities 7.66 7.60 7.97 8.00
Investment securities 6.26 6.07 6.26 6.02
Interest-earning deposits 3.91 2.79 3.36 3.31
Other 7.86 7.50 7.87 7.90
---- ---- ---- ----
Total earning assets 7.52 7.52 7.45 7.57
Weighted average cost:
Savings, checking, and money
market accounts 2.35 2.51 2.39 2.60
Certificates of deposit 5.77 5.70 5.80 5.83
FHLB advances 6.00 6.08 5.88 6.09
---- ---- ---- ----
Total interest-bearing
liabilities 4.70 4.82 4.70 4.91
---- ---- ---- ----
Interest rate spread 2.82% 2.70% 2.75% 2.66%
==== ==== ==== ====
Net interest margin 3.14% 3.07% 3.08% 3.02%
==== ==== ==== ====
Net interest income before provision for loan losses was $6.5
million during the second quarter of 1998 and represented an
$200,000 increase compared to the second quarter of 1997. Net
interest income was positively affected by lower cost of funds
in 1998 and growth in average earning assets, primarily in loans
receivable. The Corporation's net interest margin was 3.14
percent for the three months ended June 30, 1998, an improvement
from 3.07 percent for the comparable quarter of 1997. Average
loans receivable were $752.2 million in the second quarter of
1998, representing growth of $10.9 million over average loans
receivable of $741.3 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 fixed-rate,
medium-term mortgage loans all of which are held in the
Corporation's portfolio. The Corporation's net interest margin
of 3.14 percent for the three months ended June 30, 1998
exceeded the net interest margin of 3.08 percent at June 30,
1998 primarily due to the favorable impact of the reversal of
deferred loan fees in connection with loan payoffs during the
period.
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 June 30, 1998 compared to December
31, 1997. This also contributed to the decline in yield on
earning assets from 7.57 percent at December 31, 1997 to 7.45
percent at June 30, 1998. The decline in yield in earning
assets was more than offset by a decline in cost of funds during
1998, causing an increase in net interest margin from 3.02
percent at December 31, 1997 to 3.08 percent at June 30, 1998.
Loans held for sale remained steady at $6.2 million at June 30,
1998 compared to December 31, 1997. 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. Because the Corporation is
liability sensitive, pressure may be felt on the Corporation's
net interest margin if short-term market interest rates rise.
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 second quarter of 1998, the provision for loan losses
was $97,500 compared to $90,000 during the second 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 $2.3 million for the three months ended
June 30, 1998, up 31 percent from $1.7 million for the three
months ended June 30, 1997. During the second quarter of 1998,
the Corporation had a nonrecurring gain on the sale of a bank
building of $273,000. In the same quarter of 1997, the
Corporation had nonrecurring gains on the sales of two branches
totalling $352,000. Increased deposit fees assessed on a higher
level of transaction account activity increased other income
$201,000. Gains on sales of the Corporation's 30-year fixed-
rate mortgage loan production increased other income $288,000.
Loan servicing income declined $78,000 during the second quarter
of 1998, compared to the second quarter of 1997, due to
11
additional amortization of originated mortgage servicing rights
caused by accelerated prepayments on the underlying mortgage
loans. Capitalized originated mortgage servicing rights at June
30, 1998 were $696,000. The related balance of loans serviced
for others totalled $128.7 million.
General and Administrative Expenses
- -----------------------------------
General and administrative expenses were $3.9 million for the
three months ended June 30, 1998, unchanged from the same
quarter a year ago. Compensation and fringe benefits expense
rose $167,000 between periods as a result of merit-based salary
increases. Decreased office occupancy and equipment expense of
$123,000 resulted from equipment becoming fully depreciated in
the second quarter of 1997.
Federal Income Tax Expense
- --------------------------
Federal income tax expense was $1.6 million for the three months
ended June 30, 1998, compared to $1.3 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.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998,
COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1997
Net income for the six months ended June 30, 1998 was $6.0
million compared to $5.1 million for the same period in 1997, a
net increase of $0.9 million. Principally accounting for this
increase in net income between years was growth in both the
Corporation's net interest margin and fee income and an increase
in gains on sales of the Corporation's 30-year fixed-rate
mortgage loan production. Net income for the six months ended
June 30, 1998 represented a return on average stockholders'
equity of 18.33 percent, an increase from 16.14 percent in the
1997 period and a return on average assets of 1.44 percent, an
increase from 1.23 percent in the 1997 period. The
Corporation's efficiency ratio, or operating expenses over
recurring operating revenues, was 49.2 percent for the six
months ended June 30, 1998, an improvement from 52.9 percent in
the year earlier period.
Net Interest Income
- -------------------
Net interest income before provision for loan losses was $12.9
million during the first six months of 1998 and represented a
$400,000 increase compared to the same period of 1997. Net
interest income was positively affected by lower deposit rates
in 1998 and growth in earning assets. The Corporation's net
yield on average earning assets was 3.11 percent for the six
months ended June 30, 1998, an improvement from 3.05 percent for
the comparable six month period of 1997.
12
Provision for Loan Losses
- -------------------------
The provision for loan losses was $195,000 during the six months
ended June 30, 1998 compared to $180,000 for the 1997 period.
Management believes the current provision and related allowance
for loan loses is adequate to meet current and potential credit
risks in the current loan portfolio.
Other Income
- ------------
Other income was $4.1 million for the six months ended June 30,
1998, an increase of $1.2 million compared to $2.9 million for
the six months ended June 30, 1997. During 1998, the
Corporation had a nonrecurring gain on the sale of a bank
building of $273,000. In 1997, the Corporation had nonrecurring
gains on the sales of two branches totalling $352,000.
Increased deposit fees assessed on a higher level of transaction
account activity increased other income $399,000. Gains on
sales of the Corporation's 30-year fixed-rate mortgage loan
production increased other income $668,000. Loan servicing
income declined $78,000 during 1998, compared to 1997, due to
additional amortization of originated mortgage servicing rights
caused by accelerated prepayments on the underlying mortgage
loans.
General and Administrative Expenses
- -----------------------------------
General and administrative expenses were $7.9 million for the
six months ended June 30, 1998, unchanged from the same period a
year ago. Compensation expense rose between periods primarily
as a result of merit-based salary increases. Decreased office
occupancy and equipment expense resulted from equipment becoming
fully depreciated in the second quarter of 1997.
Federal Income Tax Expense
- --------------------------
Federal income tax expense was $3.0 million for the six months
ended June 30, 1998, an increase of $641,000 from $2.3 million
for the comparable 1997 period. The increase in federal income
tax expense resulted 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 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.
13
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.
June 30, December 31,
1998 1997
---- ----
(dollars in thousands)
Nonaccruing loans:
One- to four-family
residential mortgages $ 944 $ 697
Income-producing property 266 -
FHA-partially insured
and VA-partially guaranteed 62 109
Consumer installment 199 93
------ ------
Total $1,471 $ 899
====== ======
Percentage of total assets 0.17% 0.10%
====== ======
Real estate owned:(1)
One-to four-family
residential mortgages $ 433 $ 11
Construction and development - 141
------ ------
Total $ 433 $ 152
====== ======
Percentage of total assets 0.05% 0.02%
====== ======
Total nonaccruing loans
and real estate owned $1,904 $1,051
====== ======
Percentage of total assets 0.22% 0.12%
====== ======
<FN>
(1) Real estate owned includes properties in redemption and
acquired through foreclosure.
</FN>
The Corporation had one impaired loan at June 30, 1998. The
loan was an income-producing property loan totalling $266,000
and is included in nonaccrual loans. The Corporation's average
investment in impaired loans was $266,000 during the second
quarter of 1998. Interest income recognized on impaired loans
during the second quarter of 1998 totalled $3,600. Impaired
loans have specific allocations of the allowance for loan losses
of $27,000 at June 30, 1998.
The Corporation continues to demonstrate strong credit quality.
The Corporation's ratio of nonperforming assets to total assets
was 0.22 percent and 0.12 percent at June 30, 1998 and December
31, 1997, respectively, all well below the industry average. In
addition, at June 30,
14
1998, the Corporation's allowances for loan and real estate
losses represent 253 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 6.07
percent and 7.32 percent at June 30, 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 7.47
percent, 7.47 percent, and 13.13 percent at June 30, 1998,
respectively.
The Corporation's Board of Directors declared a cash dividend of
$0.13 per share in the second quarter of 1998, an increase of 44
percent over the $0.09 per share dividend declared in the second
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.
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
426,525 shares of CFSB Bancorp, Inc. common stock. Through July
31, 1998, the Corporation repurchased 372,722 shares of CFSB
Bancorp, Inc. common stock on the open market for $8.0 million,
or at an average purchase price of $21.46 per share. The
program has been extended to April 1999 to allow the Corporation
an opportunity to repurchase the remaining 53,803 shares under
the 1997 program.
15
The Corporation's Board of Directors also declared a 10 percent
stock dividend on May 19, 1998. The additional shares as a
result of the dividend were distributed on June 12, 1998 to
stockholders of record as of May 29, 1998. 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.
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 and the
Corporation is using the compliant software. The software is
also installed on a redundant computer for testing, which is
anticipated to begin in August 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.
Year 2000 testing is scheduled for completion by March 31, 1999.
As of June 30, 1998, approximately $80,000 of costs have been
incurred in connection with ensuring the Corporation's systems
and products are Year 2000 compliant. Management anticipates
total costs to for 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 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.
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and
Hedging Activities (SFAS 133). SFAS 133 establishes accounting
and reporting standards for derivative instruments and hedging
activities. It requires recognition of all derivatives as
either assets or liabilities in the statement of financial
16
condition and measurement of those instruments at fair value.
The accounting for gains and losses on derivatives depends on
the intended use of the derivative. This Statement is effective
for all fiscal quarters of fiscal years beginning after June 15,
1999, with earlier application encouraged. Retroactive
application is not permitted. Management has not completed its
evaluation of the expected impact of SFAS 133 on the financial
condition or operations of the Corporation.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation has experienced no material changes in market
risk since December 31, 1997.
FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements that involve
inherent risks and uncertainties. A number of important factors
could cause actual results to differ materially from those in
the forward-looking statements. Those factors include the
economic environment, competition, products and pricing in
geographic and business areas in which the Corporation operates,
prevailing interest rates, changes in government regulations and
policies affecting financial services companies, and credit
quality and credit risk management. CFSB Bancorp, Inc.
undertakes no obligation to release revisions to these forward-
looking statements or reflect events or circumstances after the
date of this report.
17
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
(a) Exhibits
Exhibit 27.1 Financial Data Schedule for the six
months ended June 30, 1998.
Exhibit 27.2 Restated Financial Data Schedule for
the six months ended June 30, 1997.
(b) Reports on Form 8-K
On April 21, 1998, the registrant filed a Form 8-K current
report announcing the registrant'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
426,525 shares of CFSB Bancorp, Inc. common stock. The program
has been extended to April 1999 to allow the Corporation an
opportunity to repurchase the remaining shares under the 1997
program.
On May 19, 1998, the registrant filed a Form 8-K current report
announcing the registrant's Board of Directors approved a ten
percent common stock dividend. The common stock dividend was
distributed June 12, 1998 to stockholders of record as of May
29, 1998. The common stock dividend increased the outstanding
common stock of the registrant by ten percent to approximately
8.2 million shares. Stockholders of record received one share
of common stock for each ten shares held.
18
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: August 10, 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)
19