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, 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 8,154,668 shares of the Registrant's $0.01 par value
common stock outstanding as of October 31, 1998.
CFSB BANCORP, INC., AND SUBSIDIARY
Contents
Pages
-----
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Consolidated Statements of Financial Condition at
September 30, 1998 and December 31, 1997 (unaudited) 1
Consolidated Statements of Operations for the
three months ended September 30, 1998 and 1997
(unaudited) and for the nine months ended
September 30, 1998 and 1997 (unaudited) 2
Consolidated Statements of Stockholders' Equity
and Comprehensive Income for the nine months
ended September 30, 1998 and 1997 (unaudited) 3
Consolidated Statements of Cash Flows for the
nine months ended September 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
September 30, December 31,
1998 1997
------------ -----------
(unaudited)
ASSETS
Cash and amounts due from depository institutions $ 7,333,531 $ 5,188,951
Interest-earning deposits with Federal Home
Loan Bank and other depository institutions,
at cost which approximates market 9,816,259 13,300,543
Investment securities available for sale, at
fair value 12,221,400 26,079,688
Mortgage-backed securities available for sale,
at fair value 17,919,700 21,597,690
Loans receivable, net 786,062,881 754,806,061
Accrued interest receivable, net 4,991,311 4,910,200
Real estate, net 827,132 -
Premises and equipment, net 10,020,040 10,457,180
Stock in Federal Home Loan Bank of Indianapolis,
at cost 11,423,100 11,423,100
Deferred federal income tax benefit 455,000 266,784
Other assets 6,316,604 4,857,716
------------ ------------
Total assets $867,386,958 $852,887,913
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $577,723,352 $562,412,067
Advances from Federal Home Loan Bank 208,460,296 212,692,934
Advance payments by borrowers for taxes
and insurance 4,224,896 1,454,316
Accrued interest payable 2,825,852 3,043,923
Federal income taxes payable 897,259 556,315
Other liabilities 5,435,587 5,193,568
------------ ------------
Total liabilities 799,567,242 785,353,123
------------ ------------
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
at September 30, 1998 and 7,655,466 shares at
December 31, 1997 81,735 76,555
Additional paid-in capital 63,756,314 48,377,350
Retained income - substantially restricted 3,777,817 20,011,874
Net unrealized gains on available-for-sale securities,
net of tax expense of $242,506 at September
30,1998 and $161,035 at December 31, 1997 473,748 312,597
Employee Stock Ownership Plan (92,983) (227,522)
Treasury stock, at cost; 7,849 shares at September
30, 1998 and 52,787 shares at December 31, 1997 (176,915) (1,016,064)
------------ ------------
Total stockholders' equity 67,819,716 67,534,790
------------ ------------
Total liabilities and stockholders' equity $867,386,958 $852,887,913
============ ============
See accompanying notes to consolidated financial statements.
1
CFSB BANCORP, INC., AND SUBSIDIARY
Consolidated Statements of Operations
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------------ ------------ ----------- -----------
(Unaudited) (Unaudited)
INTEREST INCOME:
Loans receivable $14,667,794 $14,699,198 $43,431,151 $42,798,137
Mortgage-backed securities 337,941 454,107 1,104,844 1,439,714
Investment securities 202,906 373,900 751,331 1,297,583
Other 477,787 351,769 1,499,116 973,451
----------- ----------- ----------- -----------
Total interest income 15,686,428 15,878,974 46,786,442 46,508,885
INTEREST EXPENSE:
Deposits, net 6,245,586 6,180,450 18,645,172 18,251,699
Federal Home Loan Bank advances 2,935,178 3,232,682 8,686,517 9,232,576
----------- ----------- ----------- -----------
Total interest expense 9,180,764 9,413,132 27,331,689 27,484,275
----------- ----------- ----------- -----------
Net interest income before provision
for loan losses 6,505,664 6,465,842 19,454,753 19,024,610
Provision for loan losses 97,500 90,000 292,500 270,000
----------- ----------- ----------- -----------
Net interest income after provision
for loan losses 6,408,164 6,375,842 19,162,253 18,754,610
OTHER INCOME (LOSS):
Service charges and other fees 1,268,589 1,132,743 3,664,261 3,129,257
Loan servicing income 68,455 67,042 133,991 228,661
Losses on sales of investment securities
available for sale, net - - - (31,372)
Gains on sales of loans, net 370,357 137,747 1,179,621 279,430
Gains on sales of mortgage-backed
securities available for sale, net - - 2,362 -
Real estate operations, net 32,232 (15,000) 39,502 (45,000)
Gains on sales of branches, net - 153,958 272,793 505,698
Other, net 241,070 151,114 813,080 476,571
----------- ----------- ----------- -----------
Total other income 1,980,703 1,627,604 6,105,610 4,543,245
GENERAL AND ADMINISTRATIVE EXPENSES:
Compensation, payroll taxes, and fringe
benefits 2,234,647 2,100,271 6,634,941 6,198,376
Office occupancy and equipment 570,378 530,980 1,578,293 1,872,660
Federal insurance premiums 87,168 88,009 261,208 265,296
Data processing 142,190 107,516 361,165 319,504
Marketing 205,991 220,241 613,044 668,906
Other, net 825,727 818,248 2,490,421 2,406,117
----------- ----------- ----------- -----------
Total general and administrative
expenses 4,066,101 3,865,265 11,939,072 11,730,859
----------- ----------- ----------- -----------
Income before federal income tax
expense 4,322,766 4,138,181 13,328,791 11,566,996
Federal income tax expense 1,453,000 1,337,000 4,420,000 3,663,000
----------- ----------- ----------- -----------
Net income $ 2,869,766 $ 2,801,181 $ 8,908,791 $ 7,903,996
=========== =========== =========== ===========
EARNINGS PER SHARE:
Basic $ 0.35 $ 0.34 $ 1.08 $ 0.94
=========== =========== =========== ===========
Diluted $ 0.34 $ 0.32 $ 1.04 $ 0.90
=========== =========== =========== ===========
DIVIDENDS PAID PER SHARE $ 0.13 $ 0.09 $ 0.36 $ 0.24
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
2
CFSB BANCORP, INC., AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity and
Comprehensive Income
For the Nine Months Ended September 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 - - 7,903,996 - - - 7,903,996
Change in unrealized
gain on securities,
net (see disclosure) - - - - - 64,582 64,582
----------
Comprehensive income - - - - - - 7,968,578
Stock options exercised - - (112,425) - 172,993 - 60,568
Repayment of ESOP debt - - - 173,914 - - 173,914
Cash dividends on common
stock - $0.27 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)
------- ----------- ----------- --------- ------------ --------- -----------
Balance at
September 30, 1997 $75,286 $48,385,710 $18,257,114 $(285,494) $ (440,384) $ 279,176 $67,271,408
======= =========== =========== ========= =========== ========= ===========
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 - - 8,908,791 - - - 8,908,791
Change in unrealized
gain on securities,
net (see disclosure) - - - - - 16,151 161,151
-----------
Comprehensive income - - - - - - 9,069,942
Stock options exercised - - (514,158) - 676,505 - 162,347
Repayment of ESOP debt - - - 134,539 - - 134,539
Cash dividends on common
stock - $0.38 per share - - (3,097,696) - - - (3,097,696)
10% common stock dividend 5,180 15,300,221 (21,530,994) - 6,210,476 - (15,117)
Treasury stock purchased - - - - (6,047,832) - (6,047,832)
Tax benefit associated
with exercise of stock
options - 78,743 - - - - 78,743
------- ----------- ----------- --------- ------------ --------- -----------
Balance at
September 30, 1998 $81,735 $63,756,314 $ 3,777,817 $ (92,983) $ (176,915) $ 473,748 $67,819,716
======= =========== =========== ========= =========== ========= ===========
See accompanying notes to consolidated financial statements.
3
CFSB BANCORP, INC., AND SUBSIDIARY
Consolidated Statements of Cash Flows
Nine Months Ended
September 30,
1998 1997
-------- ---------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,908,791 $ 7,903,996
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 758,229 1,107,367
Provision for loan losses 292,500 270,000
Provision for real estate losses - 45,000
Net amortization of premiums and accretion
of discounts 63 67,582
Loans originated for sale (46,900,954) (12,459,892)
Proceeds from sales of loans originated for sale 45,557,524 12,929,525
Net gains on sales of loans and securities (1,181,983) (248,058)
Net gains on sales of REO (40,470) -
Net gains on sales and disposals of premises
and equipment (272,794) (479,626)
Decrease in deferred loan fees (561,598) (202,741)
Increase in accrued interest receivable (81,111) (573,408)
Decrease in accrued interest payable (218,071) (441,429)
Increase in deferred federal income tax benefit (269,688) -
Increase in federal income taxes payable 419,687 55,921
Increase in other liabilities 227,150 33,779
Increase in other assets (1,296,490) (55,137)
------------ ------------
Net cash provided by operating activities 5,340,785 7,952,879
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities available for sale (10,000,453) (24,018,281)
Proceeds from sales of investment securities available
for sale - 20,037,696
Principal repayments and maturities of investment
securities available for sale 24,000,000 9,000,000
Loan originations (net of undisbursed loans in
process) (187,255,231) (137,351,506)
Loans purchased (62,497,896) (13,125,669)
Proceeds from sales of loans 49,460,198 8,580,493
Principal repayments on loans 170,685,339 101,971,285
Purchases of mortgage-backed securities available
for sale 4,292,653 3,876,805
Principal repayments and maturities on mortgage-
backed securities available for sale (511,000) -
Proceeds from sales, redemptions, and settlements
of real estate owned, net 193,859 684,954
Purchases of premises and equipment (735,571) (1,494,371)
Proceeds from sales and disposals of premises
and equipment 687,276 1,354,211
Purchases of Federal Home Loan Bank stock - (791,100)
------------ ------------
Net cash used by investing activities (11,680,826) (31,275,483)
4
CFSB BANCORP, INC., AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
Nine Months Ended
September 30,
1998 1997
-------- ---------
(unaudited)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits $ 15,311,285 $ 2,192,518
Stock options exercised 162,347 60,568
Purchases of treasury stock (6,047,832) (2,055,983)
Net increase in advance payments by borrowers
for taxes and insurance 2,770,580 3,571,657
Federal Home Loan Bank advance repayments (80,360,147) (89,118,030)
Federal Home Loan Bank advances 76,127,509 109,939,381
Dividends paid on common stock (2,963,405) (2,044,738)
------------ ------------
Net cash provided by financing activities 5,000,337 22,545,373
------------ ------------
Net decrease in cash and cash equivalents (1,339,704) (777,231)
Cash and cash equivalents at beginning of period 18,489,494 22,749,963
------------ ------------
Cash and cash equivalents at end of period $ 17,149,790 $ 21,972,732
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest expense $ 27,549,760 $ 27,925,704
Federal income taxes 4,270,000 3,650,000
Transfers of loans to real estate owned 980,521 656,491
Transfers of loans to repossessed assets 162,398 130,827
Loans charged-off 160,575 242,552
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, 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. In accordance with
SFAS 128, the Corporation has restated all prior period earnings
per share
6
3. EARNINGS PER SHARE - CONTINUED
A reconciliation of basic and diluted EPS for the three and nine
month periods ending September 30 follows:
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
-------- ------- --------- --------
Net earnings applicable to common stock
and common stock equivalents $2,869,766 $2,801,181 $8,908,791 $7,903,996
========== ========== ========== ==========
Average number of shares outstanding 8,168,738 8,405,515 8,216,940 8,445,271
Effect of dilutive securities - stock options 401,418 342,748 388,648 342,019
---------- ---------- ---------- ----------
8,570,156 8,748,263 8,605,588 8,787,290
========== ========== ========== ==========
Diluted earnings per share $0.34 $0.32 $1.04 $0.90
========== ========== ========== ==========
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 nine month periods ending September 30 are as follows:
1998 1997
------------------------- -------------------------
Tax Tax
Expense Reclassification Expense Reclassification
------- ---------------- ------- ----------------
Change in unrealized holding
gains arising during period,
net of tax $ (81,471) $ 161,151 $(24,559) $ 47,674
Add: reclassification adjustment
for realized gain included
in net income, net of tax -- -- (8,710) 16,908
--------- --------
Other comprehensive income for
the period $ 161,151 $ 64,582
========= ========
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 also
conducts lending operations in Livingston and Jackson counties.
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 increased to $867.4 million at
September 30, 1998 from $852.9 million at December 31, 1997.
Most of the increase occurred in loans receivable, which was
partially offset by a decrease in investment securities.
Investment securities decreased to $12.2 million at September
30, 1998 from $26.1 million at December 31, 1997. This decline
resulted from the maturity of United States Treasury notes in
January and July 1998.
Net loans receivable increased to $786.1 million at September
30, 1998 from $754.8 million at December 31, 1997. This net
increase of $31.3 million occurred primarily through an increase
in mortgages of $33.6 million and growth in commercial and
consumer loans of $2.0 million and $5.1 million, respectively,
partially offset by a decline in income-producing property loans
of $9.4 million. Mortgage loan originations for the nine months
ended September 30, 1998 were $183.8 million, compared to $103.3
million for the same period a year ago. With comparatively
8
low mortgage rates in 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.
Deposits increased $15.3 million to $577.7 million at September
30, 1998 from $562.4 million at December 31, 1997. This growth
occurred through an increase in checking accounts of $8.7
million, savings accounts of $5.1 million, and certificates of
deposit of $1.5 million.
FHLB advances decreased $4.2 million to $208.5 million at
September 30, 1998 from $212.7 million at December 31, 1997.
The net decrease was composed of an increase in fixed-rate
advances of $6.8 million and a decline in adjustable-rate
advances of $11.0 million. The Corporation had no adjustable-
rate advances at September 30, 1998. The Corporation's
cumulative one-year gap, one-to-three year gap, and three-to-
five year gap was a negative 11.7 percent, negative 0.6 percent,
and negative 0.4 percent, respectively, at September 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 $67.8 million at September 30,
1998, a $300,000 increase compared to the 1997 year-end total of
$67.5 million. The increase was primarily the result of net
income for the first nine months of 1998, partially offset by
treasury stock purchases and dividend declarations.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
1998, COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1997
Net income for the three months ended September 30, 1998 was
$2,870,000, or $0.34 per diluted share, compared to $2,801,000,
or $0.32 per diluted share for the same 1997 period, a net
increase of $0.02 per share, or 6 percent. Principally
accounting for this increase in net income between years was
growth in net interest income, improved fee income, and an
increase in gains on sales of the Corporation's 30-year fixed-
rate mortgage loan production. In 1997, the Corporation had a
nonrecurring gain on the sale of a branch of $154,000. The
Corporation's favorable financial performance for the third
quarter is attributable to strong mortgage and consumer loan
production and a larger deposit base.
Net income for the 1998 third quarter represents a return on
average assets of 1.33 percent, an increase from 1.31 percent
for the 1997 third quarter and a return on average stockholders'
equity of 16.94, unchanged from 1997. The Corporation's
efficiency ratio, or operating expenses over recurring operating
revenues, was 50.10 percent for the quarter ended September 30,
1998, compared to 49.54 percent for the quarter ended September
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
9
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.
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 and nine months ended September 30,
1998 and 1997, and at September 30, 1998 and December 31, 1997.
For the For the
Three Months Nine Months
Ended Ended At At
September 30, September 30, September 30, December 31,
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
Weighted average yield:
Loans receivable, net 7.59% 7.77% 7.65% 7.69% 7.51% 7.71%
Mortgage-backed securities 7.61 7.73 7.72 7.72 7.86 8.00
Investment securities 6.01 5.76 6.16 5.91 5.78 6.02
Interest-earning deposits 4.09 3.03 4.07 2.79 3.17 3.31
Other 7.89 7.86 7.87 7.62 7.87 7.90
---- ---- ---- ---- ---- ----
Total earning assets 7.47 7.63 7.51 7.55 7.43 7.57
Weighted average cost:
Savings, checking, and money
market accounts 2.40 2.48 2.41 2.52 2.39 2.60
Certificates of deposit 5.76 5.76 5.78 5.72 5.76 5.83
FHLB advances 5.93 6.20 6.01 6.10 5.82 6.09
---- ---- ---- ---- ---- ----
Total interest-bearing
liabilities 4.68 4.85 4.74 4.83 4.70 4.91
---- ---- ---- ---- ---- ----
Interest rate spread 2.79% 2.78% 2.77% 2.72% 2.73% 2.66%
==== ==== ==== ==== ==== ====
Net yield on earning assets 3.14% 3.16% 3.11% 3.08% 3.07% 3.02%
==== ==== ==== ==== ==== ====
Net interest income before provision for loan losses was $6.5
million during the third quarter of 1998 and represented an
$40,000 increase compared to the third 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 September 30, 1998, compared
to 3.16 percent for the comparable quarter of 1997. Average
loans receivable were $772.4 million in the third quarter of
1998, representing growth of $16.5 million over average loans
receivable of $755.9 million in the same quarter a year earlier.
The increased level of loans outstanding resulted from
originations of
10
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 September 30, 1998 exceeded the net interest margin
of 3.07 percent at September 30, 1998.
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 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 yields at September 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 7.43 percent at
September 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 3.07 percent at September 30, 1998. Loans
held for sale increased to $10.3 million at September 30, 1998,
compared to $6.2 million at 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 third quarter of 1998, the provision for loan losses
was $97,000 compared to $90,000 during the third 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 $2.0 million for the three months ended
September 30, 1998, up 22 percent from $1.6 million for the
three months ended September 30, 1997. During the third quarter
of 1997, the Corporation had a nonrecurring gain on the sale of
a branch of $154,000. Increased deposit fees assessed on a
higher level of transaction account activity increased other
income $136,000. Gains on sales of the Corporation's 30-year
fixed-rate mortgage loan production increased other income
$233,000.
11
General and Administrative Expenses
- -----------------------------------
General and administrative expenses were $4.1 million for the
three months ended September 30, 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.
Federal Income Tax Expense
- --------------------------
Federal income tax expense was $1.5 million for the three months
ended September 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 NINE MONTHS ENDED SEPTEMBER 30,
1998, COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1997
Net income for the nine months ended September 30, 1998 was $8.9
million compared to $7.9 million for the same period in 1997, a
net increase of $1.0 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 nine months ended
September 30, 1998 represented a return on average stockholders'
equity of 17.83 percent, an increase from 16.40 percent in the
1997 period and a return on average assets of 1.40 percent, an
increase from 1.26 percent in the 1997 period. The
Corporation's efficiency ratio, or operating expenses over
recurring operating revenues, was 49.53 percent for the nine
months ended September 30, 1998, an improvement from 51.42
percent in the year earlier period.
Net Interest Income
- -------------------
Net interest income before provision for loan losses was $19.5
million during the first nine months of 1998 and represented a
$430,000 increase compared to the same period of 1997. Net
interest income was positively affected by lower cost of funds
in 1998 and growth in earning assets. The Corporation's net
yield on average earning assets was 3.11 percent for the nine
months ended September 30, 1998, an improvement from 3.08
percent for the comparable nine month period of 1997.
Provision for Loan Losses
- -------------------------
The provision for loan losses was $292,000 during the nine
months ended September 30, 1998 compared to $270,000 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.
12
Other Income
- ------------
Other income was $6.1 million for the nine months ended
September 30, 1998, an increase of $1.6 million compared to $4.5
million for the nine months ended September 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 three branches totaling
$506,000. Increased deposit fees assessed on a higher level of
transaction account activity increased other income $535,000.
Gains on sales of the Corporation's 30-year fixed-rate mortgage
loan production increased other income $900,000. Debit card
income increased $128,000 in 1998 due to an increase in cards
issued and related transactions.
General and Administrative Expenses
- -----------------------------------
General and administrative expenses were $11.9 million for the
nine months ended September 30, 1998, compared to $11.7 million
for 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 $4.4 million for the nine months
ended September 30, 1998, an increase of $757,000 from $3.7
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.
September 30, December 31,
1998 1997
---- ----
(dollars in thousands)
Nonaccruing loans:
One-to-four family
residential mortgages $ 496 $ 697
FHA-partially insured
and VA-partially guaranteed 130 109
Consumer installment 157 93
------- -------
Total $ 783 $ 899
======= =======
Percentage of total assets 0.09% 0.10%
======= =======
Real estate owned:(1)
One-to-four family
residential mortgages $ 578 $ 11
Construction and development 402 141
------- -------
Total $ 980 $ 152
======= =======
Percentage of total assets 0.11% 0.02%
======= =======
Total nonaccruing loans
and real estate owned $ 1,763 $ 1,051
======= =======
Percentage of total assets 0.20% 0.12%
======= =======
<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 0.20 percent and 0.12 percent at September 30, 1998 and
December 31, 1997, respectively, all well below the industry
average. In addition, at September 30, 1998, the Corporation's
allowances for loan and real estate losses represent 287 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
14
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 3.85
percent and 7.32 percent at September 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 7.53
percent, 7.53 percent, and 13.82 percent at September 30, 1998,
respectively.
The Corporation's Board of Directors declared a cash dividend of
$0.13 per share in the third quarter of 1998, an increase of 30
percent from the $0.10 per share dividend declared in the third
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 Year 2000 issue is the result of potential problems with
computer systems or any equipment with computer chips that store
the year portion of the date as just two digits. Systems using
this two-digit approach may not be able to determine whether 00
represents the year 2000 of 1900. The problem, if not
corrected, may make those systems fail or allow them to generate
incorrect calculations causing a disruption of normal
operations.
In 1998, a comprehensive project plan to address the Year 2000
issue as it relates to the Corporation was developed, approved
by the Board of Directors, and implemented. The scope of the
plan includes five phases: Awareness, Assessment, Renovation,
Validation and Implementation, as defined by federal banking
regulatory agencies. A project team that consists of key
members of the technology staff, representatives of functional
business units and senior management was developed.
Additionally, the Director of Operations, a member of senior
management, serves as the Year 2000 project manager and
regularly reports to the Board of Directors.
15
An assessment of the impact of the Year 2000 issue on the
Corporation's computer systems has been completed. The scope of
the project also includes other operational and environmental
systems since they may be impacted if embedded computer chips
control the functionality of those systems. From this
assessment, the Corporation has identified and prioritized those
systems deemed to be mission critical or those that have
significant impact on normal operations.
The Corporation is progressing with the Renovation, Validation,
and Implementation phases of the project plan. The Corporation
relies on third party vendors and service providers for its data
processing capabilities and to maintain its computer systems.
Formal communications with these providers and other external
counterparties were initiated in 1998 to assess the Year 2000
readiness of their products and services. Their progress in
meeting their targeted schedules is being monitored for any
indication that they may not be able to address the problem on a
timely basis. Thus far, responses indicate that most of the
significant providers currently have compliant versions
available or are well into the renovation and testing phases
with completion scheduled for sometime in early 1999.
Specifically, the Corporation's core data processing software is
provided by an outside vendor, which has certified the software
is Year 2000 compliant. The Corporation is using the compliant
software and has installed it on a redundant computer for
testing, which began 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.
The Corporation can give no guarantee that the systems of these
service providers and vendors on which the Corporation's systems
rely will be timely renovated.
Additionally, the Corporation has implemented a plan to manage
the potential risk posed by the impact of the Year 2000 issue on
its major customers. Formal communications have been initiated,
and the assessment is scheduled to be significantly completed by
December 31, 1998.
The Corporation has completed the development of contingency
plans for systems that are determined to be mission critical.
These plans include the replacement of vendors or development of
alternative systems or processes where systems will not be
completed by specified dates. The Corporation is in the process
of forming a task force to update its business resumption plan,
with particular emphasis on addressing contingencies associated
with systems that are thought to be Year 2000 compliant, but
prove not to be at a future date.
As of September 30, 1998, approximately $169,000 of costs have
been incurred in connection with ensuring the Corporation's
systems and products are Year 2000 compliant. Management
anticipates total costs for Year 2000 implementation will
approximate $700,000 to $900,000. These costs will be primarily
for the replacement of depreciable assets.
The costs and the timetable in which the Corporation plans to
complete the Year 2000 readiness activities are based on
management's best estimates, which were derived using numerous
assumptions of future events including the continued
availability of certain resources, third party readiness plans
and other factors. The Corporation can make no guarantee that
these estimates will be achieved, and actual results could
differ from such plans.
16
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
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 nine
months ended September 30, 1998
Exhibit 27.2 Restated Financial Data Schedule for
the nine months ended September 30,
1997
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: November 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