UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended: March 31, 1999 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 8,437,346 shares of the Registrant's $0.01 par value
common stock outstanding as of April 30, 1999.
CFSB BANCORP, INC., AND SUBSIDIARY
Contents
Pages
-----
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Consolidated Statements of Financial Condition at
March 31, 1999 and December 31, 1998 (unaudited) 1
Consolidated Statements of Operations for the
three months ended March 31, 1999 and 1998
(unaudited) 2
Consolidated Statements of Stockholders' Equity
and Comprehensive Income for the three months
ended March 31, 1999 and 1998 (unaudited) 3
Consolidated Statements of Cash Flows for the
three months ended March 31, 1999 and 1998
(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. 8-16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARK RISK. 16
PART II - OTHER INFORMATION 17
SIGNATURES 18
CFSB BANCORP, INC., AND SUBSIDIARY
Consolidated Statements of Financial Condition
March 31, December 31,
1999 1998
------------ -----------
(unaudited)
ASSETS:
Cash and amounts due from depository institutions $ 9,596,288 $ 11,694,940
Interest-earning deposits with Federal Home
Loan Bank and other depository institutions,
at cost which approximates market 17,195,996 10,246,287
Investment securities available for sale, at
fair value 22,063,300 22,018,800
Mortgage-backed securities available for sale,
at fair value 14,835,080 16,006,538
Loans receivable, net 789,924,359 786,411,364
Accrued interest receivable, net 4,742,632 4,380,539
Real estate, net 962,796 979,838
Premises and equipment, net 10,196,641 10,345,702
Stock in Federal Home Loan Bank of Indianapolis,
at cost 11,645,700 11,450,700
Deferred federal income tax benefit 794,000 635,000
Other assets 7,114,495 6,177,007
------------ ------------
Total assets $889,071,287 $880,346,715
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Deposits $580,093,704 $586,707,413
Advances from Federal Home Loan Bank and
securities sold under agreement to repurchase 225,030,167 213,607,417
Advance payments by borrowers for taxes
and insurance 3,388,896 1,345,619
Accrued interest payable 2,694,851 2,760,854
Federal income taxes payable 967,885 850,629
Other liabilities 5,479,302 5,797,462
------------ ------------
Total liabilities 817,654,805 811,069,394
------------ ------------
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 8,437,346 shares
at March 31, 1999 and 8,173,517 shares at
December 31, 1998 84,373 81,735
Additional paid-in capital 64,849,444 63,770,944
Retained income - substantially restricted 6,270,163 5,464,366
Accumulated other comprehensive income 268,293 269,897
Employee Stock Ownership Plan (55,791) (74,387)
Treasury stock, at cost; 0 shares at March
31, 1999 and 10,449 shares at December 31, 1998 -- (235,234)
------------ ------------
Total stockholders' equity 71,416,482 69,277,321
------------ ------------
Total liabilities and stockholders' equity $889,071,287 $880,346,715
============ ============
See accompanying notes to consolidated financial statements.
1
CFSB BANCORP, INC., AND SUBSIDIARY
Consolidated Statements of Operations
Three Month Ended
March 31,
---------------------
1999 1998
------- -------
(Unaudited)
INTEREST INCOME:
Loans receivable $14,669,666 $14,338,377
Mortgage-backed securities 281,884 403,967
Investment securities 289,389 297,650
Other 382,201 508,380
----------- -----------
Total interest income 15,623,140 15,548,374
INTEREST EXPENSE:
Deposits, net 5,713,343 6,196,215
Federal Home Loan Bank advances and securities
sold under agreement to repurchase 3,193,984 2,946,399
----------- -----------
Total interest expense 8,907,327 9,142,614
----------- -----------
Net interest income before provision
for loan losses 6,715,813 6,405,760
Provision for loan losses 105,000 97,500
----------- -----------
Net interest income after provision
for loan losses 6,610,813 6,308,260
NONINTEREST INCOME:
Service charges and other fees 1,314,503 1,125,744
Loan servicing income 63,187 72,230
Gains on sales of loans, net 225,754 449,069
Gains on sales of mortgage-backed securities
available for sale, net -- 2,362
Real estate operations, net (20,768) 9,658
Other, net 277,213 211,797
----------- -----------
Total other income 1,859,889 1,870,860
NONINTEREST EXPENSE:
Compensation, payroll taxes, and fringe
benefits 2,329,224 2,180,922
Office occupancy and equipment 634,645 498,296
Federal insurance premiums 87,921 87,020
Marketing 218,695 202,269
Data processing 175,329 113,356
Merger and acquisition costs 343,747 --
Other, net 876,051 908,612
----------- -----------
Total noninterest expense 4,665,612 3,990,475
----------- -----------
Income before federal income tax
expense 3,805,090 4,188,645
Federal income tax expense 1,266,000 1,359,000
----------- -----------
Net income $ 2,539,090 $ 2,829,645
=========== ===========
EARNINGS PER SHARE:
Basic $ 0.31 $ 0.34
=========== ===========
Diluted $ 0.30 $ 0.33
=========== ===========
DIVIDENDS PAID PER SHARE $ 0.13 $ 0.11
=========== ===========
See accompanying notes to consolidated financial statements.
2
CFSB BANCORP, INC., AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity and
Comprehensive Income
For the Three Months Ended March 31, 1999 and 1998
(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, 1997 $76,555 $48,377,350 $20,011,874 $(227,522) $(1,016,064) $ 312,597 $67,534,790
Net income - - 2,829,645 - - - 2,829,645
Change in unrealized
gain on securities,
net (see disclosure) - - - - - (58,665) (58,665)
----------
Comprehensive income - - - - - - 2,770,980
Stock options exercised - - (65,275) - 101,922 - 36,647
Repayment of ESOP debt - - - 57,971 - - 57,971
Cash dividends on common
stock - $0.12 per share - - (975,997) - - - (975,997)
Treasury stock purchased - - - - (4,063,948) - (4,063,948)
------- ----------- ----------- --------- ------------ --------- -----------
Balance at
March 31, 1998 $76,555 $48,377,350 $21,800,247 $(169,551) $(4,978,090) $ 253,932 $65,360,443
======= =========== =========== ========= =========== ========= ===========
Balance at
December 31, 1998 $81,735 $63,770,944 $ 5,464,366 $ (74,387) $ (235,234) $ 269,897 $69,277,321
Net income - - 2,539,090 - - - 2,539,090
Change in unrealized
gain on securities,
net (see disclosure) - - - - - (1,604) (1,604)
-----------
Comprehensive income - - - - - - 2,537,486
Stock options exercised 2,638 565,756 (660,104) - 729,297 - 637,587
Repayment of ESOP debt - - - 18,596 - - 18,596
Cash dividends on common
stock - $0.13 per share - - (1,073,189) - - - (1,073,189)
Treasury stock purchased - - - - (494,063) - (494,063)
Tax benefit associated
with exercise of stock
options - 512,744 - - - - 512,744
------- ----------- ----------- --------- ------------ --------- -----------
Balance at
March 31, 1999 $84,373 $64,849,444 $ 6,270,163 $ (55,791) $ - $ 268,293 $71,416,482
======= =========== =========== ========= =========== ========= ===========
See accompanying notes to consolidated financial statements.
3
CFSB BANCORP, INC., AND SUBSIDIARY
Consolidated Statements of Cash Flows
Three Months Ended
March 31,
1999 1998
-------- ---------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,539,090 $ 2,829,645
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 315,086 245,924
Provision for loan losses 105,000 97,500
Net amortization of premiums and accretion
of discounts (115,704) --
Loans originated for sale (18,002,874) (10,723,170)
Proceeds from sales of loans originated for sale 15,584,952 7,834,321
Net gains on sales of loans and securities (225,754) (451,431)
Net loss on sales and disposals of premises
and equipment 18,594 34
Decrease in deferred loan fees (169,411) (112,267)
Decrease (increase) in accrued interest receivable (362,093) 415,312
Decrease in accrued interest payable (66,003) (162,272)
Increase in deferred federal income tax benefit (164,000) (269,688)
Increase in federal income taxes payable 630,000 1,553,688
Increase (decrease) in other liabilities (311,554) 1,520,278
Increase in other assets (847,042) (826,021)
------------ ------------
Net cash provided by (used by) operating
activities (1,071,713) 1,951,853
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal repayments and maturities of investment
securities available for sale -- 10,000,000
Loan originations (net of undisbursed loans in
process) (92,180,066) (47,129,030)
Loans purchased (5,085,400) (6,807,464)
Proceeds from sales of loans 11,915,170 25,367,512
Principal repayments on loans 84,377,703 52,744,962
Principal repayments and maturities on mortgage-
backed securities available for sale 1,246,058 1,604,429
Proceeds from sales, redemptions, and settlements
of real estate owned, net 94,281 --
Purchases of premises and equipment (208,578) (187,404)
Proceeds from sales and disposals of premises
and equipment 23,959 --
Purchases of Federal Home Loan Bank stock (195,000) --
------------ ------------
Net cash provided by (used by) investing activities (11,873) 35,593,005
4
CFSB BANCORP, INC., AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
Three Months Ended
March 31,
1999 1998
-------- ---------
(unaudited)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits $ (6,613,709) $14,069,323
Stock options exercised 637,587 36,647
Purchases of treasury stock (494,063) (4,063,948)
Net increase in advance payments by borrowers
for taxes and insurance 2,043,277 2,088,672
Federal Home Loan Bank advance repayments (9,266,022) (48,646,123)
Federal Home Loan Bank advances 20,000,000 25,000,000
Securities sold under agreement to repurchase 688,772 --
Dividends paid on common stock (1,061,199) (912,897)
------------ ------------
Net cash provided (used by) by financing activities 5,934,643 (12,428,326)
------------ ------------
Net increase in cash and cash equivalents 4,851,057 25,116,532
Cash and cash equivalents at beginning of period 21,941,227 18,489,494
------------ ------------
Cash and cash equivalents at end of period $ 26,792,284 $ 43,606,026
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest expense $ 8,973,330 $ 9,304,886
Federal income taxes 800,000 75,000
Transfers of loans to real estate owned 77,239 2,466
Transfers of loans to repossessed assets 90,446 64,878
Loans charged-off 73,632 58,227
See accompanying notes to consolidated financial statements.
5
CFSB BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements
(unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements are
prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions to Form 10-Q. Accordingly, they do not include all
of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation
are included. The results of operations for the three months
ended March 31, 1999 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, 1998, included in the Corporation's 1998
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 follows Financial Accounting Standards Board
(FASB) Statement No. 128, Earnings Per Share (SFAS 128). 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
There are no reconciling items when calculating basic earnings
per share. A reconciliation of diluted EPS for the three month
periods ending March 31 follows:
1999 1998
---- ----
Net earnings applicable to common stock $2,539,090 $2,829,645
========== ==========
Average number of shares outstanding 8,217,592 8,308,060
Effect of dilutive securities - stock options 307,216 401,392
---------- ----------
8,524,808 8,709,452
========== ==========
Diluted earnings per share $0.30 $0.33
========== ==========
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.
Amounts reclassified from net income to comprehensive income for
the three month periods ending March 31 are as follows:
1999 1998
-------------------------- -----------------------
Tax Tax
Benefit Reclassification Benefit Reclassification
------- ---------------- ------- ----------------
Change in unrealized holding
gains arising during period,
net of tax $5,001 $(1,604) $30,528 $(58,665)
Add: reclassification adjustment
for realized gain included
in net income, net of tax -- -- -- --
------- --------
Other comprehensive income for
the period $(1,604) $(58,665)
======= ========
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following sections are designed to provide a more thorough
discussion of the Corporation's financial condition and results
of operations as well as to provide additional information on
the Corporation's asset quality, sources of liquidity, and
capital resources. Management's discussion and analysis should
be read in conjunction with the consolidated financial
statements and supplemental data contained elsewhere in this
report.
GENERAL
CFSB Bancorp, Inc. (Corporation) is the holding company for
Community First Bank (Bank). Substantially all of the
Corporation's assets are currently held in, and operations
conducted through its sole subsidiary, Community First Bank.
The Bank is a community-oriented financial institution offering
a variety of financial services to meet the needs of the
communities it serves. The Bank's primary market area is the
greater Lansing, Michigan area, which is comprised 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.
RECENT DEVELOPMENTS
On February 24, 1999, the Corporation entered into an Agreement
and Plan of Merger (the "Merger Agreement") with Old Kent
Financial Corporation ("Old Kent"), pursuant to which the
Corporation is expected to merge with and into Old Kent (the
"Merger"). As a result of the Merger, each outstanding share of
the Corporation's common stock ("CFSB Common Stock") is expected
to be converted into the right to receive 0.6222 shares of
common stock of Old Kent. The Merger is conditioned upon, among
other things, approval by holders of a majority of CFSB Common
Stock and the receipt of certain regulatory and governmental
approvals. It is intended that the Merger will be treated as a
pooling-of-interests for accounting and financial reporting
purposes. The Merger is to be voted on by the Corporation's
stockholders at a special meeting of stockholders expected to be
held on June 8, 1999 and is expected to be consummated in the
third quarter of Calendar 1999.
Concurrently with their execution and delivery of the Merger
Agreement, the Corporation and Old Kent entered into a stock
option agreement (the "Stock Option Agreement") pursuant to
8
which the Corporation granted Old Kent the right, upon the terms
and subject to the conditions set forth in the Stock Option
Agreement, to purchase up to 1,645,364 shares (or 19.99%) of
CFSB Common Stock, subject to certain adjustments.
FINANCIAL CONDITION
The Corporation's total assets increased to $889.1 million at
March 31, 1999 from $880.3 million at December 31, 1998. Most
of the increase occurred in interest-earning deposits.
Interest-earning deposits increased to $17.2 million at March
31, 1999 from $10.2 million at December 31, 1998. This increase
was due to normal fluctuations in excess earning assets.
Net loans receivable increased to $789.9 million at March 31,
1999 from $786.4 million at December 31, 1998. This net
increase of $3.5 million occurred primarily through increases in
mortgages of $4.5 million and consumer loans of $2.7 million,
partially offset by declines in commercial and income-producing
property loans of $1.1 million and $2.6 million, respectively.
Mortgage loan originations for the three months ended March 31,
1999 were $91.3 million, compared to $43.7 million for the same
period a year ago. With comparatively low mortgage rates in the
first quarter of 1999, consumers continued to refinance
adjustable-rate mortgages into fixed-rate mortgages. The
Corporation continues to sell fixed-rate mortgages with
maturities exceeding 15 years.
Deposits declined $6.6 million to $580.1 million at March 31,
1999 from $586.7 million at December 31, 1998. This decline
occurred through a decrease in checking accounts of $3.9 million
and certificates of deposit of $8.5 million, partially offset by
an increase in savings accounts of $5.8 million.
FHLB advances increased $10.8 million to $222.6 million at March
31, 1999 from $211.8 million at December 31, 1998. The increase
was composed of an increase in fixed-rate advances of $13.3
million, partially offset by a decline in adjustable-rate
advances of $2.5 million. The Corporation had no
adjustable-rate advances at March 31, 1999. The Corporation's
cumulative one-year gap, one-to-three year gap, and
three-to-five year gap was a negative 10.2 percent, negative 4.1
percent, and negative 6.8 percent, respectively, at March 31,
1999, compared to a negative 9.6 percent, negative 5.5 percent,
and negative 5.7 percent, respectively, at December 31, 1998.
Total stockholders' equity was $71.4 million at March 31, 1999,
a $2.1 million increase compared to the 1998 year-end total of
$69.3 million. The increase was primarily due to net income for
the first three months of 1999 and proceeds and tax benefits
from exercise of stock options, partially offset by dividend
declarations and treasury stock purchases.
9
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999,
COMPARED TO THE THREE MONTHS ENDED MARCH 31, 1998
Net income for the three months ended March 31, 1999 was
$2,539,000, or $0.30 per diluted share, compared to $2,830,000,
or $0.33 per diluted share for the same 1998 period, a net
decrease of $291,000, or 10 percent. Principally accounting for
this decrease in net income between years was costs associated
with the pending merger, which reduced net income by $259,000 or
$.03 per diluted share. Excluding the merger related costs, net
income in 1999 was positively impacted by growth in net interest
income and improved fee income, which was offset by a decline in
gains on sales of the Corporation's 30-year fixed-rate mortgage
loan production and increases in the Corporation's noninterest
expense.
Net income for the 1999 first quarter represents a return on
average assets of 1.16 percent, a decrease from 1.35 percent for
the 1998 first quarter, and a return on average stockholders'
equity of 14.60 percent compared to 17.15 percent in 1998.
Return on average assets and average stockholders' equity for
the first quarter of 1999, excluding merger related costs, was
1.27 percent and 16.09 percent, respectively. The Corporation's
efficiency ratio, or operating expenses over recurring operating
revenues, was 55.9 percent for the quarter ended March 31, 1999,
or 51.8 percent excluding merger related costs, compared to 51.0
percent for the quarter ended March 31, 1998.
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 and other borrowings. This amount,
when annualized and divided by average earning assets, is
referred to as the net interest margin. Net interest income and
net interest margin are directly impacted by changes in volume
and mix of earning assets and interest-bearing liabilities,
market rates of interest, the level of nonperforming assets,
demand for loans, and other market forces.
10
The following table presents the yields on the Corporation's
earning assets and costs of the Corporation's interest-bearing
liabilities, the interest rate spread, and the net interest
margin for the three months ended March 31, 1999 and 1998, and
at March 31, 1999 and December 31, 1998.
For the
Three Months
Ended At At
March 31, March 31, December 31,
1999 1998 1999 1998
---- ---- ---- ----
Weighted average yield:
Loans receivable, net 7.46% 7.68% 7.32% 7.39%
Mortgage-backed securities 7.40 7.85 7.70 7.82
Investment securities 5.29 6.16 5.31 5.31
Interest-earning deposits 3.53 4.22 3.59 2.80
Other 7.82 7.86 7.83 7.83
---- ---- ---- ----
Total earning assets 7.33 7.54 7.19 7.27
Weighted average cost:
Savings, checking, and money
market accounts 2.16 2.50 2.14 2.32
Certificates of deposit 5.48 5.81 5.44 5.60
FHLB advances and other
borrowings 5.76 6.12 5.67 5.73
---- ---- ---- ----
Total interest-bearing
liabilities 4.46 4.84 4.40 4.55
---- ---- ---- ----
Interest rate spread 2.87% 2.70% 2.79% 2.72%
==== ==== ==== ====
Net yield on earning assets 3.11% 3.06% 3.09% 3.02%
==== ==== ==== ====
Net interest income before provision for loan losses was $6.7
million during the first quarter of 1999 and represented a
$310,000 increase compared to the first quarter of 1998. Net
interest income was positively impacted by growth in earning
assets in 1999, primarily in loans receivable. The
Corporation's net interest margin was 3.11 percent for the three
months ended March 31, 1999, an improvement from 3.06 percent
for the comparable quarter of 1998. Average loans receivable
were $788.2 million in the first quarter of 1999, representing
growth of $39.9 million over average loans receivable of $748.3
million in the same quarter one 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.
Because the Corporation is liability sensitive, pressure may be
felt on the Corporation's net interest margin if short-term
market interest rates rise. The Corporation's net interest
margin of 3.11 percent for
11
the three months ended March 31, 1999 exceeded the net interest
margin of 3.09 percent at March 31, 1999.
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 during 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.
This activity contributed to a decline in loan yields at March
31, 1999 compared to March 31, 1998. The decline in loan yields
was more than offset by a decline in cost of interest-bearing
liabilities. This contributed to an increase in net interest
margin to 3.11 percent for the quarter ended March 31, 1999,
compared to 3.06 percent one year earlier. Loans held for sale
decreased by $1.7 million during the quarter to $4.9 million at
March 31, 1999. A continued high level of refinancings and
conversions of adjustable-rate mortgage loans to 30-year
fixed-rate loans could have a negative impact on future net
interest income. Additional factors affecting the Corporation's
net interest income will continue to be the volatility of
interest rates, slope of the yield curve, asset size,
maturity/repricing activity, and competition.
Provision for Loan Losses
- -------------------------
During the first quarter of 1999, the provision for loan losses
was $105,000 compared to $97,500 during the first quarter one
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 credit risks in the
current loan portfolio (for more information, see "Asset
Quality.)"
Noninterest Income
- ------------------
Noninterest income totaled $1.9 million for the three months
ended March 31, 1999 and 1998. Increased deposit fees assessed
on a higher level of transaction account activity increased
noninterest income $189,000 compared to the same period in 1998.
Income from debit cards, which were introduced in April 1996,
increased noninterest income $53,000. A decline in gains on
sales of the Corporation's 30-year fixed-rate mortgage loan
production reduced other income $223,000.
Noninterest Expense
- -------------------
Noninterest expense was $4.7 million for the three months ended
March 31, 1999 compared to $4.0 million for the same quarter one
year ago. Noninterest expense increased during 1999 primarily
due to merger related costs incurred totaling $344,000.
Compensation and fringe benefits expense rose $148,000 between
periods due primarily to merit-based salary increases.
Increased office occupancy and equipment expense of $136,000
resulted primarily from
12
increased depreciation expense of $75,000 on computer equipment
placed in service in late 1998 in connection with the
Corporation's Year 2000 project.
Federal Income Tax Expense
- --------------------------
Federal income tax expense was $1.3 million for the three months
ended March 31, 1999 compared to $1.4 million for the comparable
1998 quarter. The Corporation's federal income tax expense is,
for the most part, recorded at the federal statutory rate less a
pro rata portion of the anticipated low-income housing tax
credits expected to be available based upon the Corporation's
limited partnership investments.
ASSET QUALITY
The following table presents the Corporation's nonperforming
assets. Management normally considers loans to be nonperforming
when payments are 90 days or more past due, when credit terms
are renegotiated below market levels, or when an analysis of an
individual loan indicates repossession of the collateral may be
necessary to satisfy the loan.
March 31, December 31,
1999 1998
---- ----
(dollars in thousands)
Nonaccruing loans:
One-to-four family
residential mortgages $ 204 $ 256
FHA-partially insured
and VA-partially guaranteed 70 132
Consumer installment 106 223
------ ------
Total $ 380 $ 611
====== ======
Percentage of total assets 0.04% 0.07%
====== ======
Real estate owned:(1)
One-to-four family
residential mortgages $ 676 $ 686
Construction and development 350 379
------ ------
Total $1,026 $1,065
====== ======
Percentage of total assets 0.12% 0.12%
====== ======
Total nonaccruing loans
and real estate owned $1,406 $1,676
====== ======
Percentage of total assets 0.16% 0.19%
====== ======
<FN>
(1) Real estate owned includes properties in redemption and acquired
through foreclosure.
</FN>
13
The Corporation continues to demonstrate strong credit quality.
The Corporation's ratio of nonperforming assets to total assets
was 0.16 percent and 0.19 percent at March 31, 1999 and December
31, 1998, respectively, all below industry average. In
addition, at March 31, 1999, the Corporation's allowances for
loan and real estate losses represent 359 percent of its
nonperforming assets, which is above industry average.
Management believes the current provisions and related
allowances for loan and real estate owned losses are adequate to
meet current 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 3.82
percent and 4.40 percent at March 31, 1999 and December 31,
1998, 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 7.80
percent, 7.80 percent, and 14.44 percent at March 31, 1999,
respectively.
The Corporation's Board of Directors declared a cash dividend of
$0.13 per share in the first quarter of 1999, an increase of 8
percent over the $0.12 per share dividend declared in the first
quarter of 1998. 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 READINESS DISCLOSURE
The Year 2000 issue refers to 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 or 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
14
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.
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 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. 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 completion of testing the software for
integration with other third party software by June 30, 1999.
Management successfully completed testing its remaining internal
systems for Year 2000 compliance during first quarter 1999.
Year 2000 testing is scheduled for completion on all systems by
June 30, 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 implemented a plan to manage the
potential risk posed by the impact of the Year 2000 issue on its
major customers. Formal communications took place with major
customers during first quarter 1999 and management has completed
an assessment of the impact of the Year 2000 posed by the
Corporation's major customers.
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 formed a task
force and is in the process of updating 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 March 31, 1999, approximately $750,000 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 not exceed
$900,000. These costs are primarily for the replacement of
depreciable assets.
15
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.
ACCOUNTING STANDARDS
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, 1998.
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, credit quality
and credit risk management, and impact of the Year 2000. 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.
16
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
On March 1, 1999, the registrant filed a Form 8-K current report
announcing the registrant entered into a definitive agreement
(the Agreement) on February 24, 1999 providing for the merger of
CFSB Bancorp, Inc. into Old Kent Financial Corporation. The
Agreement calls for an exchange of 0.6222 shares of Old Kent
Financial Corporation stock for each share of CFSB Bancorp, Inc.
stock. The merger is subject to, among other things,
stockholder approval and certain regulatory and governmental
approvals and is expected to be completed in the
third quarter of 1999. It is intended that the merger will be
structured as a "pooling-of-interests" for accounting purposes.
On April 14, 1999, the registrant filed a Form 8-K current
report announcing the registrant's earnings for the three months
ended March 31, 1999.
Exhibit 27.1 Financial Data Schedule for the three
months ended March 31, 1999.
Exhibit 27.2 Restated Financial Data Schedule for the
three months ended March 31, 1998
CFSB BANCORP, INC.
Signatures
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CFSB BANCORP, INC.
(Registrant)
Date: May 10, 1999
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)
18