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, 1997 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 No.)
112 East Allegan
Lansing, Michigan 48933
----------------------------------------
(Address of Principal Executive Offices)
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 4,672,657 shares of the Registrant's $0.01 par value common stock
outstanding as of April 30, 1997.
CFSB BANCORP, INC., AND SUBSIDIARY
Contents
Pages
-----
PART I - FINANCIAL INFORMATION
Consolidated Statements of Financial Condition
at March 31, 1997, and December 31, 1996 (unaudited) 1
Consolidated Statements of Operations for the three months
ended March 31, 1997 and 1996 (unaudited) 2
Consolidated Statement of Stockholders' Equity for the three
months ended March 31, 1997 (unaudited) 3
Consolidated Statements of Cash Flows for the three months
ended March 31, 1997 and 1996 (unaudited) 4-5
Notes to Consolidated Financial Statements (unaudited) 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-17
PART II - OTHER INFORMATION 18
SIGNATURES 19
CFSB BANCORP, INC., AND SUBSIDIARY
Consolidated Statements of Financial Condition
March 31, December 31,
1997 1996
--------------- ---------------
(unaudited)
ASSETS
Cash and amounts due from depository institutions $ 3,866,176 $ 7,479,722
Interest-earning deposits with Federal Home
Loan Bank and other depository institutions,
at cost which approximates market 11,139,276 15,270,241
Investment securities available for sale, at fair value 30,922,300 31,093,494
Mortgage-backed securities available for sale, at fair value 25,653,479 27,220,567
Loans receivable, net 728,350,275 717,714,636
Accrued interest receivable, net 4,836,609 4,349,240
Real estate, net 271,755 -
Premises and equipment, net 11,543,886 10,985,199
Stock in Federal Home Loan Bank of Indianapolis, at cost 10,632,000 10,632,000
Deferred federal income tax benefit 436,951 317,270
Other assets 6,599,748 4,737,177
-------------- -------------
Total assets $ 834,252,455 $ 829,799,546
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 559,645,280 $ 553,574,001
Advances from Federal Home Loan Bank 196,544,338 202,639,323
Advance payments by borrowers for taxes and insurance 3,812,970 1,356,507
Accrued interest payable 4,220,193 4,233,799
Federal income taxes payable 1,606,242 740,242
Other liabilities 4,783,973 4,785,647
-------------- --------------
Total liabilities 770,612,996 767,329,519
-------------- --------------
Stockholders' equity:
Serial preferred stock, $0.01 par value; authorized
2,000,000 shares; issued - none - -
Common stock, $0.01 par value; authorized 10,000,000 shares;
issued 4,849,611 shares 48,496 48,496
Additional paid-in capital 41,422,898 41,422,898
Retained income - substantially restricted 25,401,776 23,863,600
Net unrealized gains (losses) on available-for-sale securities,
net of tax benefit (expense) of $9,132 - 1997 and ($110,548) -
1996 (17,728) 214,594
Employee Stock Ownership Plan (401,437) (459,408)
Treasury stock, at cost; 152,574 shares - 1997 and
143,570 shares - 1996 (2,814,546) (2,620,153)
-------------- --------------
Total stockholders' equity 63,639,459 62,470,027
-------------- --------------
Total liabilities and stockholders' equity $ 834,252,455 $ 829,799,546
============== ==============
See accompanying notes to consolidated financial statements.
1
CFSB BANCORP, INC., AND SUBSIDIARY
Consolidated Statements of Operations
Three Months Ended
March 31,
1997 1996
-------------- -------------
(unaudited)
INTEREST INCOME:
Loans receivable $ 13,902,372 $ 12,114,542
Mortgage-backed securities 511,188 649,253
Investment securities 455,659 667,713
Other 301,501 354,096
-------------- -------------
Total interest income 15,170,720 13,785,604
INTEREST EXPENSE:
Deposits, net 6,036,114 6,000,777
Federal Home Loan Bank advances 2,919,262 2,418,021
-------------- -------------
Total interest expense 8,955,376 8,418,798
Net interest income before provision
for loan losses 6,215,344 5,366,806
Provision for loan losses 90,000 60,000
-------------- -------------
Net interest income after provision
for loan losses 6,125,344 5,306,806
OTHER INCOME (LOSS):
Service charges and other fees 927,159 767,854
Loan servicing income 80,039 110,984
Gains on sales of loans, net 69,857 106,199
Gains on sales of investment securities
available for sale, net 19,659 -
Real estate operations, net (15,000) (15,000)
Other, net 112,439 51,064
-------------- -------------
Total other income 1,194,153 1,021,101
GENERAL AND ADMINISTRATIVE EXPENSES:
Compensation, payroll taxes, and fringe benefits 2,046,076 1,980,505
Office occupancy and equipment 708,578 585,718
Federal insurance premiums 87,734 300,967
Marketing 212,573 196,049
Data processing 101,674 84,064
Other, net 789,258 650,687
-------------- -------------
Total general and administrative expenses 3,945,893 3,797,990
Income before federal income tax expense 3,373,604 2,529,917
Federal income tax expense 1,066,000 815,000
-------------- -------------
NET INCOME $ 2,307,604 $ 1,714,917
============== =============
EARNINGS PER SHARE:
Primary $ 0.47 $ 0.34
============== =============
Fully diluted $ 0.47 $ 0.34
============== =============
DIVIDENDS PAID PER SHARE $ 0.12 $ 0.10
============== =============
See accompanying notes to consolidated financial statements.
2
CFSB BANCORP, INC. AND SUBSIDIARY
Consolidated Statement of Stockholders' Equity
Three Months Ended March 31, 1997
(unaudited)
Net Unrealized
Additional Gains (Losses) Commitment Total
Common Paid-in Retained On Available-For- for ESOP Treasury Stockholders'
Stock Capital Income Sale Securities Debt Stock Equity
-------- ------------ ------------ ----------------- ---------- ------------ ------------
Balance at
December 31, 1996 $ 48,496 $ 41,422,898 $ 23,863,600 $ 214,594 $ (459,408) $ (2,620,153) $ 62,470,027
Net income - - 2,307,604 - - - 2,307,604
Stock options exercised - - (65,065) - - 100,302 35,237
Repayment of ESOP debt - - - - 57,971 - 57,971
Cash dividends on common
stock - $0.15 per share - - (704,363) - - - (704,363)
Treasury stock purchased - - - - - (294,695) (294,695)
Change in market value
of available-for-sale
securities, net - - - (232,322) - - (232,322)
-------- ------------ ------------ ----------------- ---------- ------------ ------------
Balance at
March 31, 1997 $ 48,496 $ 41,422,898 $ 25,401,776 $ (17,728) $ (401,437) $ (2,814,546) $ 63,639,459
======== ============ ============ ================= ========== ============ ============
See accompanying notes to consolidated financial statements.
3
CFSB BANCORP, INC., AND SUBSIDIARY
Consolidated Statements of Cash Flows
Three Months Ended
March 31,
1997 1996
-------------- -------------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,307,604 $ 1,714,917
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 441,071 318,564
Provision for loan losses 90,000 60,000
Provision for real estate losses 15,000 15,000
Net amortization of premiums and accretion of discounts 28,855 166,879
Loan origination fees, net of costs deferred 53,994 (16,178)
Amortization of loan fees (67,024) (94,294)
Amortization of mortgage servicing rights 27,891 96
Loans originated for sale (4,207,182) (9,427,425)
Proceeds from sales of loans originated for sale 4,744,300 7,471,757
Net gains on sales of loans and securities (89,516) (106,199)
Net losses on sales and disposals of premises and equipment 2,634 -
Net gains on sales of repossessed property - (430)
Recoveries of losses 7,660 13,526
Decrease (increase) in accrued interest receivable (487,369) 109,247
Decrease in accrued interest payable (13,606) (40,305)
Increase in federal income taxes payable 866,000 815,000
Decrease in other liabilities (83,337) (100,319)
Increase in other assets (1,816,742) (1,002,402)
-------------- -------------
Net cash provided (used) by operating activities 1,820,233 (102,566)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities available for sale (9,992,968) (5,041,125)
Proceeds from sales of investment securities available for sale 10,029,101 -
Principal repayments and maturities of investment
securities available for sale - 12,920,000
Loan originations (net of undisbursed loans in process) (32,074,366) (28,057,643)
Loans purchased (5,015,292) (20,157,862)
Proceeds from sales of loans 856,647 1,787,128
Principal repayments on loans 24,613,035 24,509,022
Principal repayments and maturities on mortgage-backed
securities available for sale 1,340,950 285,605
Principal repayments and maturities on mortgage-backed
securities held to maturity - 2,113,881
Due to broker - 1,998,000
Proceeds from sales, redemptions, and settlements of
real estate owned, net 63,767 -
Proceeds from sales of repossessed property 13,600 5,510
Capitalized additions to real estate owned, net of recoveries (5,496) 7,929
Purchases of premises and equipment (1,005,491) (431,666)
Proceeds from sales and disposals of premises and equipment 3,100 1,224
-------------- -------------
Net cash used by investing activities (11,173,413) (10,059,997)
4
CFSB BANCORP, INC., AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
Three Months Ended
March 31,
1997 1996
-------------- --------------
(unaudited)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits $ 6,071,279 $ 5,795,793
Stock options exercised 35,237 88,827
Purchases of Treasury stock (294,695) -
Net increase in advance payments by
borrowers for taxes and insurance 2,456,462 1,771,478
Federal Home Loan Bank advance repayments (9,985,568) (1,282,819)
Federal Home Loan Bank advances 3,890,583 46,145
Dividends paid on common stock (564,629) (490,144)
------------ --------------
Net cash provided by financing activities 1,608,669 5,929,280
------------ --------------
Net decrease in cash and cash equivalents (7,744,511) (4,233,283)
Cash and cash equivalents at beginning of period 22,749,963 29,724,175
------------ --------------
Cash and cash equivalents at end of period $ 15,005,452 $ 25,490,892
============ ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest expense $ 8,968,982 $ 8,459,103
Federal income taxes 200,000 -
Transfers of loans to real estate owned 444,294 73,256
Transfers of loans to repossessed property 48,620 14,226
Loans charged-off 94,779 25,455
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, 1997, are not necessarily indicative of the
results to be expected for the full year. These Consolidated Financial
Statements should be read in conjunction with the Consolidated Financial
Statements and Notes thereto, for the year ended December 31, 1996, included in
the Corporation's 1996 Annual Report.
2. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts and transactions of
CFSB Bancorp, Inc. (Corporation) and its wholly-owned subsidiary, Community
First Bank (Bank), and the Bank's wholly-owned subsidiary, Capitol Consolidated
Financial Corporation (Capitol Consolidated), and Capitol Consolidated's wholly-
owned subsidiary, Community First Insurance and Investment Services.
Intercompany transactions and account balances are eliminated.
3. EARNINGS PER SHARE
Earnings per share of common stock are based on the weighted average number of
common shares and common share equivalents outstanding during the period.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following sections are designed to provide a more thorough discussion of the
Corporation's financial condition and results of operations as well as to
provide additional information on the Corporation's asset/liability management
strategies, sources of liquidity, and capital resources. Management's discussion
and analysis should be read in conjunction with the consolidated financial
statements and supplemental data contained elsewhere in this report.
GENERAL
CFSB Bancorp, Inc. (the "Corporation") is the holding company for Community
First Bank (the "Bank"). Substantially all of the Corporation's assets are
currently held in, and operations conducted through its sole subsidiary,
Community First Bank. The Bank is a community-oriented financial institution
offering a variety of financial services to meet the needs of the communities
it serves. The Bank's primary market area is the greater Lansing area, which is
composed of the tri-county area of Clinton, Eaton, and Ingham counties, the
western townships of Shiawassee County, and the southwest corner of Ionia
County. The Bank's business consists primarily of attracting deposits from the
general public and using such deposits, together with Federal Home Loan Bank
("FHLB") advances, to 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.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1997, COMPARED TO THE
THREE MONTHS ENDED MARCH 31, 1996
Net income for the three months ended March 31, 1997, was $2,307,000, or $0.47
per fully diluted share, compared to $1,715,000, or $0.34 per fully diluted
share for the same 1996 period, a net increase of $592,000, or 34.6 percent.
Principally accounting for this increase in net income between years was growth
in the Bank's net interest margin and improved fee income partially offset by
increased general and administrative expenses. The Corporation's solid financial
performance for the first quarter is attributable to strong mortgage and
consumer loan production, improved net interest margins, increased deposits,
growth in fee income, and substantially reduced deposit insurance premiums.
Net income for the 1997 first quarter represents a return on average assets of
1.13 percent, an increase from 0.91 percent for the 1996 first quarter and a
return on average stockholders' equity of 14.80 percent compared to 10.85
percent in 1996. The Corporation's efficiency ratio, or operating expenses over
recurring operating revenues, was 53.9 percent for the quarter ended
7
March 31, 1997, a significant reduction from 60.5 percent for the quarter ended
March 31, 1996.
Net Interest Income
- -------------------
The most significant component of the Corporation's earnings is net interest
income, which is the difference between interest earned on loans, mortgage-
backed securities, investment securities and other earning assets, and interest
paid on deposits and FHLB advances. This amount, when annualized and divided by
average earning assets, is referred to as the net interest margin. Net interest
income and net interest margin are directly impacted by changes in volume and
mix of earning assets and interest-bearing liabilities, market rates of
interest, the level of non-performing assets, demand for loans, and other market
forces.
The following table presents the yields on the Corporation's earning assets and
costs of the Corporation's interest-bearing liabilities, the interest rate
spread, and the net interest margin for the three months ended March 31, 1997
and 1996, and at March 31, 1997, and December 31, 1996. The costs include the
annualized effect of the Corporation's interest rate exchange agreement.
For the
Three Months
Ended At At
March 31, March 31, December 31,
1997 1996 1997 1996
-------- ----------- ----------- ------------
Weighted average yield:
Loans receivable, net 7.64% 7.72% 7.66% 7.60%
Mortgage-backed securities 7.81 7.62 7.67 7.82
Investment securities 5.87 5.40 5.85 5.89
Interest-earning deposits 2.52 4.26 1.71 4.93
Other 7.50 7.58 7.57 7.55
---- ---- ---- ----
Total earning assets 7.50 7.49 7.51 7.47
Weighted average cost:
Savings, checking, and money
market accounts 2.57 2.59 2.54 2.65
Certificates of deposit 5.70 5.89 5.74 5.73
FHLB advances 6.02 6.08 6.01 5.97
---- ---- ---- ----
Total interest-bearing
liabilities 4.82 4.94 4.81 4.86
---- ---- ---- ----
Interest rate spread 2.68% 2.55% 2.70% 2.61%
==== ==== ==== ====
Net yield on earning assets 3.02% 2.89% 3.04% 2.95%
==== ==== ==== ====
8
Net interest income before provision for loan losses was $6.2 million during the
first quarter of 1997, and represented an $848,000 increase compared to the
first quarter of 1996. Net interest income was positively affected by lower
deposit rates in 1997 and strong growth in earning assets. The Corporation's net
interest margin was 3.02 percent for the three months ended March 31, 1997, an
improvement from 2.89 percent for the comparable quarter of 1996. A shift in the
composition of average earning assets from lower yielding more liquid assets
toward higher-earning, longer-term assets also contributed to an improved net
interest margin during 1997. Average loans receivable were $729.2 million in the
first quarter of 1997 representing growth of $101.3 million, or 16.1 percent,
over average loans receivable of $627.9 million in the same quarter a year
earlier. The increased level of loans outstanding resulted from originations of
adjustable-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 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. As the slope of the yield curve
began to steepen in the first quarter, customer preferences in the Corporation's
local market favored adjustable-rate mortgage loans. 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
- -------------------------
The allowance for loan losses, established through provisions for losses charged
to expense, is increased by recoveries of loans previously charged off and
reduced by charge-offs of loans. During the first quarter of 1997, the provision
for loan losses was $90,000 compared to $60,000 during the first quarter a year
ago. Increasing the provision resulted from management's evaluation of the
adequacy of the allowance for loan losses including consideration of growth in
the loan portfolio, the perceived risk exposure among all loan types, actual
loss experience, delinquency rates, borrower circumstances, current and
projected economic conditions, and other relevant factors. Management believes
the current provision and related allowance for loan losses is adequate to meet
current and potential credit risks in the current loan portfolio.
For more information on the Corporation's allowance for loan losses and activity
therein, reference is made to "Asset Quality."
Other Income
- ------------
Other income totaled $1.2 million for the three months ended March 31, 1997, up
16.9 percent from $1.0 million for the three months ended March 31, 1996. Growth
in other income resulted primarily from increased deposit fees assessed on a
higher level of transaction account activity. A gain on the redemption of an
equity security and gains on the sales of investment securities in 1997 also
favorably affected the comparison of other income. Partially offsetting these
increases
9
in other income were reduced gains on loan sales and decreased servicing income
resulting from lower balances of loans serviced for other parties and
amortization of capitalized mortgage servicing costs.
General and Administrative Expenses
- -----------------------------------
General and administrative expenses were $3.9 million for the three months ended
March 31, 1997, compared to $3.8 million for the same quarter a year ago.
Compensation and fringe benefits expense rose between periods as a result of
upward merit-based salary adjustments and increased employment taxes on a higher
compensation base partly offset by the effect of fewer full-time equivalent
employees. The increase in office occupancy and equipment expense principally
results from accelerating the depreciation on computer equipment to more closely
reflect the estimated remaining life of this equipment. FDIC insurance, $213,000
lower to date in 1997, reflects the lower premium of 6.5 cents per $100 of
domestic deposits versus 23 cents per $100 of domestic deposits in 1996.
Contributing to higher other general and administrative expenses was the April
1996 introduction of the Moneycard which resulted in debit card embossment and
servicing charges in 1997 but not in first quarter 1996. This card serves as
both an ATM card and a debit card allowing customers to make direct withdrawals
from their checking accounts when making purchases at merchants accepting
MasterCard. The continued promotion of the Corporation's checking account
products has resulted in a significant expansion of its customer base. As a
consequence, the expanded account base has led to more operating losses in first
quarter 1997 than in the first quarter of the prior period. As a partial offset
to these increases in general and administrative expenses, regulation by the
Michigan Financial Institutions Bureau resulted in lower supervisory fees than
similar fees assessed by the Office of Thrift Supervision.
Federal Income Tax Expense
- --------------------------
Federal income tax expense was $1.1 million for the three months ended March 31,
1997, compared to $815,000 for the comparable 1996 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
of 34 percent less a pro rata portion of the anticipated low-income housing tax
credits expected to be available based upon the Corporation's limited
partnership investments.
ASSET QUALITY
Impaired loans as defined by Statement of Financial Accounting Standards No.
114, Accounting by Creditors for Impairment of a Loan and as amended by
Statement of Financial Accounting Standards No. 118, Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures totaled $62,000 at
March 31, 1997, and include one income-producing property loan and two
commercial business loans. One of these loans totaling $48,000 is included in
nonaccrual loans at March 31, 1997. The other two loans totaling $14,000 were
not included as nonaccrual loans as they were not 90 days or more past due at
March 31, 1997. The Corporation's nonaccrual loans include residential mortgage
and consumer installment loans, for which SFAS 114 does not apply. The
Corporation's respective average investment in impaired
10
loans was $345,000 during the first quarter of 1997. Interest income recognized
on impaired loans during first quarter 1997 totaled $1,000. Impaired loans had
specific allocations of the allowance for loan losses in accordance with SFAS
114 of $27,000 at March 31, 1997. The Corporation did not have any impaired
loans at or during the quarter ended March 31, 1996.
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,
1997 1996
--------- ------------
(dollars in thousands)
Nonaccruing loans:
One- to four-family
residential mortgages $ 265 $ 892
Income-producing property - 359
FHA-partially insured
and VA-partially guaranteed 77 183
Commercial 48 195
Consumer installment 145 158
------ ------
Total $ 535 $1,787
====== ======
Percentage of total assets 0.07% 0.21%
====== ======
Real estate owned:/(1)/
One-to four-family
residential mortgages $ 244 $ 205
Income-producing property 359 -
Construction and development - 7
------ ------
Total $ 603 $ 212
====== ======
Percentage of total assets 0.07% 0.03%
====== ======
Total nonaccruing loans
and real estate owned $1,138 $1,999
====== ======
Percentage of total assets 0.14% 0.24%
====== ======
/(1)/ Real estate owned includes properties in redemption and acquired through
foreclosure.
11
The following is a summary of the Corporation's loan and real estate owned loss
experience from December 31, 1993, through March 31, 1997.
Real
Loans Estate Total
----------- ----------- ------------
Balance at December 31, 1993 $3,846,733 $ 167,087 $4,013,820
Provision for losses 240,000 565,000 805,000
Charges against the allowance (153,263) (711,937) (865,200)
Recoveries 190,448 55,823 246,271
---------- --------- ----------
Balance at December 31, 1994 4,123,918 75,973 4,199,891
Provision for losses 240,000 120,000 360,000
Charges against the allowance (55,107) (34,614) (89,721)
Recoveries 54,328 62,218 116,546
---------- --------- ----------
Balance at December 31, 1995 4,363,139 223,577 4,586,716
Provision for losses 240,000 60,000 300,000
Charges against the allowance (76,528) (187,214) (263,742)
Recoveries 36,983 115,796 152,779
---------- --------- ----------
Balance at December 31, 1996 4,563,594 212,159 4,775,753
Provision for losses 90,000 15,000 105,000
Charges against the allowance (94,779) (12,648) (107,427)
Recoveries 7,660 116,574 124,234
---------- --------- ----------
Balance at March 31, 1997 $4,566,475 $ 331,085 $4,897,560
========== ========= ==========
The Corporation continues to demonstrate strong credit quality. The
Corporation's ratio of nonperforming assets to total assets was 0.14 percent and
0.24 percent at March 31, 1997, and December 31, 1996, respectively, all well
below the industry average. In addition, at March 31, 1997, the Corporation's
allowances for loan and real estate losses represent 430 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.
ASSET/LIABILITY MANAGEMENT
The operating results of the Corporation are dependent, to a large extent, upon
its net interest income, which is the difference between its interest income
from interest-earning assets, such as loans, mortgage-backed securities and
investment securities, and interest expense on interest-bearing liabilities,
such as deposits and FHLB advances.
12
The Corporation's current asset/liability management objective is to provide an
acceptable balance between interest rate risk, credit risk, and maintenance of
yield. The principal operating strategy of the Corporation is to manage the
repricing of its interest-sensitive assets and liabilities to reduce the
sensitivity of the Corporation's earnings to changes in interest rates. The
Corporation generally implements this strategy by: (i) originating and retaining
or purchasing adjustable-rate mortgages; (ii) originating construction and
consumer loans which typically have shorter terms to maturity or repricing than
long-term, fixed-rate residential mortgages; (iii) maintaining liquidity levels
adequate to allow flexibility in reacting to the interest rate environment; and
(iv) selling upon origination certain long-term, fixed-rate, residential
mortgages in the secondary mortgage market.
One indicator used to measure interest rate risk is a certain time period gap
which represents the difference between interest-earning assets which mature or
reprice within a certain time period and interest-bearing liabilities which
mature or reprice within the same time period. The Corporation's one-year gap,
one-to-three-year gap, and three-to-five-year gap was a negative 9.3 percent,
negative 5.6 percent, and negative 1.9 percent, respectively at December 31,
1996. The Corporation's gap positions remained relatively unchanged as of March
31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Total assets rose to $834.3 million at March 31, 1997, a slight increase of $4.5
million from $829.8 million at December 31, 1996.
The Corporation anticipates it will have sufficient funds available to meet
current commitments either through operations, deposit growth, or borrowings
from the FHLB. At March 31, 1997, the Corporation had total outstanding mortgage
loan commitments of $20.8 million of which $16.6 million were for adjustable-
rate loans and $4.2 million were for fixed-rate loans. The interest rate on
fixed-rate loans generally is not determined until the approximate closing date.
Loans in process at quarter-end March 1997 totaled $15.7 million and primarily
represented undrawn funds on adjustable- and fixed-rate construction loans of
$15.1 million and $579,000, respectively. In addition at year end, there were
$1.4 million of commitments to make consumer and commercial business loans. The
Corporation also had commitments to extend adjustable-rate home equity lines of
credit in the amount of $33.5 million at March 31, 1997. There were additionally
$2.3 million of loans in process or undrawn lines of credit on installment and
commercial business loans as of March 31, 1997. The Corporation had no firm
commitments to purchase mortgage loans and had commitments to sell $1.6 million
of fixed-rate, residential mortgage loans at March 31, 1997. One- to four-family
residential, fixed-rate mortgage loans totaling $747,000 with a weighted average
interest rate of 8.4 percent were held for sale at March 31, 1997.
Lending
- -------
Loans receivable increased $10.7 million, or 1.5 percent, to $728.4 million at
March 31, 1997, from $717.7 million at December 31, 1996, and increased $94.2
million, or 14.8 percent from $634.2 million at March 31, 1996.
13
The Corporation originated $36.3 million of loans during the first quarter of
1997, a slight decrease from $37.5 million during the comparable period of 1996.
Loan demand remains strong in the Corporation's local market. As market rates
edged upward during first quarter 1997, customers sought to secure mortgage
loans with favorable interest rates. The Corporation received principal
repayments on loans of $24.6 million during the three months ended March 31,
1997, compared to $24.5 million during the first quarter of 1996. The following
schedule sets forth the Corporation's loan originations for the three months
ended March 31, 1997 and 1996.
Three Months Ended
March 31,
1997 1996
-------- ---------
(in thousands)
Fixed-rate:
One- to four-family residential $ 6,782 $11,534
Income-producing - 758
FHA-insured and VA-partially guaranteed 116 65
Construction and development:
One- to four-family residential 1,209 1,609
Commercial 130 10
Consumer 3,586 3,414
------- -------
11,823 17,390
Adjustable-rate:
One- to four-family residential 8,375 7,385
Construction and development:
One- to four-family residential 10,032 6,938
Income-producing 467 600
Commercial 615 1,020
Consumer 4,970 4,152
------- -------
24,459 20,095
------- -------
Total originations $36,282 $37,485
======= =======
During the quarters ended March 31, 1997 and 1996, the Corporation sold
primarily fixed-rate loans aggregating $5.6 million and $9.2 million,
respectively. The level of loan sales is partially a function of the interest
rate environment. In the first quarter of 1996, the spread between fixed and
adjustable mortgage rates narrowed and there was a proportionately higher
concentration of fixed-rate mortgage loan applications and subsequent closings.
Consequently, there were a higher level of sales in 1996. When the spread
between fixed and adjustable mortgage interest rates was relatively wide in the
first quarter of 1997, mortgage loan originations reflected customer preferences
in the Corporation's market area for adjustable-rate loans which are retained in
the Corporation's portfolio.
14
During the three months ended March 31, 1997, the Corporation purchased from an
unaffiliated financial institution $5.0 million of one- to four-family
residential, fixed- and adjustable-rate, medium-term mortgage loans compared to
purchases of $20.2 million during the three months ended March 31, 1996. The
Corporation purchases residential loans to supplement and complement its own
mortgage loan production; purchases are also dependent upon product availability
and the Corporation's liquidity position.
Investment and Mortgage-Backed Securities
- -----------------------------------------
At December 31, 1996, investment and mortgage-backed securities available for
sale included unrealized net gains of $325,000 reported net of $110,000 of
federal income tax expense as a separate component of stockholders' equity.
Throughout the first quarter of 1997, market interest rates generally climbed
which unfavorably impacted the market value of the principally fixed-rate
investment and mortgage-backed securities available for sale. At March 31, 1997,
investment and mortgage-backed securities available for sale included unrealized
net losses of $27,000 reported net of $9,000 of federal income tax benefit as a
separate component of stockholders' equity. The Corporation had no investment or
mortgage-backed securities classified as held-to-maturity or trading securities
as of March 31, 1997.
Included in the composition of the Corporation's earning assets at March 31,
1997, were $25.7 million of mortgage-backed securities, a 5.8 percent decline
from the $27.2 million held at December 31, 1996. The Corporation did not
purchase or sell any mortgage-backed securities during the three months ended
March 31, 1997 or 1996. The approximate fair value of the mortgage-backed
securities portfolio was $25.7 million at March 31, 1997, with gross unrealized
gains and losses of $349,000 and $239,000, respectively.
At March 31, 1997, the level of the Corporation's investment securities
portfolio declined to $30.9 million from $31.1 million at December 31, 1996.
During the first quarter of 1997, $10.0 million of U.S. Treasury securities were
sold at gross gains of $20,000. The proceeds from the sales were reinvested in
$10.0 million of U.S. Treasury securities with slightly longer maturities. There
were no sales of investment securities during the first quarter of 1996. The
approximate fair value of the Corporation's investment securities was $30.9
million at March 31, 1997, with gross unrealized gains and losses of $6,000 and
$143,000, respectively.
Deposits
- --------
Total deposits grew $6.0 million from $553.6 million at December 31, 1996, to
$559.6 million at March 31, 1997. The increase resulted from transaction and
savings account growth of $2.6 million and $4.8 million, respectively, partially
offset by $1.4 million of net certificate of deposit withdrawals. During 1995,
the Corporation introduced Really Free Checking and five other highly
competitive checking account programs. To support these checking account
programs, the Corporation conducts comprehensive marketing campaigns. The
continued promotion of Really Free Checking has resulted in an expansion of the
Corporation's deposit base through attracting new customers and cross-selling
other Bank products to existing customers.
15
Borrowings
- ----------
Since mid-1993, borrowings from the FHLB have been an integral component of the
Corporation's funding strategy. Borrowings replace maturing certificates of
deposit and other deposit withdrawals, fund asset growth, and are used to manage
interest rate risk. FHLB advances grew from $77.8 million at December 31, 1993,
to $202.6 million at December 31, 1996, and declined to $196.5 million at March
31, 1997. Of the outstanding FHLB advances at March 31, 1997, $149.6 million
carried a weighted average fixed-rate of 6.08 percent. Adjustable-rate advances
at March 31, 1997, totaled $46.9 million, all of which reprice based upon three-
month LIBOR. Net deposit inflows during the first quarter of 1997 generated
liquidity in excess of the levels needed to meet operating requirements,
including funding loan originations. As a result, the Corporation repaid $6.1
million of borrowings.
Capital
- -------
Total stockholders' equity was $63.6 million at March 31, 1997, a $1.1 million
increase, compared to the 1996 year-end total of $62.5 million. Book value per
share correspondingly increased to $13.55 at March 31, 1997, from $13.27 per
share at December 31, 1996. The increases were primarily the result of net
income for the first quarter of 1997 offset in part by dividend declarations and
downward market adjustments on available-for-sale securities. Principally as the
result of the increase in total stockholders' equity during the first quarter,
the ratio of stockholders' equity to assets increased to 7.6 percent at March
31, 1997, from 7.5 percent at December 31, 1996. 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 7.4 percent, 7.4 percent, and 13.2 percent at March
31, 1997, respectively.
The Corporation's Board of Directors declared a cash dividend of $0.15 per share
in the first quarter of 1997, an increase of 50.0 percent over the $0.10 per
share dividend declared in the first quarter of 1996. The Corporation's cash
dividend policy is continually reviewed by management and the Board of
Directors. The Corporation currently intends to continue its policy of paying
quarterly dividends, however, such payments will depend upon a number of
factors, including capital requirements, regulatory limitations, the
Corporation's financial condition and results of operations, and the Bank's
ability to pay dividends to the Corporation. Presently, the Corporation has no
significant source of income other than dividends from the Bank. Consequently,
the Corporation depends upon dividends from the Bank to accumulate earnings for
payment of cash dividends to its stockholders.
During June 1996, the Corporation's Board of Directors approved a stock
repurchase program pursuant to which the Corporation may repurchase up to 5
percent or 246,400 shares of CFSB Bancorp, Inc. common stock. Through the March
31, 1997, the Corporation repurchased 237,420 shares of CFSB Bancorp, Inc.
common stock on the open market for $4.4 million, or an average purchase price
of $18.46 per share. The program has a one-year term.
16
ACCOUNTING STANDARDS
In February 1997, the FASB issued Statement of Financial Accounting Standards
No. 128, Earnings Per Share (SFAS 128). The statement specifies the computation,
presentation, and disclosure requirements for earnings per share (EPS) for
entities with publicly held common stock. SFAS 128 was issued to simplify the
computation of EPS and to make the U.S. standard more compatible with the EPS
standards of other countries and that of the International Accounting Standards
Committee. It replaces Primary EPS and Fully Diluted EPS with Basic EPS and
Diluted EPS, respectively. It also requires dual presentation of Basic EPS and
Diluted EPS on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator and
denominator of the Basic EPS computation to the numerator and denominator of the
Diluted EPS computation. The Corporation currently reports Primary EPS and Fully
Diluted EPS. SFAS 128 is effective for financial statements for both interim and
annual periods ended after December 15, 1997. Earlier application is not
permitted. The impact of implementation is not quantified; however, the
Corporation expects upon adoption, Basic EPS will be slightly higher than
Primary EPS and Diluted EPS will be approximately the same as Fully Diluted EPS.
In June 1996, the FASB issued Statement of Financial Accounting Standards No.
125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities (SFAS 125). This statement is based upon a
financial-components approach that focuses on control to determine the
accounting for transfers of assets. Sales and transfers of assets often divide
financial assets and liabilities into components, some of which are retained and
some which are not. After transfer, an entity recognizes on its balance sheet
the financial and servicing assets it controls and the liabilities it has
incurred, and removes the assets when control has been surrendered, and
derecognizes liabilities when the obligations have been satisfied. Examples of
transactions covered by this standard include, but are not limited to, asset
securitizations, repurchase agreements, wash sales, loan participations,
transfers of loans with recourse, and servicing of loans. This statement
requires liabilities and derivatives incurred or obtained by transferors as part
of a transfer of financial assets be initially measured at fair value, if
practicable. SFAS 125 is effective for transactions occurring after December 31,
1996. This standard does not have a material impact on the Corporation's
financial condition or results of operation.
SUBSEQUENT EVENT
On April 15, 1997, the Corporation's Board of Directors authorized a stock
repurchase program pursuant to which the registrant may repurchase up to 235,000
shares of the registrant's common stock, which represents approximately 5
percent of registrant's outstanding common stock. The timing of the repurchases
and the exact number of shares to be repurchased will be dependent on future
market conditions. The Board of Directors approved a similar repurchase program
in June 1996. This program was completed in April 1997 with 246,400 shares of
common stock purchased on the open market at an average price of $18.58 per
share, an aggregate of $4.6 million.
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
None
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: May 15, 1997
By: /s/ Robert H. Becker By: /s/ Holly L. Schreiber
------------------------- ----------------------------
Robert H. Becker Holly L. Schreiber
President and Vice President and Treasurer
Chief Executive Officer (Principal Financial and
(Duly Authorized Officer) Accounting Officer)
By: /s/ John W. Abbott
-------------------------
John W. Abbott
Executive Vice President,
Chief Operating Officer,
and Secretary
19