SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 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 5,096,521 shares of the Registrant's $0.01 par value common stock
outstanding as of July 31, 1997.
CFSB BANCORP, INC., AND SUBSIDIARY
Contents
Pages
-----
PART I - FINANCIAL INFORMATION
Consolidated Statements of Financial Condition
at June 30, 1997, and December 31, 1996 (unaudited) 1
Consolidated Statements of Operations for the three months
ended June 30, 1997 and 1996 (unaudited) and for the
six months ended June 30, 1997 and 1996 (unaudited) 2
Consolidated Statement of Stockholders' Equity for the six
months ended June 30, 1997 (unaudited) 3
Consolidated Statements of Cash Flows for the six months
ended June 30, 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 7-19
PART II - OTHER INFORMATION 20
SIGNATURES 21
CFSB BANCORP, INC., AND SUBSIDIARY
Consolidated Statements of Financial Condition
June 30, December 31
1997 1996
-------------- --------------
(unaudited)
ASSETS
Cash and amounts due from depository institutions $ 3,686,931 $ 7,479,722
Interest-earning deposits with Federal Home
Loan Bank and other depository institutions,
at cost which approximates market 13,176,570 15,270,241
Investment securities available for sale, at fair value 26,041,788 31,093,494
Mortgage-backed securities available for sale, at fair value 24,344,469 27,220,567
Loans receivable, net 745,057,491 717,714,636
Accrued interest receivable, net 5,198,656 4,349,240
Real estate, net 401,787 -
Premises and equipment, net 10,749,314 10,985,199
Stock in Federal Home Loan Bank of Indianapolis, at cost 10,766,600 10,632,000
Deferred federal income tax benefit 337,772 317,270
Other assets 5,676,707 4,737,177
-------------- --------------
Total assets $ 845,438,085 $ 829,799,546
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 560,353,267 $ 553,574,001
Advances from Federal Home Loan Bank 204,430,743 202,639,323
Advance payments by borrowers for taxes and insurance 6,374,171 1,356,507
Accrued interest payable 4,327,349 4,233,799
Federal income taxes payable 914,163 740,242
Other liabilities 4,592,778 4,785,647
-------------- --------------
Total liabilities 780,992,471 767,329,519
-------------- --------------
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 5,103,843 shares - 1997 and 4,849,611 shares - 1996 51,038 48,496
Additional paid-in capital 48,409,958 41,422,898
Retained income - substantially restricted 16,337,218 23,863,600
Net unrealized gains on available-for-sale securities,
net of tax expense of $90,046 - 1997 and $110,548 - 1996 174,796 214,594
Employee Stock Ownership Plan (343,465) (459,408)
Treasury stock, at cost; 7,911 shares - 1997 and
157,927 shares - 1996 (183,931) (2,620,153)
-------------- --------------
Total stockholders' equity 64,445,614 62,470,027
-------------- --------------
Total liabilities and stockholders' equity $ 845,438,085 $ 829,799,546
============== ==============
See accompanying notes to consolidated financial statements.
1
CFSB BANCORP, INC., AND SUBSIDIARY
Consolidated Statements of Operations
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
------------ ----------- ----------- -----------
(unaudited) (unaudited)
INTEREST INCOME:
Loans receivable $ 14,196,567 $12,593,062 $28,098,939 $24,707,604
Mortgage-backed securities 474,419 598,085 985,607 1,247,338
Investment securities 468,024 594,740 923,683 1,262,453
Other 320,181 279,654 621,682 633,750
------------ ----------- ----------- -----------
Total interest income 15,459,191 14,065,541 30,629,911 27,851,145
INTEREST EXPENSE:
Deposits, net 6,035,135 5,849,951 12,071,249 11,850,728
Federal Home Loan Bank advances 3,080,632 2,494,168 5,999,894 4,912,189
------------ ----------- ----------- -----------
Total interest expense 9,115,767 8,344,119 18,071,143 16,762,917
Net interest income before provision
for loan losses 6,343,424 5,721,422 12,558,768 11,088,228
Provision for loan losses 90,000 60,000 180,000 120,000
------------ ----------- ----------- -----------
Net interest income after provision
for loan losses 6,253,424 5,661,422 12,378,768 10,968,228
OTHER INCOME (LOSS):
Service charges and other fees 1,069,355 814,474 1,996,514 1,582,328
Loan servicing income 81,580 102,960 161,619 213,944
Losses on sales of investment securities
available for sale, net (51,031) (11,419) (31,372) (11,419)
Gains (losses) on sales of loans, net 71,826 (4,378) 141,683 101,821
Real estate operations, net (15,000) (15,000) (30,000) (30,000)
Gains on sales of branches, net 351,740 - 351,740 -
Other, net 213,018 20,305 325,457 71,369
------------ ----------- ----------- -----------
Total other income 1,721,488 906,942 2,915,641 1,928,043
GENERAL AND ADMINISTRATIVE EXPENSES:
Compensation, payroll taxes, and fringe benefits 2,052,029 2,035,444 4,098,105 4,015,949
Office occupancy and equipment 633,102 554,818 1,341,680 1,140,536
Federal insurance premiums 89,553 302,060 177,287 603,027
Data processing 110,314 89,022 211,988 173,086
Marketing 236,092 196,947 448,665 392,996
Other, net 798,611 676,003 1,587,869 1,326,690
------------ ----------- ----------- -----------
Total general and administrative expense 3,919,701 3,854,294 7,865,594 7,652,284
------------ ----------- ----------- -----------
Income before federal income tax expense 4,055,211 2,714,070 7,428,815 5,243,987
Federal income tax expense 1,260,000 863,000 2,326,000 1,678,000
------------ ----------- ----------- -----------
Net income $ 2,795,211 $ 1,851,070 $ 5,102,815 $ 3,565,987
============ =========== =========== ===========
EARNINGS PER SHARE:
Primary $ 0.52 $ 0.33 $ 0.95 $ 0.64
============ =========== =========== ===========
Fully diluted $ 0.52 $ 0.33 $ 0.95 $ 0.64
============ =========== =========== ===========
DIVIDENDS PAID PER SHARE $ 0.14 $ 0.09 $ 0.25 $ 0.18
============ =========== =========== ===========
See accompanying notes to consolidated financial statements.
2
CFSB BANCORP, INC. AND SUBSIDIARY
Consolidated Statement of Stockholders' Equity
Six Months Ended June 30, 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 - - 5,102,815 - - - 5,102,815
Stock options exercised - - (96,727) - - 150,696 53,969
Repayment of ESOP debt - - - - 115,943 - 115,943
Cash dividends on common
stock - $0.29 per share - - (1,469,052) - - - (1,469,052)
10% common stock dividend 2,542 6,987,060 (11,063,418) - - 4,062,759 (11,057)
Treasury stock purchased - - - - - (1,777,23) (1,777,233)
Change in market value
of available-for-sale
securities, net - - - (39,798) - - $ (39,798)
-------- ----------- ------------- ------------- ------------ ----------- -----------
Balance at
June 30, 1997 $51,038 $48,409,958 $ 16,337,218 $ 174,796 $ (343,465) (183,931) 64,445,614
======== =========== ============= ============= =========== =========== ===========
See accompanying notes to consolidated financial statements.
3
CFSB BANCORP, INC., AND SUBSIDIARY
Consolidated Statements of Cash Flows
Six Months Ended
June 30,
1997 1996
------------ ------------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,102,815 $ 3,565,987
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 821,198 657,499
Provision for loan losses 180,000 120,000
Provision for real estate losses 30,000 30,000
Net amortization of premiums and accretion of discounts 43,274 268,142
Loan origination fees, net of costs deferred 21,915 58,494
Amortization of loan fees (112,467) (144,977)
Amortization of mortgage servicing rights 54,174 8,141
Loans originated for sale (7,344,077) (18,588,895)
Proceeds from sales of loans originated for sale 7,759,645 13,924,936
Net gains on sales of loans and securities (110,311) (90,402)
Net (gains) losses on sales and disposals of premises and equipment (325,667) 27,716
Net gains on sales of repossessed assets - (430)
Recoveries of losses 22,292 18,868
Increase in accrued interest receivable (849,416) (228,210)
Increase in accrued interest payable 93,550 74,394
Increase in federal income taxes payable 173,921 143,000
Decrease in other liabilities (276,687) (551,490)
Increase in other assets (910,790) (6,121,518)
------------ ------------
Net cash provided by operating activities 4,373,369 (6,828,745)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities available for sale (20,000,781) (10,041,125)
Proceeds from sales of investment securities available for sale 20,037,696 10,042,188
Principal repayments and maturities of investment
securities available for sale 5,000,000 18,420,000
Loan originations (net of undisbursed loans in process) (80,637,802) (78,102,486)
Loans purchased (9,215,305) (31,733,987)
Proceeds from sales of loans 2,172,845 1,977,550
Principal repayments on loans 59,335,828 52,696,783
Principal repayments and maturities on mortgage-backed
securities available for sale 2,755,944 609,993
Principal repayments and maturities on mortgage-backed
securities held to maturity - 4,214,179
Proceeds from sales, redemptions, and settlements of
real estate owned, net 79,194 374,341
Proceeds from sales of repossessed assets 47,571 5,510
Capitalized additions to real estate owned, net of recoveries (26,253) (23,518)
Purchases of premises and equipment (1,307,387) (865,645)
Proceeds from sales and disposals of premises and equipment 1,047,741 4,624
Purchases of Federal Home Loan Bank stock (134,600) (283,900)
------------ ------------
Net cash used by investing activities (20,845,309) (32,705,493)
4
CFSB BANCORP, INC., AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
Six Months Ended
June 30,
1997 1996
------------ ------------
(unaudited)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits $ 6,779,266 $ 9,709,546
Stock options exercised 53,969 92,281
Purchases of treasury stock (1,777,233) (103,750)
Net increase in advance payments by
borrowers for taxes and insurance 5,017,663 4,382,879
Federal Home Loan Bank advance repayments (46,672,961) (9,721,539)
Federal Home Loan Bank advances 48,464,381 23,746,959
Dividends paid on common stock (1,279,607) (982,523)
------------ ------------
Net cash provided by financing activities 10,585,478 27,123,853
------------ ------------
Net decrease in cash and cash equivalents (5,886,462) (12,410,385)
Cash and cash equivalents at beginning of period 22,749,963 29,724,175
------------ ------------
Cash and cash equivalents at end of period $ 16,863,501 $ 17,313,790
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest expense $ 17,977,593 $ 16,688,523
Federal income taxes 2,195,000 1,535,000
Transfers of loans to real estate owned 583,996 107,733
Transfers of loans to repossessed assets 110,232 26,226
Loans charged-off 225,579 36,194
Loans to facilitate the sale of real estate owned - 279,700
See accompanying notes to consolidated financial statements.
5
CFSB BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements
(unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements are prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation are included. The results of operations for
the three and six months ended June 30, 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. (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 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
make 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 JUNE 30, 1997, COMPARED TO THE
THREE MONTHS ENDED JUNE 30, 1996
Net income for the three months ended June 30, 1997, was $2,795,000, or $0.52
per fully diluted share, a net increase of 51.0 percent, or $944,000, from
$1,851,000, or $0.33 per fully diluted share, for the corresponding period in
1996. The Corporation's strong financial performance for the quarter reflected
an improved net interest margin, increased fee income, and non-recurring gains
generated from the sales of two branches, partially offset by increased general
and administrative expenses. Net income for the 1997 second quarter represented
a return on average assets of 1.34 percent, an increase from 0.95 percent for
the 1996 second quarter and a return on average stockholders' equity of 17.46
percent compared to 11.51 percent in 1996. The Corporation's return on
stockholders' equity excluding the gains on the sales of branches was 16.01
percent for the quarter ended June 30, 1997. The Corporation's efficiency
ratio, or operating expenses over recurring operating revenues, was 51.0 percent
for the quarter ended June 30, 1997, an improvement from 58.0 percent for the
quarter ended June 30, 1996.
7
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 and six months ended June 30,
1997 and 1996, and at June 30, 1997, and December 31, 1996. The costs include
the annualized effect of the Corporation's interest rate exchange agreement.
For the For the
Three Months Six Months
Ended Ended At At
June 30, June 30, June 30, December 31,
1997 1996 1997 1996 1997 1996
------ ------ ------ ------ -------- ------------
Weighted average yield:
Loans receivable, net 7.66% 7.66% 7.65% 7.69% 7.70% 7.60%
Mortgage-backed securities 7.60 7.58 7.71 7.60 7.68 7.82
Investment securities 6.07 5.73 5.97 5.55 6.11 5.89
Interest-earning deposits 2.79 3.71 2.66 4.04 2.01 4.93
Other 7.50 7.22 7.50 7.40 7.54 7.55
----- ----- ----- ----- ----- -----
Total earning assets 7.52 7.49 7.51 7.49 7.55 7.47
Weighted average cost:
Savings, checking, and money
market accounts 2.51 2.45 2.54 2.52 2.49 2.65
Certificates of deposit 5.70 5.75 5.70 5.82 5.78 5.73
FHLB advances 6.08 6.02 6.05 6.05 6.06 5.97
----- ----- ----- ----- ----- -----
Total interest-bearing
liabilities 4.82 4.78 4.82 4.86 4.83 4.86
----- ----- ----- ----- ----- -----
Interest rate spread 2.70% 2.71% 2.69% 2.63% 2.72% 2.61%
===== ===== ===== ===== ===== =====
Net interest margin 3.07% 3.04% 3.05% 2.96% 3.08% 2.95%
===== ===== ===== ===== ===== =====
8
Net interest income before provision for loan losses was $6.3 million during the
second quarter of 1997, and represented a $622,000 increase compared to the
second quarter of 1996. Net interest income was positively affected by strong
growth in earning assets. The Corporation's net interest margin was 3.07
percent for the three months ended June 30, 1997, an improvement from 3.04
percent for the comparable quarter of 1996. Because the Corporation is
liability sensitive, pressure may be felt on the Corporation's net interest
margin if short-term market interest rates rise. In a falling interest rate
environment, competition may pressure the Corporation's net interest margin. 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 $741.3
million in the second quarter of 1997 representing growth of $83.1 million, or
12.6 percent, over average loans receivable of $658.2 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.
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, and refinancings and a resulting change in the
composition of the Corporation's earning assets. As the slope of the yield
curve steepened in the first quarter, customer preferences in the Corporation's
local market favored adjustable-rate mortgage loans. During the second quarter
the yield curve began to flatten, in response, customer's demand for fixed rate
loans increased. 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 second quarter of 1997, the
provision for loan losses was $90,000 compared to $60,000 during the year-ago
period. Increasing the provision resulted from management's evaluation of the
adequacy of the allowance for loan losses including consideration of the growth
in the loan portfolio, 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."
9
Other Income
- ------------
Other income totaled $1.7 million for the three months ended June 30, 1997, up
from $907,000 for the three months ended June 30, 1996. During the second
quarter of 1997 the Bank had non-recurring gains on the sales of two of its
branches totaling $352,000. Increased deposit fees assessed on a higher level
of transaction account activity favorably impacted other income. Also favorably
affecting the comparison of other income was increased fees associated with the
use of debit cards introduced in April 1996, increased gains on the sales of
loans, and increased check printing income. Partially offsetting these
increases in other income was decreased servicing income resulting from lower
balances of loans serviced for other parties and amortization of capitalized
mortgage servicing costs.
General and Administrative Expenses
- -----------------------------------
Total general and administrative expenses remained relatively unchanged at $3.9
million for the three months ended June 30, 1997 and 1996. Compensation and
fringe benefits expense rose between periods as a result of upward merit-based
salary adjustments partly offset by the effect of fewer full-time equivalent
employees. Increased office occupancy and equipment expense resulted from
increases in real estate taxes. FDIC insurance, $213,000 lower in 1997,
reflects the lower premium of 6.3 cents per $100 of domestic deposits versus 23
cents per $100 of domestic deposits in 1996. An increase in Michigan Single
Business tax expense also occurred between periods as a result of higher taxable
income during the period ended June 30, 1997. The continued promotion of the
Corporation's checking account products has resulted in a significant expansion
of its customer base. Partially as a consequence, the expanded account base has
led to more operating losses in the second quarter of 1997 than in the same
quarter a year ago. Somewhat offsetting these increases are reduced supervisory
and assessment fees as regulation by the Michigan Financial Institutions Bureau
resulted in lower supervisory fees than similar fees assessed by the Office of
Thrift Supervision. A refund of Michigan intangibles tax in the second quarter
of 1996 also reduced other general and administrative expense for the quarter
ended June 30, 1996.
Federal Income Tax Expense
- --------------------------
Federal income tax expense was $1.3 million for the three months ended June 30,
1997, compared to $863,000 for the comparable 1996 quarter. The increase in
federal income tax expense resulted primarily 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 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.
10
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997, COMPARED TO THE
SIX MONTHS ENDED JUNE 30, 1996
Net income for the six months ended June 30, 1997, was $5.1 million compared to
$3.6 million for the same period in 1996, a net increase of $1.5 million.
Principally accounting for this increase in net income between years was
significant growth in the Corporation's 1997 net interest margin, gains
generated from the sales of two branches, and improved fee income partially
offset by increased general and administrative expenses. Net income for the six
months ended June 30, 1997, represented a return on average stockholders' equity
of 16.14 percent, an increase from 11.18 percent in the 1996 period and a return
on average assets of 1.23 percent, an increase from 0.93 percent in the 1996
period. The Corporation's return on stockholders' equity excluding the gains on
the sales of branches was 15.41 percent for the six months ended June 30, 1997.
The Corporation's efficiency ratio, or operating expenses over recurring
operating revenues, was 52.4 percent for the six months ended June 30, 1997, an
improvement from 59.2 percent in the year earlier period.
Net Interest Income
- -------------------
Net interest income before provision for loan losses was $12.6 million during
the first six months of 1997, and represented a $1.5 million increase compared
to the same period of 1996. Net interest income was positively affected by
lower deposit rates in 1997 and strong growth in earning assets. The
Corporation's net yield on average earning assets was 3.05 percent for the six
months ended June 30, 1997, an improvement from 2.96 percent for the comparable
six-month period 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.
Provision for Loan Losses
- -------------------------
The provision for loan losses was $180,000 during the six months ended June 30,
1997 compared to $120,000 for the 1996 period. 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.
Other Income
- ------------
Other income was $2.9 million for the six months ended June 30, 1997, an
increase of $988,000 compared to $1.9 million for the six months ended June 30,
1996. Growth in other income resulted primarily from increased deposit fees
assessed on a higher level of transaction account activity. Also contributing
to the higher level of other income were non-recurring gains on the sales of two
branches and increased gains on the sales of loans. Prior to the adoption of
SFAS 122, the Corporation had no assets capitalized for originated or purchased
servicing rights. Effective January 1, 1996, the Corporation adopted the
provisions of SFAS 122. As a result, the amortization of the originated
servicing asset has led to a decrease in loan servicing income. Also reducing
other income were increased losses on the sales of investment securities.
11
General and Administrative Expenses
- -----------------------------------
General and administrative expenses were $7.9 million for the six months ended
June 30, 1997, an increase of $213,000 compared to $7.7 million for the same
period a year ago. Compensation rose between periods as a result of upward
merit-based salary adjustments and an increased provision for the management
incentive program partly offset by the effect of fewer full-time equivalent
employees. Furniture and equipment depreciation increased as a result of
accelerating the depreciation on computer equipment to more closely reflect the
remaining useful life of this equipment. Marketing expense also increased
compared to the 1996 period principally as the result of the continued promotion
of the Corporation's checking account products. Increases in single business
tax, operating losses, and ATM network fees also contributed to the increase in
other general and administrative expense. Federal deposit insurance premiums
were substantially reduced as a result of a 16.7 cent reduction in the rates
paid per $100 of assessable deposits. Reductions in supervisory fees occurred
as a result of the lower fees charged by the Michigan Financial Institutions
Bureau.
Federal Income Tax Expense
- --------------------------
Federal income tax expense was $2.3 million for the six months ended June 30,
1997, an increase of $648,000 from $1.7 million for the comparable 1996 period.
The increase in federal income tax expense resulted from a higher level of pre-
tax earnings plus a higher tax rate applied to annualized taxable income in
excess of $10 million. The corporation's effective tax rate decreased from 32.0
percent to 31.3 percent during the period primarily due to an increase in the
expected annual use of an additional $132,000 of low-income housing federal tax
credits.
ASSET QUALITY
The Corporation had no impaired loans at June 30, 1997 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. 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 loans was
$31,000 and $208,000 during the three and six-month periods ended June 30, 1997.
Interest income recognized on impaired loans for the six-month period ended June
30, 1997, totaled $1,000.
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.
12
June 30, December 31,
1997 1996
-------- --------
(dollars in thousands)
Nonaccruing loans:
One- to four-family
residential mortgages $ 898 $ 892
Income-producing property - 359
FHA-partially insured
and VA-partially guaranteed 110 183
Commercial - 195
Consumer installment 64 158
-------- --------
Total $1,072 $1,787
======== ========
Percentage of total assets 0.13% 0.21%
======== ========
Real estate owned:/(1)/
One-to four-family
residential mortgages $ 368 $ 205
Income-producing property 359 -
Construction and development - 7
-------- --------
Total $ 727 $ 212
======== ========
Percentage of total assets 0.08% 0.03%
======== ========
Total nonaccruing loans
and real estate owned $ 1,799 $ 1,999
======== ========
Percentage of total assets 0.21% 0.24%
======== ========
/(1)/Real estate owned includes properties in redemption and acquired through
foreclosure.
13
The following is a summary of the Corporation's loan and real estate owned loss
experience from December 31, 1993, through June 30, 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 180,000 30,000 210,000
Charges against the allowance (225,579) (34,665) (260,244)
Recoveries 22,292 117,834 140,126
---------- --------- ----------
Balance at June 30, 1997 $4,540,307 $ 325,328 $4,865,635
========== ========= ==========
The Corporation continues to demonstrate strong credit quality. The
Corporation's ratio of nonperforming assets to total assets was 0.21 percent and
0.24 percent at June 30, 1997, and December 31, 1996, respectively, all well
below the industry average. In addition, at June 30, 1997, the Corporation's
allowances for loan and real estate losses represent 270 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.
14
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.
The Corporation's one-year gap, one-to-three year gap, and three-to-five year
gap was a negative 7.3 percent, positive 4.5 percent, and a positive 2.6
percent, respectively at June 30, 1997, compared to a negative 9.3 percent,
negative 5.6 percent, and negative 1.9 percent, respectively at December 31,
1996. The change in the Corporation's gap position between periods is primarily
the result of using medium-term Federal Home Loan Bank borrowings to fund the
origination of adjustable-rate mortgages.
LIQUIDITY AND CAPITAL RESOURCES
Total assets rose to $845.4 million at June 30, 1997, an increase of $15.6
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 June 30, 1997, the Corporation had total outstanding mortgage
loan commitments of $24.3 million of which $20.7 million were for adjustable-
rate loans and $3.6 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 June 1997 totaled $16.4 million and primarily
represented undrawn funds on adjustable- and fixed-rate construction loans of
$14.9 million and $1.5 million, respectively. In addition at quarter 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 $34.9 million at June 30, 1997. There were
additionally $2.5 million of loans in process or undrawn lines of credit on
installment and commercial business loans as of June 30, 1997. The Corporation
had no firm commitments to purchase mortgage loans and had commitments to sell
$1.2 million of fixed-rate, residential mortgage loans at June 30, 1997. One-
to four-family residential mortgage loans totaling $1.3 million with a weighted
average interest rate of 8.2 percent were held for sale at June 30, 1997.
Lending
- -------
Loans receivable increased $27.4 million, or 3.8 percent, to $745.1 million at
June 30, 1997, from $717.7 million at December 31, 1996, and increased $75.1
million, or 11.2 percent from $670.0 million at June 30, 1996.
15
The Corporation originated $51.7 million and $88.0 million of loans during the
second quarter and first six months of 1997, respectively, a decrease from $59.0
million and $96.5 million during the comparable periods of 1996, respectively.
Loan demand remains strong in the Corporation's local market. As rates fell
during the second quarter loan demand began to increase resulting in greater
origination activity and more refinancings. The Corporation received principal
repayments on loans of $34.8 million and $59.4 million during the three and six
months ended June 30, 1997, respectively, compared to $24.2 million and $52.7
million during the second quarter and first six months of 1996, respectively.
The following schedule sets forth the Corporation's loan originations for the
three and six months ended June 30, 1997 and 1996.
Three Months Ended Six Month Ended
June 30, June 30,
1997 1996 1997 1996
-------- -------- -------- --------
(in thousands)
Fixed-rate:
One- to four-family residential $ 5,593 $ 9,798 $12,375 21,332
Income-producing 295 - 295 758
FHA-insured and VA-partially guaranteed - 78 115 143
Construction and development:
One- to four-family residential 2,065 1,805 3,274 3,414
Commercial 315 253 445 263
Consumer 6,314 5,510 9,901 8,924
------- ------- ------- -------
14,582 17,444 26,405 34,834
Adjustable-rate:
One- to four-family residential 15,172 21,512 23,547 28,897
Income-producing - 610 - 610
Construction and development:
One- to four-family residential 12,696 11,679 22,728 18,617
Income-producing 2,547 1,705 3,013 2,305
Commercial 643 730 1,258 1,750
Consumer 6,060 5,338 11,031 9,490
------- ------- ------- -------
37,118 41,574 61,577 61,669
------- ------- ------- -------
Total originations $51,700 $59,018 $87,982 $96,503
======= ======= ======= =======
During the quarters ended June 30, 1997 and 1996, the Corporation sold primarily
fixed-rate loans, aggregating $4.3 million and $6.6 million, respectively. Loan
sales for the six-month periods ended June 30, 1997 and 1996, were $9.9 million
and $15.9 million, respectively. The level of loan sales is partially a
function of the interest rate environment. The spread between fixed and
adjustable mortgage rates was narrower in 1996 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. As the
spread between fixed and adjustable mortgage
16
interest rates increased during the first six months of 1997, customer
preferences in the Corporation's market area favored adjustable-rate loans which
are retained in the Corporation's portfolio.
During the three months ended June 30, 1997 and 1996, the Corporation purchased
from an unaffiliated financial institution $4.2 million and $11.6 million,
respectively of one-to-four family residential, fixed and adjustable-rate,
medium-term mortgage loans. Loans purchased during the six months ended June
30, 1997 and 1996, totaled $9.2 million and $31.7 million, respectively. 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 half 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 June 30, 1997, investment
and mortgage-backed securities available for sale included unrealized net gains
of $175,000 reported net of $90,000 of federal income tax expense 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 June 30, 1997.
Included in the composition of the Corporation's earning assets at June 30,
1997, were $24.3 million of mortgage-backed securities, a 10.6 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 quarters or six
months ended June 30, 1997 or 1996. The approximate fair value of the mortgage-
backed securities portfolio was $24.3 million at June 30, 1997, with gross
unrealized gains and losses of $415,000 and $192,000, respectively.
At June 30, 1997, the level of the Corporation's investment securities portfolio
declined to $26.0 million from $31.1 million at December 31, 1996. During the
first half of 1997, $20.0 million of U.S. Treasury securities were sold at gross
losses of $31,000. The proceeds from the sales were reinvested in $20.0 million
of U.S. Treasury securities with slightly longer maturities. The approximate
fair value of the Corporation's investment securities was $26.0 million at June
30, 1997, with gross unrealized gains and losses of $43,000 and $1,000,
respectively.
Deposits
- --------
Total deposits grew $6.8 million from $553.6 million at December 31, 1996, to
$560.4 million at June 30, 1997. The increase resulted from transaction and
savings account growth of $5.4 million and $2.9 million, respectively, partially
offset by $1.5 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
17
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.
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 increased to $204.4 million at June
30, 1997. Of the outstanding FHLB advances at June 30, 1997, $169.6 million
carried a weighted average fixed-rate of 6.13 percent. Adjustable-rate advances
at June 30, 1997, totaled $34.8 million, all of which reprice based upon three-
month LIBOR or prime.
Capital
- -------
Total stockholders' equity was $64.4 million at June 30, 1997, a $1.9 million
increase, compared to the 1996 year-end total of $62.5 million. Book value per
share correspondingly increased to $12.65 at June 30, 1997, from $12.06 per
share at December 31, 1996. The increases were primarily the result of net
income for the first half 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 half
of the year, the ratio of stockholders' equity to assets increased to 7.6
percent at June 30, 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 7.3 percent, 7.3 percent, and 13.1
percent at June 30, 1997, respectively.
The Corporation's Board of Directors declared a cash dividend of $0.15 per share
in the second quarter of 1997, an increase of 50.0 percent over the $0.10 per
share dividend declared in the second 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.
The Corporation's Board of Directors also declared a 10 percent stock dividend
on May 20, 1997. The additional shares as a result of the dividend were
distributed on June 16, 1997, to stockholders of record as of May 30, 1997.
Although the stock dividend represents a component of the Corporation's
established dividend practices and the Corporation intends to issue similar
dividends in the future, such declarations will depend on several factors
similar to the cash dividend.
18
During April 1997, the Corporation's Board of Directors approved a stock
repurchase program pursuant to which the Corporation may repurchase up to 5
percent or 258,500 shares of CFSB Bancorp, Inc. common stock. Through the June
30, 1997, the Corporation repurchased 62,690 shares of CFSB Bancorp, Inc. common
stock on the open market for $1.3 million, or an average purchase price of
$20.54 per share. The program has a one-year term.
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.
19
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 May 22, 1997, the registrant filed a Form 8-K current report
announcing the registrant's Board of Directors approved a ten
percent common stock dividend. The common stock dividend was
distributed June 16, 1997, to stockholders of record as of May
30, 1997. The common stock dividend increased the outstanding
common stock of the registrant by ten percent to approximately
5.1 million shares. Stockholders of record received one share of
common stock for each ten shares held.
20
CFSB BANCORP, INC.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CFSB BANCORP, INC.
(Registrant)
Date: August 6, 1997
By: /s/ Robert H. Becker
---------------------------
Robert H. Becker
President and
Chief Executive Officer
(Duly Authorized Officer)
By: /s/ John W. Abbott
---------------------------
John W. Abbott
Executive Vice President,
Chief Operating Officer,
and Secretary
(Principal Financial and
Accounting Officer)
21