GROWING OUR COMMUNITIES
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[LOGO OF CFSB BANCORP APPEARS HERE]
1997 Annual Report
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Fulfilling Our Mission
CFSB Bancorp, Inc., through Community First Bank, is a financial services
organization of dedicated people serving the needs of our customers. We provide
competitive products and services with a continuous emphasis on quality. We will
achieve superior returns for our stockholders by placing the interests of our
customers and our communities first.
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Business of the Corporation
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CFSB Bancorp, Inc. is the parent company of Community First Bank, an $851
million state-chartered savings bank headquartered in Lansing, Michigan. CFSB
Bancorp, Inc. was organized as a Delaware Corporation in November 1989.
The reorganization of the Bank into the holding company form of ownership and
the commencement of operations by the Corporation occurred in June 1990.
Since the reorganization, the Corporation's activities have principally been
limited to holding the stock of the Bank. The Bank originates and invests in
single family mortgage loans. The Bank also offers retail banking services to
the mid-Michigan marketplace.
In addition, the Bank offers a variety of complementary services such as
commercial business loans, consumer loans, and home equity loans. The Bank's
full line of retail deposit services includes checking and savings accounts, and
certificates of deposit.
The Bank's deposits are insured by the Federal Deposit Insurance Corporation
up to the applicable limits.
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Stock Market Highlights
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Year End Closing Stock Price
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1994 1995 1996 1997
---- ---- ---- ----
$8.515 $11.845 $11.818 $26.250
Performance Highlights
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Net Income Return on Average
(In Thousands) Assets
1994 1995 1996* 1997 1994 1995 1996* 1997
---- ---- ----- ---- ---- ---- ----- ----
$5,589 $6,803 $7,661 $10,673 .80% .92% .97% 1.26%
*Excludes FDIC special assessment *Excludes FDIC special assessment
Return on Average
Equity
1994 1995 1996* 1997
---- ---- ----- ----
10.18% 11.47% 11.89% 16.39%
*Excludes FDIC special assessment
Four Year Summary Of Selected Consolidated Financial Data
At and for the Years Ended December 31, 1997 1996 1995 1994
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(Dollars in Thousands, Except Per Share Data)
Summary of Financial Condition:
Total assets $852,888 $829,800 $761,418 $727,243
Interest-earning deposits 13,301 15,270 22,654 10,524
Investment securities, net 26,080 31,093 55,109 88,712
Mortgage-backed securities, net 21,598 27,221 35,156 66,151
Loans receivable, net 754,806 717,715 610,284 518,591
Deposits 562,412 553,574 527,816 501,690
FHLB advances 212,693 202,639 160,649 160,351
Stockholders' equity 67,535 62,470 62,743 55,607
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Summary of Operations:
Interest income $ 62,501 $ 57,402 $ 53,621 $ 47,080
Interest expense 37,131 34,498 33,188 26,978
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Net interest income before provision for loan losses 25,370 22,904 20,433 20,102
Provision for loan losses 360 240 240 240
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Net interest income after provision for loan losses 25,010 22,664 20,193 19,862
Other income 6,401 4,242 3,966 2,349
General and administrative expenses 15,762 15,669 14,427 14,473
FDIC special assessment -- 3,355 -- --
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Income before federal income tax expense 15,649 7,882 9,732 7,738
Federal income tax expense 4,976 2,435 2,929 2,149
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Net income $ 10,673 $ 5,447 $ 6,803 $ 5,589
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Per Share Data: (1)
Basic earnings $ 1.39 $ 0.68 $ 0.84 $ 0.69
Diluted earnings 1.34 0.66 0.82 0.67
Stockholders' equity (book value) 8.88 8.04 7.76 6.91
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Ratios and Other Data:
Interest rate spread 2.70% 2.63% 2.52% 2.69%
Net yield on average earning assets 3.06 2.98 2.85 2.98
Return on average assets 1.26 0.69 0.92 0.80
Return on average stockholders' equity 16.39 8.55 11.47 10.18
Average earning assets to average
interest-bearing liabilities 108.18 107.78 107.23 107.41
Efficiency ratio 51.42 58.13 60.73 64.51
General and administrative expenses
to average assets 1.87 1.98 1.95 2.08
Stockholders' equity to total assets 7.92 7.53 8.24 7.65
Nonaccruing loans and real estate
owned to total assets 0.12 0.24 0.08 0.44
Dividend payout ratio 31.71 41.28 28.38 30.14
Number of full-service offices 17 18 18 18
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(1) The financial information for per share amounts has been restated to reflect
the ten percent stock dividend declared May 20, 1997 and a 3-for-2 stock
split declared on November 18, 1997, as well as previous stock dividends
paid in 1996, 1995, and 1994 and a stock split distributed in 1993.
1
Exceeding
Expectations
Our goal is to continuously exceed the expectations of our stockholders and our
customers in order to continually add value to our Bank and meet the financial
needs of our communities. Only by setting the highest standards of performance
in everything we do, and then achieving even greater results, can we expect to
remain the leading financial institution in mid-Michigan.
[PHOTOGRAPH OF ROBERT H. BECKER APPEARS HERE]
Robert H. Becker
President and
Chief Executive Officer
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To Our Stockholders
- -------------------
GROWTH IN EARNING ASSETS, PROPER MANAGEMENT OF OUR COST OF FUNDS, NEW SOURCES OF
NON-INTEREST INCOME, AND CONTROLLED NON-INTEREST EXPENSE COMBINED TO MAKE 1997
ANOTHER VERY SUCCESSFUL YEAR FOR CFSB BANCORP, INC.
Managing a strong community bank in a changing and competitive industry is a
welcome challenge for all of us at Community First Bank. In 1997 the dedicated
teamwork of our employees and board of directors resulted in exceptional results
for our shareholders while delivering convenient products and services to our
growing customer base.
Net income for 1997 was $10.7 million, or $1.34 per share, compared to $5.4
million, or $0.66 per share, for 1996. Federal legislation to recapitalize the
Federal Deposit Insurance Corporation's (FDIC) Savings Association Insurance
Fund significantly impacted 1996 earnings. As a result, earnings were reduced
$2.2 million, or $0.27 per share. In addition, pre-tax earnings were favorably
impacted by net gains on asset sales of $1.1 million and $192,000 in 1997 and
1996, respectively.
Pre-tax core earnings for 1997, which exclude net gains on asset sales,
increased 32 percent over 1996 pre-tax core earnings, which exclude the 1996
special FDIC deposit premium assessment and net gains on asset sales. Total
assets climbed to $852.9 million at year-end 1997, an increase of $23.1 million
from $829.8 million at year-end 1996.
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The Corporation's strong financial performance enabled us to declare a 10
percent stock dividend in May, announce a 3-for-2 stock split in November, and
increase our cash dividend during the year, concluding 1997 with the declaration
of our 28th consecutive quarterly cash dividend at an annualized rate of $0.48
per share.
On January 1, 1998, the Detroit News reported CFSB Bancorp, Inc. was one of
Michigan's Top Ten performers in stock price appreciation, with 121 percent
growth in 1997.
At December 31, 1997, our common stock closed at $26.25 per share. The average
annual return for the last three years was 87.51 percent.
To assist in our capital management, we continue our stock repurchase
programs. In our current program, we repurchased 141,035 shares of the 387,750
authorized shares at an average cost of $16.23 per share. We believe this
represents a very prudent investment and use of our capital.
A vigorous Michigan business climate has contributed to our growth. New and
existing businesses combined with mid-Michigan's three major employers--the
State of Michigan, General Motors, and Michigan State University--to produce a
growing and robust economy. Unemployment in Greater Lansing stood at 2.7 percent
in December 1997--the second lowest metropolitan rate in Michigan. All
indicators point to continued growth of business, jobs, and the diverse economic
strength of the region we serve.
Our success has been achieved, in part, from listening to our growing
community and responding with service options that fit its banking needs and
lifestyles. Our response has included continued investment in technology to
build relationships--making us more convenient and more accessible to our
customers.
There has been a significant amount of publicity recently about the Year 2000
and the problems that may
2
be encountered with computers and computer software. At CFSB Bancorp, Inc. we
are taking appropriate actions to ensure the new millennium does not disrupt the
delivery of products and services to our customers.
OUR GOAL IS TO BUILD A LONG-LASTING RELATIONSHIP WITH EVERY CUSTOMER. Through
our branch office network we provide face-to-face service, a practice some other
financial institutions discourage. Customers can also speak to specialists over
the telephone through our Customer Service Center, which currently serves more
than 180,000 callers annually.
In 1997 we consolidated our two Okemos offices into a more modern and
convenient branch facility. We also expanded the capacity of our Mason office.
In 1998 we are improving other facilities and services, as well as building a
new Williamston office on its existing location.
For those customers who prefer to access our services where they live, work or
shop, we continue to place new 24-Hour ATM Banking Centers in convenient
locations. In addition, customers can access information and services on demand
anywhere, anytime, using our FirstLine Telephone Banking, Loan by Phone, and
Internet Web site, http://www.communityfirst.com.
Our rapidly growing ATM network is now processing over 1.2 million
transactions annually. To complement this service, last year we introduced our
new MoneyCard which combines ATM and debit card access and can be used directly
with merchants, eliminating the need for writing checks. These cards generated
over 800,000 transactions in 1997.
WE CONTINUE TO HOLD A STRONG MARKET SHARE IN BOTH DEPOSITS AND LOANS, AND WE
ARE, BY FAR, THE LARGEST LOCALLY OWNED AND CONTROLLED FINANCIAL INSTITUTION IN
OUR AREA. We are proud to report that 28 percent of the households in the
Greater Lansing area are customers of our Bank.
Community First is consistently the number one home mortgage lender in mid-
Michigan and the leading construction lender. We have built valuable
relationships with nearly 300 realtors in our communities. We continue to
finance newly constructed homes, serving over 200 approved builders. In 1997 we
helped more than 1,200 families purchase or build new homes, many who were
first-time home owners.
In the first quarter of 1997, we entered into a partnership with 14 mid-
Michigan banks to form a title insurance agency. We can now provide this service
to all of our loan customers.
Also during 1997, we formed a new subsidiary of Community First Bank--
Community First Insurance and Investment Services--to market annuities and
uninsured mutual funds to our customers. Currently 30 of our employees are
licensed to sell these products.
In 1995 we introduced Really Free Checking to our market. This account is
heavily promoted and continues to be very well received, leading to a 70 percent
increase in checking accounts since 1994.
THE "COMMUNITY" IN OUR NAME STANDS FOR OUR LEADERSHIP IN GIVING BACK TO THE
COMMUNITIES THAT SUPPORT OUR SUCCESS. Our employees are in the forefront of this
effort, serving as ambassadors for Community First Bank in charitable and civic
organizations throughout our communities. We are especially proud to support
housing initiatives that assist lower income families through activities related
to the Community Reinvestment Act.
For 1998 the pace of product introduction, service enhancement, and business
development will only accelerate. We pledge to continually evaluate and evolve
our entire product line and delivery system to ensure we are operating with the
most efficient and cost-effective methods. We also pledge to continue our market
leadership by providing a total banking solution to a growing family of
customers.
We are pleased with the recent U.S. Supreme Court decision regarding the
curtailment of the tax-exempt credit union growth. In concurring with this
ruling, we believe the large non-traditional credit unions should be taxed as
the full service financial institutions they have become, while leaving the
small traditional credit unions with their current tax-exempt status.
I would like to personally thank our retiring director, Donald F. Wall, for
his outstanding service to both CFSB Bancorp, Inc. and Community First Bank.
We are very pleased with CFSB Bancorp, Inc.'s strong financial performance for
1997. On the following pages you will find details of other priorities, products
and services we have in place to continue our profitability and value. As an
investor, your interest and support are very much a part of our success. Thank
you.
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Sincerely yours,
/s/ Robert H. Becker
Robert H. Becker
President and
Chief Executive Officer
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FORMING LASTING
RELATIONSHIPS
By virtue of the superior banking products we offer and the unmatched quality of
our service, we expect to continue helping people achieve their financial goals.
From an individual's first checking account to their preparations for
retirement, Community First Bank plans to be there.
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=================
MAKING BANKING
ACCESSIBLE
=================
AT COMMUNITY FIRST BANK, A WHOLLY-OWNED SUBSIDIARY OF CFSB BANCORP, INC., WE
WANT OUR CUSTOMERS TO BE ABLE TO BANK ANYWHERE, ANYTIME.
And we continually look for better delivery channels for customers to access our
bank at their convenience. At the same time, as the largest, independent
community bank in mid-Michigan, we aim to meet the needs of our customers who
prefer dealing with a familiar person in a branch office.
During 1997 our customers had more ways to bank with us than ever before.
They responded by using all delivery channels available to them and at record
levels.
Leading the growth of "on-demand" automated banking services is our
FirstLine Telephone Banking. Calls into this automated voice response system
rose dramatically in 1997, offering customers immediate access to their accounts
24 hours a day, seven days a week to transfer funds, check account balances,
calculate loan payments and much more.
In 1997, we expanded our telephone banking by adding Loan by Phone, a fully
automated, 24-hour, loan qualification program that allows customers to complete
a brief touch-tone questionnaire to initiate the loan process. We then follow up
the process with a personal call the next business day.
Our customers also embraced our MoneyCard, a combination ATM and debit card
introduced in 1996. With MoneyCard, customers can access their checking account
at over 12 million merchants nationwide, anywhere MasterCard is accepted. In
1997, debit card purchase transactions exceeded 800,000.
For many customers, the ATM is their 24-hour banking center of choice,
exceeding 1.2 million transactions in 1997. We continue to install ATMs in new
and current markets including high-traffic locations like the Meridian Mall in
Okemos. In 1998 our initial plans include installing several ATMs in grocery
stores in our DeWitt market, and at the downtown Lansing Center, the hub of
mid-Michigan's convention and trade show business.
[_] Use of our new MoneyCard quickly accelerated to 800,000 debit card
transactions per year.
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CUSTOMER SERVICE CENTER
1995 39,000
1996 114,000
1997 180,000
FIRSTLINE TELEPHONE
BANKING SERVICE
1995 71,000
1996 365,000
1997 664,000
DRIVE-UP TRANSACTIONS
1995 782,000
1996 1,045,000
1997 1,045,000
[_] Community First Bank served more customers, through more delivery channels,
than ever before--by phone, in person, and at the drive-up windows.
When customers need more one-on-one banking assistance with the convenience
of a telephone call, our Customer Service Center stands ready to assist them.
Staffed six days a week, our specialists answer questions, provide account
information, open new accounts and schedule sales appointments. Last year we
helped over 180,000 callers take care of their banking from the convenience of
their homes, cars, offices, hotel rooms and anywhere else they chose to make
their calls.
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[GRAPHIC OF CFSB WEB PAGE APPEARS HERE]
[_] Community First Bank's Web site provides product and service information 24
hours a day.
New and potential customers can now surf the 'Net to find complete
product and service information, rates, hours, and branch office locations at
http://www.communityfirst.com. Additional plans include adding functioning loan
applications and calculators to our site. Customers will be able to calculate
their payments and apply for a consumer or home mortgage loan at their
convenience. Community First Bank's home page is already linked to many
businesses in mid-Michigan including real estate companies and the residential
listing site hosted by the Lansing State Journal.
While advanced technologies produced dramatic increases in transactions and
income, many customers still prefer a traditional approach to banking. A warm
smile and a personal touch continue to be our most popular method of banking at
Community First. Our customers also visited our drive-through windows in record
numbers, topping the million mark for the second straight year.
[PHOTO APPEARS HERE]
[_] Six days a week, Customer Service Center banking specialists like Anna
Shipman, left, and Dawn Cutler provide friendly, one-on-one assistance over
the telephone.
By telephone, in person, at an automated teller machine (ATM), or on the
Web, Community First Bank serves more customers through more delivery channels
than ever before. We know today's customers demand service that is better,
faster and cheaper. They want the conveniences of automated services, and at the
same time they want "one-stop shopping" -- one place where they can buy mutual
funds, make deposits, and set up savings accounts for their children and
grandchildren.
In 1997 we formed our own insurance agency-- Community First Insurance and
Investment Services. We provide full service, on-line trading access to products
like individual securities, bonds, mutual funds, fixed and variable annuities,
and life insurance. We launched a direct marketing campaign to present our term
life insurance products to a wide customer audience.
[PHOTO APPEARS HERE]
[_] Sherrie Cooper, right, customer service specialist, Okemos office, is one of
a growing number of trained professionals advising customers about annuities
to help plan their financial futures.
Beyond products and services, we are dedicated to giving our customers the
information they need to make smart investment decisions. We regularly conduct
seminars on estate planning, pension distribution, and asset allocation. A new
seminar, "Women and Wealth," empowers women to understand and take charge of
their financial futures.
We are building a bank of the future by listening to our customers and
refining the way we deliver our products and services to them. At the same time,
we are constantly exploring new market opportunities to grow our customer base.
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[_] In 1997, more mid-Michigan families realized their dream of home ownership
with Community First Bank than any other financial institution.
[PHOTO APPEARS HERE]
COMMUNITY FIRST BANK CONTINUES TO BE MID-MICHIGAN'S #1 HOME MORTGAGE LENDER AND
THE RECOGNIZED LEADER IN CONSTRUCTION LOANS. It's a record we are proud of
because it means that every year we continue to help more families realize their
home ownership dreams than any other financial institution in mid-Michigan. Many
of these homebuyers begin their house shopping with new confidence thanks to our
Buyer's Edge mortgage pre-approval program. Buyer's Edge gives the customer an
advantage with the real estate community as well as sellers because they know up
front what they can afford, and they are already approved for that amount.
Buyer's Edge also gives us the opportunity to start a relationship with many
homebuyers just when they need it--at the beginning of the home-buying process.
In 1997 we helped over 1,200 families purchase homes.
Right from the start, we are building relationships with our mortgage
customers as they automatically qualify for a Homeowners' Checking account. And
we take every opportunity to provide them with other products such as our home
equity line of credit, mortgage life insurance, and investment services.
Also in 1997, we joined with 14 other mid-Michigan banks to form a title
insurance agency--Michigan Bankers Title of Mid-Michigan. The agency allows us
to provide competitive title insurance rates and more complete service to our
loan customers.
In our quest to build long-term relationships with consumers, builders and
realtors, we also took action to make sure we were operating as cost effectively
and as efficiently as possible. In 1997 we installed Loan Prospector, an
automated underwriting system that allows us to process loans quicker, and with
less paperwork. This technology enables us to increase our volume, and at the
same time, speed the approval process.
New products, combined with product enhancements, all helped to strengthen
our position. Auto financing and related secured loans increased in 1997 as we
continued to be a major full-service lender to mid-Michigan families and
businesses.
Home equity loans and lines of credit continued to grow in 1997, as
customers view equity in their homes as a means of buying autos, making home
repairs, consolidating debt, and financing college educations.
STEADY GROWTH IS COMMUNITY FIRST BANK'S HALLMARK. OUR DEPOSIT BASE CONTINUES TO
GROW, particularly since we introduced Really Free Checking to our market in
1995. Since that time, our checking accounts have increased by 70 percent as we
continue to be the leader in our market offering free checking. This product has
introduced us to thousands of new checking account customers. Now we are helping
them discover all of the other products and services Community First Bank can
provide them, from savings and investment services to home mortgages. It's our
way of building long-term customers.
Really Free Checking also helps to increase our relationships with local
college and university students. Each summer we direct mail to incoming Michigan
State University students before they arrive on campus. Then in the fall, we
launch an aggressive one-week campaign targeted to all students. With a major
university, two law schools, a community college and a business college, this
provides a tremendous opportunity for Community First Bank to expand our deposit
market share in mid-Michigan.
Our Power Rate Money Market account continues to be a successful product
attracting over $20 million since its introduction in the fourth
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[GRAPHIC OF VINE BEHIND TEXT APPEARS HERE]
[PHOTO OF MULTI-MEDIA CAMPAIGN APPEARS HERE]
[_] A multi-media campaign, including the billboard above, invites customers to
"Do the Math" and open a Really Free Checking account. Thousands have
accepted the invitation.
quarter of 1996. Power Rate offers customers a high yielding, liquid account
with a $25,000 minimum deposit. We continue to offer certificates of deposit
including a special 14-Month Bump CD, which features a competitive rate, and the
opportunity to move into a two-year product and increase the rate.
Equally important to competitive products and services is our evolving
sales culture. We expect more of our growth to come from existing markets
through business development. In 1998 our external sales force will focus on
prospecting new business as well as enhancing current relationships, both at the
consumer and small-business level.
Also recognizing the busy lifestyles of our customers today, and their
demand for convenience and immediate access to banking services, we constantly
analyze our delivery channels including our branch office network. In 1997 we
consolidated our two Okemos branch offices into one more convenient and modern
facility, and expanded our Mason branch office. Both of these offices now offer
enhanced drive-up window and ATM services to accommodate a growing customer
base. In 1998 we will also improve our Williamston branch office by rebuilding
this office on its current location. We continue to move toward full-service
financial centers.
AS THE LARGEST, INDEPENDENT LOCAL BANK IN MID-MICHIGAN, WE HAVE A STRONG
COMMUNITY ORIENTATION. At Community First Bank, we have always taken pride in
our relationships within the communities where we live and work. All our
decisions are made locally which means fast, efficient, personal service for our
customers. Our employees are at the forefront of our commitment to community
matters, taking great pride in their leadership roles with the Capital Area
United Way, American Cancer Society, the Children's Miracle Network, and dozens
of other giving organizations throughout mid-Michigan.
Employees who deserve a round of applause are Ellen Messer, the 1997 winner
of the President's Excellence Award, and the members of the Volunteer Activities
Group, winners of the 1997 Volunteer of the Year Award. These individuals are
wonderful examples of the way employees of Community First Bank grow special
relationships with our customers, with people in need, with the community we
serve. We are honored, every day, to work side by side with them.
Community banking is thriving in mid-Michigan, and will continue to prosper
within Community First Bank as long as customers prefer local decision making,
personal service, competitive products and the caring employees that make it all
happen.
[PHOTO APPEARS HERE]
[_] Ellen Messer, St. Johns office, received the 1997 President's Excellence
Award for outstanding customer service.
[PHOTO APPEARS HERE]
[_] The Volunteer Activities Group (some members not shown), 1997 Volunteer of
the Year Award winners, exemplify the commitment to community at Community
First Bank.
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CFSB BANCORP, INC., AND SUBSIDIARY
December 31, 1997
TABLE OF CONTENTS
Statement of Management's Responsibility....................................9
Five Year Summary of Consolidated Financial Data...........................10
Management's Discussion and Analysis of
Financial Condition and Results of Operations.........................11
Independent Auditors' Report...............................................23
Consolidated Statements of Financial Condition.............................24
Consolidated Statements of Operations......................................25
Consolidated Statements of Stockholders' Equity............................26
Consolidated Statements of Cash Flows......................................27
Notes to Consolidated Financial Statements.................................29
Stockholder Information....................................................54
8
STATEMENT OF MANAGEMENT'S RESPONSIBILITY
The management of CFSB Bancorp, Inc. (the Corporation), and its wholly-owned
subsidiary Community First Bank, is responsible for the preparation of the
consolidated financial statements and other related financial information
included in the annual report. The consolidated financial statements have been
prepared in accordance with generally accepted accounting principles and include
amounts based on management's estimates and judgments where applicable. The
financial statements of the Bank, as filed with the Federal Deposit Insurance
Corporation (FDIC), have been prepared in accordance with the FDIC instructions
for Call Reports.
The Corporation maintains a system of internal controls to provide reasonable
assurance that assets are safeguarded and that transactions are executed in
accordance with management's authorization and are recorded properly to permit
the preparation of financial statements in accordance with generally accepted
accounting principles. Management continually monitors the internal control
structure for compliance with established policies and procedures. As an
integral part of the internal control system, the Corporation maintains a staff
of internal auditors who monitor compliance with internal controls and
coordinate audit coverage with the independent public accountants.
The Audit Committee of the board of directors, composed entirely of outside
directors, oversees the Corporation's financial reporting process and has
responsibility for recommending the independent public accountants who are
appointed by the board of directors to audit the Corporation's annual financial
statements.
The financial statements in this annual report have been audited by KMPG Peat
Marwick LLP.
The Audit Committee of the board of directors meets regularly with management,
internal auditors, independent public accountants and regulatory examiners to
review matters relating to financial reporting and internal controls. The
internal auditors, independent public accountants and regulatory examiners have
direct access to the Audit Committee.
The Corporation assesses its internal control structure over financial reporting
in relation to the criteria described in the "Internal Control--Integrated
Framework" issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this assessment, management of the Corporation believes
that as of December 31, 1997, in all material respects, the Corporation
maintained an effective internal control structure over financial reporting.
/s/ Robert H. Becker
Robert H. Becker
President & Chief Executive Officer
/s/ John W. Abbott
John W. Abbott
Executive Vice President, Chief Operating Officer & Secretary
/s/ Rick L. Laber
Rick L. Laber
Vice President, Chief Financial Officer & Treasurer
9
FIVE YEAR SUMMARY OF CONSOLIDATED FINANCIAL DATA
At and for the Years Ended December 31, 1997 1996 1995 1994 1993
(Dollars in Thousands, Except Per Share Data)
====================================================================================================================
Summary of Financial Condition:
Total assets $ 852,888 $ 829,800 $ 761,418 $ 727,243 $ 669,910
Interest-earning deposits 13,301 15,270 22,654 10,524 11,639
Investment securities, net 26,080 31,093 55,109 88,712 142,736
Mortgage-backed securities, net 21,598 27,221 35,156 66,151 107,712
Loans receivable, net 754,806 717,715 610,284 518,591 374,658
Deposits 562,412 553,574 527,816 501,690 526,218
FHLB advances 212,693 202,639 160,649 160,351 77,830
Stockholders' equity 67,535 62,470 62,743 55,607 54,835
====================================================================================================================
Summary of Operations:
Interest income $ 62,501 $ 57,402 $ 53,621 $ 47,080 $ 44,644
Interest expense 37,131 34,498 33,188 26,978 25,771
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Net interest income before provision for loan losses 25,370 22,904 20,433 20,102 18,873
Provision for loan losses 360 240 240 240 240
- --------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 25,010 22,664 20,193 19,862 18,633
Other income 6,401 4,242 3,966 2,349 5,678
General and administrative expenses 15,762 15,669 14,427 14,473 14,672
FDIC special assessment -- 3,355 -- -- --
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Income before federal income tax expense
and cumulative effect of accounting change 15,649 7,882 9,732 7,738 9,639
Federal income tax expense 4,976 2,435 2,929 2,149 2,947
- --------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of
accounting change 10,673 5,447 6,803 5,589 6,692
Cumulative effect of change in accounting
for postretirement benefits -- -- -- -- (436)
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Net income $ 10,673 $ 5,447 $ 6,803 $ 5,589 $ 6,256
====================================================================================================================
Per Share Data: (1)
Basic earnings:
Before cumulative effect of accounting change $ 1.39 $ 0.68 $ 0.84 $ 0.69 $ 0.82
Net income 1.39 0.68 0.84 0.69 0.77
Diluted earnings:
Before cumulative effect of accounting change 1.34 0.66 0.82 0.67 0.79
Net income 1.34 0.66 0.82 0.67 0.74
Stockholders' equity (book value) 8.88 8.04 7.76 6.91 6.74
====================================================================================================================
Ratios and Other Data:
Interest rate spread 2.70% 2.63% 2.52% 2.69% 2.71%
Net yield on average earning assets 3.06 2.98 2.85 2.98 3.04
Return on average assets 1.26 0.69 0.92 0.80 0.96
Return on average stockholders' equity 16.39 8.55 11.47 10.18 12.02
Average earning assets to average
interest-bearing liabilities 108.18 107.78 107.23 107.41 107.92
Efficiency ratio 51.42 58.13 60.73 64.51 66.33
General and administrative expenses
to average assets 1.87 1.98 1.95 2.08 2.25
Stockholders' equity to total assets 7.92 7.53 8.24 7.65 8.19
Nonaccruing loans and real estate
owned to total assets 0.12 0.24 0.08 0.44 0.83
Dividend payout ratio 31.71 41.28 28.38 30.14 21.43
Number of full-service offices 17 18 18 18 18
====================================================================================================================
(1) The financial information for per share amounts has been restated to reflect
the ten percent stock dividend declared May 20, 1997 and a 3-for-2 stock
split declared on November 18, 1997, as well as previous stock dividends
paid in 1996, 1995, and 1994 and a stock split distributed in 1993.
10
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, Michigan area, which is comprised of the
tri-county area of Clinton, Eaton, and Ingham counties, the western townships of
Shiawassee County, and Ionia County. The Bank's business consists primarily of
attracting deposits from the general public and using such deposits, together
with Federal Home Loan Bank (FHLB) advances, to originate loans for the purchase
and construction of residential properties. To a lesser extent, the Bank also
makes income-producing property loans, commercial business loans, home equity
loans, and various types of consumer loans. The Bank's revenues are derived
principally from interest income on mortgage and other loans, mortgage-backed
securities, investment securities, and to a lesser extent, from fees and
commissions. The operations of the Bank, and the financial services industry
generally, are significantly influenced by general economic conditions and
related monetary and fiscal policies of financial institution regulatory
agencies. Deposit flows and cost of funds are impacted by interest rates on
competing investments and market rates of interest. Lending activities are
affected by the demand for financing of real estate and other types of loans,
which in turn is affected by the interest rates at which such financing is
offered.
Financial Condition
The Corporation's total assets increased to $852.9 million at December 31, 1997
from $829.8 million at December 31, 1996. Most of the growth occurred in loans,
which was funded by an increase in deposits and FHLB advances, as well as
repayments on mortgage-backed securities and maturities of investments.
Net loans receivable increased to $754.8 million at December 31, 1997 from
$717.7 million at December 31, 1996. This net growth of $37.1 million occurred
primarily through growth in mortgages of $28.7 million, consumer loans of $9.7
million, and commercial loans of $0.5 million, partially offset by a decrease in
income-producing property loans of $1.8 million. The Corporation originated
$206.0 million of loans in 1997, compared to $226.6 million in 1996. Single
family mortgage loan originations in 1997 were $142.3 million, compared to
$164.6 million for 1996. During 1997 and 1996, the Corporation sold primarily
fixed-rate loans aggregating $46.8 million and $32.0 million, respectively. The
Corporation purchased loans consisting of one-to-four family residential, fixed-
and adjustable-rate loans from an unaffiliated financial institution. These
purchases, totalling $27.8 million and $31.7 million in 1997 and 1996,
respectively, are used to supplement and complement the Corporation's own
mortgage loan production.
Deposits increased $8.8 million to $562.4 million at December 31, 1997 from
$553.6 million at December 31, 1996. This growth occurred through an increase in
savings accounts of $3.7 million, an increase in checking accounts of $5.0
million, and an increase in certificates of deposit of $0.1 million.
FHLB advances increased $10.1 million to $212.7 million at December 31,
1997 from $202.6 million at December 31, 1996. The net increase was composed of
an increase in fixed-rate advances of $50.8 million, partially offset by a
decline in adjustable-rate advances of $40.7 million. The use of fixed-rate
advances increased as management continues to take steps to reduce interest rate
risk.
Total stockholders' equity was $67.5 million at December 31, 1997, a $5.0
million increase, compared to the 1996 year end total of $62.5 million. The
increase was primarily the result of net income for 1997, offset in part by
dividend declarations and treasury stock purchases.
11
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997,
COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
Net income for the year ended December 31, 1997 was $10.7 million, or $1.34 per
diluted share, compared to $5.4 million, or $0.66 per diluted share for 1996, a
net increase of $5.3 million. Earnings for 1996 were significantly impacted by a
nonrecurring, pre-tax charge of $3.4 million resulting from federal legislation
to recapitalize the Federal Deposit Insurance Corporation's (FDIC) Savings
Association Insurance Fund (SAIF). As a result of this charge, 1996 after-tax
earnings were reduced $2.2 million, or $0.27 per diluted share.
Pre-tax core earnings for 1997 increased 32 percent over 1996 pre-tax core
earnings. Principally accounting for the increase in pre-tax core earnings
between years was significant growth in the Corporation's net interest margin
and improved fee income.
The following table reconciles net income to pre-tax core earnings:
1997 1996
(Dollars in Thousands)
================================================================================
Net income $ 10,673 $ 5,447
Federal income tax expense 4,976 2,435
Net gains on loan and security sales (614) (192)
Net gains on sales of branches (506) --
FDIC special assessment -- 3,355
- -------------------------------------------------------------------------------
Pre-tax core earnings $ 14,529 $ 11,045
================================================================================
Net income for 1997 represents a return on average assets of 1.26 percent,
an increase from 0.69 percent for 1996 and a return on average stockholders'
equity of 16.39 percent compared to 8.55 percent for 1996. The Corporation's
efficiency ratio, or recurring operating expenses over recurring operating
revenues, was 51.4 percent for the year ended December 31, 1997, an improvement
from 58.1 percent for the year ended December 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 divided by
average earning assets, is referred to as the net yield on average earning
assets. Net interest income and net yield on average earning assets are directly
impacted by changes in volume and composition of earning assets and
interest-bearing liabilities, market rates of interest, the level of
nonperforming assets, demand for loans, and other market forces.
12
Analysis of Net Interest Income
The following table sets forth, for the periods indicated, information
regarding: (i) the total dollar amount of interest income from average earning
assets and the resultant average yields; (ii) the total dollar amount of
interest expense on average interest-bearing liabilities and the resultant
average cost; (iii) net interest income; (iv) interest rate spread; and (v) net
yield on average earning assets. Average balances are based on daily average
balances.
Years Ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
Interest Interest Interest
Average Earned/ Yield/ Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
(Dollars in Thousands)
- ------------------------------------------------------------------------------------------------------------------------------
Earning Assets:
Loans receivable (1) $747,060 $ 57,570 7.71% $674,437 $ 51,612 7.65% $566,249 $ 44,449 7.85%
Mortgage-backed securities 24,144 1,769 7.32 30,714 2,342 7.62 60,789 4,188 6.89
Investment securities 28,452 1,689 5.94 38,848 2,189 5.63 71,191 3,862 5.43
Interest-earning deposits
with FHLB and other
depository institutions 15,836 523 3.30 14,598 465 3.18 9,122 374 4.10
Other 12,433 950 7.64 10,680 794 7.44 9,918 748 7.55
- ------------------------------------------------------------------------------------------------------------------------------
Total earning assets 827,925 62,501 7.55 769,277 57,402 7.46 717,269 53,621 7.48
- ------------------------------------------------------------------------------------------------------------------------------
Interest-bearing Liabilities:
Savings, checking, and money
market accounts (2) 235,475 5,930 2.52 217,316 5,435 2.50 207,635 5,802 2.79
Certificates of deposit (2) 322,998 18,547 5.74 319,491 18,403 5.76 310,253 18,008 5.80
FHLB advances 206,826 12,654 6.12 176,943 10,660 6.02 150,998 9,378 6.21
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 765,299 37,131 4.85 713,750 34,498 4.83 668,886 33,188 4.96
- ------------------------------------------------------------------------------------------------------------------------------
Excess earning assets $ 62,626 $ 55,527 $ 48,383
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 25,370 $ 22,904 $ 20,433
- ------------------------------------------------------------------------------------------------------------------------------
Interest rate spread (3) 2.70% 2.63% 2.52%
- ------------------------------------------------------------------------------------------------------------------------------
Net yield on average
earning assets (4) 3.06% 2.98% 2.85%
- ------------------------------------------------------------------------------------------------------------------------------
Average earning assets to average
interest-bearing liabilities 108.18% 107.78% 107.23%
- ------------------------------------------------------------------------------------------------------------------------------
(1) The average balance for loans receivable includes average balances for
nonaccrual loans. The amortization of loan fees, net of capitalized costs,
is included as an adjustment to yield but does not significantly affect the
yield calculation.
(2) Interest expense includes the cost of the Bank's interest rate exchange
agreements in 1996 and 1995.
(3) Represents the weighted average yield on earning assets for the year less
the weighted average cost of interest-bearing liabilities for the year.
(4) Net interest income divided by average outstanding balances of earning
assets.
13
The following table presents information concerning yields on the
Corporation's earning assets and costs of the Corporation's interest-bearing
liabilities, the interest rate spread, and the net yield on earning assets at
the dates and for the periods indicated. Yields and costs for the periods were
computed using daily average balances.
Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
For the Year End of Year For the Year End of Year For the Year End of Year
==========================================================================================================================
Weighted Average Yield:
Loans receivable (1) 7.71% 7.71% 7.65% 7.60% 7.85% 7.75%
Mortgage-backed securities 7.32 8.00 7.62 7.82 6.89 7.86
Investment securities 5.94 6.02 5.63 5.89 5.43 5.37
Interest-earning deposits with
FHLB and other depository
institutions 3.30 3.31 3.18 4.93 4.10 4.92
Other 7.64 7.90 7.44 7.55 7.55 7.61
- --------------------------------------------------------------------------------------------------------------------------
Total earning assets 7.55 7.57 7.46 7.47 7.48 7.49
==========================================================================================================================
Weighted Average Cost:
Savings, checking, and money
market accounts (2) 2.52 2.60 2.50 2.65 2.79 2.76
Certificates of deposit (2) 5.74 5.83 5.76 5.73 5.80 5.97
FHLB advances 6.12 6.09 6.02 5.97 6.21 6.02
- --------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 4.85 4.91 4.83 4.86 4.96 5.00
==========================================================================================================================
Interest rate spread (3) 2.70% 2.66% 2.63% 2.61% 2.52% 2.49%
==========================================================================================================================
Net yield on earning assets (4) 3.06% 3.02% 2.98% 2.95% 2.85% 2.81%
==========================================================================================================================
(1) The amortization of loan fees, net of capitalized costs, is included as an
adjustment to yield but does not significantly affect the yield calculation.
(2) Includes the effect of the applicable interest rate exchange agreements.
(3) Represents the weighted average yield on earning assets less the weighted
average cost of interest-bearing liabilities.
(4) Net yield on earning assets for the period represents net interest income
divided by average earning assets. Net yield on earning assets at the period
represents net interest income computed using the end of period balance and
rate, divided by earning assets at the end of the period.
Net interest income before provision for loan losses was $25.4 million
during 1997, a $2.5 million increase from $22.9 million during 1996. Net
interest income was positively affected by higher loan rates in 1997 and strong
growth in earning assets. The Corporation's net yield on average earning assets
was 3.06 percent for 1997, an improvement from 2.98 percent for 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. Average loans receivable were $747.1 million in 1997,
representing growth of 10.8 percent over average loans receivable of $674.4
million in 1996. 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 or if long-term mortgage rates fall.
The future trend of the Corporation's net interest margin and net interest
income may further be impacted by the level of mortgage loan originations,
purchases, repayments, refinancings, and sales, and a resulting change in the
composition of the Corporation's earning assets. The relatively flat yield curve
during late 1997 resulted in a shift toward more customers exhibiting a
preference for fixed-rate mortgage loans, many of which were originated for sale
in the secondary market. In late 1997, customers began converting adjustable
rate mortgage loans to 30-year fixed-rate loans, which are sold in the secondary
market. The average net interest margin for 1997 was 3.06 percent. The net
interest margin at December 31, 1997 was 3.02 percent. A continued high level of
refinancings and conversions of adjustable-rate mortgage loans to 30-year
fixed-rate loans could have a negative impact on future net interest income.
Additional factors affecting the Corporation's net interest income will continue
to be the volatility of interest rates, slope of the yield curve, asset size,
maturity/repricing activity, and competition.
14
Rate/Volume Analysis of Net Interest Income
The following table presents the dollar amount of changes in interest income and
interest expense for major components of earning assets and interest-bearing
liabilities, distinguishing between changes related to outstanding balances and
changes due to interest rates. For each category of earning assets and
interest-bearing liabilities, information is provided on changes attributable
to: (i) changes in rate (i.e., changes in rate multiplied by prior volume); and
(ii) changes in volume (i.e., changes in volume multiplied by prior rate). For
purposes of this table, changes attributable to both rate and volume which
cannot be segregated have been allocated proportionately to the change due to
volume and the change due to rate.
Years Ended December 31, 1997 vs 1996 1996 vs 1995
- -------------------------------------------------------------------------------------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
Volume Rate Total Volume Rate Total
(Dollars in Thousands) (Dollars in Thousands)
=============================================================================================================
Interest Income
Loans receivable $ 5,554 $ 404 $ 5,958 $ 8,319 $(1,156) $ 7,163
Mortgage-backed securities (484) (89) (573) (2,251) 405 (1,846)
Investment securities (614) 114 (500) (1,811) 138 (1,673)
Interest-earning deposits with FHLB
and other depository institutions 40 18 58 188 (97) 91
Other 134 22 156 57 (11) 46
- -------------------------------------------------------------------------------------------------------------
Total interest income 4,630 469 5,099 4,502 (721) 3,781
=============================================================================================================
Interest Expense
Savings, NOW, and money
market accounts 452 43 495 259 (626) (367)
Certificates of deposit 207 (63) 144 522 (127) 395
FHLB advances 1,815 179 1,994 1,575 (293) 1,282
- -------------------------------------------------------------------------------------------------------------
Total interest expense 2,474 159 2,633 2,356 (1,046) 1,310
=============================================================================================================
Net interest income $ 2,156 $ 310 $ 2,466 $ 2,146 $ 325 $ 2,471
=============================================================================================================
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. The provision for loan losses was $360,000 and
$240,000 during 1997 and 1996, respectively.
The Corporation maintains the allowance for loan losses at a level
determined to be adequate by management based on a review of the loan portfolio.
While management uses available information to determine the allowance for
losses on loans, future additions to the allowance may be necessary based on
changes in economic conditions and borrower circumstances. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Corporation's allowance for losses on loans. Such
agencies may require the Corporation to record additions to the allowance based
on their judgments about information available to them at the time of their
examination.
For more information on the Corporation's allowance for loan losses and
activity therein, reference is made to "Asset Quality."
15
Other Income
Other income, a significant component of the Corporation's earnings, was $6.4
million for the year ended December 31, 1997, an increase of $2.2 million
compared to $4.2 million for the year ended December 31, 1996. The increase in
other income resulted primarily from an increase in service charges and other
fees of $847,000. The increase in service charges and fees results from higher
fees assessed on a higher level of accounts and transaction account activity.
Net gains on sales of loans and securities increased $421,000 compared to 1996.
During 1997, other income included nonrecurring net gains on the sales of three
branches totalling $506,000. Debit cards were introduced in April 1996 and
income from debit cards increased $199,000 in 1997.
General and Administrative Expenses
Earnings for 1996 were significantly impacted by a nonrecurring, pre-tax charge
of $3.4 million to recapitalize the FDIC's SAIF. General and administrative
expenses in 1997 were $15.8 million, compared to $15.7 million in 1996,
excluding the FDIC special assessment of $3.4 million. Compensation and fringe
benefits expense rose $416,000 between periods as a result of merit-based salary
adjustments, an increased provision for the management incentive program,
employee bonuses paid in 1997, and unallocated ESOP dividends used to reduce
1996 ESOP expense. Furniture and equipment depreciation decreased $288,000
compared to 1996 primarily as a result of certain computer equipment becoming
fully depreciated in 1997. FDIC insurance, $796,000 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. Michigan single business tax was $214,000
higher in 1997 due to higher taxable income and higher compensation. Various
other costs were higher in 1997 due to a larger customer base and higher
transaction volumes.
Federal Income Tax Expense
Federal income tax expense was $5.0 million for the year ended December 31,
1997, compared to $2.4 million for 1996. The Corporation's federal income tax
expense is, for the most part, recorded at the federal statutory rate less a pro
rata portion of the anticipated low-income housing tax credits expected to be
available based upon the Corporation's limited partnership investments.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996,
COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
Net income for the year ended December 31, 1996 was $5.4 million, or $0.66 per
diluted share, compared to $6.8 million, or $0.82 per diluted share for 1995, a
net decrease of $1.4 million. Earnings were significantly impacted by a
nonrecurring, pre-tax charge of $3.4 million resulting from federal legislation
to recapitalize the FDIC's SAIF. As a result of this charge, 1996 after-tax
earnings were reduced $2.2 million, or $0.27 per diluted share. Other components
of income also varied significantly from year to year.
Net Interest Income
Net interest income for 1996 was $22.9 million, compared to $20.4 million for
1995. Interest rate spread increased to 2.63 percent in 1996 from 2.52 percent
in 1995 and net yield on average earning assets was 2.98 percent, compared to
2.85 percent for 1995. Net interest income for 1996 increased due to 1) a $52.0
million increase in average earning assets, partially offset by a $44.9 million
increase in average interest bearing liabilities and 2) a 13 basis point
decrease in cost of funds, partially offset by a 2 basis point decrease in yield
on funds. The $2.5 million increase in net interest income is summarized as
follows: net volume increases contributed $2.2 million and net rate increases
contributed $0.3 million to the net interest income increase over 1995.
16
Provision for Loan Losses
The provision for loan losses was $240,000 during both 1996 and 1995. The
Corporation maintains the allowance for loan losses at a level determined to be
adequate by management based on a review of the loan portfolio. Factors
considered in this review include the historical loss experience, recovery
levels of loans previously charged off, the financial condition of the
borrowers, the perceived risk exposure among loan types, delinquency rates, and
present and projected economic conditions, as well as other relevant factors.
While the allowance for loan losses increased to $4.6 million at December
31, 1996, compared to $4.4 million at December 31, 1995, the Corporation's level
of nonperforming assets as a percentage of total assets increased from 0.08
percent at December 31, 1995 to 0.24 percent at December 31, 1996, and the
allowance for loan losses as a percentage of total loans as of December 31, 1996
declined to 0.62 percent compared to 0.69 percent at December 31, 1995. The
ratio of net loan charge-offs to average loans outstanding during the years
ended December 31, 1996 and 1995 was 0.01 percent and 0.00 percent,
respectively.
Other Income
Other income, a significant component of the Corporation's earnings, was $4.2
million for the year ended December 31, 1996, an increase of $0.2 million
compared to $4.0 million for the year ended December 31, 1995. Growth in other
income resulted principally from $769,000 more in deposit fees assessed on a
higher level of transaction account activity. Although offset in part by
lower-of-cost or market adjustments on loans intended for sale in the secondary
market, increased gains on loan sales, including the impact of adopting
Statement of Financial Accounting Standards No. 122, Accounting for Mortgage
Servicing Rights, an amendment of FASB Statement No. 65 (SFAS 122), also
contributed to the higher level of other income. Partially offsetting these
increases in other income were decreased servicing income resulting from lower
balances of loans serviced for other parties and the amortization of capitalized
mortgage servicing costs. In addition, a $587,000 nonrecurring gain on the sale
of real estate owned was recognized in 1995.
General and Administrative Expenses
Earnings in 1996 were significantly impacted by a nonrecurring, pre-tax charge
of $3.4 million to recapitalize the FDIC's SAIF. Excluding the FDIC special
assessment of $3.4 million, general and administrative expenses were $15.7
million for 1996, up $1.3 million compared to $14.4 million for 1995.
Compensation and fringe benefits expense rose $204,000 between periods as a
result of merit-based salary increases, an increased provision for the
management incentive program, and increased employment taxes on a higher
compensation base partly offset by the effect of fewer full-time equivalent
employees. Furniture and equipment depreciation increased $374,000, or 48
percent, over 1995 primarily as a result of accelerating the depreciation on
computer equipment to more closely reflect the estimated remaining lives of this
equipment. Marketing expense also increased over 1995 as the result of the
continued promotion of the Corporation's checking account products. In addition,
the expanded account base resulted in more operating losses than in the prior
year.
Federal Income Tax Expense
Federal income tax expense was $2.4 million for the year ended December 31,
1996, compared to $2.9 million for 1995. The reduction reflects the tax benefit
of the FDIC special assessment. 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
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 that repossession of the collateral may
be necessary to satisfy the loan.
17
December 31, 1997 1996
(Dollars in Thousands)
===============================================================================
=Nonaccruing Loans:
One-to-four family residential mortgages $ 697 $ 892
Income-producing property -- 359
FHA-partially insured and VA-partially guaranteed 109 183
Commercial -- 195
Consumer installment 93 158
- -------------------------------------------------------------------------------
Total $ 899 $1,787
===============================================================================
Percentage of total assets 0.10% 0.21%
===============================================================================
Real Estate Owned:(1)
One-to-four family residential $ 11 $ 205
Construction and development 141 7
- -------------------------------------------------------------------------------
Total $ 152 $ 212
===============================================================================
Percentage of total assets 0.02% 0.03%
===============================================================================
Total nonaccruing loans and real estate owned $1,051 $1,999
===============================================================================
Percentage of total assets 0.12% 0.24%
===============================================================================
(1) Real estate owned includes properties in redemption and acquired through
foreclosure.
The following is a summary of the Corporation's loan and real estate owned
loss experience from December 31, 1994 through December 31, 1997. The ratio of
net loan charge-offs to average loans outstanding during the years ended
December 31, 1997 and 1996, was 0.03 percent and 0.01 percent, respectively.
REAL
LOANS ESTATE TOTAL
================================================================================
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 360,000 45,000 405,000
Charges against the allowance (247,432) (247,080) (494,512)
Recoveries 54,245 142,548 196,793
- --------------------------------------------------------------------------------
Balance at December 31, 1997 $ 4,730,407 $ 152,627 $ 4,883,034
================================================================================
While the $4.7 million allowance for loan losses at December 31, 1997 grew
from $4.6 million at December 31, 1996, the allowance for loan losses as a
percentage of total loans as of December 31, 1997 declined slightly to 0.61
percent compared to 0.62 percent at December 31, 1996. Nonperforming assets as a
percentage of total assets were 0.24 percent at December 31, 1996, and decreased
to 0.12 percent at December 31, 1997. The ratio of net loan charge-offs to
average loans outstanding was 0.03 percent, and 77.4 percent of the growth in
loans receivable in 1997 was in mortgages, which tend to have a lower risk of
loss than other lending.
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.
18
Market Risk
Derivative financial instruments include futures, forwards, interest rate swaps,
option contracts and other financial instruments with similar characteristics.
The Corporation currently does not enter into futures, forwards, swaps, or
options. However, the Corporation is party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to
extend credit and standby letters of credit. These instruments involve to
varying degrees elements of credit and interest rate risk in excess of the
amount recognized in the consolidated balance sheets. Commitments to extend
credit are agreements to lend to a customer as long as there is no violation of
any condition established in the contract. Commitments generally have fixed
expiration dates and may require collateral from the borrower if deemed
necessary by the Corporation. Standby letters of credit are conditional
commitments issued by the Corporation to guarantee the performance of a customer
to a third party up to a stipulated amount and with specified terms and
conditions.
Commitments to extend credit and standby letters of credit are not recorded
as an asset or liability by the Corporation until the instrument is exercised.
The Bank's exposure to market risk is reviewed on a regular basis by the
Asset/Liability Committee (See "Asset/Liability Management"). Interest rate risk
is the potential for economic losses due to future interest rate changes. These
economic losses can be reflected as a loss of future net interest income and/or
a loss of current fair market values. The objective is to measure the effect on
net interest income and to adjust the balance sheet to minimize the inherent
risk while at the same time maximize income. Management realizes certain risks
are inherent and the goal is to identify and minimize the risks. Tools used by
management include the standard GAP report and an interest rate shock simulation
report. The Bank has no market risk sensitive instruments held for trading
purposes. The condensed GAP report summarizing the Bank's interest rate
sensitivity is presented under "Asset/Liability Management."
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.
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 has
been to manage the repricing of its interest-sensitive assets and liabilities
and manage the sensitivity of the Corporation's earnings to changes in interest
rates. The Corporation generally implemented this strategy by: (i) originating
and retaining 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 following table sets forth the interest rate sensitivity of the
Corporation's interest-earning assets and interest-bearing liabilities at
December 31, 1997. One indicator used to measure interest rate risk is the
one-year gap which represents the difference between interest-earning assets
which mature or reprice within one year and interest-bearing liabilities which
mature or reprice within one year. The Corporation's one-year gap was a negative
10.4 percent at December 31, 1997, compared to a negative 9.3 percent at
December 31, 1996, and the Corporation's three-to-five-year gap was a negative
1.5 percent at December 31, 1997, compared to a negative 1.9 percent at December
31, 1996. Fixed-rate loans and mortgage-backed securities are shown on the basis
of contractual amortization adjusted for prepayments at rates estimated by
available industry sources. Adjustable-rate loans and investment and
mortgage-backed securities are determined to reprice at the earlier of maturity,
call date or the next contractual repricing date. The allocation of savings,
checking, and money market account balances between the various
maturity/repricing periods is based on anticipated withdrawals and/or repricing
practices. The assumptions used should not be regarded as indicative of the
actual prepayments and withdrawals which may be experienced by the Corporation.
FHLB advances that are putable by the FHLB are assumed to mature/reprice at the
first put date.
19
The data presented in the table represent a static measure of assets and
liabilities maturing over various time periods. The table does not necessarily
indicate the impact of general interest rate movements on the Corporation's net
yield, because the repricing of certain categories of assets and liabilities is
subject to competitive and other pressures beyond the Corporation's control. As
a result, certain assets and liabilities indicated as maturing or otherwise
repricing within a stated period may, in fact, mature or reprice at different
times or at different volumes.
MATURITY/RATE SENSITIVITY
At December 31, 1997
- -------------------------------------------------------------------------------------------------------------------------------
0-6 7-12 1-3 3-5 Over 5
Months Months Years Years Years Total
(Dollars in Thousands)
===============================================================================================================================
Assets:
First mortgage loans $ 116,924 $ 100,665 $ 246,544 $ 111,874 $ 114,059 $ 690,066
Second mortgage and other loans 43,286 7,353 9,222 5,263 4,346 69,470
Mortgage-backed securities 12,500 2,636 6,461 -- -- 21,597
Investment securities 9,998 14,055 -- 2,027 -- 26,080
Other 13,301 -- -- -- -- 13,301
- -------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets 196,009 124,709 262,227 119,164 118,405 820,514
Noninterest earning assets 32,374
- -------------------------------------------------------------------------------------------------------------------------------
Total assets $ 852,888
===============================================================================================================================
Liabilities and Stockholders' Equity:
Savings 6,452 5,676 9,712 7,706 33,520 $ 63,066
Checking 7,746 6,155 12,731 3,406 7,565 37,603
Money market 53,693 9,886 5,607 50,447 -- 119,633
Certificates of deposit 139,791 104,098 64,891 14,725 839 324,344
Advances from Federal
Home Loan Bank 16,144 56,209 98,246 40,874 1,220 212,693
- -------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities 223,826 182,024 191,187 117,158 43,144 757,339
Stockholders' equity and
noninterest bearing liabilities 95,549
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $ 852,888
===============================================================================================================================
Rate Sensitivity GAP and Ratios:
GAP for period (interest-earning assets
less interest-bearing liabilities) $ (27,817) $ (57,315) $ 71,040 $ 2,006 $ 75,261 $ 63,175
- -------------------------------------------------------------------------------------------------------------------------------
Cumulative gap $ (27,817) $ (85,132) $ (14,092) $ (12,086) $ 63,175 --
===============================================================================================================================
GAP as a percentage of
interest-earning assets -3.39% -6.99% 8.66% 0.25% 9.17% 7.70%
- -------------------------------------------------------------------------------------------------------------------------------
Cumulative gap as a percentage of
interest-earning assets -3.39% -10.38% -1.72% -1.47% 7.70% --
===============================================================================================================================
Cumulative gap at December 31, 1996 -6.89% -9.29% -5.61% -1.92% 8.04% --
- -------------------------------------------------------------------------------------------------------------------------------
Average Estimated
Total Interest Rate Fair Value
===============================================================================================================================
Assets:
Loans $759,536 7.71% $771,000
Securities 47,677 6.91 48,000
Other 13,301 3.39 13,000
Liabilities:
Deposits 544,646 4.47 546,000
FHLB Advances 212,693 6.09 214,000
===============================================================================================================================
20
Liquidity
The Bank has no regulatory mandated minimum liquidity requirements. Management's
intention is to maintain average short-term liquid assets each quarter of 3.0
percent of net withdrawable deposit accounts plus borrowings payable in one year
or less. The Bank's short-term liquidity ratio was 7.32 percent and 4.01 percent
at December 31, 1997 and December 31, 1996, respectively. Although the liquidity
ratio fluctuates, the ratio has been consistently maintained above minimum
targeted levels.
The Bank's principal sources of funds are deposits, principal and
interest payments on loans, sale of loans, maturities of securities, securities
available for sale and FHLB advances. All of the securities held in portfolio
are available for sale, thereby increasing the Bank's flexibility with respect
to such securities. While scheduled loan repayments and maturing investments are
relatively predictable, deposit flows and early loan prepayments are more
influenced by interest rates, general economic conditions, and competition.
As of September 30, 1996, based upon liquidity and interest rate
considerations, management determined it could no longer assert its intention to
hold all mortgage-backed securities until maturity. Therefore, the entire
mortgage-backed securities portfolio totalling $28.6 million was reclassified to
an available-for-sale classification. As a result, the Corporation intends to
classify any investment or mortgage-backed securities currently held or
purchased in the two years subsequent to September 30, 1996 as available for
sale.
Capital Resources
The Bank is subject to capital asset requirements in accordance with Bank
regulations. Community First Bank's regulatory capital ratios are well in excess
of minimum capital requirements specified by federal banking regulations. The
Bank's tangible, core, and risk-based capital ratios were 7.63 percent, 7.63
percent, and 13.77 percent at December 31, 1997, respectively.
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 operation, 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 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 cash dividends.
The Corporation's board of directors also declared a 3-for-2 stock split
on November 18, 1997. The additional shares were distributed on December 18,
1997 to stockholders of record as of December 1, 1997.
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 387,750 shares of CFSB Bancorp, Inc. common stock. Through December
31, 1997, the Corporation repurchased 141,035 shares of CFSB Bancorp, Inc.
common stock on the open market for $2.3 million for an average purchase price
of $16.23 per share. The program has a one-year term.
21
Year 2000
The Corporation has an ongoing program to identify, correct and test any
processing systems that are date driven and are not Year 2000 compliant. The
Corporation's core data processing software is provided by an outside vendor.
The outside vendor projects the software they provide will be Year 2000
compliant, including testing, in 1998. The Corporation anticipates testing the
software and integration with other third party software in 1998. Management
also anticipates testing its remaining systems for Year 2000 compliance in 1998.
As of December 31, 1997, no identifiable costs have been incurred in
connection with ensuring the Corporation's systems and products are Year 2000
compliant. Management anticipates costs to complete Year 2000 implementation
will approximate $500,000 to $750,000. These costs will be primarily for the
replacement of depreciable assets.
Accounting Standards
In February 1997, the Financial Accounting Standards Board (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. SFAS 128 was
effective for financial statements for both interim and annual periods ended
after December 15, 1997. Earlier application was not permitted. This standard
does not have a material impact on the Corporation's results of operations.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, Reporting Comprehensive Income (SFAS 130). SFAS 130 establishes
standards for reporting and displaying comprehensive income and its components,
including but not limited to unrealized gains or losses on securities available
for sale, in the financial statements. This statement is effective for both
interim and annual periods beginning after December 15, 1997 with earlier
application permitted. SFAS 130 will require reclassification of all prior
period amounts.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise and Related Information
(SFAS 131). SFAS 131 establishes standards for the way that public entities
report information about operating segments in financial statements. This
statement is effective for both interim and annual periods beginning after
December 31, 1997 with restatement of prior period information required.
22
Independent Auditors' Report
[LOGO OF KPMG PEAT MARWICK LLP APPEARS HERE]
The Board of Directors and Stockholders
CFSB Bancorp, Inc.:
We have audited the consolidated statements of financial condition of CFSB
Bancorp, Inc., and subsidiary ("Corporation") as of December 31, 1997 and 1996,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1997. These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CFSB Bancorp, Inc.,
and subsidiary as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
Lansing, Michigan
January 20, 1998
23
CFSB BANCORP, INC., AND SUBSIDIARY
Consolidated Statements of Financial Condition
December 31, 1997 1996
=============================================================================================================
Assets:
Cash and amounts due from depository institutions $ 5,188,951 $ 7,479,722
Interest-earning deposits with Federal Home Loan Bank and
other depository institutions, at cost, which approximates market 13,300,543 15,270,241
Investment securities available for sale, at fair value 26,079,688 31,093,494
Mortgage-backed securities available for sale, at fair value 21,597,690 27,220,567
Loans receivable, net 754,806,061 717,714,636
Accrued interest receivable, net 4,910,200 4,349,240
Premises and equipment, net 10,457,180 10,985,199
Stock in Federal Home Loan Bank of Indianapolis, at cost 11,423,100 10,632,000
Other assets 5,124,500 5,054,447
- -------------------------------------------------------------------------------------------------------------
Total assets $ 852,887,913 $ 829,799,546
=============================================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Deposits $ 562,412,067 $ 553,574,001
Advances from Federal Home Loan Bank 212,692,934 202,639,323
Advance payments by borrowers for taxes and insurance 1,454,316 1,356,507
Accrued interest payable 3,043,923 4,233,799
Federal income taxes payable 556,315 740,242
Other liabilities 5,193,568 4,785,647
- -------------------------------------------------------------------------------------------------------------
Total liabilities 785,353,123 767,329,519
- -------------------------------------------------------------------------------------------------------------
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 7,655,466 shares in 1997 and 7,274,416 shares in 1996 76,555 72,744
Additional paid-in capital 48,377,350 41,398,650
Retained income - substantially restricted 20,011,874 23,863,600
Net unrealized gains on available-for-sale securities,
net of tax of $161,035 - 1997 and $110,548 - 1996 312,597 214,594
Employee Stock Ownership Plan (227,522) (459,408)
Treasury stock, at cost; 47,988 shares - 1997 and 236,891 shares - 1996 (1,016,064) (2,620,153)
- -------------------------------------------------------------------------------------------------------------
Total stockholders' equity 67,534,790 62,470,027
- -------------------------------------------------------------------------------------------------------------
Commitments and contingent liabilities -- --
Total liabilities and stockholders' equity $ 852,887,913 $ 829,799,546
=============================================================================================================
See accompanying notes to consolidated financial statements.
24
CFSB Bancorp, Inc., and Subsidiary
Consolidated Statements of Operations
Years Ended December 31, 1997 1996 1995
=========================================================================================================
Interest Income:
Loans receivable $ 57,570,229 $ 51,612,087 $ 44,448,774
Mortgage-backed securities 1,768,498 2,341,727 4,187,867
Investment securities 1,688,983 2,188,967 3,862,157
Other 1,473,760 1,259,274 1,122,512
- ---------------------------------------------------------------------------------------------------------
Total interest income 62,501,470 57,402,055 53,621,310
- ---------------------------------------------------------------------------------------------------------
Interest Expense:
Deposits, net 24,477,571 23,837,494 23,810,254
Federal Home Loan Bank advances 12,654,049 10,660,383 9,377,784
- ---------------------------------------------------------------------------------------------------------
Total interest expense 37,131,620 34,497,877 33,188,038
- ---------------------------------------------------------------------------------------------------------
Net interest income before provision
for loan losses 25,369,850 22,904,178 20,433,272
Provision for loan losses 360,000 240,000 240,000
- ---------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 25,009,850 22,664,178 20,193,272
- ---------------------------------------------------------------------------------------------------------
Other Income (Loss):
Service charges and other fees 4,296,132 3,449,537 2,688,164
Loan servicing income 305,174 399,446 476,292
Losses on sales of investment securities
available for sale, net (31,372) (64,188) (2,975)
Gains (losses) on sales of mortgage-backed securities
available for sale, net 2,051 -- (42,056)
Gains on sales of loans, net 642,876 256,343 100,885
Real estate operations, net (50,121) (60,000) 467,478
Gains on sales of branches, net 505,698 -- --
Other, net 730,168 260,529 278,138
- ---------------------------------------------------------------------------------------------------------
Total other income 6,400,606 4,241,667 3,965,926
- ---------------------------------------------------------------------------------------------------------
General and Administrative Expenses:
Compensation, payroll taxes, and fringe benefits 8,426,696 8,010,714 7,807,029
Office occupancy and equipment 2,384,424 2,609,958 2,170,139
Federal insurance premiums 354,007 1,150,117 1,174,941
FDIC special assessment -- 3,355,000 --
Marketing 808,823 792,083 626,657
Data processing 454,099 365,704 316,188
Other, net 3,333,879 2,739,977 2,332,341
- ---------------------------------------------------------------------------------------------------------
Total general and administrative expenses 15,761,928 19,023,553 14,427,295
- ---------------------------------------------------------------------------------------------------------
Income before federal income tax expense 15,648,528 7,882,292 9,731,903
Federal income tax expense 4,976,000 2,435,000 2,929,000
- ---------------------------------------------------------------------------------------------------------
Net income $ 10,672,528 $ 5,447,292 $ 6,802,903
=========================================================================================================
Earnings Per Share:
Basic $ 1.39 $ 0.68 $ 0.84
Diluted 1.34 0.66 0.82
=========================================================================================================
Dividends per share 0.42 0.27 0.23
=========================================================================================================
See accompanying notes to consolidated financial statements.
25
CFSB Bancorp, Inc., and Subsidiary
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1997, 1996, and 1995
=================================================================================================
Net Unrealized
Gains (Losses) on
Common Additional Retained Available-for-
Stock Paid-in Capital Income Sale Securities
=================================================================================================
Balance at December 31, 1994 $ 61,622 $ 24,658,144 $ 34,774,725 $ (1,721,695)
Net income for the year 1995 -- -- 6,802,903 --
10% common stock dividend 6,155 9,636,500 (9,654,329) --
Stock options exercised -- -- (203,543) --
Repayment of ESOP debt -- -- -- --
Cash dividends on common
stock - $0.23 per share -- -- (1,866,776) --
Tax benefit of ESOP dividends -- 45,220 -- --
Tax benefit associated with exercise
of stock options -- 26,706 -- --
Change in market value of
available-for-sale securities,
net of tax of $923,851 -- -- -- 1,793,356
- -------------------------------------------------------------------------------------------------
Balance at December 31, 1995 67,777 34,366,570 29,852,980 71,661
Net income for the year 1996 -- -- 5,447,292 --
10% common stock dividend 4,967 6,969,800 (8,980,475) --
Treasury stock purchased -- -- -- --
Stock options exercised -- -- (283,171) --
Repayment of ESOP debt -- -- -- --
Cash dividends on common stock -
$0.27 per share -- -- (2,173,026) --
Tax benefit of ESOP dividends -- 28,730 -- --
Tax benefit associated with exercise
of stock options -- 33,550 -- --
Change in market value of
available-for-sale securities,
net of tax of $73,631 -- -- -- 142,933
- -------------------------------------------------------------------------------------------------
Balance at December 31, 1996 72,744 41,398,650 23,863,600 214,594
Net income for the year 1997 -- -- 10,672,528 --
10% common stock dividend 3,811 6,985,791 (11,063,418) --
Cash value of fractional shares
on stock split -- (7,091) -- --
Treasury stock purchased -- -- -- --
Stock options exercised -- -- (214,148) --
Repayment of ESOP debt -- -- -- --
Cash dividends on common
stock - $0.42 per share -- -- (3,246,688) --
Change in market value of
available-for-sale securities,
net of tax of $50,487 -- -- -- 98,003
- -------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $ 76,555 $ 48,377,350 $ 20,011,874 $ 312,597
=================================================================================================
=================================================================================
Total
Commitment Treasury Stockholders'
for ESOP Debt Stock Equity
=================================================================================
Balance at December 31, 1994 $ (923,180) $ (1,242,288) $ 55,607,328
Net income for the year 1995 -- -- 6,802,903
10% common stock dividend -- -- (11,674)
Stock options exercised -- 317,615 114,072
Repayment of ESOP debt 231,886 -- 231,886
Cash dividends on common
stock - $0.23 per share -- -- (1,866,776)
Tax benefit of ESOP dividends -- -- 45,220
Tax benefit associated with exercise
of stock options -- -- 26,706
Change in market value of
available-for-sale securities,
net of tax of $923,851 -- -- 1,793,356
- ---------------------------------------------------------------------------------
Balance at December 31, 1995 (691,294) (924,673) 62,743,021
Net income for the year 1996 -- -- 5,447,292
10% common stock dividend -- 1,995,912 (9,796)
Treasury stock purchased -- (4,089,237) (4,089,237)
Stock options exercised -- 397,845 114,674
Repayment of ESOP debt 231,886 -- 231,886
Cash dividends on common stock -
$0.27 per share -- -- (2,173,026)
Tax benefit of ESOP dividends -- -- 28,730
Tax benefit associated with exercise
of stock options -- -- 33,550
Change in market value of
available-for-sale securities,
net of tax of $73,631 -- -- 142,933
- ---------------------------------------------------------------------------------
Balance at December 31, 1996 (459,408) (2,620,153) 62,470,027
Net income for the year 1997 -- -- 10,672,528
10% common stock dividend -- 4,062,759 (11,057)
Cash value of fractional shares
on stock split -- -- (7,091)
Treasury stock purchased -- (2,777,983) (2,777,983)
Stock options exercised -- 319,313 105,165
Repayment of ESOP debt 231,886 -- 231,886
Cash dividends on common
stock - $0.42 per share -- -- (3,246,688)
Change in market value of
available-for-sale securities,
net of tax of $50,487 -- -- 98,003
- ---------------------------------------------------------------------------------
Balance at December 31, 1997 $ (227,522) $ (1,016,064) $ 67,534,790
=================================================================================
See accompanying notes to consolidated financial statements.
26
CFSB BANCORP, INC., AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended December 31, 1997 1996 1995
=========================================================================================================================
Cash Flows From Operating Activities:
Net income $ 10,672,528 $ 5,447,292 $ 6,802,903
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,347,691 1,605,669 1,217,594
Provision for loan losses 360,000 240,000 240,000
Provision for real estate losses 45,000 60,000 120,000
Net amortization of premiums and accretion
of discounts 165,158 370,832 1,178,859
Loans originated for sale (20,424,389) (25,856,898) (10,755,582)
Proceeds from sales of loans originated for sale 18,650,496 24,219,028 10,080,914
Net gains on sales of loans and securities (613,555) (192,155) (55,854)
Net gains on sales of real estate owned -- -- (587,478)
Net (gains) losses on sales and disposals of
premises and equipment (491,675) 83,101 (6,752)
Increase (decrease) in deferred loan fees (353,731) 198,518 89,768
Decrease (increase) in accrued interest receivable (560,960) 533,993 (399,843)
Increase (decrease) in accrued interest payable (1,189,876) 759,736 722,010
Increase (decrease) in federal income taxes payable (183,927) 273,902 506,999
Increase (decrease) in other liabilities 291,539 (192,161) 458,314
Decrease (increase) in other assets (66,566) 1,595,411 3,401,950
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 7,647,733 9,146,268 13,013,802
- -------------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Purchases of investment securities available for sale (24,018,281) (20,060,266) (5,065,650)
Proceeds from sales of investment securities
available for sale 20,037,695 23,135,173 13,906,169
Principal repayments and maturities of investment
securities held to maturity -- -- 14,450,000
Principal repayments and maturities of investment
securities available for sale 9,000,000 20,420,000 11,000,000
Loan originations (net of undisbursed loans in process) (185,621,409) (200,744,785) (134,320,368)
Loans purchased (27,847,054) (31,733,987) (43,592,182)
Proceeds from sales of loans 28,439,980 7,853,490 4,822,738
Principal repayments on loans 149,524,869 118,078,242 84,224,676
Proceeds from sales of mortgage-backed securities
available for sale -- -- 19,545,420
Principal repayments and maturities on mortgage-
backed securities available for sale 5,571,279 2,271,581 4,035,345
Principal repayments and maturities on mortgage-
backed securities held to maturity -- 5,967,777 8,219,953
Proceeds from sales, redemptions, and settlements
of real estate owned, net 751,580 437,935 742,358
Capitalized additions to real estate owned,
net of recoveries (27,864) 59,702 11,884
Purchases of premises and equipment (1,706,796) (1,456,346) (463,318)
Proceeds from sales and disposals of premises
and equipment 1,378,799 5,524 13,455
Purchases of Federal Home Loan Bank stock (791,100) (2,095,200) (374,000)
- -------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (25,308,302) (77,861,160) (22,843,520)
- -------------------------------------------------------------------------------------------------------------------------
27
CFSB BANCORP, INC., AND SUBSIDIARY
Consolidated Statements of Cash Flows, continued
Years Ended December 31, 1997 1996 1995
=================================================================================================================
Cash Flows From Financing Activities:
Net increase in deposits $ 8,838,066 $ 25,757,823 $ 26,126,642
Stock options exercised 105,165 114,674 114,072
Purchases of treasury stock (2,777,983) (4,089,237) --
Net increase (decrease) in advance payments
by borrowers for taxes and insurance 97,809 75,464 (815,970)
Federal Home Loan Bank advance repayments (110,885,770) (98,262,720) (147,218,103)
Federal Home Loan Bank advances 120,939,381 140,252,667 147,516,795
Dividends paid on common stock (2,916,568) (2,107,991) (1,832,008)
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 13,400,100 61,740,680 23,891,428
- -----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (4,260,469) (6,974,212) 14,061,710
Cash and cash equivalents at beginning of period 22,749,963 29,724,175 15,662,465
- -----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 18,489,494 $ 22,749,963 $ 29,724,175
=================================================================================================================
Supplemental Disclosures of Cash Flow Information:
Cash paid for:
Interest expense $ 38,321,496 $ 33,738,141 $ 32,466,028
Federal income taxes 5,170,000 2,450,000 2,285,000
Transfers of loans to real estate owned 672,078 342,408 264,637
Transfers of loans to repossessed property and
accounts receivable 150,611 69,673 53,600
Loans charged off 247,432 76,528 55,107
Loans to facilitate the sale of real estate owned -- 279,700 2,724,120
Transfers of securities to available-for-sale classification:
Investment securities -- -- 18,081,023
Mortgage-backed securities -- 28,553,035 --
=================================================================================================================
See accompanying notes to consolidated financial statements.
28
CFSB BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997
(1) SIGNIFICANT ACCOUNTING POLICIES
Business
CFSB Bancorp, Inc. is a unitary savings and loan holding company whose principal
business is conducted through its subsidiary Community First Bank. Community
First Bank (the Bank) is a community-oriented financial institution offering a
variety of financial services to meet the needs of the communities it serves.
The Bank's primary market area is the Greater Lansing, Michigan area, which is
comprised of the tri-county area of Clinton, Eaton, and Ingham counties, the
western townships of Shiawassee County, and Ionia County.
Principles of Consolidation
CFSB Bancorp, Inc. (the Corporation), is the holding company for Community First
Bank, a state chartered stock savings bank. Substantially all of the
Corporation's assets are currently held in, and operations conducted through its
sole subsidiary, Community First Bank.
The consolidated financial statements include the accounts and transactions
of CFSB Bancorp, Inc., and its wholly-owned subsidiary, Community First Bank,
and the Bank's wholly-owned subsidiary, Capitol Consolidated Financial
Corporation (Capitol Consolidated), and Capitol Consolidated's wholly-owned
subsidiary, Allegan Insurance Agency, doing business as Community First
Insurance and Investment Services. Intercompany transactions and account
balances are eliminated.
Basis of Financial Statement Presentation
The consolidated financial statements are prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities as of the date of the balance sheet and the reported amounts of
income and expenses for the period. Actual results could differ from those
estimates.
Investment and Mortgage-Backed Securities
Investment and mortgage-backed securities available for sale represent those
securities not classified as held-to-maturity. Unrealized holding gains and
losses, net of tax, on available-for-sale securities are reported as a net
amount in a separate component of stockholders' equity until realized. Gains and
losses on the sale of securities are determined using the
specific-identification method and are recognized on a trade-date basis.
Premiums and discounts are recognized in interest income using the
effective-interest method over the period to maturity.
Loans Receivable
Loans receivable, which the Corporation has the intent and ability to hold for
the foreseeable future or until maturity or payoff, are reported at their
outstanding unpaid principal balances, net of any undistributed portion of loans
in process, net deferred origination fees, and the allowance for loan losses.
Loan Origination and Commitment Fees
Fees received in connection with loan commitments are deferred in other
liabilities until the loan is advanced, and are then recognized over the term of
the loan as an adjustment to the yield. Fees on commitments that expire unused
are recognized as fee income at expiration.
29
CFSB BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(1) SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Loan origination fees, net of certain loan origination costs, are deferred
and recognized over the lives of the related loans as an adjustment to the
yield. When loans are sold, any remaining unamortized deferred fees are
recognized as an adjustment of gain (loss) on sale of loans.
Loan origination and commitment fees charged on adjustable-rate mortgages
are generally deemed to be adjustments to the first adjustment period yield of
the mortgage, to the extent the interest rate during the first adjustment period
on the mortgage is less than the index rate plus the contractual spread.
Nonaccrual Assets
Nonaccrual assets are comprised of loans where the accrual of interest has been
discontinued, loans which the terms have been renegotiated to less than market
rates as a result of a serious weakening of the borrower's financial condition,
and real estate which has been acquired primarily through foreclosure and is
awaiting disposition.
Loans are generally placed on a nonaccrual basis when principal or interest
is past due 90 days or more or when, in the opinion of management, full
collection of principal and interest is unlikely. At the time a loan is placed
on nonaccrual status, interest previously accrued but not collected is charged
against current income. Income on such loans is then recognized only to the
extent that cash is received and where future collections of principal are
probable. A nonaccrual loan may be restored to accrual status when interest and
principal payments are current and the loan appears otherwise collectible.
Allowance for Losses on Loans and Real Estate
Provisions for losses on loans and real estate are charged to operations based
upon management's evaluation of potential losses in the portfolio. In addition
to providing reserves on specific assets where a decline in value has been
identified, general provisions for losses are established based upon the overall
portfolio composition and general market conditions. In establishing both
specific and general valuation allowances, management reviews individual loans,
recent loss experience, current economic conditions, the overall balance and
composition of the portfolio, and such other factors which, in management's
judgment, deserve recognition in estimating possible losses.
Management believes the allowance for losses on loans and real estate is
adequate. While management uses available information to recognize losses on
loans and real estate, future additions to the allowance may be necessary based
on changes in economic conditions and borrower circumstances.
Impaired loans have been identified in accordance with provisions of SFAS
No. 114. The Corporation considers a loan to be impaired when it is probable
that it will be unable to collect all or part of amounts due according to the
contractual terms of the loan agreement. Impaired loans are measured based on
the present value of expected cash flows discounted at the loan's effective
interest rate or, as a practical expedient, at a loan's observable market price
or the fair value of the collateral if the loan is collateral dependent.
Real Estate
Real estate acquired through foreclosure is carried at the lower of estimated
fair value less costs to sell or cost. Such determination is made on an
individual-asset basis. At the time of acquisition, any excess of carrying
amount over estimated fair value is recorded as a reduction in the allowance for
loan losses. Subsequent declines in fair value less estimated costs to sell are
recognized as increases in the valuation allowance. If the estimated fair value
of the asset minus the estimated costs to sell the asset is more than its
carrying amount, the valuation allowance is reduced, but not below zero.
Increases or decreases in the valuation allowance are charged or credited to
income. Generally, expenditures relating to the development and improvement of
real estate acquired through foreclosure are capitalized.
30
CFSB BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(1) SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Loans Held for Sale
Additional funds for lending are periodically provided by selling mortgage
loans. Mortgage loans intended for sale in the secondary market are carried at
the lower-of-cost or estimated market value in the aggregate. These loans are
classified as held for sale and are included in loans receivable in the
consolidated statements of financial condition. Net unrealized losses are
recorded by charges to income.
Loan Servicing
The Corporation services for investors mortgage loans that are not included in
the consolidated statements of financial condition. Fees earned for servicing
loans owned by investors are reported as income when the related mortgage loan
payments are collected. Loan servicing costs are charged to expense as incurred.
The total cost of mortgage loans originated with the intent to sell is
allocated between the loan servicing right and the mortgage loan without
servicing, based on their relative fair value at the date of origination. The
capitalized cost of loan servicing rights is amortized in proportion to, and
over the period of, estimated net future servicing revenue.
Mortgage servicing rights are periodically evaluated for impairment. For
purposes of measuring impairment, mortgage servicing rights are stratified based
on predominant risk characteristics of the underlying serviced loans. These risk
characteristics include loan type, term, year originated, and note rate.
Impairment represents the excess of cost of an individual mortgage servicing
rights stratum over its fair value, and is recognized through a valuation
allowance.
Fair values for individual strata are based on quoted market prices for
comparable transactions if available or estimated fair value. Estimates of fair
value include assumptions about prepayment, default and interest rates, and
other factors which are subject to change over time. Changes in these underlying
assumptions could cause the fair value of mortgage servicing rights, and the
related valuation allowance, to change significantly in the future.
Federal Income Taxes
The Corporation and its subsidiary file a consolidated federal income tax
return. The provision for federal income taxes is based upon income for
financial statement purposes, rather than amounts reported on the Corporation's
income tax return.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized as income or
expense in the period that includes the enactment date.
Premises and Equipment
Office property and equipment are carried at cost, less accumulated depreciation
and amortization. Depreciation and amortization of office properties and
equipment is charged to operations on a straight-line basis over the estimated
useful lives of the related assets.
Derivative Financial Instruments
Interest rate exchange agreements, designated as hedges against future
fluctuations in the interest rates of specifically identified assets or
liabilities, are not marked to market. Net interest income (expense) resulting
from the differential between exchanging floating and fixed-rate interest
payments is recorded as an addition to or reduction of the interest income
(expense) on the associated asset or liability. Gains and losses on terminated
interest rate exchange agreements are amortized over the remaining terms of the
agreements.
31
CFSB BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(1) SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Interest on Deposits
Penalty income on early withdrawal of certificates of deposit is recognized as a
reduction of interest expense on deposits.
Statement of Cash Flows
For the purpose of presentation in the consolidated statement of cash flows,
cash and cash equivalents include cash and amounts due from depository
institutions and interest-earning deposits with the Federal Home Loan Bank and
other depository institutions.
Stock-Based Compensation
FASB SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123) encourages
but does not require companies to record compensation cost for stock-based
employee compensation plans at fair value. The Bank has chosen to continue to
measure compensation cost for those plans using the intrinsic value based method
of accounting prescribed by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (Opinion 25). Accordingly, compensation
cost for stock options is measured as the excess, if any, of the quoted market
price of the Corporation's stock at the date of the grant over the amount an
employee must pay to acquire the stock.
Stock Dividend and Split
The Corporation's board of directors 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. The Corporation's
board of directors declared a 3-for-2 stock split on November 18, 1997. The
additional shares as a result of the split were distributed on December 18, 1997
to stockholders of record as of December 1, 1997. Common shares outstanding, per
common share amounts, and price per common share have been restated for all
periods presented to give retroactive effect to the stock dividend and the stock
split.
Reclassifications
Certain prior year's financial statement amounts have been reclassified to
conform to the current year financial statement presentation.
(2) Restrictions on Cash and Amounts Due from Depository Institutions
The Bank is required to maintain certain daily reserve balances in accordance
with Federal Reserve Board requirements. The reserve balances maintained in
accordance with such requirements were $1,754,000 and $5,684,000 at December 31,
1997 and 1996, respectively.
32
CFSB BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(3) INVESTMENT SECURITIES
Investment securities available for sale consist of the following:
December 31, 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
Amortized Cost Fair Value Amortized Cost Fair Value
- -----------------------------------------------------------------------------------------------------------------------
United States Government and Agency Obligations:
Maturing within one year $ 24,000,000 $ 24,053,125 $ 20,096,712 $ 20,071,094
Federal agency obligations:
Maturing from one to five years 2,000,000 2,026,563 -- --
Maturing from five to ten years -- -- 7,000,000 7,015,200
- -----------------------------------------------------------------------------------------------------------------------
2,000,000 2,026,563 7,000,000 7,015,200
Corporate bonds:
Maturing within one year -- -- 4,000,000 4,007,200
- -----------------------------------------------------------------------------------------------------------------------
$ 26,000,000 $ 26,079,688 $ 31,096,712 $ 31,093,494
=======================================================================================================================
Weighted average interest rate 6.02% 5.89%
=======================================================================================================================
Unrealized gains and losses on investment securities available for sale are
summarized as follows:
December 31, 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
Gross Gross Gross Gross
Unrealized Gains Unrealized Losses Unrealized Gains Unrealized Losses
- -----------------------------------------------------------------------------------------------------------------------
United States government and
agency obligations $ 54,688 $ 1,563 $ 21,205 $ 46,823
Federal agency obligations 26,563 -- 15,200 --
Corporate bonds -- -- 7,200 --
- -----------------------------------------------------------------------------------------------------------------------
$ 81,251 $ 1,563 $ 43,605 $ 46,823
=======================================================================================================================
Proceeds from sales of investment securities available for sale during the
years ended December 31, 1997, 1996, and 1995 were $20,037,695, $23,135,173, and
$13,906,169, respectively. Gross gains of $19,659, $43,207, and $29,872, and
gross losses of $51,031, $107,395, and $32,847, were realized on those sales
during 1997, 1996, and 1995, respectively.
Expected maturities may differ from the contractual maturities above
because certain borrowers have the right to call or prepay obligations with or
without call or prepayment penalties. During the years ended December 31, 1997
and 1996, call provisions were exercised on $5,000,000 and $4,295,000,
respectively, of investment securities available for sale. No gains or losses
were recognized during the respective periods. There were no call provisions
exercised on investment securities available for sale during 1995.
In accordance with A Guide to Implementation of Statement 115 on Accounting
for Certain Investments in Debt and Equity Securities, the Corporation, in order
to allow further flexibility in future asset liability management decisions
relating to securities, in 1995 reclassified $18,081,023 of corporate notes and
U.S. Treasury securities from a held-to-maturity classification to an available-
for-sale classification. The unrealized pre-tax losses of $103,210 on these
securities were recorded as a negative adjustment to stockholders' equity.
Accrued interest receivable related to investment securities approximated
$627,000 and $293,000 at December 31, 1997 and 1996, respectively.
At December 31, 1997, the Bank had no commitments to purchase or sell
investment securities.
33
CFSB BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(4) MORTGAGE-BACKED SECURITIES
Mortgage-backed securities available for sale consist of the following:
December 31, 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
Amortized Cost Fair Value Amortized Cost Fair Value
- -----------------------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corporation
participation certificates $ 15,711,732 $ 16,137,553 $ 19,438,088 $ 19,845,510
Fannie Mae guaranteed mortgage
pass-through certificates 2,308,037 2,275,221 2,547,019 2,468,209
Government National Mortgage Association
modified pass-through certificates 45,208 46,338 92,490 95,265
Conventional pass-through certificates 3,138,769 3,138,578 3,982,504 3,981,597
Collateralized mortgage obligations -- -- 832,106 829,986
- -----------------------------------------------------------------------------------------------------------------------
$ 21,203,746 $ 21,597,690 $ 26,892,207 $ 27,220,567
=======================================================================================================================
Weighted average interest rate 8.00% 7.82%
=======================================================================================================================
Unrealized gains and losses on mortgage-backed securities available for sale are
summarized as follows:
December 31, 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
Gross Gross Gross Gross
Unrealized Gains Unrealized Losses Unrealized Gains Unrealized Losses
- -------------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corporation
participation certificates $ 494,651 $ 68,830 $ 538,105 $ 130,683
Fannie Mae guaranteed mortgage
pass-through certificates 409 33,225 629 79,439
Government National Mortgage Association
modified pass-through certificates 1,130 -- 2,775 --
Conventional pass-through certificates -- 191 -- 907
Collateralized mortgage obligations -- -- -- 2,120
- -------------------------------------------------------------------------------------------------------------------------------
$ 496,190 $ 102,246 $ 541,509 $ 213,149
===============================================================================================================================
Proceeds from the sales of mortgage-backed securities available for sale
during the year ended December 31, 1995 were $19,545,420. Gross gains of $8,889
and gross losses of $50,945 were realized on those 1995 sales. There were no
sales of mortgage-backed securities during the years ended December 31, 1997 and
1996.
During the year ended December 31, 1997 call provisions were exercised on
$380,544 of mortgage-backed securities available for sale. Gross gains of $2,051
were recognized during the respective period. There were no call provisions
exercised on mortgage-backed securities available for sale during 1996 and 1995.
As of September 30, 1996, based upon liquidity and interest rate
considerations, the Corporation determined it could no longer assert its
intention to hold all mortgage-backed securities until maturity. Therefore, the
entire mortgage-backed securities portfolio totaling $28,553,035 was
reclassified to an available-for-sale classification with unrealized pre-tax
gains of $190,368 being recorded as a favorable adjustment to stockholders'
equity. As a result, the Corporation intends to classify any investment or
mortgage-backed securities currently held or purchased in the subsequent two
years as available for sale.
Accrued interest receivable on mortgage-backed securities was approximately
$250,000 and $316,000 at December 31, 1997 and 1996, respectively.
The cost of mortgage-backed securities at December 31, 1997 and 1996
included net unamortized premiums of $0 and $119,000, respectively.
34
CFSB BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(4) MORTGAGE-BACKED SECURITIES - CONTINUED
Variable-rate mortgage-backed securities approximated $9,681,000 and
$11,286,000, with weighted average rates of 7.29 percent and 6.95 percent, at
December 31, 1997 and 1996, respectively.
At December 31, 1997, the Bank had no commitments to buy or sell mortgage-
backed securities.
(5) LOANS RECEIVABLE
Loans receivable consist of the following:
December 31, 1997 1996
- --------------------------------------------------------------------------------
First mortgage:
One-to-four family residential $ 585,266,880 $ 553,690,395
Income-producing property 44,580,004 52,583,762
FHA-insured and VA-partially guaranteed 7,607,118 6,404,211
Construction and development:
One-to-four family residential 34,821,124 38,072,036
Income-producing property 32,648,987 31,428,040
- --------------------------------------------------------------------------------
704,924,113 682,178,444
Second mortgage 549,105 510,458
Other loans:
Land contract 149,095 254,068
Auto 10,218,761 7,925,413
Commercial 5,087,147 4,644,308
Educational 1,347,731 1,870,672
Marine 1,349,584 1,307,903
Home equity 42,281,117 36,275,330
Mobile home 1,099,038 1,518,817
Other 8,037,676 5,425,604
- --------------------------------------------------------------------------------
69,570,149 59,222,115
- --------------------------------------------------------------------------------
775,043,367 741,911,017
Less:
Undistributed portion of loans in process (14,408,253) (18,147,704)
Deferred origination fees (1,098,646) (1,485,083)
Allowance for losses on loans (4,730,407) (4,563,594)
- --------------------------------------------------------------------------------
$ 754,806,061 $ 717,714,636
================================================================================
Weighted average interest rate 7.71% 7.60%
================================================================================
Accrued interest receivable on loans receivable, net of the allowance for
uncollectible interest, approximated $3,986,000 and $3,703,000, at December 31,
1997 and 1996, respectively.
The Corporation had approximately $883,000 and $1,787,000 of nonaccruing
loans as of December 31, 1997 and 1996, respectively. Interest received and
included as income on these loans for the years ended December 31, 1997, 1996,
and 1995, was $46,000, $118,000, and $26,000, respectively. The Corporation
would have recorded $32,000, $46,000, and $39,000 of additional interest income
on these nonaccrual loans for the years ended December 31, 1997, 1996, and 1995,
respectively, if these loans had been current in accordance with their original
terms and had been outstanding throughout the periods or since origination.
35
CFSB BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(5) LOANS RECEIVABLE - CONTINUED
There were no impaired loans as defined by SFAS 114 at December 31, 1997
and 1995. Impaired loans at December 31, 1996 totaled $554,000, and included one
income-producing property loan and three commercial business loans. 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 $112,000, $559,000, and $0
during 1997, 1996, and 1995, respectively. Interest income recognized on
impaired loans during 1997, 1996, and 1995 totaled $1,000, $27,000, and $0,
respectively. Impaired loans had specific allocations of the allowance for loan
losses in accordance with SFAS 114 approximating $0, $150,000, and $0 at
December 31, 1997, 1996, and 1995, respectively.
The Corporation had no troubled debt restructured loans at December 31,
1997 and 1996.
Included in one-to-four family residential, first-mortgage loans were
approximately $407,000,000 and $395,300,000 of adjustable-rate mortgages at
December 31, 1997 and 1996, respectively.
Included in income-producing property loans were approximately $44,500,000
and $46,300,000 of adjustable-rate mortgages at December 31, 1997 and 1996,
respectively.
The Corporation serviced loans for others of approximately $180,200,000,
$156,600,000, and $154,900,000 at December 31, 1997, 1996, and 1995,
respectively.
The balance of loans serviced for others at December 31, 1997 and 1996 with
capitalized originated mortgage servicing rights approximated $73,300,000 and
$30,100,000, respectively. Capitalized originated mortgage servicing rights at
December 31, 1997 and 1996 approximated $402,000 and $191,000, respectively. No
valuation allowances for capitalized originated mortgage servicing rights were
considered necessary as of December 31, 1997.
The Corporation had commitments to originate the following mortgage loans
at December 31, 1997:
Amount Weighted Average Rate
==============================================================================================
One-to-four family residential:
Fixed-rate $ 12,415,000 7.59%
Adjustable-rate 13,397,000 7.21
Income-producing property, fixed-rate 1,050,000 8.23
- ----------------------------------------------------------------------------------------------
$ 26,862,000 7.43%
==============================================================================================
The Corporation had commitments to sell one-to-four family residential,
fixed-rate mortgage loans of $7,685,000 at December 31, 1997. As of December 31,
1997, the Corporation had no commitments to buy mortgage loans. As of year-end
1997, $6,210,000 of one-to-four family residential, fixed-rate mortgage loans
were held for sale. Loans held for sale, after consideration of the
aforementioned commitments, were valued at the lower-of-cost or market, as
determined on an aggregate basis.
36
CFSB BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(6) CONCENTRATION OF CREDIT RISK
The Corporation considers its primary market area for lending and savings
activities to be the Greater Lansing area in mid-Michigan. The Corporation's
one-to-four family residential real estate loans totaled $627,700,000 and
$598,200,000 at December 31, 1997 and 1996, respectively, and included
$498,500,000 and $474,900,000 of originated loans, respectively. Substantially
all of the originated loans were on properties located in Michigan. Of the
purchased loans which are serviced by other institutions at December 31, 1997,
$40,400,000, $83,700,000 and $5,100,000 represented loans on properties located
in Michigan, Texas, and Florida, respectively. Substantially all of the
Corporation's income-producing property and consumer loans are based in
Michigan. Although the Corporation has a diversified loan portfolio, a
substantial portion of its debtors' ability to honor their contractual
obligations is reliant upon the economic stability of the area. The Greater
Lansing area is a diversified market with a strong service sector and, to a
lesser extent, trade and manufacturing sectors. The three major employers in the
area are the State of Michigan, General Motors, and Michigan State University.
The Corporation is not dependent upon any single industry or business for its
banking opportunities.
Collateral securing the Corporation's income-producing loan portfolio
consists of the following property types:
December 31, 1997 1996
================================================================================
Apartments $ 35,466,164 $ 35,340,019
Office buildings 16,068,170 22,242,915
Restaurants and motels 3,808,960 5,699,844
Retail centers 5,448,099 5,000,860
Residential land development 6,683,685 7,490,957
Residential and condominiums 5,309,418 3,552,506
Other 4,444,494 4,684,701
- --------------------------------------------------------------------------------
$ 77,228,990 $ 84,011,802
================================================================================
(7) Real Estate
Real estate held by the Corporation is summarized as follows:
December 31, 1997 1996
================================================================================
Real estate in judgment, subject to redemption $ 11,455 $ 189,990
Real estate acquired through foreclosure 141,172 22,169
- --------------------------------------------------------------------------------
152,627 212,159
Less: Allowance for losses (152,627) (212,159)
- --------------------------------------------------------------------------------
$ -- $ --
================================================================================
The following is a summary of the results of real estate operations for
the years indicated:
Years Ended December 31, 1997 1996 1995
=======================================================================================
Income from sales of real estate acquired
through foreclosure, net $ -- $ -- $ 587,478
Provision for losses on real estate (45,000) (60,000) (120,000)
Real estate expenses (5,121) -- --
- ---------------------------------------------------------------------------------------
$ (50,121) $ (60,000) $ 467,478
=======================================================================================
37
CFSB BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(8) ALLOWANCE FOR LOSSES ON LOANS AND REAL ESTATE
The following is a summary of the allowance for losses on loans and real estate:
Loans Real Estate Total
========================================================================================
Balance at December 31, 1994 $ 4,123,918 $ 75,973 $ 4,199,891
Provision for losses 240,000 120,000 360,000
Losses charged against the allowance (55,107) (34,614) (89,721)
Recoveries of losses 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
Losses charged against the allowance (76,528) (187,214) (263,742)
Recoveries of losses 36,983 115,796 152,779
- ----------------------------------------------------------------------------------------
Balance at December 31, 1996 4,563,594 212,159 4,775,753
Provision for losses 360,000 45,000 405,000
Losses charged against the allowance (247,432) (247,080) (494,512)
Recoveries of losses 54,245 142,548 196,793
- ----------------------------------------------------------------------------------------
Balances at December 31, 1997 $ 4,730,407 $ 152,627 $ 4,883,034
========================================================================================
(9) Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation and are
summarized by major classification as follows:
December 31, 1997 1996
================================================================================
Land $ 2,873,424 $ 3,004,842
Office buildings and improvements 12,009,627 11,901,210
Furniture, fixtures, and equipment 9,155,258 9,205,565
- --------------------------------------------------------------------------------
24,038,309 24,111,617
Less: Accumulated depreciation (13,581,129) (13,126,418)
- --------------------------------------------------------------------------------
$ 10,457,180 $ 10,985,199
================================================================================
(10) INVESTMENT IN FEDERAL HOME LOAN BANK STOCK
The Bank is required to maintain an investment in the stock of the Federal Home
Loan Bank of Indianapolis (FHLB) in an amount equal to at least 1.0 percent of
the unpaid principal balances of the Bank's residential mortgage loans, 0.3
percent of its total assets, or 5.0 percent of its outstanding advances from the
FHLB, whichever is greater. Purchases and sales of stock are made directly with
the FHLB at par value.
38
CFSB BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(11) DEPOSITS
Deposits represented by various types of programs are presented below:
December 31, 1997 1996
- -------------------------------------------------------------------------------------------
Weighted Weighted
Average Rate Amount Average Rate Amount
===========================================================================================
Regular savings 2.16% $ 63,069,112 2.14% $ 65,213,797
Money market savings 5.80 21,943,735 6.03 16,136,425
Consumer checking 1.77 93,339,386 1.85 86,722,533
Commercial checking -- 9,616,043 -- 9,324,314
Money market checking 3.81 50,099,329 4.07 51,962,675
- -------------------------------------------------------------------------------------------
2.60 238,067,605 2.65 229,359,744
Certificates of deposit 5.83 324,344,462 5.73 324,214,257
- -------------------------------------------------------------------------------------------
Total deposits 4.47% $ 562,412,067 4.46% $ 553,574,001
===========================================================================================
Accrued interest payable on deposits approximated $2,434,000 and $3,678,000 at
December 31, 1997 and 1996, respectively. Contractual maturities of certificates
of deposit are as follows:
December 31, 1997 1996
- -------------------------------------------------------------------------------------------
Weighted Weighted
Average Rate Amount Average Rate Amount
===========================================================================================
Maturing in
1997 5.62% $ 219,022,772
1998 5.76% $ 227,836,887 5.88 51,800,281
1999 5.97 60,441,070 5.96 30,414,437
2000 6.15 19,800,311 6.37 14,024,568
2001 5.68 7,403,257 5.63 7,821,907
2002 6.01 8,023,975 5.99 605,346
2003 and thereafter 5.95 838,962 5.94 524,946
- -------------------------------------------------------------------------------------------
5.83% $ 324,344,462 5.73% $ 324,214,257
===========================================================================================
Included in total certificates of deposit as of December 31, 1997 and
1996 are approximately $34,000,000 and $32,800,000, respectively, in
certificates of deposit of $100,000 or more in amount, with weighted average
interest rates of 6.00 percent and 5.85 percent, respectively. Contractual
maturities of certificates of deposit of $100,000 or more in amount outstanding
at December 31, 1997 are $3,600,000 within 3 months or less; $8,200,000 within 3
months to 6 months; $11,600,000 within 6 months to 12 months; and $10,600,000
for over 12 months.
At December 31, 1997, the Corporation had $100,000 of brokered deposits,
representing 0.02 percent of total deposits.
39
CFSB BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(11) DEPOSITS - CONTINUED
By regulation, certain penalties are assessed depositors exercising early
certificate withdrawal privileges. These penalties are accounted for as offsets
to interest expense on deposits in the year they are incurred. Listed below are
interest expense and penalties for the years indicated.
Years Ended December 31, 1997 1996 1995
===================================================================================================
Interest on deposits (net of penalties):
Savings $ 1,407,554 $ 1,592,132 $ 1,985,791
Checking 4,522,875 3,842,849 3,816,335
Certificates of deposit 18,547,142 18,402,513 18,008,128
- ---------------------------------------------------------------------------------------------------
$ 24,477,571 $ 23,837,494 $ 23,810,254
===================================================================================================
Penalties $ 121,000 $ 102,000 $ 117,000
===================================================================================================
The Corporation's interest rate exchange agreements were terminated in
November 1994. The remainder of the deferred loss was amortized in 1996. The
cost of the Corporation's interest rate exchange agreements was $106,927 and
$109,018 during the years ended December 31, 1996, and 1995, respectively, and
is included above as interest expense on deposits. There were no costs
associated with interest rate exchange agreements in 1997.
(12) ADVANCES FROM FEDERAL HOME LOAN BANK
FHLB advances at December 31, 1997 and 1996 are secured by the Corporation's
investment in the stock of the Federal Home Loan Bank of Indianapolis, and
substantially all of its first mortgage loans are under a blanket collateral
agreement. Maturities and weighted average interest rates are as follows:
December 31, 1997 1996
- ------------------------------------------------------------------------------------------------------------
Weighted Weighted
Average Rate Amount Average Rate Amount
============================================================================================================
Fixed-rate advances maturing in
1997 6.12% $ 26,746,389
1998 6.01% $ 61,357,552 6.01 61,357,552
1999 6.07 71,165,257 6.17 37,190,257
2000 5.85 27,086,995 5.66 13,586,995
2001 6.59 11,295,559 6.60 8,295,559
2002 6.46 29,567,059 6.42 2,567,059
2003 and thereafter 6.17 1,220,512 6.17 1,220,512
- ------------------------------------------------------------------------------------------------------------
Total fixed-rate advances 6.11 201,692,934 6.08 $150,964,323
Adjustable-rate advances maturing in
1997 -- -- 5.64 51,675,000
1998 5.70 11,000,000 -- --
- ------------------------------------------------------------------------------------------------------------
Total adjustable-rate advances 5.70 11,000,000 5.64 51,675,000
- ------------------------------------------------------------------------------------------------------------
6.09% $212,692,934 5.97% $202,639,323
============================================================================================================
At December 31, 1997 and 1996, the portfolio of FHLB advances included
borrowings of $1,650,000, which contractually the Corporation may, at its option
and without prepayment penalty, repay such advances on the first anniversary
date of each borrowing or semiannually thereafter until maturity.
40
CFSB BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(12) ADVANCES FROM FEDERAL HOME LOAN BANK - CONTINUED
At December 31, 1997, the portfolio of FHLB advances included borrowings
of $30,000,000, which contractually the FHLB may, at its option on the second
anniversary date and quarterly thereafter, convert such advances to a quarterly
adjustable interest rate indexed to the three month LIBOR rate. If the FHLB
exercises its option, the Corporation may, at its option and without prepayment
penalty, repay such advances on the second anniversary date or quarterly
thereafter. These advances are included in the fixed rate maturity year that
corresponds with their second anniversary date in the preceding schedule.
The Corporation had a $5,000,000 available but unused line of credit from
the FHLB at December 31, 1997 and 1996.
(13) FEDERAL INCOME TAXES
Federal income tax expense consists of:
Years Ended December 31, 1997 1996 1995
=============================================================================================================
Current tax expense $ 4,976,000 $ 2,500,000 $ 2,792,000
Deferred tax expense (benefit) -- (65,000) 137,000
- -------------------------------------------------------------------------------------------------------------
Income tax expense in the statement of operations 4,976,000 2,435,000 2,929,000
Income tax expense (benefit) charged (credited)
directly to stockholders' equity:
Gains on securities available for sale 50,000 74,000 924,000
ESOP dividends -- (29,000) (45,000)
Exercise of stock options -- (34,000) (27,000)
- -------------------------------------------------------------------------------------------------------------
$ 5,026,000 $ 2,446,000 $ 3,781,000
=============================================================================================================
The tax effects of temporary differences between the financial statement
carrying amounts and the tax bases of assets and liabilities that gave rise to
significant portions of the deferred tax assets and deferred tax liabilities are
summarized as follows:
December 31, 1997 1996
==================================================================================================
Deferred tax assets:
Allowance for losses on loans and real estate $ 1,709,000 $ 1,657,000
Postretirement benefits 552,000 533,000
Compensation and benefits 289,000 261,000
Premises and equipment 371,000 53,000
Other 273,000 209,000
- --------------------------------------------------------------------------------------------------
Total gross deferred tax assets 3,194,000 2,713,000
Deferred tax liabilities:
Excess of tax bad debt reserves over base-year reserves (1,255,000) (1,255,000)
Unrealized gains on available-for-sale securities (161,000) (111,000)
Federal Home Loan Bank stock dividends (285,000) (285,000)
Deferred loan origination fees (648,000) (506,000)
Servicing rights (141,000) (65,000)
Other (437,000) (174,000)
- --------------------------------------------------------------------------------------------------
Total gross deferred tax liabilities (2,927,000) (2,396,000)
- --------------------------------------------------------------------------------------------------
Net deferred tax asset $ 267,000 $ 317,000
==================================================================================================
41
CFSB BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(13) FEDERAL INCOME TAXES - CONTINUED
The deferred tax asset is subject to certain asset realization tests.
Management believes no valuation allowance is required at December 31, 1997 and
1996, or at the end of any interim quarter during these years, due to the
combination of potential recovery of tax previously paid and the reversal of
certain deductible temporary differences.
Federal income tax expense differs from the amounts computed using the
statutory federal income tax rate. The reasons for the differences are
summarized as follows:
Years Ended December 31, 1997 1996 1995
==========================================================================================================
Computed "expected" tax expense $ 5,477,000 $ 2,680,000 $ 3,309,000
Increase (reduction) resulting from:
Base-year tax bad debt reserves, net -- -- (174,000)
Low-income housing tax credits (360,000) (228,000) (228,000)
Other, net (141,000) (17,000) 22,000
- ----------------------------------------------------------------------------------------------------------
$ 4,976,000 $ 2,435,000 $ 2,929,000
==========================================================================================================
As a result of legislation enacted in 1996, the Bank is not permitted to use the
reserve method previously available to thrift institutions to compute its tax
bad debt deduction for years ending after December 31, 1995. It is expected the
excess of the Bank's December 31, 1995 tax bad debt reserves over its reserves
as of December 31, 1987 will be taken into taxable income ratable over a
six-year period beginning in 1998, and a deferred tax liability has been
recognized related to this amount. No deferred tax liability has been recognized
for the Bank's December 31, 1987 tax bad debt reserves of $8,500,000 since these
reserves would only be taken into taxable income under circumstances the
Corporation is not likely to encounter. Therefore, this temporary difference is
not expected to reverse in the foreseeable future.
(14) STOCK OPTION PLANS
In October 1990, the Corporation adopted the 1990 Stock Option Plan (1990 Plan)
for the benefit of directors, selected officers, and other key employees. The
number of shares of common stock reserved for issuance under the 1990 Plan was
equal to 10 percent of the total number of common shares issued pursuant to the
Bank's conversion to capital stock form. The 1990 Plan provides for the granting
of options for up to 628,587 shares of the Corporation's common stock at the
fair market value at the time the options are granted. The 1990 Plan will remain
in effect until June 28, 2000. Each stock option granted under the 1990 Plan
must be exercised within ten years of the date the option was granted.
In April 1994, the Corporation adopted the 1994 Stock Option and
Incentive Plan (1994 Plan) to provide select employees and directors the
opportunity to acquire shares. The number of shares of common stock reserved for
issuance under the 1994 Plan was equal to 10 percent of the then-outstanding
shares. The 1994 Plan provides for the granting of options for up to 818,765
shares of the Corporation's common stock at the fair market value at the time
the options are granted. The 1994 Plan will remain in effect until April 19,
2004. Each stock option granted under the 1994 Plan must be exercised within ten
years of the date the option was granted. The 1994 Plan provides that the Stock
Option Committee (Committee), appointed by the Corporation's board of directors,
at its discretion, may award restricted shares of the Corporation's common stock
to employees. Shares of the Corporation's common stock issued pursuant to the
1994 Plan are restricted for a period of no less than six months and no greater
than five years. The Committee determines the restrictions applicable to the
award of restricted stock, including, but not limited to, requirements of
continuous service for a specified term or the attainment of specific corporate,
divisional, or individual performance standards or goals. As of December 31,
1997, no restricted stock has been awarded.
42
CFSB BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(14) STOCK OPTION PLANS - CONTINUED
Both plans also provide for the granting of options with tandem stock
appreciation rights. Stock appreciation rights entitle the grantee to receive
cash equal to the excess of the market value of the shares at the date the right
is exercised over the exercised price. Upon exercise of a stock appreciation
right, the related option, or portion thereof, is canceled. An expense is
accrued for the amount by which the market value of the stock exceeds the option
price for each stock appreciation right outstanding. As of December 31, 1997, no
stock appreciation rights have been granted.
Financial Accounting Standard No. 123, which became effective for 1996,
requires pro forma disclosures for companies that do not adopt its fair value
accounting method for stock-based employee compensation. Accordingly, the
following pro forma information presents net income and earnings per share had
the Standard's fair value method been used to measure compensation cost for
stock option plans. There were no compensation costs recognized for stock
options during 1997 and 1996.
1997 1996
================================================================================
Net income as reported $ 10,672,528 $ 5,447,292
Pro forma net income 10,569,927 5,349,009
Basic earnings per share as reported 1.39 0.68
Pro forma basic earnings per share 1.38 0.67
Diluted earnings per share as reported 1.34 0.66
Pro forma diluted earnings per share 1.33 0.65
================================================================================
In future years, the pro forma effect of not applying this standard is
expected to increase as additional options are granted.
Options exercisable at December 31 are as follows:
1997 1996 1995
================================================================================
Number of options 317,753 331,119 372,311
Weighted average exercise price $ 2.76 $ 2.65 $ 2.55
================================================================================
For options granted during the years indicated, the weighted-average fair
values at grant date are as follows:
1997 1996
================================================================================
Options granted at market price:
Exercise price $ 14.35 $ 11.59
Fair value 2.63 3.39
================================================================================
The fair value of options granted during 1997 and 1996 is estimated using
the following weighted average information:
1997 1996
================================================================================
Risk-free interest rate 5.78% 5.42%
Expected life 7 years 10 years
Expected volatility of stock price 18.97% 17.01%
Expected dividends 2.00% 2.00%
================================================================================
43
CFSB BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(14) STOCK OPTION PLANS - CONTINUED
At December 31, 1997, options outstanding were as follows:
================================================================================
Number of options 508,948
Range of exercise price $2.31 - $17.55
Weighted average exercise price $6.07
Weighted average remaining option life 4.78 years
For options now exercisable:
Number 317,753
Weighted-average exercise price $2.76
================================================================================
The following table summarizes outstanding grants and stock option
transactions for the three years ended December 31, 1997:
Number of Shares Average Exercise Price
=============================================================================================
Options outstanding at December 31, 1994 423,846 $ 2.71
Options exercised (39,494) 2.89
Options forfeited (1,864) 5.11
Options granted 188,942 11.42
- ---------------------------------------------------------------------------------------------
Options outstanding at December 31, 1995 571,430 5.58
Options exercised (46,299) 2.48
Options forfeited (655) 8.82
Options granted 17,810 11.59
- ---------------------------------------------------------------------------------------------
Options outstanding at December 31, 1996 542,286 6.03
Options exercised (23,249) 4.52
Options forfeited (21,986) 11.41
Options granted 11,897 14.35
- ---------------------------------------------------------------------------------------------
Options outstanding at December 31, 1997 508,948 $ 6.07
=============================================================================================
At December 31, 1997, 627,819 shares were available for future grants.
(15) EMPLOYEE STOCK OWNERSHIP PLAN
In conjunction with the plan of conversion, the Corporation's board of
directors approved a noncontributory Employee Stock Ownership Plan (ESOP) for
substantially all employees. The ESOP acquired 331,271 and 108,316 shares of
common stock in June 1990 and December 1991, respectively, for $1,260,000 and
$595,088, respectively, financed by loans payable to a nonaffiliated bank. The
loan agreements are secured by pledges of the Corporation's common stock owned
by the ESOP and purchased with the proceeds from these loans. The Corporation
does not guarantee the debt.
On April 25, 1994, the ESOP borrowed from the Corporation funds totaling
$1,097,095, which were used to repay debt outstanding to the nonaffiliated bank.
The repayment schedules for the new loans are the same as those contained in the
original loan agreements; however, the new agreements provide for the payment of
no interest on the unpaid principal balances. As of December 31, 1997, the
outstanding loan balances are reflected as a reduction in stockholders' equity.
44
CFSB BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(15) EMPLOYEE STOCK OWNERSHIP PLAN - CONTINUED
The Corporation's contribution to the ESOP was approximately $232,000,
$147,000, and $99,000 for the years ended December 31, 1997, 1996, and 1995,
respectively. These amounts were charged to expense in the accompanying
consolidated statements of operations. Dividends on shares not allocated to
participants and held by the ESOP are utilized to service the ESOP debt and are
tax-deductible by the Corporation to the extent they are utilized to repay the
outstanding principal of the debt. Contributions from dividends on shares held
by the ESOP approximated $0, $85,000, and $133,000 for the years ended December
31, 1997, 1996, and 1995, respectively. The interest portion of the loan
payments was zero for the years ended December 31, 1997, 1996, and 1995,
respectively.
(16) PENSION PLAN AND OTHER RETIREMENT BENEFITS
Employees' Deferred Savings Plan and Deferred Savings Plan
The Bank's Employees' Deferred Savings Plan and Deferred Savings Plan (401(k)
plans) cover substantially all of its employees who have attained the age of 21,
have completed at least one year of service, and are a full-time or part-time
employee who has worked at least 1,000 hours during such plan year. Eligible
employees may contribute up to 18 percent of their annual compensation, subject
to certain maximums established by the Internal Revenue Service. The Corporation
will match up to 50 percent of the first 4 percent of the employees'
compensation deferred each year. In 1994, in addition to providing matching
funds under the 401(k) plans, the Bank established a discretionary
profit-sharing plan whereby eligible employees, regardless of their level of
participation in the 401(k) plans, received a contribution to their 401(k)
account in an amount equal to 2 percent of their compensation. The Corporation's
cost of these plans for the years ending December 31, 1997, 1996, and 1995, was
approximately $141,000, $176,000, and $132,000, respectively.
Financial Institutions Retirement Fund
The former Union Federal Savings (Union), which was merged into the Bank in
December 1991, was a participant in the multiple employer Financial Institutions
Retirement Fund (FIRF or the Fund), and substantially all of its officers and
employees were covered by the plan. FIRF provides benefits based on basic
compensation and years of service for employees age 21 and over after one year
of service. Union's contributions were determined by FIRF and generally
represented the normal cost of the Fund.
Union's participation in the FIRF was withdrawn effective February 29,
1992; therefore, no subsequent contributions have been required. Employee
participants were given the election to either choose continued participation
with the FIRF or to transfer the accrued benefit into the Bank's 401(k) plans.
Transfer of excess plan assets to the Bank's 401(k) plans occurred during 1993
and 1994 and are periodically allocated to remaining eligible participants as an
employer contribution.
Postretirement Benefits
The Bank's Employees' Retirement Health Care and Life Insurance Plan
(Postretirement Plan) is a contributory defined benefit postretirement health
care plan which covers substantially all employees of the Bank and their covered
dependents. Eligibility for benefits from the Postretirement Plan is age 60 with
at least 25 years of service with the Bank and active employment at retirement.
Retirees' contributions to the Postretirement Plan vary based upon the retiree's
age and election of coverage.
45
CFSB BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(16) PENSION PLAN AND OTHER RETIREMENT BENEFITS - CONTINUED
Components of net periodic postretirement benefit cost for the years
indicated are as follows:
Years Ended December 31, 1997 1996 1995
=================================================================================
Service cost $ 22,645 $ 21,209 $ 13,729
Interest cost 53,107 47,523 49,682
Amortization and deferral -- -- (3,470)
- ---------------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 75,752 $ 68,732 $ 59,941
=================================================================================
The weighted average discount rate used in determining the net periodic
postretirement benefit cost for 1997, 1996, and 1995 was 7.50 percent, 7.25
percent, and 8.75 percent, respectively. Additionally, in determining the net
periodic postretirement benefit cost, in 1997 there was a health care inflation
assumption of 10.41 percent, grading down uniformly to 5.50 percent in 2005 and
all years thereafter. A health care inflation assumption of 11.06 percent,
grading down uniformly to 5.25 percent in 2005 and all years thereafter, was
used in 1996. The dental inflation assumption was 5.00 percent in 1997 and 1996.
The Postretirement Plan's funded status, reconciled with amounts recognized
in the consolidated statements of financial condition, is as follows:
December 31, 1997 1996
==========================================================================================
Accumulated postretirement benefit obligation for:
Retirees $ 427,568 $ 433,545
Other fully eligible plan participants 20,429 41,710
Other active plan participants 311,315 264,113
- ------------------------------------------------------------------------------------------
Total accumulated postretirement benefit obligation 759,312 739,368
Plan assets at fair value -- --
- ------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation in excess
of plan assets 759,312 739,368
Unrecognized net transition obligation -- --
Unrecognized net gains (losses) from experience different
from that assumed (15,609) (21,872)
Prior service cost not yet recognized in net periodic
postretirement benefit cost -- --
- ------------------------------------------------------------------------------------------
Accrued postretirement benefit cost $ 743,703 $ 717,496
==========================================================================================
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation at December 31, 1997 and 1996, was 7.00
percent and 7.50 percent, respectively.
For measurement purposes at December 31, 1997, the health care inflation
rate is assumed to decline uniformly from 9.80 percent per year presently to
5.00 percent per year in 2005 and all years thereafter. The dental inflation
assumption is 5.00 percent per year in all future years.
At December 31, 1996, for measurement purposes, the health care inflation
rate is assumed to decline uniformly from 10.41 percent per year to 5.50 percent
per year in 2005 and all years thereafter. The dental inflation assumption is
5.00 percent per year in all future years.
The effect of a one-percentage-point increase in the health care cost
trend rate assumptions on the service and interest components of net periodic
postretirement benefit cost for 1997, 1996, and 1995 and the accumulated
postretirement benefit obligation as of December 31, 1997 and 1996 would be
minimal because of the application of defined dollar caps on employer-provided
benefits.
46
CFSB BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(17) REGULATORY MATTERS
The Bank is subject to regulatory capital requirements administered by federal
regulatory agencies. Capital adequacy guidelines and prompt corrective action
regulations involve quantitative measures of assets, liabilities, and certain
off-balance-sheet items calculated under regulatory accounting practices.
Capital amounts and classifications are also subject to qualitative judgments by
regulators about components, risk weightings, and other factors, and the
regulators can lower classifications in certain cases. Failure to meet various
capital requirements can initiate regulatory action that could have a direct
material effect on the consolidated financial statements.
The prompt corrective action regulations provide five classifications,
including well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized, although these
terms are not used to represent overall financial condition. If adequately
capitalized, regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required. The minimum
requirements are:
Capital to Risk- Tier 1 Capital
Weighted Assets to Adjusted
Total Tier 1 Total Assets
================================================================================
Well capitalized 10% 6% 5%
Adequately capitalized 8 4 4
Undercapitalized 6 3 3
================================================================================
At year-end, actual capital levels (in millions) and minimum required
levels were:
Minimum Required
Minimum Required To Be Well Capitalized
for Capital Under Prompt-
Actual Adequacy Purposes Corrective-Action Regulations
- -------------------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
===============================================================================================================================
1997
Total capital (to risk-weighted assets) $ 69.7 13.8% $ 40.5 8.0% $ 50.6 10.0%
Tier 1 (core) capital
(to risk-weighted assets) $ 65.0 12.8% $ 20.2 4.0% $ 30.4 6.0%
Tier 1 (core) capital
(to adjusted total assets) $ 65.0 7.6% $ 25.5 3.0% $ 42.6 5.0%
Tangible capital
(to adjusted total assets) $ 65.0 7.6% $ 12.8 1.5% N/A N/A
- -------------------------------------------------------------------------------------------------------------------------------
1996
Total capital (to risk-weighted assets) $ 64.1 13.2% $ 38.9 8.0% $ 48.6 10.0%
Tier 1 (core) capital
(to risk-weighted assets) $ 59.6 12.3% $ 19.4 4.0% $ 29.1 6.0%
Tier 1 (core) capital
(to adjusted total assets) $ 59.6 7.2% $ 24.9 3.0% $ 41.5 5.0%
Tangible capital
(to adjusted total assets) $ 59.6 7.2% $ 12.4 1.5% N/A N/A
===============================================================================================================================
The Bank, at December 31, 1997 and 1996, was categorized as well
capitalized.
47
CFSB BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(17) REGULATORY MATTERS - CONTINUED
The following is a reconciliation of the Corporation's consolidated
stockholders' equity for financial reporting purposes to the Bank's consolidated
tangible, core, and risk-based capital available to meet its regulatory
requirements:
December 31, 1997 1996
======================================================================================================
Corporation's stockholders' equity as reported
in the accompanying consolidated financial statements $ 67,534,790 $ 62,470,027
Plus (less):
Capitalization of parent company (2,266,491) (2,683,442)
Unrealized gains on available-for-sale securities, net of tax (312,597) (214,594)
- ------------------------------------------------------------------------------------------------------
Tangible and core capital 64,955,702 59,571,991
Plus supplementary capital:
General loss reserves 4,730,407 4,563,594
- ------------------------------------------------------------------------------------------------------
Risk-based capital $ 69,686,109 $ 64,135,585
======================================================================================================
The Bank may not declare or pay cash dividends on, or purchase, any of its
shares of common stock if the effect thereof would cause stockholders' equity to
be reduced below applicable regulatory capital maintenance requirements or if
such declaration and payment would otherwise violate regulatory requirements.
(18) EARNINGS PER SHARE
In February 1997 the FASB issued SFAS No. 128, Earnings Per Share (SFAS 128).
SFAS 128 specifies the computation, presentation, and disclosure requirements
for earnings per share. It replaces primary earnings per share and fully diluted
earnings per share with basic earnings per share and diluted earnings per share.
Effective December 31, 1997 the Corporation adopted SFAS 128. For the
Corporation, the computation for basic earnings per share is similar to primary
earnings per share except stock options are not considered when computing basic
earnings per share. For the Corporation, diluted earnings per share and fully
diluted earnings per share are similar. Diluted earnings per share of common
stock are based on the weighted average number of common shares and common share
equivalents outstanding during the year. The effect of common stock equivalent
shares applicable to employees' and directors' stock options has been included
in the calculation of diluted earnings per share for 1997, 1996, and 1995
because their impact was dilutive. The weighted average number of common and
common equivalent shares used in the calculation of diluted earnings per share
for 1996 and 1995 was restated to give retroactive effect to the 10 percent
stock dividend declared May 20, 1997 and the 3-for-2 stock split declared on
November 18, 1997.
A reconciliation of basic and diluted earnings per share for the years
ended December 31, follows:
Years Ended December 31, 1997 1996 1995
==================================================================================================
Net earnings applicable to common stock and
common stock equivalents $10,672,528 $ 5,447,292 $ 6,802,903
==================================================================================================
Average number of shares outstanding 7,673,080 8,013,783 8,060,989
Effect of dilutive securities - stock options 304,212 234,648 259,796
- --------------------------------------------------------------------------------------------------
7,977,292 8,248,431 8,320,785
==================================================================================================
Diluted earnings per share $ 1.34 $ 0.66 $ 0.82
==================================================================================================
48
CFSB Bancorp, Inc., and Subsidiary
Notes to Consolidated Financial Statements, continued
(19) Financial Instruments with Off-Balance-Sheet Risk
In the normal course of business, to meet the financing needs of its customers
and to reduce its own exposure to fluctuations in interest rates, the
Corporation is a party to financial instruments with off-balance-sheet risk.
These financial instruments include commitments to extend credit and letters of
credit. Those instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the accompanying
consolidated statements of financial condition. The contract or notional amounts
of those instruments reflect the extent of involvement the Corporation has in
particular classes of financial instruments.
The Corporation's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit and
letters of credit is represented by the contractual amount of that instrument.
The Corporation uses the same credit policies in making commitments as it does
for on-balance-sheet instruments.
Financial instruments whose contract amounts represent credit risk at
December 31, 1997 and 1996, are as follows:
1997 1996
===========================================================================
Commitments to extend credit $82,305,000 $73,220,000
Letters of credit 440,000 283,000
===========================================================================
There were no financial instruments whose notional amounts exceeded the
amount of credit risk at December 31, 1997.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Because many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Corporation applies the same
credit standards used in the lending process when extending these commitments
and evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Corporation upon
extension of credit, is based on management's credit evaluation of the
counterparty. Collateral held varies, but may include residential real estate
and income-producing commercial properties.
Letters of credit written are conditional commitments issued by the
Corporation to guarantee the performance of a customer to a third party. Most
guarantees extend for one year and expire in decreasing amounts through December
10, 1998. The extent of collateral held on those commitments at December 31,
1997 is equal to or in excess of the committed amount.
49
CFSB BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(20) CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
The statements of financial condition at December 31, 1997 and 1996, and
the statements of operations and cash flows for the years ended December 31,
1997, 1996, and 1995 of CFSB Bancorp, Inc., follow:
Statements of Financial Condition
December 31, 1997 1996
======================================================================================
Assets:
Cash on deposit at subsidiary bank $ 77,505 $ 1,122,093
Investment in subsidiary bank 65,268,299 59,786,585
Dividends receivable from subsidiary bank 1,767,318 829,050
Other assets 1,884,227 1,825,052
- --------------------------------------------------------------------------------------
Total assets $ 68,997,349 $ 63,562,780
======================================================================================
Liabilities:
Dividends payable to stockholders $ 912,897 $ 564,629
Other liabilities 549,662 528,124
- --------------------------------------------------------------------------------------
Total liabilities 1,462,559 1,092,753
- --------------------------------------------------------------------------------------
Stockholders' Equity:
Common stock 76,555 72,744
Additional paid-in capital 48,377,350 41,398,650
Retained income 20,011,874 23,863,600
Net unrealized gains on available-for-sale
securities of subsidiary bank, net of tax 312,597 214,594
Employee Stock Ownership Plan (227,522) (459,408)
Treasury stock (1,016,064) (2,620,153)
- --------------------------------------------------------------------------------------
Total stockholders' equity 67,534,790 62,470,027
- --------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 68,997,349 $ 63,562,780
======================================================================================
Statements of Operations
Years Ended December 31, 1997 1996 1995
===============================================================================================================
Income:
Dividends from subsidiary bank $ 5,141,733 $ 6,342,950 $ 3,022,000
Loss on equity investment (92,754) (108,153) (16,651)
- ---------------------------------------------------------------------------------------------------------------
Total operating income 5,048,979 6,234,797 3,005,349
Expenses:
Compensation, payroll taxes, and fringe benefits 401,105 312,954 333,072
Other operating expenses 297,325 208,621 222,142
- ---------------------------------------------------------------------------------------------------------------
Total operating expenses 698,430 521,575 555,214
- ---------------------------------------------------------------------------------------------------------------
Income before equity in undistributed net
income of subsidiary bank 4,350,549 5,713,222 2,450,135
Equity in undistributed net income of subsidiary bank 6,321,979 (265,930) 4,352,768
- ---------------------------------------------------------------------------------------------------------------
Net income $ 10,672,528 $ 5,447,292 $ 6,802,903
===============================================================================================================
50
CFSB BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(20) CONDENSED FINANCIAL INFORMATION -- PARENT COMPANY ONLY -- CONTINUED
Statements of Cash Flows
Years Ended December 31, 1997 1996 1995
=======================================================================================================
Cash Flows From Operating Activities:
Net income $ 10,672,528 $ 5,447,292 $ 6,802,903
Adjustments to reconcile net income:
Loss (equity) in undistributed net income
of subsidiary bank (6,321,979) 265,930 (4,352,768)
Decrease (increase) in other assets (59,175) 129,969 (634,019)
Increase in other liabilities 253,424 217,059 257,947
- -------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,544,798 6,060,250 2,074,063
- -------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Proceeds from stock options exercised 105,165 114,674 114,072
Purchases of treasury stock (2,777,983) (4,089,237) --
Dividends paid on common stock (2,916,568) (2,107,991) (1,832,008)
- -------------------------------------------------------------------------------------------------------
Net cash used by financing activities (5,589,386) (6,082,554) (1,717,936)
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (1,044,588) (22,304) 356,127
Cash at beginning of period 1,122,093 1,144,397 788,270
- -------------------------------------------------------------------------------------------------------
Cash at end of period $ 77,505 $ 1,122,093 $ 1,144,397
=======================================================================================================
(21) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, Disclosures About Fair
Value of Financial Instruments (SFAS 107), requires disclosures of fair-value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on estimates
using present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows. In that regard, the derived fair-value estimates
cannot be substantiated by comparison to independent markets and, in many cases,
could not be realized in immediate settlement of the instrument.
Fair-value methods and assumptions for the Corporation's financial
instruments are as follows:
Cash and Cash Equivalents - The carrying amounts reported in the
consolidated statements of financial condition for cash and interest-earning
deposits with the Federal Home Loan Bank and other depository institutions
reasonably approximate those assets' fair values.
Investment and Mortgage-Backed Securities - Fair values for investment and
mortgage-backed securities are based on quoted market prices.
Loans Receivable - For adjustable-rate loans that reprice frequently and
with no significant change in credit risk, fair values are generally based on
carrying values. The fair values for fixed-rate one-to-four family residential
mortgage loans, income-producing property loans, and consumer loans are
estimated using discounted cash flow analyses, using interest rates currently
being offered for loans with similar terms and similar credit quality. The
carrying amount of accrued interest receivable approximates its fair value.
Deposit Liabilities - The fair value of deposits with no stated maturity,
such as savings, checking, and money market accounts, is equal to the amount
payable on demand as of December 31, 1997 and 1996. The fair value of
certificates of deposit is based on the discounted value of contractual cash
flows. The discount rate is estimated using the rates currently offered by the
Corporation for deposits of similar remaining maturities. The fair value of
accrued interest payable approximates its carrying value.
51
CFSB BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(21) FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
Deposit Liabilities, continued - The fair-value estimates of deposit
liabilities do not include the benefit that results from the low-cost funding
provided by the deposit liabilities compared to the cost of borrowing funds in
the market.
Federal Home Loan Bank Advances - The fair value of the Corporation's
borrowings from the Federal Home Loan Bank are estimated using discounted cash
flow analyses, based on the Corporation's current incremental borrowing rates
for similar types of borrowing arrangements.
Off-Balance-Sheet Instruments - The fair value of commitments to extend
credit is estimated using the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
present creditworthiness of the counterparties. For fixed-rate loan commitments,
fair value also considers the difference between current levels of interest
rates and the committed rates.
The estimated fair value of the Corporation's financial instruments at
December 31, 1997 and 1996 is as follows:
1997 1996
Carrying Value Estimated Fair Value Carrying Value Estimated Fair Value
===================================================================================================================================
Financial assets:
Cash and short-term interest-earning deposits $ 18,489,494 $ 18,500,000 $ 22,749,963 $ 22,700,000
Investment securities 26,079,688 26,100,000 31,093,494 31,100,000
Mortgage-backed securities 21,597,690 21,600,000 27,220,567 27,200,000
Loans receivable, net 754,806,061 765,900,000 717,714,636 717,900,000
Accrued interest receivable 4,910,200 4,900,000 4,349,240 4,300,000
- -----------------------------------------------------------------------------------------------------------------------------------
Financial liabilities:
Savings, checking, and money market accounts 238,067,605 238,100,000 229,359,744 229,400,000
Certificates of deposit 324,344,462 325,400,000 324,214,257 325,300,000
Advances from Federal Home Loan Bank 212,692,934 214,200,000 202,639,323 202,600,000
Accrued interest payable 3,043,923 3,000,000 4,233,799 4,200,000
- -----------------------------------------------------------------------------------------------------------------------------------
Off-balance-sheet items:
Commitments to extend credit -- -- -- --
===================================================================================================================================
Limitations
Fair-value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Corporation's entire holding of a particular financial
instrument. Because no market exists for a significant portion of the
Corporation's financial instruments, fair-value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment, and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
Fair-value estimates are based on existing on- and off-balance-sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. Accordingly, the aggregate fair-value amounts presented
do not represent the underlying value of the Corporation.
52
CFSB BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(22) QUARTERLY FINANCIAL INFORMATION
The following is a summary of quarterly financial information for the years
ended December 31, 1997 and 1996 (unaudited):
March 31 June 30 September 30 December 31
(Dollars in Thousands, Except Per Share Data)
===============================================================================================================
1997
Interest income $ 15,171 $ 15,459 $ 15,879 $ 15,992
Net interest income 6,215 6,344 6,466 6,345
Provision for loan losses 90 90 90 90
Income before federal income tax expense 3,373 4,056 4,138 4,082
Net income 2,307 2,796 2,801 2,769
Earnings per share (1):
Basic .30 .36 .37 .36
Diluted .29 .35 .35 .35
Stock price range (1) $11.52-$13.48 $12.88-$16.50 $15.50-$20.67 $19.17-$26.25
- ---------------------------------------------------------------------------------------------------------------
1996
Interest income $ 13,786 $ 14,065 $ 14,549 $ 15,002
Net interest income 5,367 5,721 5,806 5,950
Provision for loan losses 60 60 60 60
Income (loss) before federal income tax expense 2,530 2,714 (530) 3,168
Net income (loss) 1,715 1,851 (293) 2,174
Earnings (loss) per share (1):
Basic .21 .23 (.04) .28
Diluted .21 .22 (.04) .27
Stock price range (1) $11.02-$13.22 $10.74-$12.12 $10.74-$12.12 $10.91-$12.58
===============================================================================================================
(1) Per share data was restated to give retroactive effect to the 10 percent
stock dividend declared May 20, 1997 and the 3-for-2 stock split declared
November 18, 1997.
53
=======================
STOCKHOLDER INFORMATION
=======================
Corporate Headquarters
CFSB Bancorp, Inc.
112 East Allegan Street
Lansing, MI 48933
(517) 374-3550
Fax (517) 374-3557
Wholly-Owned Subsidiary
Community First Bank
112 East Allegan Street
Lansing, Michigan 48933
(517) 371-2911
Stock Transfer Agent & Registrar
Registrar and Transfer Company
Investor Relations
10 Commerce Drive
Cranford, New Jersey 07016
(800) 368-5948
Dividend Reinvestment Plan
CFSB Bancorp, Inc. offers a Dividend Reinvestment and Stock Purchase Plan to
stockholders. The plan provides participating stockholders with a convenient way
to purchase additional shares of CFSB Bancorp common stock by reinvesting the
cash dividends paid on their shares. Participants may also purchase additional
shares by making an optional cash payment of $50 to $2,000. There are no fees or
commissions charged on shares purchased through the Plan. If you are interested
in learning more about the Dividend Reinvestment and Stock Purchase Plan, please
contact the Marketing Department at (517) 374-3569.
Annual Meeting
The annual meeting of stockholders for the year ended December 31, 1997 will be
held at the Sheraton Lansing Hotel, 925 South Creyts Road, Lansing, Michigan, on
Tuesday, April 21, 1998, at 11:00 a.m.
Form 10-K
The Corporation's 1997 Annual Report on Form 10-K as filed with the Securities
and Exchange Commission will be provided without charge to stockholders upon
request. Send requests to the Marketing Department at CFSB Bancorp, 112 East
Allegan Street, Lansing, Michigan 48933, or call (517) 374-3569.
54
Quarterly Stock Price and Dividend Information
Quarterly stock prices and dividends declared are shown in the table below:
Years Ended December 31, 1997 1996
- ---------------------------------------------------------------------------------------------------------------
Dividends Dividends
High Low Close Declared High Low Close Declared
===============================================================================================================
Quarter
First $ 13 1/2 $ 11 1/2 $ 12 7/8 $ 0.09 $13 1/4 $ 11 $ 11 7/8 $ 0.06
Second 16 1/2 12 7/8 15 1/2 0.10 12 1/8 10 3/4 11 7/16 0.07
Third 20 11/16 15 1/2 19 1/4 0.11 12 1/8 10 3/4 10 15/16 0.07
Fourth 26 1/4 19 3/16 26 1/4 0.12 12 9/16 10 15/16 11 13/16 0.07
- ---------------------------------------------------------------------------------------------------------------
Year $ 26 1/4 $ 11 1/2 $ 26 1/4 $ 0.42 $13 1/4 $ 10 3/4 $ 11 13/16 $ 0.27
===============================================================================================================
On November 18, 1997, the Corporation's board of directors declared a
3-for-2 stock split payable on December 18, 1997 to stockholders of record on
December 1, 1997. On May 20, 1997 a 10 percent stock dividend payable on June
16, 1997 to stockholders of record on May 30, 1997 was declared. In addition, on
August 20, 1996 the Corporation's board of directors declared a 10 percent stock
dividend payable on September 12, 1996 to stockholders of record on August 30,
1996. As a result, per share amounts have been restated for all periods to
reflect the stock split and the stock dividends.
On June 29, 1990, the Corporation's common stock began trading on the
NASDAQ National Market System under the symbol CFSB.
As of December 31, 1997, there were 7,607,478 shares of common stock issued
and outstanding.
As of February 27, 1998, there were approximately 1,261 stockholders of
record which does not include stockholders holding their stock in street name or
nominee's name.
55
==================
BOARD OF DIRECTORS
==================
[PHOTO APPEARS HERE] [PHOTO APPEARS HERE]
James L. Reutter Robert H. Becker
Chairman of the Board, President and
CFSB Bancorp, Inc. Chief Executive Officer,
President, Lansing Ice CFSB Bancorp, Inc.
and Fuel Company Lansing, Michigan
Lansing, Michigan
[PHOTO APPEARS HERE] [PHOTO APPEARS HERE]
David H. Brogan William C. Hollister
Agent, Ohio National Life President, Basic Insight
Insurance Company East Lansing, Michigan
Lansing, Michigan
[PHOTO APPEARS HERE] [PHOTO APPEARS HERE]
Cecil Mackey J. Paul Thompson, Jr.
Professor of Economics, President,
Michigan State University Computer Graphics, Inc.
East Lansing, Michigan DeWitt, Michigan
[PHOTO APPEARS HERE] [PHOTO APPEARS HERE]
Donald F. Wall Henry W. Wolcott, IV
President, Compass Shareholder,
Management, Inc. Public Accounting Firm
Williamston, Michigan of Kutas, Hawes, Wolcott &
Bergman, P.C.
Lansing, Michigan
[GRAPHIC OF VINE APPEARS HERE BEHIND TEXT]
========
OFFICERS
========
CFSB Bancorp, Inc.
Officers
James L. Reutter, Chairman
Robert H. Becker, President & Chief Executive Officer
John W. Abbott, Executive Vice President,
Chief Operating Officer & Secretary
Rick L. Laber, Vice President, Chief Financial Officer & Treasurer
Community First Bank
Executive Officers
Robert H. Becker, President & Chief Executive Officer
John W. Abbott, Executive Vice President,
Chief Operating Officer & Secretary
Carl C. Farrar, Senior Vice President & Chief Lending Officer
Jack G. Nimphie, Senior Vice President & Director of Operations
C. Wayne Weaver, Senior Vice President & Director of Retail Banking
JaneMarie Judge McMillian, Vice President &
Director of Human Resources
Rick L. Laber, Vice President, Chief Financial Officer & Treasurer
Sally A. Peters, Vice President & Director of Marketing
Other Officers
Vice Presidents
Richard J. Benson, Manager of Data Processing
S. Mark Guastella, Branch Administrator
David A. Huson, Manager of Central Operations
James S. Leenstra, Director of Lending Operations
Carole A. Rush-Witt, Manager of Residential Lending
Douglas W. Sutton, Manager of Consumer Lending
Rodney W. Weaver, Director of Corporate Services
Assistant Vice Presidents
Brenda G. Bartowiak, Williamston Branch Manager
Susan K. Bennett, Manager of Residential Lending Operations
Rhonda A. Curtis, Ionia Branch Manager
Kevin J. Fedewa, St. Johns Area Branch Manager
Michael C. Fildey, Operations Service Manager
Julie M. Goff, Manager of Construction Lending
JoAnn R. Isham, Okemos Area Branch Manager
Dan O. Kares, Manager of Commercial Lending
Paul L. Kelsey, East Lansing Area Branch Manager
R. Anthony Payne, West Saginaw Area Branch Manager
Joseph F. Szombati, Grand Ledge Area Branch Manager
Glenn R. Varlesi, South Cedar Area Branch Manager
Michelle L. Warfle, Mason Branch Manager
Robert D. Warnke, Metro Area Branch Manager &
Manager of Retirement Accounts
Gail L. Wilcox, Manager of Mortgage Loan Servicing
Gail M. Williams, Charlotte Branch Manager
Crystal D. Yaw, DeWitt Branch Manager
Managers
Stanley J. Gorecki, Controller
William E. Johnson, Data Processing Operations Manager
Ronald M. Pioch, Manager of Internal Control and Compliance
Lori A. Smith, Consumer Loan Officer
56
[GRAPHIC OF VINE APPEARS HERE]
==============================
COMMUNITY FIRST BANK LOCATIONS
==============================
[MAP APPEARS HERE]
* Branch Office with Full-Service ATM Banking Center
[] Branch Office without ATM Banking Center
+ Full-Service ATM Banking Center
(Deposits and Withdrawals)
. ATM Banking Center (Withdrawals Only)
[MAP OF REGION APPEARS HERE]
[GRAPHIC OF VINE APPEARS HERE]
[LOGO OF CFSB BANCORP APPEARS HERE]