[PHOTO]
A community of success.
A new century of growth.
CFSB [LOGO]
BANCORP
1998 Annual Report
[PHOTO]
Community First
Executive Officers
(standing) Sally Peters, Robert Becker, Rick Laber, (seated) John Abbott, Wayne
Weaver, Jack Nimphie, Jane Judge McMillian.
"Never doubt that a
small group of thoughtful,
committed people can
change the world.
Indeed, it is the only
thing that ever has."
Margaret Mead
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.
TABLE OF CONTENTS
Five Year Summary of Selected
Consolidated Financial Data..................................................8
Statement of Management's Responsibility.......................................9
Management's Discussion and Analysis of
Financial Condition and Results of Operations...............................10
Independent Auditors' Report..................................................23
Consolidated Statements of Financial Condition................................24
Consolidated Statements of Operations.........................................25
Consolidated Statements of Stockholders'
Equity and Comprehensive Income.............................................26
Consolidated Statements of Cash Flows.........................................27
Notes to Consolidated Financial Statements....................................29
Stockholder Information.......................................................55
Business of the Corporation
CFSB Bancorp, Inc., with consolidated assets of $880 million, is the
parent company of Community First Bank, a state-chartered savings bank
headquartered in Lansing, Michigan. CFSB Bancorp, Inc. was organized as a
Delaware Corporation in November 1989.
The Bank was originally chartered in 1890 as Capitol Investment Building
and Loan Association.
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.
PERFORMANCE HIGHLIGHTS
Net Income
(in thousands)
[GRAPHIC]
1994 1995 1996* 1997 1998
$5,589 $6,803 $7,661 $10,673 $11,844
PERFORMANCE HIGHLIGHTS
Return on Average Assets
[GRAPHIC]
1994 1995 1996* 1997 1998
.80% .92% .97% 1.26% 1.38%
PERFORMANCE HIGHLIGHTS
Return on Average Equity
[GRAPHIC]
1994 1995 1996* 1997 1998
10.18% 11.47% 11.89% 16.39% 17.59%
STOCK MARKET HIGHLIGHTS
Year End Closing Stock Price
[GRAPHIC]
1994 1995 1996 1997 1998
$7.74 $10.77 $10.74 $23.86 $24.38
*1996 excludes FDIC special assessment
A Message
to our Stockholders
[LETTERHEAD OF CFSB BANCORP]
Dear Stockholders,
I would like to thank our Board of Directors for their continued support
and the teamwork, dedication and energy of our officers and employees. They all
helped to make 1998 a record year for you, our stockholders. I especially want
to thank our retiring director, Cecil Mackey, a former president of Michigan
State University and current professor of economics at MSU, for his 20 years of
excellent service to both CFSB Bancorp, Inc. and Community First Bank.
Your investment in CFSB Bancorp, Inc. had a compounded annual return of 36
percent since June 1990, the date of our initial public offering. But that was
just one of many records we exceeded during the year.
For the twelve months ended December 31, 1998, net income increased 11
percent to $11.8 million compared to $10.7 million for 1997. Return on equity
also increased to 17.59 percent in 1998 from 16.39 percent in 1997.
The Corporation has paid cash dividends for 32 consecutive quarters.
Stockholders earned $1.38 per share compared to $1.22 for 1997. We continued to
outperform our peer banks and thrifts in increasing stockholder value. Last
year, Crain's Detroit Business recognized CFSB Bancorp as the highest ranking
bank in the "The Michigan Super 10," a special ranking of companies based on
one-year return, net income growth, revenue growth, and return on equity.
We added more than 13,600 new customers in 1998, giving us a commanding 30
percent share of all households in our area.
Our share of the deposit market grew to 11 percent, another impressive
figure. Together the number of our deposit and loan accounts have grown 15
percent over the last two years.
Improvements in operations and earnings were made. Now 91 percent of our
earning assets are in loans. We have increased training, software, marketing and
loan office locations to handle more loans, more efficiently. At the same time,
we have effectively lowered the cost of our funds through borrowing from the
Federal Home Loan Bank and taking advantage of the current low interest rates.
Community First also continued to expand its lead in home mortgage real
estate closings. We have been the number one lender in our area with six
consecutive years of growth.
We are very pleased with the growth the Corporation has experienced. Our
diversified business plan and our flourishing sales culture are bringing more
products, services, and convenient access to our customers every year.
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 90 percent
increase in personal checking accounts since 1994. In third quarter 1998, we
introduced First Sweep Business Checking, capitalizing on the growing small
business market. In addition, we continue to enhance two important Community
First Services: Community First Insurance and Investment Services providing
mutual funds, annuities, and financial planning; and Michigan Bankers Title of
Mid-Michigan, LLC, providing title insurance to our loan customers. Both grew in
1998 and helped increase fee income.
Our main geographic area of focus continues to be the greater Lansing
area, which continues to grow at a modest but steady pace, and as a result,
unemployment remains very low at just 3.1 percent. This strong employment base
has been led by three major employers: State of Michigan with 20,000 employees,
General Motors with 13,400 employees, and Michigan State University with 12,500
employees and 43,000 students.
2
In 1998, we also expanded our residential mortgage lending into Jackson
and Livingston counties. Livingston County, just west of Metro Detroit, is the
fastest growing county in Michigan. Residential growth is projected to double
and jobs to increase 83 percent by 2020.
As we offered more to our customers, their transactions with us continued
to grow. Traditional face-to-face transactions grew to 2.4 million and automated
transactions increased to nearly 4 million.
We gave our customers more convenient access with new ATMs, enhanced
on-line Web services, automated telephone banking services and an expanded
customer service center. In total, automated transactions were up 26 percent.
All of these transaction increases have helped steadily grow our fee
income. It has nearly doubled over the last three years. In 1998 fee income
represented 15 percent of our total net interest and noninterest income.
Regarding our compliance with the Year 2000, the Corporation's core data
processing software, which is provided by an outside vendor, has been certified
as Year 2000 compliant and is currently being tested. Year 2000 testing on all
internal systems is anticipated to be complete by March 31, 1999.
As you may know, on February 24, 1999, we announced that our Corporation
entered into a definitive agreement with Old Kent Financial Corporation
providing for the merger of CFSB Bancorp, Inc. with Old Kent. This agreement
calls for an exchange of .6222 shares of Old Kent Financial Corporation stock
for each share of CFSB Bancorp, Inc. stock
You may question why after such a successful year and so much hard work by
our team would we decide to merge this time.
The answer to your question is the basic promise of our Mission statement:
"We will achieve superior returns for our stockholders by placing the interests
of our customers and our communities first."
The year, 1998, was not only outstanding for CFSB, it was also a record
year for Old Kent Financial Corp. Their stockholders (and soon to include you)
earned $1.84 per share on net income of $198.8 million. Old Kent has a 40-year
history of consecutive annual increases in per share earnings and dividends.
Only five other companies listed on the New York Stock Exchange can match that
record.
Our customers will have even more access, more convenience, and more
financial services to help manage their money.
Customers will be able to utilize over 230 Old Kent branches and more than
400 ATMs throughout Michigan, Indiana and Illinois. They will have more services
and financial products for both individual and business needs. And they will
have the strength and dependability of a 146-year-old financial institution with
$17 billion in assets.
Our community will have the support of one of the strongest financial
institutions in the nation. A financial partner who is one of the leading
lenders of Small Business Association loans in Michigan.
So based on these benefits to our stockholders, our customers, and our
community, our Board of Directors has decided that now is the optimal time to
enter into a merger with Old Kent. And while the name on the door will change,
the spirit of Community First and the dedication of our employees will remain
strong. I salute you. I am proud to have worked with you in building Community
First into the largest, independent, local bank in mid-Michigan.
Join me as we enter a new century, as we become part of one of the
strongest and most respected financial services organizations in the nation.
Thank you.
Sincerely yours,
/s/ Robert H. Becker
Robert H. Becker
President and Chief Executive Officer
[PHOTO]
3
[PHOTO] We make it easy for customers [PHOTO]
to connect on-line or
on-the-phone.
Approaching the next century
As we enter a new era, we conclude with one of our most successful years ever.
By anticipating and meeting customer needs we grew our market share, expanded
our reach in growing markets, and enhanced our relationship with current
customers. In 1998 we gave our customers more convenience, access, services, and
new products. Our customers gave Community First another very profitable year.
We served more customers in more areas through more delivery channels than ever
before. And our customers responded enthusiastically, driving up our loan
originations and deposits and completing more than 3.5 million financial
transactions.
Loan Leadership
Our loan programs, competitive products, and improved loan processing
efficiencies helped us exceed our loan goals in 1998. We originated a record
number of residential mortgage, home equity, lines of credit, small business,
and personal loans in 1998.
Mortgages continue to be the strength of our loan program and the largest
contributor to our loan income. Community First Bank is again mid-Michigan's #1
home mortgage lender.
We have helped more families enjoy the satisfaction of home ownership than any
other financial institution in the area. We have accomplished it by building
very strong relationships with more than 300 realtors and 200 approved builders,
and by always understanding that mid-Michigan is a community of people and
homes.
More than 2,169 families bought a house with a Community First mortgage during
1998, an increase of 78 percent over 1997. Many were first time buyers who took
advantage of our Buyer's Edge mortgage pre-approval program. This has been a key
part of our strategy to build solid financial relationships with more customers
right from the start and then provide them with more financial products as their
needs expand. We start by automatically qualifying all mortgage customers for a
Homeowners' Checking account.
To strengthen our mortgage program we joined with other banks in 1997 to form a
title insurance company, Michigan Bankers Title of Mid-Michigan, LLC. This
enabled us to give more comprehensive service and added convenience to our
mortgage loan customers. The timing was terrific as the 1998 boom in refinancing
pushed the company to large profits and growth.
We also made it easier to apply for a loan by adding on-line loan applications
and a special loan calculator to our expanded Website at www.communityfirst.com.
It's one more way we are using our Website as a marketing tool.
Loan production received another boost from our Loan By Phone program. It's a
fully automated loan qualification program. Customers used it to apply for a
loan conveniently by phone, 24 hours a day, 7 days a week.
To capitalize on the profitable loan business in fast growing Livingston County
and Jackson County we put new Loan Production Offices in these communities.
These special
Building, buying or renovating, we help make happy homeowners.
4
home loan centers helped us capture more of these important markets.
These loan programs have helped us increase the percentage of loans as a part of
our earning assets to more than 91 percent.
Deposit Building
One of our most popular and profitable products has been Really Free Checking.
Each year this product has brought us thousands of new customers. 1998 was no
exception. We have more than 50,000 checking customers who have also become a
great source of customers for savings, investment services, home mortgages,
personal loans, and other Community First products and services. Really Free
Checking has helped push our total deposits to $587 million.
Another proven deposit builder has been our Power Rate Money Market account. The
hyperactive stock market helped drive more customers to our more steady Power
Rate. We, in turn, were then able to introduce them to additional Community
First products.
[PHOTO]
Business knows the value of time and money. They save both with us.
[PHOTO]
Business Banking Opportunities
Small business is another important growth area for bank income. Especially in
Michigan, where we have more successful business entrepreneurs than almost any
other state.
New Community First commercial business products brought added convenience and
access to our business customers as we expanded our market in 1998. Our First
Sweep Business Checking proved to be a popular new commercial sweep account.
Also our new ACH Origination Software for payroll, cash management, and accounts
receivables helped bring new ease of doing business to small businesses.
Growing Transactions Automatically
In 1998 we enhanced our automated transactions to make it easier for customers
to bank with us. We added more ATMs. We expanded our Customer Service Center for
more capacity, added convenience, and personal service. Customers called in for
one-on-one banking over the phone in record numbers. Calls increased 52 percent
over 1997.
Customers also connected automatically, day and night, seven days a week through
our First Line Telephone Banking. First Line phone transactions increased 24
percent over last year.
[GRAPHIC]
CUSTOMER SERVICE CENTER
[GRAPHIC]
FIRSTLINE TELEPHONE BANKING SERVICE
[GRAPHIC]
DRIVE-UP TRANSACTIONS
5
On-the-go or in-the-branch, customers keep in touch.
[PHOTO]
[PHOTO]
[PHOTO]
We also saw a tremendous increase in MoneyCard transactions. These cards are
producing substantial fee income with more than 200,000 transactions per
quarter. Our combination ATM and debit card lets customers access their checking
accounts at more than 12 million merchants around the world. Customers made
almost a million MoneyCard debit transactions in 1998, up 48 percent.
Complementing our MoneyCard service is our expanding ATM network. Thirty
machines are processing more than 300,000 transactions each quarter. Many of
these transactions are by non-customers, bringing in additional fee income with
each transaction.
www.communityfirst.com, our Website continues to bring in new customers as more
people go on-line to bank. It provides rate, branch office, and business hours
information, applications, and loan calculators, as well as linking customers to
all of our products and services. Many area businesses including real estate
companies and a residential listing site are also linked to our site.
Serving More Customers
Surprisingly, our convenient automated services did not diminish traditional
face-to-face service in our branches. Our customers still like service delivered
in person. Branch transactions increased 4.3 percent. We also expanded drive
through lanes in our Okemos and Mason branch offices to build stronger customer
relationships in these important areas. Altogether, customer transactions
increased 51 percent from 1997. Many of these transactions helped generate fee
income.
[PHOTO]
Our Website links customers to all of our products and services.
Enhanced Service
Insurance and investments are important growth areas for banks. So in 1997 we
formed our own agency to capitalize on this opportunity. The customer demand was
strong and in 1998 we expanded the agency with new offices and staffing. We
brought in a top-ranked investment professional to lead our expanded investment
team. This enabled us to provide better service to our customers while
generating additional fee income.
The Right Product At the Right Time
Part of our successful growth this year is due to having the right information
to make good decisions. We have introduced a new Profitability Measurement
Program. Combining this state of the art software system with an in-depth Furash
Research Study on market potential we were able to match our most profitable
products and services in the most appropriate markets. The result was a very
powerful, efficient, and effective marketing and sales focus. It is a strong
competitive advantage.
[PHOTO]
6
Community Ties
We always have had a long history of service and commitment to the communities
we serve. Our contributions of both volunteer time and financial investments
have increased each year, growing more than 20 percent in the last year.
[PHOTO]
Our community is a lot bigger than the bank.
We have focused much of our efforts on helping lower income families obtain
housing. We are members of the Lansing Neighborhood Housing Corporation that
provides financing for non-profit housing developers. We have increased our
support of CRA activities. And our employees have volunteered countless hours to
help the Capital Area United Way, American Cancer Society, Children's Miracle
Network, and dozens of other giving organizations throughout mid-Michigan.
David Huson,
Central Operations
[PHOTO]
Two employees who deserve special recognition are David Huson and Dennis Smith,
winners of our Volunteer of the Year Award for 1998.
We would not have become the leading independent, local bank in mid-Michigan
without taking the lead role in supporting and enhancing our communities. We
also would not have accomplished such a successful year without the amazing
performance of Community First employees, like Ron Salander, winner of the
President's Excellence Award for 1998.
[PHOTO]
Dennis Smith,
Accounting
Concluding a Chapter, Beginning a New Book
Our customers, our community commitment, our profitable products and services,
our successful marketing program and the dedication of our employees have made
us the leading financial institution in the growing mid-Michigan market. Our
success has made us a very attractive financial partner. And with our merger
into Old Kent we have succeeded in bringing more value to our stockholders, our
customers and our community. We are proud of our accomplishments, our programs
and our people. We look forward to the challenges ahead as we enter a new
century and a new banking relationship.
7
FIVE YEAR SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
- --------------------------------------------------------------------------------
At and for the Years Ended December 31, 1998 1997 1996 1995 1994
==========================================================================================================
Summary of Financial Condition: (Dollars in Thousands, Except Per Share Data)
Total assets $880,347 $852,888 $829,800 $761,418 $727,243
Interest-earning deposits 10,246 13,301 15,270 22,654 10,524
Investment securities, net 22,019 26,080 31,093 55,109 88,712
Mortgage-backed securities, net 16,007 21,598 27,221 35,156 66,151
Loans receivable, net 786,411 754,806 717,715 610,284 518,591
Deposits 586,707 562,412 553,574 527,816 501,690
FHLB advances and securities
sold under agreement to repurchase 213,607 212,693 202,639 160,649 160,351
Stockholders' equity 69,277 67,535 62,470 62,743 55,607
==========================================================================================================
Summary of Operations:
Interest income $62,562 $62,501 $57,402 $53,621 $47,080
Interest expense 36,601 37,131 34,498 33,188 26,978
- ----------------------------------------------------------------------------------------------------------
Net interest income before provision for
loan losses 25,961 25,370 22,904 20,433 20,102
Provision for loan losses 390 360 240 240 240
- ----------------------------------------------------------------------------------------------------------
Net interest income after provision for
loan losses 25,571 25,010 22,664 20,193 19,862
Noninterest income 8,309 6,401 4,242 3,966 2,349
Noninterest expense 16,224 15,762 15,669 14,427 14,473
FDIC special assessment -- -- 3,355 -- --
- ----------------------------------------------------------------------------------------------------------
Income before federal income tax expense 17,656 15,649 7,882 9,732 7,738
Federal income tax expense 5,812 4,976 2,435 2,929 2,149
- ----------------------------------------------------------------------------------------------------------
Net income $11,844 $10,673 $5,447 $6,803 $5,589
==========================================================================================================
Per Share Data: (1)
Basic earnings $1.44 $1.26 $0.62 $0.76 $0.63
Diluted earnings 1.38 1.22 0.60 0.75 0.61
Stockholders' equity (book value) 8.49 8.07 7.31 7.05 6.28
==========================================================================================================
Ratios and Other Data:
Interest rate spread 2.76% 2.70% 2.63% 2.52% 2.69%
Net yield on average earning assets 3.10 3.06 2.98 2.85 2.98
Return on average assets 1.38 1.26 0.69 0.92 0.80
Return on average stockholders' equity 17.59 16.39 8.55 11.47 10.18
Average earning assets to average
interest-bearing liabilities 107.67 108.18 107.78 107.23 107.41
Efficiency ratio 50.10 51.42 58.13 60.73 64.51
Noninterest expense to average assets 1.89 1.87 1.98 1.95 2.08
Stockholders' equity to total assets 7.87 7.92 7.53 8.24 7.65
Nonaccruing loans and real estate
owned to total assets 0.19 0.12 0.24 0.08 0.44
Dividend payout ratio 36.90 31.71 41.28 28.38 30.14
Number of full-service offices 17 17 18 18 18
==========================================================================================================
(1) The financial information for per share amounts has been restated to
reflect the ten percent stock dividend declared May 19, 1998 as well as
previous stock dividends paid in 1997, 1996, and 1995 and a stock split
distributed in 1997.
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 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, 1998, 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
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 $880.3 million at December 31, 1998
from $852.9 million at December 31, 1997. Most of the growth occurred in loans,
which was funded by an increase in deposits, as well as repayments on
mortgage-backed securities and maturities of investments.
Net loans receivable increased to $786.4 million at December 31, 1998 from
$754.8 million at December 31, 1997. This net growth of $31.6 million occurred
primarily through growth in mortgages of $32.8 million, consumer loans of $3.7
million and commercial loans of $2.6 million, partially offset by a decrease in
income-producing property loans of $7.5 million. The Corporation originated
$327.2 million of loans in 1998, compared to $206.0 million in 1997. Single
family mortgage loan originations in 1998 were $246.7 million, compared to
$142.3 million for 1997. During 1998 and 1997, the Corporation sold primarily
fixed-rate loans aggregating $131.8 million and $46.8 million, respectively. The
Corporation purchased loans consisting of one-to-four family residential, fixed-
and adjustable-rate loans from unaffiliated financial institutions. These
purchases, totaling $71.2 million and $27.8 million in 1998 and 1997,
respectively, are used to supplement and complement the Corporation's own
mortgage loan production.
Deposits increased $24.3 million to $586.7 million at December 31, 1998
from $562.4 million at December 31, 1997. This growth occurred through an
increase in savings accounts of $6.8 million and an increase in checking
accounts of $21.1 million, partially offset by a decrease in certificates of
deposit of $3.6 million.
FHLB advances and securities sold under agreement to repurchase are
comprised primarily of FHLB advances. Advances decreased $858,000 to $211.8
million at December 31, 1998 from $212.7 million at December 31, 1997. The net
decrease was composed of a decline in adjustable-rate advances of $8.5 million,
partially offset by an increase in fixed-rate advances of $7.6 million. The use
of fixed-rate advances increased as management continues to take steps to reduce
interest rate risk.
Total stockholders' equity was $69.3 million at December 31, 1998, an $1.8
million increase, compared to the 1997 year-end total of $67.5 million. The
increase was primarily the result of net income for 1998, offset in part by
dividend declarations and treasury stock purchases.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Results of Operations for the Year Ended December 31, 1998,
Compared to the Year Ended December 31, 1997
Net income for the year ended December 31, 1998 was $11.8 million, or $1.38 per
diluted share, compared to $10.7 million, or $1.22 per diluted share for 1997, a
net increase of $1.1 million. Earnings per share for 1998 increased 13 percent
over 1997. Principally accounting for the increase in earnings between years was
growth in both net interest income and fee income and an increase in gains on
sales of the Corporation's 30-year fixed-rate mortgage loan production, which
increased net income for 1998 over 1997 by $629,000.
Net income for 1998 represents a return on average assets of 1.38 percent,
an increase from 1.26 percent for 1997, and a return on average stockholders'
equity of 17.59 percent compared to 16.39 percent for 1997. The Corporation's
efficiency ratio, or recurring operating expenses over recurring operating
revenues, was 50.1 percent for the year ended December 31, 1998, an improvement
from 51.4 percent for the year ended December 31, 1997.
Net Interest Income
The most significant component of the Corporation's earnings is net interest
income, which is the difference between interest earned on loans,
mortgage-backed securities, investment securities and other earning assets, and
interest paid on deposits and FHLB advances and other borrowings. 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.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
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, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
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) $764,624 $58,166 7.61% $747,060 $57,570 7.71% $674,437 $51,612 7.65%
Mortgage-backed securities 18,489 1,415 7.66 24,144 1,769 7.32 30,714 2,342 7.62
Investment securities 16,872 1,007 5.97 28,452 1,689 5.94 38,848 2,189 5.63
Interest-earning deposits
with FHLB and other
depository institutions 25,439 1,026 4.03 15,836 523 3.30 14,598 465 3.18
Other 12,063 948 7.86 12,433 950 7.64 10,680 794 7.44
- ------------------------------------------------------------------------------------------------------------------------------------
Total earning assets 837,487 62,562 7.47 827,925 62,501 7.55 769,277 57,402 7.46
====================================================================================================================================
Interest-bearing Liabilities:
Savings, checking and money
market accounts(2) 254,009 6,052 2.38 235,475 5,930 2.52 217,316 5,435 2.50
Certificates of deposit(2) 325,400 18,716 5.75 322,998 18,547 5.74 319,491 18,403 5.76
FHLB advances
and securities sold
under agreement
to repurchase 198,429 11,833 5.96 206,826 12,654 6.12 176,943 10,660 6.02
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 777,838 36,601 4.71 765,299 37,131 4.85 713,750 34,498 4.83
====================================================================================================================================
Excess earning assets $ 59,649 $ 62,626 $ 55,527
====================================================================================================================================
Net interest income $25,961 $25,370 $22,904
====================================================================================================================================
Interest rate spread(3) 2.76% 2.70% 2.63%
====================================================================================================================================
Net yield on average
earning assets(4) 3.10% 3.06% 2.98%
====================================================================================================================================
Average earning assets to average
interest-bearing liabilities 107.67% 108.18% 107.78%
====================================================================================================================================
(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.
(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.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
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, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year End of Year For the Year End of Year For the Year End of Year
====================================================================================================================================
Weighted Average Yield:
Loans receivable (1) 7.61% 7.39% 7.71% 7.71% 7.65% 7.60%
Mortgage-backed securities 7.66 7.82 7.32 8.00 7.62 7.82
Investment securities 5.97 5.31 5.94 6.02 5.63 5.89
Interest-earning deposits with
FHLB and other depository
institutions 4.03 2.80 3.30 3.31 3.18 4.93
Other 7.86 7.83 7.64 7.90 7.44 7.55
- ------------------------------------------------------------------------------------------------------------------------------------
Total earning assets 7.47 7.27 7.55 7.57 7.46 7.47
====================================================================================================================================
Weighted Average Cost:
Savings, checking and money
market accounts (2) 2.38 2.32 2.52 2.60 2.50 2.65
Certificates of deposit (2) 5.75 5.60 5.74 5.83 5.76 5.73
FHLB advances and other borrowings 5.96 5.73 6.12 6.09 6.02 5.97
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 4.71 4.55 4.85 4.91 4.83 4.86
====================================================================================================================================
Interest rate spread (3) 2.76% 2.72% 2.70% 2.66% 2.63% 2.61%
====================================================================================================================================
Net yield on earning assets (4) 3.10% 3.02% 3.06% 3.02% 2.98% 2.95%
====================================================================================================================================
(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 $26.0 million
during 1998, a $591,000 increase from $25.4 million during 1997. Net interest
income in 1998 was positively affected by growth in loans receivable and earning
assets and a decline in cost of funds. The Corporation's net yield on average
earning assets was 3.10 percent for 1998, an improvement from 3.06 percent for
1997. 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 $764.6 million in
1998, representing growth of $17.5 million over average loans receivable of
$747.1 million in 1997. The increased level of loans outstanding resulted from
originations of adjustable- and fixed-rate, medium-term mortgage loans and
purchases of adjustable- and fixed-rate, medium-term mortgage loans, all of
which are held in the Corporation's portfolio. The Corporation's net interest
margin of 3.10 percent for the year ended December 31, 1998 exceeded the net
interest margin of 3.02 percent at December 31, 1998.
The future trend of the Corporation's net interest margin and net interest
income may be impacted by the level of mortgage loan originations, purchases,
repayments, refinancings, sales and a resulting change in the composition of the
Corporation's earning assets. The relatively flat yield curve during late 1997
and 1998 resulted in a shift toward more customers exhibiting a preference for
fixed-rate mortgage loans, many of which were originated for sale in the
secondary market. In late 1997, customers began converting adjustable-rate
mortgage loans to 30-year fixed-rate loans, which the Bank sells in the
secondary market. This activity contributed to a decline in loan yields at
December 31, 1998, compared to December 31, 1997. This also contributed to the
decline in yield on earning assets from 7.55 percent for 1997 to 7.47 percent
for 1998.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
The decline in yield in earning assets was more than offset by a decline
in cost of funds during 1998, causing an increase in net interest margin from
3.06 percent for 1997 to 3.10 percent for 1998. Loans held for sale increased
slightly to $6.6 million at December 31, 1998, compared to $6.2 million at
December 31, 1997. A continued high level of refinancings and conversions of
adjustable-rate mortgage loans to 30-year fixed-rate loans could have a negative
impact on future net interest income. Because the Corporation is liability
sensitive, pressure may be felt on the Corporation's net interest margin if
short-term market interest rates rise or if long-term mortgage rates fall.
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.
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, 1998 vs 1997 1997 vs 1996
- -----------------------------------------------------------------------------------------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
Volume Rate Total Volume Rate Total
(Dollars in Thousands) (Dollars in Thousands)
=================================================================================================================
Interest Income:
Loans receivable $ 1,347 $(751) $ 596 $ 5,554 $ 404 $ 5,958
Mortgage-backed securities (432) 79 (353) (484) (89) (573)
Investment securities (691) 9 (682) (614) 114 (500)
Interest-earning deposits with FHLB
and other depository institutions 368 134 502 40 18 58
Other (29) 26 (3) 134 22 156
- -----------------------------------------------------------------------------------------------------------------
Total interest income 563 (503) 60 4,630 469 5,099
=================================================================================================================
Interest Expense:
Savings, NOW and money
market accounts 457 (336) 121 452 43 495
Certificates of deposit 137 32 169 207 (63) 144
FHLB advances and securities sold
under agreement to repurchase (499) (322) (821) 1,815 179 1,994
- -----------------------------------------------------------------------------------------------------------------
Total interest expense 95 (626) (531) 2,474 159 2,633
=================================================================================================================
Net interest income $ 468 $ 123 $ 591 $ 2,156 $ 310 $ 2,466
=================================================================================================================
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 $390,000 and
$360,000 during 1998 and 1997, 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."
14
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Noninterest Income
Noninterest income, a significant component of the Corporation's earnings, was
$8.3 million for the year ended December 31, 1998, an increase of $1.9 million,
compared to $6.4 million for the year ended December 31, 1997. The increase in
noninterest income resulted primarily from an increase in net gains on sales of
loans of $967,000 compared to 1997. The increase in gains on sales of loans was
primarily due to the high level of refinancings and conversions of
adjustable-rate mortgage loans to 30-year fixed-rate loans, which are sold in
the secondary market. An increase in interest rates could have a negative impact
on gains on sales of loans in future periods. Another significant component of
the increase in noninterest income was an increase in service charges and other
fees of $745,000. The increase in service charges and fees results from higher
fees assessed on a higher level of accounts and transaction account activity.
During 1998, noninterest income included a nonrecurring gain on the sale of a
bank building of $273,000, compared to nonrecurring net gains on the sales of
three branches totaling $506,000 in 1997. Income from debit cards, which were
introduced in April 1996, increased $176,000 in 1998 to $467,000 for the year
ended December 31, 1998.
Noninterest Expense
Noninterest expense in 1998 was $16.2 million, compared to $15.8 million in
1997. Compensation and fringe benefits expense rose $567,000 between periods as
a result of merit-based salary adjustments, an increased provision for the
management incentive program, an increase in the number of employees as open
employment positions were filled in 1998 and the use of temporary help in 1998.
Decreased office occupancy and equipment expense resulted from equipment
becoming fully depreciated in the second quarter of 1997. Depreciation expense
is expected to increase in 1999 due in part to equipment purchases made in late
1998 in connection with the Year 2000 project. See "Year 2000." Various other
costs were higher in 1998 due to a larger customer base and higher transaction
volumes.
Federal Income Tax Expense
Federal income tax expense was $5.8 million for the year ended December 31,
1998, compared to $5.0 million for 1997. 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, 1997,
COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
Net income for the year ended December 31, 1997 was $10.7 million, or $1.22 per
diluted share, compared to $5.4 million, or $0.60 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 $0.25 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.
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
Net interest income for 1997 was $25.4 million, compared to $22.9 million for
1996. The interest rate spread increased to 2.70 percent in 1997 from 2.63
percent in 1996, and net yield on average earning assets was 3.06 percent,
compared to 2.98 percent for 1996. Net interest income for 1997 increased due to
1) a $58.6 million increase in average earning assets, partially offset by a
$51.5 million increase in average interest bearing liabilities and 2) a 9 basis
point increase in yield on funds, partially offset by a 2 basis point increase
in cost of 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 1996.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Provision for Loan Losses
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.
Factors considered in this review include the historical loss experience,
recovery levels of loans previously charged off, the financial condition of
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 $4.7 million at December
31, 1997, compared to $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 decreased from 0.24 percent as of
December 31, 1996 to 0.12 percent as of December 31, 1997.
Noninterest Income
Noninterest 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
noninterest 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, noninterest income included nonrecurring net gains on the
sales of three branches totaling $506,000. Debit cards were introduced in April
1996 and income from debit cards increased $199,000 in 1997.
Noninterest Expense
Earnings for 1996 were significantly impacted by a nonrecurring, pre-tax charge
of $3.4 million to recapitalize the FDIC's SAIF. Noninterest expense in 1997 was
$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. 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.
Asset Quality
The following table presents the Corporation's nonperforming assets. Management
normally considers loans to be nonperforming when payments are 90 days or more
past due, when credit terms are renegotiated below market levels, or when an
analysis of an individual loan indicates repossession of the collateral may be
necessary to satisfy the loan.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
December 31, 1998 1997
(Dollars in Thousands)
================================================================================
Nonaccruing Loans:
One-to-four family residential mortgages $ 256 $ 697
FHA-partially insured and VA-partially guaranteed 132 109
Consumer installment 223 93
- --------------------------------------------------------------------------------
Total $ 611 $ 899
================================================================================
Percentage of total assets 0.07% 0.10%
================================================================================
Real Estate Owned:(1)
One-to-four family residential $ 686 $ 11
Construction and development 379 141
- --------------------------------------------------------------------------------
Total $1,065 $ 152
================================================================================
Percentage of total assets 0.12% 0.02%
================================================================================
Total nonaccruing loans and real estate owned $1,676 $1,051
================================================================================
Percentage of total assets 0.19% 0.12%
================================================================================
(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, 1995 through December 31, 1998. The ratio of
net loan charge-offs to average loans outstanding during the years ended
December 31, 1998 and 1997, was 0.02 percent and 0.03 percent, respectively.
Real
Loans Estate Total
================================================================================
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
Provision for losses 390,000 -- 390,000
Charges against the allowance (167,493) (67,444) (234,937)
Recoveries 51,234 -- 51,234
- --------------------------------------------------------------------------------
Balance at December 31, 1998 $ 5,004,148 $ 85,183 $ 5,089,331
================================================================================
Nonperforming assets increased from $1.1 million to $1.7 million from
December 31, 1997 to December 31, 1998, and as a percentage of total assets
increased from 0.12 percent at December 31, 1997 to 0.19 percent at December 31,
1998. Correspondingly, the $5.0 million allowance for loan losses at December
31, 1998 grew from $4.7 million at December 31, 1997, resulting in a slight
increase in the allowance for loan losses as a percentage of total loans as of
December 31, 1998 to 0.62 percent compared to 0.61 percent at December 31, 1997.
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.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
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 interest rate 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 analysis and interest rate
shock modeling. The Bank has no market risk sensitive instruments held for
trading purposes. The condensed GAP analysis 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, 1998. 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
9.6 percent at December 31, 1998, compared to a negative 10.4 percent at
December 31, 1997; the Corporation's one-to-three-year cumulative gap was a
negative 5.5 percent at December 31, 1998, compared to a negative 1.7 percent at
December 31, 1997; and the Corporation's three-to-five-year cumulative gap was a
negative 5.7 percent at December 31, 1998, compared to a negative 1.5 percent at
December 31, 1997. 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 may not be 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,
except that putable FHLB advances which mature/reprice in less than one year and
are unlikely to be put based on current interest rates are assumed to
mature/reprice in one year.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
The data presented in the table represents 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, 1998
- -------------------------------------------------------------------------------------------------------------------------------
0-6 7-12 1-3 3-5 Over 5
Months Months Years Years Years Total
(Dollars in Thousands)
===============================================================================================================================
Assets:
Loans receivable $128,421 $103,322 $211,285 $159,262 $184,121 $786,411
Mortgage-backed securities 7,520 5,432 1,893 1,162 -- 16,007
Investment securities 9,849 -- 12,170 -- -- 22,019
Other 21,697 -- -- -- -- 21,697
- -------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets 167,487 108,754 225,348 160,424 184,121 846,134
Noninterest earning assets 34,213
- -------------------------------------------------------------------------------------------------------------------------------
Total assets $880,347
===============================================================================================================================
Liabilities and Stockholders' Equity:
Regular savings 6,779 5,982 10,209 8,135 35,358 $ 66,463
Checking 18,102 14,408 29,765 8,022 17,662 87,959
Money market 41,659 5,082 2,887 25,863 -- 75,491
Certificates of deposit 139,036 100,967 60,610 19,155 969 320,737
Advances from Federal Home Loan Bank
and securities sold under agreement
to repurchase 9,631 15,689 86,982 100,861 444 213,607
- -------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities 215,207 142,128 190,453 162,036 54,433 764,257
Stockholders' equity and
noninterest bearing liabilities 116,090
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $880,347
===============================================================================================================================
Rate Sensitivity GAP and Ratios:
GAP for period (interest-earning assets
less interest-bearing liabilities) $(47,720) $(33,374) $ 34,895 $ (1,612) $129,688 $ 81,877
- -------------------------------------------------------------------------------------------------------------------------------
Cumulative gap $(47,720) $(81,094) $(46,199) $(47,811) $ 81,877
===============================================================================================================================
GAP as a percentage of
interest-earning assets (5.64)% (3.94)% 4.12% (0.19)% 15.33% 9.68%
- -------------------------------------------------------------------------------------------------------------------------------
Cumulative gap as a percentage of
interest-earning assets (5.64)% (9.58)% (5.46)% (5.65)% 9.68% --
===============================================================================================================================
Cumulative gap at December 31, 1997 (3.39)% (10.38)% (1.72)% (1.47)% 7.70% --
===============================================================================================================================
Average Estimated
Total Interest Rate Fair Value
===============================================================================================================================
Assets:
Loans $786,411 7.39% $811,300
Securities 38,026 6.29 38,000
Other 21,697 6.11 21,700
Liabilities:
Deposits 550,650 4.11 552,800
FHLB advances and securities sold under
agreement to repurchase 213,607 5.73 215,300
===============================================================================================================================
19
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
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 4.40 percent and 7.32
percent at December 31, 1998 and December 31, 1997, 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 repayments are more
influenced by interest rates, general economic conditions and competition.
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 7.6 percent, 7.6
percent and 14.1 percent, respectively, at December 31, 1998.
The Corporation's cash dividend policy is continually reviewed by
management and the Board of Directors. The Corporation currently intends to
continue its policy of paying quarterly dividends; however, such payments will
depend upon a number of factors, including capital requirements, regulatory
limitations, the Corporation's financial condition and results of 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 19, 1998. The additional shares, as a result of the dividend, were
distributed on June 12, 1998 to stockholders of record as of May 29, 1998.
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.
During April 1998, the Corporation's Board of Directors approved an
extension of the April 1997 stock repurchase program pursuant to which the
Corporation may repurchase up to 5 percent or 426,525 shares of CFSB Bancorp,
Inc. common stock. Through December 31, 1998, the Corporation repurchased
399,722 shares of CFSB Bancorp, Inc. common stock on the open market for $8.6
million, or at an average purchase price of $21.53 per share. The program was
extended to April 1999 to allow the Corporation an opportunity to repurchase the
remaining 26,803 shares under the 1997 program.
Year 2000
The Year 2000 issue refers to potential problems with computer systems or any
equipment with computer chips that store the year portion of the date as just
two digits. Systems using this two-digit approach may not be able to determine
whether 00 represents the year 2000 or 1900. The problem, if not corrected, may
make those systems fail or allow them to generate incorrect calculations causing
a disruption of normal operations.
In 1998, a comprehensive project plan to address the Year 2000 issue, as
it relates to the Corporation, was developed, approved by the Board of Directors
and implemented. The scope of the plan includes five phases: Awareness,
Assessment, Renovation, Validation and Implementation, as defined by federal
banking regulatory agencies. A project team that consists of key members of the
technology staff, representatives of functional business units, and senior
management was developed. Additionally, the Director of Operations, a member of
senior management, serves as the Year 2000 project manager and regularly reports
to the Board of Directors.
An assessment of the impact of the Year 2000 issue on the Corporation's
computer systems has been completed. The scope of the project also includes
other operational and environmental systems since they may be impacted if
embedded computer chips control the functionality of those systems. From this
assessment, the Corporation identified and prioritized those systems deemed to
be mission critical or those that have significant impact on normal operations.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
The Corporation is progressing with the Renovation, Validation and
Implementation phases of the project plan. The Corporation relies on third party
vendors and service providers for its data processing capabilities and to
maintain its computer systems. Formal communications with these providers and
other external counterparties were initiated in 1998 to assess the Year 2000
readiness of their products and services. Their progress in meeting their
targeted schedules is being monitored for any indication that they may not be
able to address the problem on a timely basis. Thus far, responses indicate that
most of the significant providers currently have compliant versions available or
are well into the renovation and testing phases, with completion scheduled for
sometime in early 1999. Specifically, the Corporation's core data processing
software is provided by an outside vendor, which has certified the software is
Year 2000 compliant. The Corporation is using the compliant software and has
installed it on a redundant computer for testing, which began in August 1998.
The Corporation anticipates completion of testing the software for integration
with other third party software in early 1999. Management also anticipates
completing testing its remaining internal systems for Year 2000 compliance by
March 31, 1999. Year 2000 testing is scheduled for completion on all systems by
June 30, 1999. The Corporation can give no guarantee that the systems of these
service providers and vendors on which the Corporation's systems rely will be
timely renovated.
Additionally, the Corporation has implemented a plan to manage the
potential risk posed by the impact of the Year 2000 issue on its major
customers. Formal communications are in process, and the assessment is scheduled
to be completed by March 31, 1999.
The Corporation has completed the development of contingency plans for
systems that are determined to be mission critical. These plans include the
replacement of vendors or development of alternative systems or processes where
systems will not be completed by specified dates. The Corporation formed a task
force and is in the process of updating its business resumption plan, with
particular emphasis on addressing contingencies associated with systems that are
thought to be Year 2000 compliant, but prove not to be at a future date.
As of December 31, 1998, approximately $700,000 of costs have been
incurred in connection with ensuring the Corporation's systems and products are
Year 2000 compliant. Management anticipates total costs for Year 2000
implementation will approximate $750,000 to $900,000. These costs are primarily
for the replacement of depreciable assets.
The costs and the timetable in which the Corporation plans to complete the
Year 2000 readiness activities are based on management's best estimates, which
were derived using numerous assumptions of future events, including the
continued availability of certain resources, third party readiness plans, and
other factors. The Corporation can make no guarantee that these estimates will
be achieved, and actual results could differ from such plans.
Accounting Standards
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133).
SFAS 133 establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires recognition of all derivatives
as either assets or liabilities in the statement of financial condition and
measurement of those instruments at fair value. The accounting for gains and
losses on derivatives depends on the intended use of the derivative. This
Statement is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999, with earlier application encouraged. Retroactive application is
not permitted. Management has not completed its evaluation of the expected
impact of SFAS 133 on the financial condition or operations of the Corporation.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Forward-looking Statements
This report includes forward-looking statements that involve inherent risks and
uncertainties. A number of important factors could cause actual results to
differ materially from those in the forward-looking statements. Those factors
include the economic environment, competition, products and pricing in
geographic and business areas in which the Corporation operates, prevailing
interest rates, changes in government regulations and policies affecting
financial services companies and credit quality and credit risk management. CFSB
Bancorp, Inc. undertakes no obligation to release revisions to these
forward-looking statements or reflect events or circumstances after the date of
this report.
22
INDEPENDENT AUDITORS' REPORT
[LOGO]
KPMG LLP
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, 1998 and 1997,
and the related consolidated statements of operations, stockholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Lansing, Michigan
January 19, 1999
Except as to Note 23, which is as of February 24, 1999
23
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
CFSB Bancorp, Inc., and Subsidiary
December 31, 1998 1997
================================================================================
Assets:
Cash and amounts due from depository
institutions $ 11,694,940 $ 5,188,951
Interest-earning deposits with
Federal Home Loan Bank and
other depository institutions,
at cost, which approximate market 10,246,287 13,300,543
Investment securities available
for sale, at fair value 22,018,800 26,079,688
Mortgage-backed securities available
for sale, at fair value 16,006,538 21,597,690
Loans receivable, net 786,411,364 754,806,061
Accrued interest receivable, net 4,380,539 4,910,200
Real estate, net 979,838 --
Premises and equipment, net 10,345,702 10,457,180
Stock in Federal Home Loan Bank
of Indianapolis, at cost 11,450,700 11,423,100
Other assets 6,812,007 5,124,500
- --------------------------------------------------------------------------------
Total assets $880,346,715 $852,887,913
================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Deposits $586,707,413 $562,412,067
Advances from Federal Home Loan Bank
and securities sold under agreement
to repurchase 213,607,417 212,692,934
Advance payments by borrowers for
taxes and insurance 1,345,619 1,454,316
Accrued interest payable 2,760,854 3,043,923
Federal income taxes payable 850,629 556,315
Other liabilities 5,797,462 5,193,568
- --------------------------------------------------------------------------------
Total liabilities 811,069,394 785,353,123
- --------------------------------------------------------------------------------
Stockholders' Equity:
Serial preferred stock, $0.01 par value;
authorized 2,000,000 shares;
issued - none -- --
Common stock, $0.01 par value;
authorized 15,000,000 shares;
issued 8,173,517 shares in 1998,
and 7,655,466 shares in 1997 81,735 76,555
Additional paid-in capital 63,770,944 48,377,350
Retained income - substantially restricted 5,464,366 20,011,874
Accumulated other comprehensive income 269,897 312,597
Employee Stock Ownership Plan (74,387) (227,522)
Treasury stock, at cost 10,449 shares - 1998,
and 52,787 shares - 1997 (235,234) (1,016,064)
- --------------------------------------------------------------------------------
Total stockholders' equity 69,277,321 67,534,790
- --------------------------------------------------------------------------------
Commitments and contingent liabilities -- --
Total liabilities and stockholders' equity $880,346,715 $852,887,913
================================================================================
See accompanying Notes to Consolidated Financial Statements.
24
CONSOLIDATED STATEMENTS OF OPERATIONS
CFSB Bancorp, Inc., and Subsidiary
Years Ended December 31, 1998 1997 1996
======================================================================================================
Interest Income:
Loans receivable $ 58,166,166 $ 57,570,229 $ 51,612,087
Mortgage-backed securities 1,415,333 1,768,498 2,341,727
Investment securities 1,006,813 1,688,983 2,188,967
Other 1,973,311 1,473,760 1,259,274
- ------------------------------------------------------------------------------------------------------
Total interest income 62,561,623 62,501,470 57,402,055
- ------------------------------------------------------------------------------------------------------
Interest Expense:
Deposits, net 24,767,702 24,477,571 23,837,494
Federal Home Loan Bank advances and securities
sold under agreement to repurchase 11,833,340 12,654,049 10,660,383
- ------------------------------------------------------------------------------------------------------
Total interest expense 36,601,042 37,131,620 34,497,877
- ------------------------------------------------------------------------------------------------------
Net interest income before provision
for loan losses 25,960,581 25,369,850 22,904,178
Provision for loan losses 390,000 360,000 240,000
- ------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 25,570,581 25,009,850 22,664,178
- ------------------------------------------------------------------------------------------------------
Noninterest Income:
Service charges and other fees 5,041,102 4,296,132 3,449,537
Loan servicing income 208,076 305,174 399,446
Losses on sales of investment securities
available for sale, net -- (31,372) (64,188)
Gains on sales of mortgage-backed securities
available for sale, net 2,362 2,051 --
Gains on sales of loans, net 1,609,982 642,876 256,343
Real estate operations, net 29,467 (50,121) (60,000)
Gains on sales of branches, net 272,793 505,698 --
Other, net 1,145,363 730,168 260,529
- ------------------------------------------------------------------------------------------------------
Total noninterest income 8,309,145 6,400,606 4,241,667
- ------------------------------------------------------------------------------------------------------
Noninterest Expense:
Compensation, payroll taxes, and fringe benefits 8,993,572 8,426,696 8,010,714
Office occupancy and equipment 2,194,540 2,384,424 2,609,958
Federal insurance premiums 346,042 354,007 1,150,117
FDIC special assessment -- -- 3,355,000
Marketing 701,081 808,823 792,083
Data processing 521,543 454,099 365,704
Other, net 3,466,916 3,333,879 2,739,977
- ------------------------------------------------------------------------------------------------------
Total noninterest expense 16,223,694 15,761,928 19,023,553
- ------------------------------------------------------------------------------------------------------
Income before federal income tax expense 17,656,032 15,648,528 7,882,292
Federal income tax expense 5,812,000 4,976,000 2,435,000
- ------------------------------------------------------------------------------------------------------
Net income $ 11,844,032 $ 10,672,528 $ 5,447,292
======================================================================================================
Earnings Per Share:
Basic $ 1.44 $ 1.26 $ 0.62
Diluted 1.38 1.22 0.60
======================================================================================================
Dividends per share 0.51 0.38 0.25
======================================================================================================
See accompanying Notes to Consolidated Financial Statements.
25
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
CFSB Bancorp, Inc., and Subsidiary
Years Ended December 31, 1998, 1997 and 1996
====================================================================================================================================
Accumulated
Other Total
Common Additional Retained Commitment Treasury Comprehensive Stockholders'
Stock Paid-in Capital Income for ESOP Debt Stock Income Equity
====================================================================================================================================
Balance at December 31, 1995 $ 67,777 $34,366,570 $ 29,852,980 $(691,294) $ (924,673) $ 71,661 $62,743,021
Net income for the year 1996 -- -- 5,447,292 -- -- -- 5,447,292
Change in net unrealized gain on
securities, net -- -- -- -- -- 142,933 142,933
-----------
Total comprehensive income 5,590,225
10% common stock dividend 4,967 6,969,800 (8,980,475) -- 1,995,912 -- (9,796)
Treasury stock purchased -- -- -- -- (4,089,237) -- (4,089,237)
Stock options exercised -- -- (283,171) -- 397,845 -- 114,674
Repayment of ESOP debt -- -- -- 231,886 -- -- 231,886
Cash dividends on common stock -
$0.25 per share -- -- (2,173,026) -- -- -- (2,173,026)
Tax benefit of ESOP dividends -- 28,730 -- -- -- -- 28,730
Tax benefit associated with exercise
of stock options -- 33,550 -- -- -- -- 33,550
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 72,744 41,398,650 23,863,600 (459,408) (2,620,153) 214,594 62,470,027
Net income for the year 1997 -- -- 10,672,528 -- -- -- 10,672,528
Change in net unrealized gain on
securities, net -- -- -- -- -- 98,003 98,003
-----------
Total comprehensive income 10,770,531
10% common stock dividend 3,811 6,985,791 (11,063,418) -- 4,062,759 -- (11,057)
Cash value of fractional shares
on stock split -- (7,091) -- -- -- -- (7,091)
Treasury stock purchased -- -- -- -- (2,777,983) -- (2,777,983)
Stock options exercised -- -- (214,148) -- 319,313 -- 105,165
Repayment of ESOP debt -- -- -- 231,886 -- -- 231,886
Cash dividends on common
stock - $0.38 per share -- -- (3,246,688) -- -- -- (3,246,688)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 76,555 48,377,350 20,011,874 (227,522) (1,016,064) 312,597 67,534,790
Net income for the year 1998 -- -- 11,844,032 -- -- -- 11,844,032
Change in net unrealized gain on
securities, net -- -- -- -- -- (42,700) (42,700)
-----------
Total comprehensive income 11,801,332
10% common stock dividend 5,180 15,300,221 (21,530,994) -- 6,210,476 -- (15,117)
Treasury stock purchased -- -- -- -- (6,317,707) -- (6,317,707)
Stock options exercised -- -- (702,861) -- 888,061 -- 185,200
Repayment of ESOP debt -- -- -- 153,135 -- -- 153,135
Cash dividends on common
stock - $0.51 per share -- -- (4,157,685) -- -- -- (4,157,685)
Tax benefit associated with
exercise of stock options -- 93,373 -- -- -- -- 93,373
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $ 81,735 $63,770,944 $ 5,464,366 $ (74,387) $ (235,234) $269,897 $69,277,321
====================================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
26
CONSOLIDATED STATEMENTS OF CASH FLOWS
CFSB Bancorp, Inc., and Subsidiary
Years Ended December 31, 1998 1997 1996
=========================================================================================================================
Cash Flows From Operating Activities:
Net income $ 11,844,032 $ 10,672,528 $ 5,447,292
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,063,859 1,347,691 1,605,669
Provision for loan losses 390,000 360,000 240,000
Provision for real estate losses -- 45,000 60,000
Net amortization of premiums and accretion
of discounts (81,690) 165,158 370,832
Loans originated for sale (64,993,732) (20,424,389) (25,856,898)
Proceeds from sales of loans originated for sale 65,726,441 18,650,496 24,219,028
Net gains on sales of loans and securities (1,612,344) (613,555) (192,155)
Net gains on sales of real estate owned (40,470) -- --
Net (gains) losses on sales and disposals of
premises and equipment (279,569) (491,675) 83,101
Increase (decrease) in deferred loan fees (698,936) (353,731) 198,518
Decrease (increase) in accrued interest receivable 529,661 (560,960) 533,993
Increase in deferred federal income tax benefit (345,688) -- (65,000)
Increase (decrease) in accrued interest payable (283,069) (1,189,876) 759,736
Increase (decrease) in federal income taxes payable 387,687 (183,927) 273,902
Increase (decrease) in other liabilities 609,819 291,539 (192,161)
Decrease (increase) in other assets (1,156,893) (66,566) 1,660,411
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 11,059,108 7,647,733 9,146,268
- -------------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Purchases of investment securities available for sale (19,774,075) (24,018,281) (20,060,266)
Proceeds from sales of investment securities
available for sale -- 20,037,695 23,135,173
Principal repayments and maturities of investment
securities available for sale 24,000,000 9,000,000 20,420,000
Loan originations (net of undisbursed loans in process) (262,256,062) (185,621,409) (200,744,785)
Loans purchased (71,153,756) (27,847,054) (31,733,987)
Proceeds from sales of loans 66,746,891 28,439,980 7,853,490
Principal repayments on loans 234,894,592 149,524,869 118,078,242
Purchases of mortgage-backed securities available for sale (510,969) -- --
Principal repayments and maturities on mortgage-
backed securities available for sale 5,955,908 5,571,279 2,271,581
Principal repayments and maturities on mortgage-
backed securities held to maturity -- -- 5,967,777
Proceeds from sales, redemptions, and settlements
of real estate owned, net 247,475 723,716 497,637
Purchases of premises and equipment (1,372,088) (1,706,796) (1,456,346)
Proceeds from sales and disposals of premises
and equipment 699,276 1,378,799 5,524
Purchases of Federal Home Loan Bank stock (27,600) (791,100) (2,095,200)
- -------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (22,550,408) (25,308,302) (77,861,160)
- -------------------------------------------------------------------------------------------------------------------------
27
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
CFSB Bancorp, Inc., and Subsidiary
Years Ended December 31, 1998 1997 1996
===================================================================================================================
Cash Flows From Financing Activities:
Net increase in deposits $ 24,295,346 $ 8,838,066 $ 25,757,823
Stock options exercised 185,200 105,165 114,674
Purchases of treasury stock (6,317,707) (2,777,983) (4,089,237)
Net increase (decrease) in advance payments
by borrowers for taxes and insurance (108,697) 97,809 75,464
Federal Home Loan Bank advance repayments (111,985,061) (110,885,770) (98,262,720)
Federal Home Loan Bank advances 111,127,509 120,939,381 140,252,667
Securities sold under agreement to repurchase 1,772,035 -- --
Dividends paid on common stock (4,025,592) (2,916,568) (2,107,991)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 14,943,033 13,400,100 61,740,680
- -------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 3,451,733 (4,260,469) (6,974,212)
Cash and cash equivalents at beginning of period 18,489,494 22,749,963 29,724,175
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 21,941,227 $ 18,489,494 $ 22,749,963
===================================================================================================================
Supplemental Disclosures of Cash Flow Information:
Cash paid for:
Interest expense $ 36,884,111 $ 38,321,496 $ 33,738,141
Federal income taxes 5,770,000 5,170,000 2,450,000
Transfers of loans to real estate owned 1,186,843 672,078 342,408
Transfers of loans to repossessed property and
accounts receivable 162,398 150,611 69,673
Loans charged off 167,493 247,432 76,528
Loans to facilitate the sale of real estate owned -- -- 279,700
Transfers of mortgage-backed securities to
available-for-sale classification -- -- 28,553,035
===================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CFSB Bancorp, Inc., and Subsidiary
December 31, 1998
(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, and 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 subsidiaries Community First Mortgage
Corporation and 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 excluded from earnings
and are reported as a separate component of other comprehensive income 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 Fees
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 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.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CFSB Bancorp, Inc., and Subsidiary
(1) SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Nonaccrual Assets
Nonaccrual assets are comprised of loans where the accrual of interest has been
discontinued, loans on 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.
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.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CFSB Bancorp, Inc., and Subsidiary
(1) SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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.
Impairment represents the excess of cost of an individual mortgage servicing
rights stratum over its fair value, and is recognized through a valuation
allowance. 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 are 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.
Interest on Deposits
Penalty income on early withdrawal of certificates of deposit is recognized as a
reduction of interest expense on deposits.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CFSB Bancorp, Inc., and Subsidiary
(1) SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Comprehensive Income
The Corporation adopted FASB Statement No. 130, Reporting Comprehensive Income
(SFAS 130), effective January 1, 1998. SFAS 130 establishes standards for
reporting and displaying comprehensive income and its components, including but
not limited to unrealized gains or losses on securities available for sale, in
the financial statements. Prior period amounts have been reclassified in the
financial statements.
Amounts reclassified from net income to comprehensive income for the years
ended December 31 are as follows:
Years Ended December 31, 1998 1997 1996
====================================================================================================================================
Tax Tax Tax
Expense Reclassification Expense Reclassification Expense Reclassification
====================================================================================================================================
Change in unrealized holding gains
arising during period, net of tax $ 22,529 $(42,700) $(59,197) $114,911 $(20,599) $ 39,987
Add: reclassification adjustment for
realized gain included in net
income, net of tax -- -- 8,710 (16,908) (53,032) 102,946
- ------------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income for the year $ (42,700) $ 98,003 $142,933
====================================================================================================================================
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.
Pension and Other Postretirement Plans
On January 1, 1998, the Corporation adopted Statement of Financial Accounting
Standards (SFAS) No. 132, Employers' Disclosures about Pension and Other
Postretirement Benefits. SFAS No. 132 revises employers' disclosures about
pension and other postretirement benefit plans. SFAS No. 132 does not change the
method of accounting for such plans.
Stock Dividend and Split
The Corporation's Board of Directors declared a 10 percent stock dividend on May
19, 1998. The additional shares as a result of the dividend were distributed on
June 12, 1998 to stockholders of record as of May 29, 1998. 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.
Reclassifications
Certain prior years' financial statement amounts have been reclassified to
conform to the current year financial statement presentation.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CFSB Bancorp, Inc., and Subsidiary
(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 $2,862,000 and $1,754,000 at December 31,
1998 and 1997, respectively.
(3) INVESTMENT SECURITIES
Investment securities available for sale consist of the following:
December 31, 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
Amortized Cost Fair Value Amortized Cost Fair Value
==========================================================================================================================
United States government and agency obligations:
Maturing within one year $ -- $ -- $24,000,000 $24,053,125
Federal agency obligations:
Maturing within one year 9,855,892 9,849,000 -- --
Maturing from one to five years 12,000,000 12,169,800 2,000,000 2,026,563
- --------------------------------------------------------------------------------------------------------------------------
21,855,892 22,018,800 2,000,000 2,026,563
- --------------------------------------------------------------------------------------------------------------------------
$21,855,892 $22,018,800 $26,000,000 $26,079,688
==========================================================================================================================
Weighted average interest rate 5.31% 6.02%
==========================================================================================================================
Unrealized gains and losses on investment securities available for sale
are summarized as follows:
December 31, 1998 1997
- ----------------------------------------------------------------------------------------------------------------
Gross Gross Gross Gross
Unrealized Gains Unrealized Losses Unrealized Gains Unrealized Losses
================================================================================================================
United States government and
agency obligations $ -- $ -- $ 54,688 $ 1,563
Federal agency obligations 169,800 6,892 26,563 --
- ----------------------------------------------------------------------------------------------------------------
$169,800 $ 6,892 $ 81,251 $ 1,563
================================================================================================================
Proceeds from sales of investment securities available for sale during the
years ended December 31, 1998, 1997, and 1996 were $0, $20,037,695 and
$23,135,173, respectively. Gross gains of $0, $19,659 and $43,207, and gross
losses of $0, $51,031 and $107,395, were realized on those sales during 1998,
1997, and 1996, 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 1998.
Accrued interest receivable related to investment securities approximated
$63,000 and $627,000 at December 31, 1998 and 1997, respectively.
At December 31, 1998, the Bank had no commitments to purchase or sell
investment securities.
Investment securities carried at fair value of $2,272,000 and $502,000 at
December 31, 1998 and 1997, respectively, were pledged to secure public deposits
and repurchase agreements.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CFSB Bancorp, Inc., and Subsidiary
(4) MORTGAGE-BACKED SECURITIES
Mortgage-backed securities available for sale consist of the following:
December 31, 1998 1997
- ----------------------------------------------------------------------------------------------------------------
Amortized Cost Fair Value Amortized Cost Fair Value
================================================================================================================
Federal Home Loan Mortgage Corporation
participation certificates $11,536,077 $11,791,572 $15,711,732 $16,137,553
Fannie Mae guaranteed mortgage
pass-through certificates 2,446,839 2,436,840 2,308,037 2,275,221
Government National Mortgage Association
modified pass-through certificates 18,927 18,927 45,208 46,338
Conventional pass-through certificates 1,759,199 1,759,199 3,138,769 3,138,578
- ----------------------------------------------------------------------------------------------------------------
$15,761,042 $16,006,538 $21,203,746 $21,597,690
================================================================================================================
Weighted average interest rate 7.82% 8.00%
================================================================================================================
Unrealized gains and losses on mortgage-backed securities available for sale are
summarized as follows:
December 31, 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
Gross Gross Gross Gross
Unrealized Gains Unrealized Losses Unrealized Gains Unrealized Losses
============================================================================================================================
Federal Home Loan Mortgage Corporation
participation certificates $258,874 $ 3,379 $494,651 $ 68,830
Fannie Mae guaranteed mortgage
pass-through certificates 1,697 11,696 409 33,225
Government National Mortgage Association
modified pass-through certificates -- -- 1,130 --
Conventional pass-through certificates -- -- -- 191
- ----------------------------------------------------------------------------------------------------------------------------
$260,571 $ 15,075 $496,190 $102,246
============================================================================================================================
There were no sales of mortgage-backed securities during the years ended
December 31, 1998, 1997 and 1996.
During the years ended December 31, 1998 and 1997, call provisions were
exercised on $345,952 and $380,544 of mortgage-backed securities available for
sale. Gross gains of $2,362 and $2,051 were recognized during the respective
periods. There were no call provisions exercised on mortgage-backed securities
available for sale during 1996.
Accrued interest receivable on mortgage-backed securities was
approximately $181,000 and $250,000 at December 31, 1998 and 1997, respectively.
The cost of mortgage-backed securities at December 31, 1998 and 1997
included net unamortized premiums of $10,842 and $0, respectively.
Variable-rate mortgage-backed securities approximated $7,358,000 and
$9,681,000, with weighted average rates of 7.09 percent and 7.29 percent, at
December 31, 1998 and 1997, respectively.
At December 31, 1998, the Bank had no commitments to buy or sell
mortgage-backed securities.
Mortgage-backed securities carried at fair value of $837,000 and
$1,144,000 at December 31, 1998 and 1997, respectively, were pledged to secure
public deposits and other liabilities.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CFSB Bancorp, Inc., and Subsidiary
(5) LOANS RECEIVABLE
Loans receivable consist of the following:
December 31, 1998 1997
================================================================================
First mortgage:
One-to-four family residential $609,446,769 $585,266,880
Income-producing property 38,318,190 44,580,004
FHA-insured and VA-partially guaranteed 10,875,736 7,607,118
Construction and development:
One-to-four family residential 37,927,357 34,821,124
Income-producing property 30,965,138 32,648,987
- --------------------------------------------------------------------------------
727,533,190 704,924,113
Second mortgage 641,716 549,105
Other loans:
Land contract 118,855 149,095
Auto 10,625,602 10,218,761
Commercial 8,218,152 5,087,147
Educational 1,164,404 1,347,731
Marine 1,314,084 1,349,584
Home equity 42,195,001 42,281,117
Mobile home 800,700 1,099,038
Other 12,104,063 8,037,676
- --------------------------------------------------------------------------------
76,540,861 69,570,149
- --------------------------------------------------------------------------------
804,715,767 775,043,367
Less:
Undistributed portion of loans in process (12,811,625) (14,408,253)
Deferred origination fees (488,630) (1,098,646)
Allowance for losses on loans (5,004,148) (4,730,407)
- --------------------------------------------------------------------------------
$786,411,364 $754,806,061
================================================================================
Weighted average interest rate 7.39% 7.71%
================================================================================
Accrued interest receivable on loans, net of the allowance for
uncollectible interest, approximated $4,099,000 and $3,986,000 at December 31,
1998 and 1997, respectively.
The Corporation had approximately $611,000 and $883,000 of nonaccruing
loans as of December 31, 1998 and 1997, respectively. Interest received and
included as income on these loans for the years ended December 31, 1998, 1997
and 1996, was $27,000, $46,000 and $118,000, respectively. The Corporation would
have recorded $25,000, $32,000 and $46,000 of additional interest income on
these nonaccrual loans for the years ended December 31, 1998, 1997 and 1996,
respectively, if these loans had been current in accordance with their original
terms and had been outstanding throughout the periods or since origination.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CFSB Bancorp, Inc., and Subsidiary
(5) LOANS RECEIVABLE - CONTINUED
There were no impaired loans as defined by SFAS 114 at December 31, 1998
and 1997. 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 $265,000, $112,000 and
$559,000 during 1998, 1997 and 1996, respectively. Interest income recognized on
impaired loans during 1998, 1997 and 1996 totaled $25,000, $1,000 and $27,000,
respectively. Impaired loans had specific allocations of the allowance for loan
losses in accordance with SFAS 114 approximating $0, $0 and $150,000 at December
31, 1998, 1997 and 1996, respectively.
The Corporation had no troubled debt restructured loans at December 31,
1998 and 1997.
Included in one-to-four family residential, first-mortgage loans were
approximately $318,900,000 and $407,000,000 of adjustable-rate mortgages at
December 31, 1998 and 1997, respectively.
Included in income-producing property loans were approximately $34,700,000
and $44,500,000 of adjustable-rate mortgages at December 31, 1998 and 1997,
respectively.
The Corporation serviced loans for others of approximately $241,700,000,
$180,200,000 and $156,600,000 at December 31, 1998, 1997 and 1996, respectively.
The balance of loans serviced for others at December 31, 1998 and 1997
with capitalized originated mortgage servicing rights approximated $174,900,000
and $73,300,000, respectively. At December 31, 1998 and 1997, capitalized
originated mortgage servicing rights had a book value of $1,047,000 and $402,000
and fair value of approximately $1,700,000 and $700,000, respectively. No
valuation allowances for capitalized originated mortgage servicing rights were
considered necessary as of December 31, 1998 or 1997.
The Corporation had commitments to originate the following mortgage loans
at December 31, 1998:
Amount Weighted Average Rate
================================================================================
Residential fixed-rate $64,431,000 6.94%
Residential adjustable-rate 15,582,000 6.91
Income-producing property, fixed-rate 1,650,000 7.44
Income-producing property, adjustable-rate 2,400,000 8.25
- --------------------------------------------------------------------------------
$84,063,000 6.98%
================================================================================
The Corporation had commitments to sell one-to-four family residential,
fixed-rate mortgage loans of $13,886,000 at December 31, 1998. As of December
31, 1998, the Corporation had no commitments to buy mortgage loans. As of
year-end 1998, $6,583,000 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CFSB Bancorp, Inc., and Subsidiary
(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 $658,250,000 and
$627,700,000 at December 31, 1998 and 1997, respectively, and included
$497,800,000 and $498,500,000 of originated loans, respectively. Substantially
all of the originated loans were on properties located in Michigan. Of the
purchased loans which were serviced by other institutions at December 31, 1998,
$40,000,000 $104,200,000, and $16,200,000 represented loans on properties
located in Michigan, Texas and other states, 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, 1998 1997
================================================================================
Apartments $24,075,353 $35,466,164
Office buildings 15,388,054 16,068,170
Restaurants and motels 3,513,726 3,808,960
Retail centers 4,545,032 5,448,099
Residential land development 11,791,400 6,683,685
Residential and condominiums 5,941,689 5,309,418
Other 4,028,074 4,444,494
- --------------------------------------------------------------------------------
$69,283,328 $77,228,990
================================================================================
(7) REAL ESTATE
Real estate held by the Corporation is summarized as follows:
December 31, 1998 1997
================================================================================
Real estate in judgment, subject to redemption $ 753,347 $ 11,455
Real estate acquired through foreclosure 311,674 141,172
- --------------------------------------------------------------------------------
1,065,021 152,627
Less: Allowance for losses (85,183) (152,627)
- --------------------------------------------------------------------------------
$ 979,838 $ --
================================================================================
The following is a summary of the results of real estate operations for
the years indicated:
Years Ended December 31, 1998 1997 1996
================================================================================
Income from sales of real estate acquired
through foreclosure, net $ 72,044 $ -- $ --
Provision for losses on real estate -- (45,000) (60,000)
Real estate expenses (42,577) (5,121) --
- --------------------------------------------------------------------------------
$ 29,467 $(50,121) $(60,000)
================================================================================
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CFSB Bancorp, Inc., and Subsidiary
(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, 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
- ------------------------------------------------------------------------------------------
Balance at December 31, 1997 4,730,407 152,627 4,883,034
Provision for losses 390,000 -- 390,000
Losses charged against the allowance (167,493) (67,444) (234,937)
Recoveries of losses 51,234 -- 51,234
- ------------------------------------------------------------------------------------------
Balance at December 31, 1998 $ 5,004,148 $ 85,183 $ 5,089,331
==========================================================================================
(9) PREMISES AND EQUIPMENT
Premises and equipment are carried at cost less accumulated depreciation and are
summarized by major classification as follows:
December 31, 1998 1997
================================================================================
Land $ 2,845,423 $ 2,873,424
Office buildings and improvements 11,251,836 12,009,627
Furniture, fixtures, and equipment 9,640,835 9,155,258
- --------------------------------------------------------------------------------
23,738,094 24,038,309
Less: Accumulated depreciation (13,392,392) (13,581,129)
- --------------------------------------------------------------------------------
$ 10,345,702 $ 10,457,180
================================================================================
(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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CFSB Bancorp, Inc., and Subsidiary
(11) DEPOSITS
Deposits represented by various types of programs are presented below:
December 31, 1998 1997
- -----------------------------------------------------------------------------------------------------
Weighted Weighted
Average Rate Amount Average Rate Amount
=====================================================================================================
Regular savings 2.00% $ 66,462,778 2.16% $ 63,069,112
Money market savings 4.94 25,369,404 5.80 21,943,735
Consumer checking 1.66 113,385,403 1.77 93,339,386
Commercial checking -- 10,631,394 -- 9,616,043
Money market checking 3.42 50,121,679 3.81 50,099,329
- -----------------------------------------------------------------------------------------------------
2.32 265,970,658 2.60 238,067,605
Certificates of deposit 5.60 320,736,755 5.83 324,344,462
- -----------------------------------------------------------------------------------------------------
Total deposits 4.11% $586,707,413 4.47% $562,412,067
=====================================================================================================
Accrued interest payable on deposits approximated $2,189,000 and
$2,434,000 at December 31, 1998 and 1997, respectively.
Contractual maturities of certificates of deposit are as follows:
December 31, 1998 1997
- -----------------------------------------------------------------------------------------------------
Weighted Weighted
Average Rate Amount Average Rate Amount
=====================================================================================================
Maturing in
1998 5.76% $227,836,887
1999 5.56% $232,974,637 5.97 60,441,070
2000 5.61 50,548,862 6.15 19,800,311
2001 5.59 14,755,760 5.68 7,403,257
2002 5.99 8,553,018 6.01 8,023,975
2003 5.81 12,714,004 6.42 191,633
2004 and thereafter 6.04 1,190,474 5.81 647,329
- -----------------------------------------------------------------------------------------------------
5.60% $320,736,755 5.83% $324,344,462
=====================================================================================================
Included in total certificates of deposit as of December 31, 1998 and 1997
are approximately $37,900,00 and $34,000,000, respectively, in certificates of
deposit of $100,000 or more in amount, with weighted average interest rates of
5.75 percent and 6.00 percent, respectively. Contractual maturities of
certificates of deposit of $100,000 or more in amount outstanding at December
31, 1998 are $6,900,000 within 3 months or less; $9,500,000 within 3 months to 6
months; $12,300,000 within 6 months to 12 months; and $9,200,000 for over 12
months.
At December 31, 1998, the Corporation had no brokered deposits.
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, 1998 1997 1996
==============================================================================================
Interest on deposits (net of penalties):
Savings $ 1,354,826 $ 1,407,554 $ 1,592,132
Checking 4,696,926 4,522,875 3,842,849
Certificates of deposit 18,715,950 18,547,142 18,402,513
- ----------------------------------------------------------------------------------------------
$24,767,702 $24,477,571 $23,837,494
==============================================================================================
Penalties $ 88,000 $ 121,000 $ 102,000
==============================================================================================
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CFSB Bancorp, Inc., and Subsidiary
(11) DEPOSITS - CONTINUED
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 during
the year ended December 31, 1996, and is included above as interest expense on
deposits. There were no costs associated with interest rate exchange agreements
in 1998 and 1997.
(12) ADVANCES FROM FEDERAL HOME LOAN BANK AND SECURITIES SOLD UNDER AGREEMENT TO
REPURCHASE
FHLB advances at December 31, 1998 and 1997 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, 1998 1997
- -----------------------------------------------------------------------------------------------------
Weighted Weighted
Average Rate Amount Average Rate Amount
=====================================================================================================
Fixed-rate advances maturing in
1998 6.01% $ 61,357,552
1999 5.86% $ 22,165,257 6.07 71,165,257
2000 5.82 42,086,995 5.85 27,086,995
2001 5.73 44,295,559 6.59 11,295,559
2002 6.06 54,567,059 6.46 29,567,059
2003 5.31 46,132,512 6.13 1,132,512
2004 and thereafter 6.75 88,000 6.75 88,000
- -----------------------------------------------------------------------------------------------------
Total fixed-rate advances 5.76 209,335,382 6.11 201,692,934
Adjustable-rate advances maturing in
1998 5.70 11,000,000
1999 5.13 2,500,000
- -----------------------------------------------------------------------------------------------------
Total adjustable-rate advances 5.13 2,500,000 5.70 11,000,000
- -----------------------------------------------------------------------------------------------------
5.75% $211,835,382 6.09% $212,692,934
=====================================================================================================
At December 31, 1998 and 1997, the portfolio of FHLB advances included
borrowings of $108,000,000 and $30,000,000, respectively, which are putable
advances. Commencing with the put date of the borrowing, the FHLB may, at its
option, convert such fixed-rate advances to an adjustable interest rate. If the
FHLB exercises its option, the Corporation may, at its option and without
prepayment penalty, repay such advances. These advances are classified as
fixed-rate advances and are assumed to mature in the year putable, unless the
current rate environment indicates it is unlikely the FHLB will put the advance,
then the put date is assumed to occur one year later.
At December 31, 1998 and 1997, the portfolio of FHLB advances included
borrowings of $1,000,000 and $1,650,000, respectively, 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.
The Corporation had a $5,000,000 available but unused line of credit from
the FHLB at December 31, 1998 and 1997.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CFSB Bancorp, Inc., and Subsidiary
(12) ADVANCES FROM FEDERAL HOME LOAN BANK AND SECURITIES SOLD UNDER AGREEMENT TO
REPURCHASE - CONTINUED
The Corporation's short term borrowings included securities sold under
agreement to repurchase, which generally mature within thirty days. Information
relating to securities sold under agreement to repurchase is summarized as
follows:
1998 1997 1996
================================================================================
At December 31: (Dollars in Thousands)
Balance $1,772 -- --
Weighted average interest rate paid 3.89% -- --
During the year:
Maximum outstanding at any month-end $1,859 -- --
Daily average 456 -- --
Weighted average interest rate paid 4.10% -- --
================================================================================
(13) FEDERAL INCOME TAXES
Federal income tax expense consists of:
Years Ended December 31, 1998 1997 1996
========================================================================================================
Current tax expense $ 6,162,000 $ 4,976,000 $ 2,500,000
Deferred benefit (350,000) -- (65,000)
- --------------------------------------------------------------------------------------------------------
Income tax expense in the statements of operations 5,812,000 4,976,000 2,435,000
Income tax expense (benefit) charged (credited)
directly to stockholders' equity:
Gains on securities available for sale (18,000) 50,000 74,000
ESOP dividends -- -- (29,000)
Exercise of stock options (93,000) -- (34,000)
- --------------------------------------------------------------------------------------------------------
$ 5,701,000 $ 5,026,000 $ 2,446,000
========================================================================================================
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, 1998 1997
================================================================================
Deferred tax assets:
Allowance for losses on loans and real estate $ 1,781,000 $ 1,709,000
Postretirement benefits 555,000 552,000
Compensation and benefits 291,000 289,000
Premises and equipment 485,000 371,000
Other 235,000 273,000
- --------------------------------------------------------------------------------
Total gross deferred tax assets 3,347,000 3,194,000
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Excess of tax bad debt reserves over
base-year reserves (1,077,000) (1,255,000)
Unrealized gains on available-for-sale securities (143,000) (161,000)
Federal Home Loan Bank stock dividends (294,000) (285,000)
Deferred loan origination fees (656,000) (648,000)
Servicing rights (366,000) (141,000)
Other (176,000) (437,000)
- --------------------------------------------------------------------------------
Total gross deferred tax liabilities (2,712,000) (2,927,000)
- --------------------------------------------------------------------------------
Net deferred tax asset $ 635,000 $ 267,000
================================================================================
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CFSB Bancorp, Inc., and Subsidiary
(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, 1998 and
1997 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, 1998 1997 1996
================================================================================
Computed "expected" tax expense $ 6,180,000 $ 5,477,000 $ 2,680,000
Reduction resulting from:
Low-income housing tax credits (349,000) (360,000) (228,000)
Other, net (19,000) (141,000) (17,000)
- --------------------------------------------------------------------------------
$ 5,812,000 $ 4,976,000 $ 2,435,000
================================================================================
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. The excess
of the Bank's December 31, 1995 tax bad debt reserves over its reserves as of
December 31, 1987 is being taken into taxable income on a ratable basis 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 691,446 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 900,642 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,
1998, no restricted stock has been awarded.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CFSB Bancorp, Inc., and Subsidiary
(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, 1998, 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 1998, 1997 and 1996.
1998 1997 1996
================================================================================
Net income as reported $11,844,032 $10,672,528 $5,447,292
Pro forma net income 11,741,793 10,569,927 5,349,009
Basic earnings per share as reported 1.44 1.26 0.62
Pro forma basic earnings per share 1.43 1.25 0.61
Diluted earnings per share as reported 1.38 1.22 0.60
Pro forma diluted earnings per share 1.37 1.21 0.59
================================================================================
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:
1998 1997 1996
================================================================================
Number of options 318,595 349,528 364,231
Weighted average exercise price $ 2.48 $ 2.51 $ 2.41
================================================================================
For options granted during the years indicated, the weighted average fair
values at grant date are as follows:
1998 1997 1996
================================================================================
Options granted at market price:
Exercise Price $25.38 $13.05 $10.54
Fair value 3.62 2.39 3.08
================================================================================
The fair value of options granted during 1998, 1997 and 1996 is estimated
using the following weighted average information:
1998 1997 1996
================================================================================
Risk-free interest rate 4.72% 5.78% 5.42%
Expected life 7 years 7 years 10 years
Expected volatility of stock price 21.19% 18.97% 17.01%
Expected dividends 2.00% 2.00% 2.00%
================================================================================
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CFSB Bancorp, Inc., and Subsidiary
(14) STOCK OPTION PLANS - CONTINUED
At December 31, 1998, options outstanding were as follows:
================================================================================
Number of options 497,891
Range of exercise price $2.10 - $25.57
Weighted average exercise price $5.43
Weighted average remaining option life 3.68 years
For options now exercisable:
Number 318,595
Weighted average exercise price $2.48
================================================================================
The following table summarizes outstanding grants and stock option
transactions for the three years ended December 31, 1998:
Number of Shares Average Exercise Price
================================================================================
Options outstanding at December 31, 1995 628,574 $ 5.07
Options exercised (50,929) 2.24
Options forfeited (721) 8.02
Options granted 19,591 10.54
- --------------------------------------------------------------------------------
Options outstanding at December 31, 1996 596,515 5.48
Options exercised (25,574) 4.11
Options forfeited (24,185) 10.37
Options granted 13,087 13.05
- --------------------------------------------------------------------------------
Options outstanding at December 31, 1997 559,843 5.52
Options exercised (39,868) 4.63
Options forfeited (24,351) 10.64
Options granted 2,267 25.38
- --------------------------------------------------------------------------------
Options outstanding at December 31, 1998 497,891 $ 5.43
================================================================================
At December 31, 1998, 712,685 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 364,398 and 119,147 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, 1998, the
outstanding loan balances are reflected as a reduction in stockholders' equity.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CFSB Bancorp, Inc., and Subsidiary
(15) EMPLOYEE STOCK OWNERSHIP PLAN - CONTINUED
The Corporation's contribution to the ESOP was approximately $153,000,
$232,000 and $147,000 for the years ended December 31, 1998, 1997 and 1996,
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 $85,000 for the year ended December 31, 1996. There
were no contributions in 1998 and 1997.
(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, 1998, 1997 and 1996, was
approximately $184,000, $141,000 and $176,000, 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. Remaining excess plan assets were allocated to eligible
participants in 1998.
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CFSB Bancorp, Inc., and Subsidiary
(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, 1998 1997 1996
================================================================================
Service cost $26,077 $22,645 $21,209
Interest cost 51,142 53,107 47,523
- --------------------------------------------------------------------------------
Net periodic postretirement benefit cost $77,219 $75,752 $68,732
================================================================================
The weighted average discount rate used in determining the net periodic
postretirement benefit cost for 1998, 1997 and 1996 was 7.00 percent, 7.50
percent and 7.25 percent, respectively. Additionally, in determining the net
periodic postretirement benefit cost, in 1998 there was a health care inflation
assumption of 9.80 percent, grading down uniformly to 5.00 percent in 2005 and
all years thereafter. A health care inflation assumption of 10.41 percent,
grading down uniformly to 5.50 percent in 2005 and all years thereafter, was
used in 1997. The dental inflation assumption was 5.00 percent in 1998 and 1997.
The following sets forth the plans' benefit obligations, fair value of
plan assets, and funded status:
December 31, 1998 1997
================================================================================
Change in benefit obligation:
Benefit obligation at beginning of year $ 759,312 $ 739,368
Service cost 26,077 22,645
Interest cost 51,142 53,107
Actuarial (gain)/loss 5,039 (3,867)
Benefits paid (50,793) (51,941)
- --------------------------------------------------------------------------------
Benefit obligation at end of year 790,777 759,312
Plan assets at fair value -- --
- --------------------------------------------------------------------------------
Unfunded status 790,777 759,312
Unrecognized net gains/(losses) from
experience different from that assumed (20,647) (15,609)
- --------------------------------------------------------------------------------
Accrued postretirement benefit cost $ 770,130 $ 743,703
================================================================================
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation at December 31, 1998 and 1997, was 6.75
percent and 7.00 percent, respectively.
For measurement purposes at December 31, 1998, the health care
inflation rate is assumed to decline uniformly from 9.06 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, 1997, for measurement purposes, the health care
inflation rate is assumed to decline uniformly from 9.80 percent per year 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.
Assumed health care cost trend rates have an effect on the amounts
reported for the health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:
1-Percentage- 1-Percentage-
Point Increase Point Decrease
================================================================================
Effect on total of service and
interest cost components $ 231 $ (234)
Effect on postretirement benefit
obligation 2,731 (2,744)
================================================================================
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CFSB Bancorp, Inc., and Subsidiary
(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.
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
==============================================================================================================================
1998
Total capital (to risk-weighted assets) $ 71.8 14.1% $ 40.9 8.0% $ 51.1 10.0%
Tier 1 (core) capital
(to risk-weighted assets) 66.8 13.1 20.4 4.0 30.6 6.0
Tier 1 (core) capital
(to adjusted total assets) 66.8 7.6 26.4 3.0 43.9 5.0
Tangible capital
(to adjusted total assets) 66.8 7.6 13.2 1.5 N/A N/A
- -------------------------------------------------------------------------------------------------------------------------------
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
==============================================================================================================================
The Bank, at December 31, 1998 and 1997, was categorized as well
capitalized.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CFSB Bancorp, Inc., and Subsidiary
(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, 1998 1997
================================================================================
Corporation's stockholders' equity
as reported in the accompanying
consolidated financial statements $ 69,277,321 $ 67,534,790
Plus (less):
Capitalization of parent company (2,234,277) (2,266,491)
Unrealized gains on available-for-sale
securities, net of tax (269,897) (312,597)
- --------------------------------------------------------------------------------
Tangible and core capital 66,773,147 64,955,702
Plus supplementary capital:
General loss reserves 5,004,148 4,730,407
- --------------------------------------------------------------------------------
Risk-based capital $ 71,777,295 $ 69,686,109
================================================================================
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. 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
1998, 1997 and 1996 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 1997 and 1996 was restated to give retroactive effect to
the 10 percent stock dividend declared May 19, 1998.
There are no reconciling items when calculating basic earnings per share.
A reconciliation of diluted earnings per share for the years ended December 31,
follows:
Years Ended December 31, 1998 1997 1996
================================================================================
Net earnings applicable to common stock $11,844,032 $10,672,528 $5,447,292
================================================================================
Average number of shares outstanding 8,202,087 8,440,388 8,815,161
Effect of dilutive securities -
stock options 385,588 334,633 258,113
- --------------------------------------------------------------------------------
8,587,675 8,775,021 9,073,274
================================================================================
Diluted earnings per share $ 1.38 $ 1.22 $ 0.60
================================================================================
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CFSB Bancorp, Inc., and Subsidiary
(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, 1998 and 1997, are as follows:
1998 1997
================================================================================
Commitments to extend credit $147,927,000 $ 82,305,000
Letters of credit 228,000 440,000
================================================================================
Notional values of off-balance-sheet financial instruments significantly
exceeded the amount of credit risk associated with these instruments.
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 October
7, 1999. The extent of collateral held on those commitments at December 31, 1998
is equal to or in excess of the committed amount.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CFSB Bancorp, Inc., and Subsidiary
(20) CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
The statements of financial condition at December 31, 1998 and 1997, and the
statements of operations and cash flows for the years ended December 31, 1998,
1997 and 1996 of CFSB Bancorp, Inc., follow:
Statements of Financial Condition
December 31, 1998 1997
================================================================================
Assets:
Cash on deposit at subsidiary bank $ 1,304,727 $ 77,505
Investment in subsidiary bank 67,043,044 65,268,299
Dividends receivable from subsidiary bank 734,336 1,767,318
Other assets 1,758,104 1,884,227
- --------------------------------------------------------------------------------
Total assets $ 70,840,211 $ 68,997,349
================================================================================
Liabilities:
Dividends payable to stockholders $ 1,060,107 $ 912,897
Other liabilities 502,783 549,662
- --------------------------------------------------------------------------------
Total liabilities 1,562,890 1,462,559
- --------------------------------------------------------------------------------
Stockholders' Equity:
Common stock 81,735 76,555
Additional paid-in capital 63,770,944 48,377,350
Retained income 5,464,366 20,011,874
Accumulated other comprehensive income of
subsidiary bank, net of tax 269,897 312,597
Employee Stock Ownership Plan (74,387) (227,522)
Treasury stock (235,234) (1,016,064)
- --------------------------------------------------------------------------------
Total stockholders' equity 69,277,321 67,534,790
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 70,840,211 $ 68,997,349
================================================================================
Statements of Operations
Years Ended December 31, 1998 1997 1996
=================================================================================================================
Income:
Dividends from subsidiary bank $ 11,932,981 $ 5,141,733 $ 6,342,950
Loss on equity investment (159,516) (92,754) (108,153)
- -----------------------------------------------------------------------------------------------------------------
Total operating income 11,773,465 5,048,979 6,234,797
Expenses:
Compensation, payroll taxes and fringe benefits 322,189 401,105 312,954
Other operating expenses 298,334 297,325 208,621
- -----------------------------------------------------------------------------------------------------------------
Total operating expenses 620,523 698,430 521,575
- -----------------------------------------------------------------------------------------------------------------
Income before equity in undistributed net
income of subsidiary bank 11,152,942 4,350,549 5,713,222
Equity in undistributed net income of subsidiary bank 691,090 6,321,979 (265,930)
- -----------------------------------------------------------------------------------------------------------------
Net income $ 11,844,032 $ 10,672,528 $ 5,447,292
=================================================================================================================
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CFSB Bancorp, Inc., and Subsidiary
(20) CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY - CONTINUED
Statements of Cash Flows
Years Ended December 31, 1998 1997 1996
============================================================================================
Cash Flows From Operating Activities:
Net income $ 11,844,032 $ 10,672,528 $ 5,447,292
Adjustments to reconcile net income:
Loss (equity) in undistributed net income
of subsidiary bank (691,089) (6,321,979) 265,930
Decrease (increase) in other assets 126,123 (59,175) 129,969
Increase in other liabilities 106,255 253,424 217,059
- --------------------------------------------------------------------------------------------
Net cash provided by operating activities 11,385,321 4,544,798 6,060,250
- --------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Proceeds from stock options exercised 185,200 105,165 114,674
Purchases of treasury stock (6,317,707) (2,777,983) (4,089,237)
Dividends paid on common stock (4,025,592) (2,916,568) (2,107,991)
- --------------------------------------------------------------------------------------------
Net cash used by financing activities (10,158,099) (5,589,386) (6,082,554)
- --------------------------------------------------------------------------------------------
Net increase (decrease) in cash 1,227,222 (1,044,588) (22,304)
Cash at beginning of period 77,505 1,122,093 1,144,397
- --------------------------------------------------------------------------------------------
Cash at end of period $ 1,304,727 $ 77,505 $ 1,122,093
============================================================================================
(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, 1998 and 1997. 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CFSB Bancorp, Inc., and Subsidiary
(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 and Securities Sold Under Agreement to
Repurchase - The fair value of the Corporation's borrowings 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, 1998 and 1997 is as follows:
1998 1997
Carrying Value Estimated Fair Value Carrying Value Estimated Fair Value
=================================================================================================================================
Financial assets:
Cash and short-term interest-earning deposits $ 21,941,227 $ 21,900,000 $ 18,489,494 $ 18,500,000
Investment securities 22,018,800 22,000,000 26,079,688 26,100,000
Mortgage-backed securities 16,006,538 16,000,000 21,597,690 21,600,000
Loans receivable, net 786,411,364 811,300,000 754,806,061 765,900,000
Accrued interest receivable 4,380,539 4,400,000 4,910,200 4,900,000
- ---------------------------------------------------------------------------------------------------------------------------------
Financial liabilities:
Savings, checking and money market accounts 265,970,658 266,000,000 238,067,605 238,100,000
Certificates of deposit 320,736,755 322,900,000 324,344,462 325,400,000
Advances from Federal Home Loan Bank and
securities sold under agreement to repurchase 213,607,417 215,300,000 212,692,934 214,200,000
Accrued interest payable 2,760,854 2,800,000 3,043,923 3,000,000
- ---------------------------------------------------------------------------------------------------------------------------------
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CFSB Bancorp, Inc., and Subsidiary
(22) QUARTERLY FINANCIAL INFORMATION (unaudited)
The following is a summary of quarterly financial information for the years
ended December 31, 1998 and 1997:
March 31 June 30 September 30 December 31
(Dollars in Thousands, Except Per Share Data)
====================================================================================================================================
1998
Interest income $ 15,548 $ 15,552 $ 15,686 $ 15,776
Net interest income 6,406 6,543 6,505 6,507
Provision for loan losses 98 97 97 98
Income before federal income tax expense 4,189 4,817 4,323 4,327
Net income 2,830 3,209 2,870 2,935
Earnings per share(1):
Basic .34 .39 .35 .36
Diluted .33 .37 .34 .34
Stock price range(1) $22.27 - 29.09 $24.77 - 28.75 $20.25 - 29.00 $20.00 - 25.00
====================================================================================================================================
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 .27 .33 .34 .33
Diluted .26 .32 .32 .32
Stock price range(1) $10.47 - 12.26 $11.71 - 15.00 $14.09 - 18.79 $17.42 - 23.86
====================================================================================================================================
(1) Per share data was restated to give retroactive effect to the 3-for-2
stock split declared November 18, 1997 and the 10% stock dividends
declared May 19, 1998 and May 20, 1997.
(23) SUBSEQUENT EVENT
On February 24, 1999, the Corporation entered into an Agreement and Plan of
Merger (the Merger Agreement) with Old Kent Financial Corporation (Old Kent),
pursuant to which the Corporation is expected to merge with and into Old Kent
(the Merger). As a result of the Merger, each outstanding share of the
Corporation's common stock, par value $0.01 per share (the Corporation Common
Stock), will be converted into the right to receive 0.6222 shares of common
stock of Old Kent, par value $1 per share (Old Kent Common Stock). The Merger is
conditioned upon, among other things, approval by holders of a majority of the
Corporation Common Stock and the receipt of certain regulatory and governmental
approvals. It is intended that the Merger will be treated as a
pooling-of-interests for accounting and financial reporting purposes.
Concurrently with their execution and delivery of the Merger Agreement,
Old Kent and the Corporation entered into a stock option agreement (the Stock
Option Agreement) pursuant to which the Corporation granted Old Kent the right,
upon the terms and subject to the conditions set forth in the Stock Option
Agreement, to purchase up to 1,645,364 shares (or 19.99%) of the Corporation
Common Stock at a price of $21.00 per share, subject to certain adjustments.
53
QUARTERLY STOCK PRICE AND DIVIDEND INFORMATION
CFSB Bancorp, Inc., and Subsidiary
Quarterly stock prices and dividends declared are shown in the table below:
Years Ended December 31, 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends Dividends
High Low Close Declared High Low Close Declared
====================================================================================================================================
Quarter
First $29.09 $22.27 $26.82 $ 0.12 $12.26 $10.47 $11.71 $ 0.08
Second 28.75 24.77 28.75 0.13 15.00 11.71 14.09 0.09
Third 29.00 20.25 22.75 0.13 18.79 14.09 17.50 0.10
Fourth 25.00 20.00 24.38 0.13 23.86 17.42 23.86 0.11
- ------------------------------------------------------------------------------------------------------------------------------------
Year $29.09 $20.00 $24.38 $ 0.51 $23.86 $10.47 $23.86 $ 0.38
====================================================================================================================================
On May 19, 1998 a 10 percent stock dividend payable on June 12, 1998 to
stockholders of record on May 29, 1998 was declared. 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. As a result, per share amounts have been restated
for all periods to reflect the stock split and the stock dividends.
CFSB Bancorp, Inc.'s common stock trades on The Nasdaq Stock Market SM
under the symbol CFSB.
As of December 31, 1998, there were 8,163,068 shares of common stock
issued and outstanding.
As of February 26, 1999, there were approximately 1,261 stockholders of
record which does not include stockholders holding their stock in street name or
nominee's name.
54
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 $3,000. 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, 1998 will be
held at the Sheraton Lansing Hotel, 925 South Creyts Road, Lansing, Michigan, on
Tuesday, April 20, 1999, at 11:00 a.m.
Form 10-K
The Corporation's 1998 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 Inc., 112
East Allegan Street, Lansing, Michigan 48933, or call (517) 374-3569.
55
OFFICERS
- --------------------------------------------------------------------------------
CFSB Bancorp, Inc.,
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
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, Commercial Real Estate Loan Officer
Carole A. Rush-Witt, Manager of Residential Lending
Douglas W. Sutton, Manager of Consumer Lending
Rodney W. Weaver, Manager of Residential Lending Operations
Assistant Vice Presidents
Brenda G. Bartowiak, Williamston Branch Manager
Rhonda A. Curtis, Ionia Branch Manager
Julie M. Farrar, Manager of Construction Lending
Kevin J. Fedewa, St. Johns Area Branch Manager
Michael C. Fildey, Operations Service Manager
Dan O. Kares, Commercial Loan Officer
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 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
Kathy S. Richards, Application Software Support Manager
Lori A. Smith, Consumer Loan Officer
Theodore M. Terzian, Community First Insurance and
Investment Services Manager
BOARD OF DIRECTORS
[PHOTO]
James L. Reutter,
Chairman of the Board,
CFSB Bancorp, Inc.
Chairman, Lansing Ice and
Fuel Company
Lansing, Michigan
[PHOTO]
Robert H. Becker
President and Chief Executive Officer,
CFSB Bancorp, Inc.
Lansing, Michigan
[PHOTO]
David H. Brogan
Agent, Ohio National Life
Insurance Company
Lansing, Michigan
[PHOTO]
William C. Hollister
President, Basic Insight
East Lansing, Michigan
[PHOTO]
Cecil Mackey
Professor of Economics,
Michigan State University
East Lansing, Michigan
[PHOTO]
J. Paul Thompson, Jr.
President,
Computer Graphics, Inc.
DeWitt, Michigan
[PHOTO]
Henry W. Wolcott, IV
Shareholder,
Public Accounting Firm of
Kutas, Hawes & Wolcott, P.C.
Lansing, Michigan
56