1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 1996 Commission File No. 0-18609
CFSB BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 38-2920051
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
112 East Allegan
Lansing, Michigan 48933
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (517) 371-2911
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- -------
There were 4,476,139 shares of the Registrant's $0.01 par value common stock
outstanding as of April 30, 1996.
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CFSB BANCORP, INC., AND SUBSIDIARY
Contents
Pages
PART I - FINANCIAL INFORMATION
[CAPTION]
Consolidated Statements of Financial Condition
at March 31, 1996, and December 31, 1995 (unaudited) 1
Consolidated Statements of Operations for the three months
ended March 31, 1996 and 1995 (unaudited) 2
Consolidated Statement of Stockholders' Equity for the three
months ended March 31, 1996 (unaudited) 3
Consolidated Statements of Cash Flows for the three months
ended March 31, 1996 and 1995 (unaudited) 4-5
Notes to Consolidated Financial Statements (unaudited) 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-19
PART II - OTHER INFORMATION 20
SIGNATURES 21
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CFSB BANCORP, INC., AND SUBSIDIARY
Consolidated Statements of Financial Condition
[CAPTION]
March 31, December 31,
1996 1995
(unaudited)
ASSETS
Cash and amounts due from depository institutions $ 7,281,131 $ 7,070,041
Interest-earning deposits with Federal Home
Loan Bank and other depository institutions,
at cost which approximates market 18,209,761 22,654,134
Investment securities available for sale, at fair value 46,847,506 55,109,533
Mortgage-backed securities available for sale, at fair value 323,071 607,895
Mortgage-backed securities held to maturity, net (fair
value $32,776,767 - 1996 and $35,160,963 - 1995) 32,424,636 34,548,012
Loans receivable, net 634,230,829 610,284,070
Accrued interest receivable, net 4,773,986 4,883,233
Real estate, net 87,902 21,717
Premises and equipment, net 11,335,025 11,223,147
Stock in Federal Home Loan Bank of Indianapolis, at cost 8,536,800 8,536,800
Deferred federal income tax benefit 402,754 326,258
Other assets 7,218,273 6,152,932
-------------- ------------
Total assets $ 771,671,674 $ 761,417,772
============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 533,611,971 $ 527,816,178
Advances from Federal Home Loan Bank 159,412,702 160,649,376
Advance payments by borrowers for taxes and insurance 3,052,521 1,281,043
Accrued interest payable 3,433,758 3,474,063
Federal income taxes payable 1,519,198 783,000
Due to broker 1,998,000 -
Other liabilities 4,631,314 4,671,091
-------------- ------------
Total liabilities 707,659,464 698,674,751
-------------- ------------
Stockholders' equity:
Serial preferred stock, $0.01 par value; authorized
2,000,000 shares; issued - none - -
Common stock, $0.01 par value; authorized 10,000,000
shares; issued 4,518,478 shares 45,185 45,185
Additional paid-in capital 34,437,842 34,389,162
Retained income - substantially restricted 30,863,434 29,852,980
Net unrealized gains (losses) on available-for-sale securities,
net of tax benefit (expense) of $39,579 - 1996 and
($36,917) - 1995 (76,830) 71,661
Employee Stock Ownership Plan (633,323) (691,294)
Treasury stock, at cost; 42,339 shares - 1996 and
62,668 shares - 1995 (624,098) (924,673)
-------------- ------------
Total stockholders' equity 64,012,210 62,743,021
-------------- ------------
Total liabilities and stockholders' equity $ 771,671,674 $ 761,417,772
============== ============
See accompanying notes to consolidated financial statements.
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CFSB BANCORP, INC., AND SUBSIDIARY
Consolidated Statements of Operations
Three Months Ended
March 31,
1996 1995
------------- ------------
(unaudited)
INTEREST INCOME:
Loans receivable $ 12,114,542 $ 10,464,892
Mortgage-backed securities 649,253 1,113,210
Investment securities 667,713 1,208,616
Other 354,096 241,843
------------- ------------
Total interest income 13,785,604 13,028,561
INTEREST EXPENSE:
Deposits, net 6,000,777 5,483,091
Federal Home Loan Bank advances 2,418,021 2,437,671
------------- ------------
Total interest expense 8,418,798 7,920,762
Net interest income before provision
for loan losses 5,366,806 5,107,799
Provision for loan losses 60,000 60,000
------------- ------------
Net interest income after provision
for loan losses 5,306,806 5,047,799
OTHER INCOME (LOSS):
Service charges and other fees 767,854 522,703
Loan servicing income 110,984 123,283
Gains on sales of loans, net 106,199 4,289
Real estate operations, net (15,000) (30,000)
Other, net 51,064 64,843
------------- ------------
Total other income 1,021,101 685,118
GENERAL AND ADMINISTRATIVE EXPENSES:
Compensation, payroll taxes, and fringe benefits 2,047,503 2,017,022
Office occupancy and equipment 585,718 524,925
Federal insurance premiums 343,554 329,007
Data processing 84,064 52,019
Other, net 872,867 793,895
------------- ------------
3,933,706 3,716,868
Loan origination costs capitalized (135,716) (107,892)
------------- ------------
Total general and administrative expenses 3,797,990 3,608,976
------------- ------------
Income before federal income tax expense 2,529,917 2,123,941
Federal income tax expense 815,000 658,000
------------- ------------
Net income $ 1,714,917 $ 1,465,941
============= ============
EARNINGS PER SHARE:
Primary $ 0.37 $ 0.32
============= ============
Fully diluted $ 0.37 $ 0.32
============= ============
DIVIDENDS PAID PER SHARE $ 0.11 $ 0.10
============= ============
See accompanying notes to consolidated financial statements.
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CFSB BANCORP, INC. AND SUBSIDIARY
Consolidated Statement of Stockholders' Equity
Three Months Ended March 31, 1996
(unaudited)
Net Unrealized
Additional Gains (Losses) Commitment Total
Common Paid-in Retained On Available-For- for ESOP Treasury Stockholders'
Stock Capital Income Sale Securities Debt Stock Equity
--------- ------------ ------------- ----------------- ----------- ----------- -------------
Balance at
December 31, 1995 $ 45,185 $ 34,389,162 $ 29,852,980 $ 71,661 $ (691,294) $ (924,673) $ 62,743,021
Net income - - 1,714,917 - - - 1,714,917
Stock options exercised - - (211,748) - - 300,575 88,827
Repayment of ESOP debt - - - - 57,971 - 57,971
Cash dividends on common
stock - $0.11 per share - - (492,715) - - - (492,715)
Tax benefit of ESOP dividends - 15,130 - - - - 15,130
Tax benefit associated with
exercise of stock options - 33,550 - - - - 33,550
Change in market value
of available-for-sale
securities, net - - - (148,491) - - (148,491)
--------- ------------ ------------- ------------- ----------- ----------- ------------
Balance at
March 31, 1996 $ 45,185 $ 34,437,842 $ 30,863,434 $ (76,830) $ (633,323) $ (624,098) $ 64,012,210
========= ============ ============= ============= =========== =========== ============
See accompanying notes to consolidated financial statements.
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CFSB BANCORP, INC., AND SUBSIDIARY
Consolidated Statements of Cash Flows
Three Months Ended
March 31,
1996 1995
-------------- ----------------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,714,917 $ 1,465,941
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 318,564 286,783
Provision for loan losses 60,000 60,000
Provision for real estate losses 15,000 30,000
Net amortization of premiums and accretion of discounts 166,879 322,419
Loan origination fees, net of costs deferred (16,178) 128,739
Amortization of loan fees (94,294) (109,153)
Loans originated for sale (9,427,425) (622,150)
Proceeds from sales of loans originated for sale 1,787,128 690,650
Capitalized originated mortgage servicing rights, net (67,939) -
Net gains on sales of loans and securities (38,164) (4,289)
Gains on sales of repossessed assets (430) -
Recoveries of losses 13,526 18,946
Decrease (increase) in accrued interest receivable 109,247 (465,770)
Increase (decrease) in accrued interest payable (40,305) 281,306
Increase in federal income taxes payable 815,000 658,000
Increase (decrease) in other liabilities (100,319) 969,878
Decrease (increase) in other assets (1,002,402) 4,148,941
-------------- -------------
Net cash provided (used) by operating activities (5,787,195) 7,860,241
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities available for sale (5,041,125) -
Principal repayments and maturities of investment
securities held to maturity - 2,000,000
Principal repayments and maturities of investment
securities available for sale 12,920,000 3,000,000
Loan originations (net of undisbursed loans in process) (32,089,929) (28,733,921)
Loans purchased (20,157,862) -
Proceeds from sales of loans 7,471,757 301,914
Principal repayments on loans 28,541,308 16,589,127
Principal repayments and maturities on mortgage-backed
securities available for sale 285,605 777,546
Principal repayments and maturities on mortgage-backed
securities held to maturity 2,113,881 2,161,565
Due to broker 1,998,000 -
Proceeds from sales, redemptions, and settlements of
real estate owned, net - 338,860
Proceeds from sales of repossessed property 5,510 -
Capitalized additions to real estate owned, net of recoveries 7,929 951
Purchases of premises and equipment (431,666) (323,189)
Proceeds from sales and disposals of premises and equipment 1,224 -
Purchases of Federal Home Loan Bank stock - (374,000)
-------------- -------------
Net cash used by investing activities (4,375,368) (4,261,147)
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CFSB BANCORP, INC., AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
Three Months Ended
March 31,
1996 1995
------------- -------------
(unaudited)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits $ 5,795,793 $ 9,195,894
Stock options exercised 88,827 7,649
Net increase in advance payments by
borrowers for taxes and insurance 1,771,478 1,511,733
Federal Home Loan Bank advance repayments (1,282,819) (44,626,171)
Federal Home Loan Bank advances 46,145 28,053,277
Dividends paid on common stock (490,144) (443,466)
------------- -------------
Net cash provided (used) by financing activities 5,929,280 (6,301,084)
------------- -------------
Net decrease in cash and cash equivalents (4,233,283) (2,701,990)
Cash and cash equivalents at beginning of period 29,724,175 15,662,465
------------- -------------
Cash and cash equivalents at end of period $ 25,490,892 $ 12,960,475
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest expense $ 8,459,103 $ 7,639,456
Federal income taxes - -
Transfers of loans to real estate owned 73,256 109,936
Transfer of loans to repossessed property 14,226 -
Loans charged-off 25,455 12,740
See accompanying notes to consolidated financial statements.
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CFSB BANCORP, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements
(unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements are prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation are included. The results of
operations for the three months ended March 31, 1996, are not necessarily
indicative of the results to be expected for the full year. These Consolidated
Financial Statements should be read in conjunction with the Consolidated
Financial Statements and Notes thereto, for the year ended December 31, 1995,
included in the Corporation's 1995 Annual Report.
2. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts and transactions of
CFSB Bancorp, Inc. (Corporation) and its wholly-owned subsidiary, Community
First Bank (Bank), and the Bank's wholly-owned subsidiary, Capitol Consolidated
Financial Corporation (Capitol Consolidated), and Capitol Consolidated's
wholly-owned subsidiary, Allegan Insurance Agency. Intercompany transactions
and account balances are eliminated.
3. EARNINGS PER SHARE
Earnings per share of common stock are based on the weighted average number of
common shares and common share equivalents outstanding during the period.
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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, a federal savings bank (Bank). Substantially all of the Corporation's
assets are currently held in, and operations conducted through its sole
subsidiary, Community First Bank. The Bank is a community-oriented financial
institution offering a variety of financial services to meet the needs of the
communities it serves. The Bank's primary market area is the greater Lansing
area, which is composed of the tri-county area of Clinton, Eaton, and Ingham
counties, the western townships of Shiawassee County, and the southwest corner
of Ionia County. The Bank's business consists primarily of attracting deposits
from the general public and using such deposits, together with Federal Home
Loan Bank (FHLB) advances, to make loans for the purchase and construction of
residential properties. To a lesser extent, the Bank also makes
income-producing property loans, commercial business loans, home equity loans,
and various types of consumer loans. The Bank's revenues are derived
principally from interest income on mortgage and other loans, mortgage-backed
securities, investment securities, and to a lesser extent, from fees and
commissions. The operations of the Bank, and the financial services industry
generally, are significantly influenced by general economic conditions and
related monetary and fiscal policies of financial institution regulatory
agencies. Deposit flows and cost of funds are impacted by interest rates on
competing investments and market rates of interest. Lending activities are
affected by the demand for financing of real estate and other types of loans,
which in turn is affected by the interest rates at which such financing is
offered.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1996, COMPARED TO
THE THREE MONTHS ENDED MARCH 31, 1995
Net income for the three months ended March 31, 1996, was $1,715,000, or $0.37
per fully diluted share, a net increase of 17.0 percent, or $249,000, from
$1,466,000, or $0.32 per fully diluted share, for the corresponding period in
1995. The Corporation's strong financial performance for the quarter reflects
improvement in net interest margin and substantial increases in fee income
partially offset by controlled general and administrative expense growth. The
comparability of net earnings was also influenced by the Corporation's
effective tax rate of 32.2 percent in 1996 compared to 31.0 percent a year
earlier. Net income for the 1996 first quarter represents a return on average
assets of 0.91 percent, an increase from 0.82 percent for the 1995 first
quarter and a return on average stockholders' equity of 10.85 percent compared
to 10.49 percent in 1995. The Corporation's efficiency ratio, or operating
expenses over recurring operating revenues, was 60.5 percent for the quarter
ended March 31, 1996, an improvement from 62.4 percent for the quarter ended
March 31, 1995.
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Net Interest Income
The most significant component of the Corporation's earnings is net interest
income, which is the difference between interest earned on loans,
mortgage-backed securities, investment securities and other earning assets, and
interest paid on deposits and FHLB advances. This amount, when annualized and
divided by average earning assets, is referred to as the net yield on average
earning assets. Net interest income and net yield on average earning assets
are directly impacted by changes in volume and mix of earning assets and
interest-bearing liabilities, market rates of interest, the level of
non-performing assets, demand for loans, and other market forces.
The following table presents the yields on the Corporation's earning assets and
costs of the Corporation's interest-bearing liabilities, the interest rate
spread, and the net yield on earning assets for the three months ended March
31, 1996 and 1995, and at March 31, 1996, and December 31, 1995. The costs
include the annualized effect of the Corporation's interest rate exchange
agreement.
For the
Three Months
Ended At At
March 31, March 31, December 31,
1996 1995 1996 1995
---------- --------- ------------ --------------
Weighted average yield:
Loans receivable, net 7.72% 7.88% 7.67% 7.75%
Mortgage-backed securities 7.62 6.76 7.89 7.86
Investment securities 5.40 5.48 5.50 5.37
Interest-earning deposits 4.26 4.07 4.78 4.92
Other 7.58 7.44 7.59 7.61
---- ---- ----- ------
Total earning assets 7.49 7.43 7.48 7.49
Weighted average cost:
Savings, checking, and money
market accounts 2.59 2.90 2.46 2.76
Certificates of deposit 5.89 5.51 5.82 5.97
FHLB advances 6.08 6.32 5.96 6.02
---- ---- ----- ------
Total interest-bearing
liabilities 4.94 4.88 4.81 5.00
---- ---- ----- ------
Interest rate spread 2.55% 2.55% 2.67% 2.49%
==== ==== ===== ======
Net yield on earning assets 2.89% 2.86% 3.01% 2.81%
==== ==== ===== ======
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Net interest income before provision for loan losses was $5.4 million during
the first quarter of 1996, and represented a $259,000 increase compared to the
first quarter of 1995. Net interest income was positively affected by strong
growth in earning assets. 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 $627.9 million in the first quarter of 1996 representing growth
of $95.7 million, or 18.0 percent, over average loans receivable of $532.2
million in the same quarter a year earlier. The increased level of loans
outstanding resulted from originations of adjustable-rate mortgage loans and
purchases of adjustable- and fixed-rate, medium-term mortgage loans all of
which are held in the Corporation's portfolio. The Corporation's net yield on
average earning assets was 2.89% for the three months ended March 31, 1996, an
improvement from 2.86% for the comparable three month period of 1995. Because
the Corporation is liability sensitive, pressure may be felt on the
Corporation's net yield if short-term market interest rates rise. In a falling
interest rate environment, competition may pressure the Corporation's net
interest margin.
The future trend of the Corporation's net yield and net interest income may
further be impacted by the level of mortgage loan originations, purchases,
repayments, and refinancings and a resulting change in the composition of the
Corporation's earning assets. The relatively flat yield curve during the first
quarter resulted in many more customers exhibiting a preference for fixed-rate
mortgage loans, most of which are originated for sale in the secondary market.
As the slope of the yield curve has more recently begun to steepen in the
second quarter, customer preferences in the Corporation's local market are
again favoring adjustable-rate mortgage loans. Additional factors affecting
the Corporation's net interest income will continue to be the volatility of
interest rates, slope of the yield curve, asset size, maturity/repricing
activity, and competition.
Provision for Loan Losses
The allowance for loan losses, established through provisions for losses
charged to expense, is increased by recoveries of loans previously charged off
and reduced by charge-offs of loans. During the first quarter of 1996, the
provision for loan losses remained unchanged at $60,000 compared to the
year-ago period. Maintaining the current provision primarily resulted from
management's evaluation of the adequacy of the allowance for loan losses
including consideration of actual loss experience, delinquency rates, borrower
circumstances, current and projected economic conditions, the perceived risk
exposure among all loan types and other relevant factors. Management believes
the current provision and related allowance for loan losses is adequate to meet
current and potential credit risks in the current loan portfolio.
For more information on the Corporation's allowance for loan losses and
activity therein, reference is made to "Asset Quality."
Other Income
Other income totaled $1,021,000 for the three months ended March 31, 1996,
compared to $685,000 for the three months ended March 31, 1995, an increase of
49.0 percent, or $336,000. Growth in other income resulted primarily from
increased deposit fees assessed on a higher level
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of transaction account activity. Increased gains on loan sales, including the
impact of adopting Statement of Financial Accounting Standards No. 122,
Accounting for Mortgage Servicing Rights (SFAS 122), also contributed to the
higher level of other income. Adopting SFAS 122 increased gains on loan sales
by $68,000 in the first quarter of 1996.
Effective January 1, 1996, the Corporation adopted the provisions of SFAS 122.
This statement requires the Corporation to recognize as separate assets rights
to service mortgage loans for others, however those servicing rights are
acquired. Prior to adoption of SFAS 122, the Corporation had no assets
capitalized for originated or purchased servicing rights. The fair value of
capitalized originated mortgage servicing rights is determined based on the
estimated discounted net cash flows to be received. In applying this valuation
method, the Corporation uses assumptions market participants would use in
estimating future net servicing income, which includes estimates of the cost of
servicing per loan, the discount rate, float value, an inflation rate,
ancillary income per loan, prepayment speeds, and default rates. Originated
mortgage servicing rights are amortized in proportion to and over the period of
estimated net loan servicing income. These capitalized mortgage servicing
rights are periodically reviewed for impairment based on the fair value of
those rights.
The ongoing impact of SFAS 122 will depend upon demand in the Corporation's
lending market for fixed-rate residential mortgage loans salable in the
secondary mortgage market. The Corporation capitalized approximately $68,000
of originated mortgage servicing rights during the three months ended March 31,
1996, of which less than $1,000 has been amortized. No valuation allowances
for capitalized originated mortgage servicing rights were considered necessary
as of March 31, 1996.
General and Administrative Expenses
General and administrative expenses were $3,798,000 for the three months ended
March 31, 1996, an increase of $189,000 compared to $3,609,000 for the same
quarter a year ago. Compensation rose between periods as a result of upward
merit-based salary adjustments partly offset by the effect of fewer full-time
equivalent employees. The use of dividends received on unallocated ESOP shares
to reduce the Corporation's contribution in the first quarter of 1996 favorably
impacted general and administrative expenses. The first quarter of 1995's
occupancy expense benefited from the receipt of rental income from the
Corporation's third-party provider of financial services and the receipt of an
upcharge in connection with renovations made to tenant specifications.
Furniture and equipment depreciation expense in 1996 increased over the
comparable 1995 period primarily as a result of accelerating the depreciation
on certain computer equipment to more closely reflect the estimated remaining
life of this equipment. Included in other general and administrative expense,
marketing expense increased $52,000 over the 1995 period principally as the
result of the continued promotion of the Corporation's checking account
products. In addition, a comparatively higher volume of mortgage loan
originations led to increased loan origination costs capitalized.
The Bank is required to pay assessments based on a percentage of its insured
deposits to the Federal Deposit Insurance Corporation (FDIC) for insurance of
its deposits by the FDIC through
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the Savings Association Insurance Fund (SAIF). Under the Federal Deposit
Insurance Act, the FDIC is required to set semi-annual assessments for
SAIF-insured institutions at a level necessary to maintain the designated
reserve ratio of the SAIF at 1.25 percent of estimated insured deposits or at a
higher percentage of estimated insured deposits that the FDIC determines to be
justified for that year by circumstances indicating a significant risk of
substantial future losses to the SAIF. The assessment rate currently ranges
from 0.23 percent of insured deposits for well-capitalized institutions to 0.31
percent of insured deposits for undercapitalized institutions.
The FDIC also administers the Bank Insurance Fund (BIF), which has the same
designated reserve ratio as the SAIF. In late 1995, the FDIC amended the
risk-based assessment schedule to significantly lower the deposit insurance
assessment rate for most commercial banks and other depository institutions
with deposits insured by the BIF effective during the semi-annual period after
the BIF achieves its designated reserve ratio of 1.25 percent of BIF-insured
deposits. Under the new BIF assessment schedule, the assessment rates of
BIF-insured institutions range from 0.31 percent of insured deposits for
undercapitalized BIF-institutions to an annual payment of $2,000 for
well-capitalized institutions which constitute over 90 percent of BIF-insured
institutions. The FDIC has indicated that the BIF achieved the designated
reserve ratio during the quarter ended June 30, 1995, and has refunded excess
premiums paid by BIF-insured institutions. The FDIC does not anticipate the
assessment rate for SAIF-insured institutions in even the lowest risk-based
premium category will fall below the current 0.23 percent of insured deposits
before the year 2002 absent a recapitalization of the SAIF. The new BIF
assessment schedule results in a substantial disparity in the deposit insurance
premiums paid by BIF and SAIF members and places SAIF-insured savings
associations such as the Bank at a competitive disadvantage to BIF-insured
institutions.
A number of proposals are being considered to recapitalize the SAIF in order to
eliminate the insurance premium disparity. Proposed legislation provides for a
one time assessment currently estimated to be 80 to 85 basis points of insured
deposits that would fully capitalize the SAIF. Under this proposal, the BIF and
SAIF would be merged into one fund on January 1, 1998. It is unknown whether
this legislation will be enacted or whether premiums for either BIF or SAIF
members will be adjusted in the future by the FDIC or by legislative action.
The legislation also contemplates that commercial banks whose deposits are
currently insured under SAIF would receive up to a 20 percent reduction in their
share of the premium assessment. If a special assessment as described above
were to be required, it would result in a one-time after-tax charge to the Bank
of up to $2.9 million, assuming such charge would be tax deductible and the
special assessment is based on deposits held at March 31, 1995, as is currently
proposed. If such a special assessment were required, while the Corporation's
net income would initially be negatively impacted, the SAIF as a result would be
fully recapitalized and this would have the effect of reducing the Bank's future
deposit insurance premiums to the SAIF, thereby increasing net income in future
periods, and restoring competitive equality between BIF-insured and SAIF-insured
institutions.
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FEDERAL INCOME TAX EXPENSE
Federal income tax expense was $815,000 for the three months ended March 31,
1996, compared to $658,000 for the comparable 1995 quarter. The increase in
federal income tax expense resulted from a higher level of pre-tax earnings
combined with an increase in the Corporation's effective tax rate from 31.0
percent for 1995 to 32.2 percent for 1996. The increase in the effective tax
rate is the result of accounting for changes in the Corporation's tax reserves
under Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes (SFAS 109). To the extent the Corporation's loan and
mortgage-backed security portfolio increased during 1995, a deferred tax
liability for the excess of the Corporation's tax bad debt reserves over the
amount of such reserves as of December 31, 1987, was reduced which had the
effect of lowering the Corporation's effective tax rate. The Corporation's
adjusted base-year tax bad debt reserve increased during 1995 to the level of
the Corporation's actual base-year tax bad debt reserve. As a result, 1996
growth in the Corporation's loan and mortgage-backed securities portfolio will
result neither in a reduced liability nor lowered tax expense. The
Corporation's federal income tax expense was also favorably impacted during
both periods by the expected annual use of $228,000 of low-income housing
federal income tax credits.
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. As of March 31, 1996, the
Corporation had no loans which were "troubled debt restructurings" as defined
in Statement of Financial Accounting Standards No. 15, Accounting by Debtors
and Creditors for Troubled Debt Restructurings. Additionally, management,
after reviewing the Corporation's commercial business and income-producing loan
portfolios, does not believe it has any nor has had any impaired loans, as
defined by Statement of Financial Accounting Standards No. 114, Accounting by
Creditors for Impairment of a Loan, at or during the quarter ended March 31,
1996. The Corporation, however, had $10,000 and $17,000 of loans on accrual
status as of March 31, 1996, and December 31, 1995, respectively, which were 90
days or more delinquent. Payment of interest on such loans was either
guaranteed or otherwise fully collectible. For purposes of presentation, these
loans are included as nonaccruing loans in the following table.
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[CAPTION]
March 31, December 31,
1996 1995
-------- --------
(dollars in thousands)
Nonaccruing loans:
One- to four-family
residential mortgages $ 419 $ 68
FHA-partially insured
and VA-partially guaranteed 73 253
Consumer installment 86 28
-------- --------
Total $ 578 $ 349
======== ========
Percentage of total assets 0.08% 0.05%
======== ========
Real estate owned:(1)
One-to four-family
residential mortgages $ 312 $ 238
Construction and development 7 7
-------- --------
Total $ 319 $ 245
======== ========
Percentage of total assets 0.04% 0.03%
======== ========
Total nonaccruing loans
and real estate owned $ 897 $ 594
======== ========
Percentage of total assets 0.12% 0.08%
======== ========
(1) Real estate owned includes properties in redemption and acquired through
foreclosure.
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The following is a summary of the Corporation's loan and real estate owned loss
experience from December 31, 1992, through March 31, 1996.
Real
Loans Estate Total
----- ------ -----
Balance at December 31, 1992 $3,836,856 $236,894 $4,073,750
Provision for losses 240,000 330,000 570,000
Charges against the allowance (347,789) (535,479) (883,268)
Recoveries 117,666 135,672 253,338
---------- --------- ----------
Balance at December 31, 1993 3,846,733 167,087 4,013,820
Provision for losses 240,000 565,000 805,000
Charges against the allowance (153,263) (711,937) (865,200)
Recoveries 190,448 55,823 246,271
---------- --------- ----------
Balance at December 31, 1994 4,123,918 75,973 4,199,891
Provision for losses 240,000 120,000 360,000
Charges against the allowance (55,107) (34,614) (89,721)
Recoveries 54,328 62,218 116,546
---------- --------- ----------
Balance at December 31, 1995 4,363,139 223,577 4,586,716
Provision for losses 60,000 15,000 75,000
Charges against the allowance (25,455) (15,210) (40,665)
Recoveries 13,526 7,281 20,807
---------- --------- ----------
Balance at March 31, 1996 $4,411,210 $230,648 $4,641,858
========== ========= ==========
While the $4.4 million allowance for loan losses at March 31, 1996, remained
relatively unchanged compared to December 31, 1995, the allowance for loan
losses as a percentage of total loans as of March 31, 1996, declined to 0.68
percent compared to 0.69 percent at December 31, 1995, and 0.77 percent at
March 31, 1995. Nonperforming assets as a percentage of total assets declined
from 0.38 percent at March 31, 1995, to 0.08 percent at December 31, 1995, and
increased slightly to 0.12 percent at March 31, 1996.
Management believes the current provision and related allowance for loan and
real estate owned losses is adequate to meet current and potential credit risks
in the current loan and real estate owned portfolio, although there can be no
assurances the related allowances may not have to be increased in the future.
ASSET/LIABILITY MANAGEMENT
The operating results of the Corporation are dependent, to a large extent, upon
its net interest income, which is the difference between its interest income
from interest-earning assets, such as loans, mortgage-backed securities and
investment securities, and interest expense on interest-
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bearing liabilities, such as deposits and FHLB advances. In recent years,
financial institutions have experienced significant fluctuations in net
interest income caused by rapidly changing interest rates and by differences in
the repricing characteristics of their interest-earning assets and
interest-bearing liabilities.
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 9.0 percent at
March 31, 1996, compared to a negative 7.1 percent at December 31, 1995, and the
Corporation's three-to-five-year gap was a negative 2.1 percent at March 31,
1996, compared to a negative 0.6 percent at December 31, 1995. The change in the
Corporation's negative gap position between periods is primarily the result of
using available liquidity from shorter-term net deposit inflows and the proceeds
from maturities and repayments of investment and mortgage-backed securities to
fund the origination of three-year adjustable-rate mortgages and the purchase of
medium-term fixed- and adjustable-rate mortgage loans.
LIQUIDITY AND CAPITAL RESOURCES
Total assets rose to $771.7 million at March 31, 1996, an increase of $10.3
million, or 1.3 percent, from $761.4 million at December 31, 1995.
The Corporation's regulatory liquidity ratios at March 31, 1996, and December
31, 1995, were 11.5 percent and 12.7 percent, respectively. The Corporation
anticipates it will have sufficient funds available to meet current commitments
either through operations, deposit growth, or borrowings from the FHLB. At
March 31, 1996, the Corporation had total outstanding mortgage loan commitments
of $23.8 million of which $16.1 million were for adjustable-rate loans and $7.7
million were for fixed-rate loans. The interest rate on fixed-rate loans
generally is not determined until the approximate closing date. Loans in
process at quarter-end 1996 totaled $11.0 million and primarily represented
undrawn funds on adjustable- and fixed-rate construction loans of $8.9 million
and $2.1 million, respectively. The Corporation also had commitments to extend
adjustable-rate home equity lines of credit in the amount of $26.2 million at
March 31, 1996. The Corporation had no firm commitments to purchase mortgage
loans and had commitments to sell $3.1 million of fixed-rate, residential
mortgage loans at March 31, 1996. Approximately $3.6 million of one- to
four-family residential, fixed-rate mortgage loans was held for sale at March
31, 1996, with a weighted average interest rate of 7.6 percent.
Lending
Loans receivable increased $23.9 million, or 3.9 percent, to $634.2 million at
March 31, 1996, from $610.3 million at December 31, 1995, and increased $104.0
million, or 19.6 percent from $530.2 million at March 31, 1995.
The Corporation originated $37.5 million of loans during the first quarter of
1996, a substantial increase from $28.9 million during the first quarter of
1995. During late 1995 and into early 1996, market rates of interest moved
lower and loan demand grew significantly compared to the
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18
first quarter a year earlier. Also influenced by the falling interest rate
environment were higher principal repayments on loans. The Corporation
received principal repayments on loans of $28.5 million during the three months
ended March 31, 1996, compared to $16.6 million during the first quarter of
1995. The following schedule sets forth the Corporation's loan originations
for the three months ended March 31, 1996 and 1995.
Three Months Ended
March 31,
1996 1995
---- ----
(in thousands)
Fixed-rate:
One- to four-family residential $ 11,534 $ 786
Income-producing 758 -
FHA-insured and VA-partially guaranteed 65 -
Construction and development:
One- to four-family residential 1,609 -
Commercial 10 61
Consumer 3,414 3,115
-------- --------
17,390 3,962
Adjustable-rate:
One- to four-family residential 7,385 7,985
Income-producing - 95
Construction and development:
One- to four-family residential 6,938 10,181
Income-producing 600 2,975
Commercial 1,020 236
Consumer 4,152 3,488
-------- --------
20,095 24,960
-------- --------
Total originations $ 37,485 $ 28,922
======== ========
During the quarters ended March 31, 1996 and 1995, the Corporation sold
primarily fixed-rate loans aggregating $9.2 million and $1.0 million,
respectively. The level of loan sales is partially a function of the interest
rate environment. When the spread between fixed and adjustable mortgage
interest rates was relatively wide in the first quarter of 1995, mortgage loan
originations reflected customer preferences in the Corporation's market area for
adjustable-rate loans which are retained in the Corporation's portfolio. In the
first quarter of 1996, however, the spread between fixed and adjustable
mortgage rates narrowed and there was a much higher concentration of fixed-rate
mortgage loan applications and subsequent closings. Consequently, there has
been a higher level of sales in 1996.
During the three months ended March 31, 1996, the Corporation purchased from an
unaffiliated
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financial institution $20.2 million one- to four-family residential, fixed- and
adjustable-rate, medium-term mortgage loans. No purchases were made in the
comparable 1995 quarter. The Corporation purchases residential loans to
supplement and complement its own mortgage loan production; purchases are also
dependent upon product availability.
Investment and Mortgage-Backed Securities
At December 31, 1995, investment and mortgage-backed securities available for
sale included unrealized net gains of $109,000 reported net of $37,000 of
federal income tax expense. Throughout the first quarter of 1996, market
interest rates generally climbed which unfavorably impacted the market value of
the principally fixed-rate investment and mortgage-backed securities available
for sale. At March 31, 1996, investment and mortgage-backed securities
available for sale included unrealized net losses of $116,000 reported net of
$39,000 of federal income tax benefit as a separate component of stockholders'
equity. The Corporation had no investment or mortgage-backed securities
classified as trading securities as of March 31, 1996.
Included in the composition of the Corporation's earning assets at March 31,
1996, were $32.7 million of mortgage-backed securities, a 6.9 percent decline
from the $35.2 million held at December 31, 1995. The relatively low interest
rate environment of early 1996 led to a more predominant refinance market and
resulted in acceleration of principal repayments on the mortgage loans
underlying these securities. While outstanding balances of mortgage-backed
securities were almost twice as high in first quarter 1995, principal
repayments and maturities of $2.4 million in first quarter 1996 approached the
level of $2.9 million in the year-ago quarter. The Corporation did not
purchase or sell any mortgage-backed securities during the quarters ended March
31, 1996 or 1995. The approximate fair value of the mortgage-backed securities
portfolio was $33.1 million at March 31, 1996, with gross unrealized gains and
losses of $544,000 and $193,000, respectively.
At March 31, 1996, the level of the Corporation's investment securities
portfolio declined to $46.8 million from $55.1 million at December 31, 1995.
The decrease in investment securities resulted principally from the maturity of
$11.1 million of investment securities and call options being exercised on $1.8
million of available-for-sale investment securities. Proceeds from the
maturities and calls were, in part, used to purchase a $2.0 million
available-for-sale medium-term federal agency security and a $3.0 million
available-for-sale medium-term U.S. Treasury security. The approximate fair
value of the Corporation's investment securities was $46.8 million at March 31,
1996, with gross unrealized gains and losses of $105,000 and $220,000,
respectively.
Deposits
Total deposits grew by $5.8 million from $527.8 million at December 31, 1995,
to $533.6 million at March 31, 1996. During 1995, the Corporation introduced
Really Free Checking and five other highly competitive checking account
programs. To support these checking account programs, the Corporation
conducted a comprehensive marketing campaign. As a result, a record number of
new checking accounts were opened during 1995. The continued promotion of
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20
Really Free Checking in 1996 has resulted in an expansion of the Corporation's
deposit base through attracting new customers and cross-selling other Bank
products to existing customers.
Borrowings
Since mid-1993, borrowings from the FHLB have been an integral component of the
Corporation's funding strategy. Borrowings replaced maturing certificates of
deposit and other deposit withdrawals, funded asset growth, and were used to
manage interest rate risk. FHLB advances grew from $77.8 million at December
31, 1993, to $160.6 million at year-end 1995. Of the $159.4 million of
outstanding FHLB advances at March 31, 1996, $131.6 million carried a weighted
average fixed-rate of 6.1 percent. Adjustable-rate advances at March 31, 1996,
totaled $27.8 million, all of which reprice based upon three-month LIBOR or
prime. Because net deposit inflows were generally available to meet the
Corporation's operating needs, borrowings during the first quarter of 1996 were
limited.
Capital
Total stockholders' equity was $64.0 million at March 31, 1996, a $1.3 million,
or 2.0 percent increase, compared to the 1995 year-end total of $62.7 million.
Book value per share correspondingly increased to $14.30 at March 31, 1996,
from $14.08 per share at December 31, 1995. The increases were primarily the
result of net income for the first quarter of 1996 offset in part by dividend
declarations and downward market adjustments on available-for-sale securities.
Principally as the result of the increase in total stockholders' equity during
the first quarter, the ratio of stockholders' equity to assets increased to 8.3
percent at March 31, 1996, from 8.2 percent at December 31, 1995.
Community First Bank's regulatory capital ratios are well in excess of minimum
capital requirements specified by federal banking regulations. During 1993,
the Office of Thrift Supervision (OTS) issued a final rule adding an interest
rate risk component to the risk-based capital requirement for thrift
institutions. The regulation requires thrifts with a greater than normal
interest rate exposure to take a deduction from the total capital available to
meet their risk-based capital requirements. The OTS measures an institution's
interest rate risk as a percentage change in the market value of its portfolio
resulting from a hypothetical 200-basis-point shift in interest rates. The
deduction from risk-based capital is equal to one-half of the difference
between the measured risk and 2 percent (normal level) multiplied by the market
value of an institution's assets. The OTS has postponed the effective date for
implementation of this regulation until it finalizes the process under which
institutions may appeal such capital deductions and it determines how the other
bank regulatory agencies plan to adjust bank capital for excessive interest
rate risk exposure. If applied, this regulation would not have significantly
impacted the amount of the Bank's risk-based capital available to meet the
requirement at March 31, 1996. The Bank's risk-based capital ratio was 14.8
percent at March 31, 1996.
Additionally, bank regulatory agencies require national banks with less than
the highest rating to maintain a core capital ratio of 4 to 5 percent. As
mandated by the Financial Institutions Reform, Recovery and Enforcement Act of
1989, the OTS must apply similar requirements to thrift
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institutions. The OTS has issued a proposal to raise the minimum core capital
ratio from 3 percent to a range of 4 to 5 percent. At this date, Community
First Bank cannot predict its ultimate required capital level or when the
proposal will be in effect. Community First Bank's tangible and core capital
ratios were 8.1 percent at March 31, 1996. Based upon the present capital
levels, management believes Community First Bank is well positioned to meet
future regulatory capital provisions.
The Corporation's Board of Directors declared a cash dividend of $0.11 per
share in the first quarter of 1996, an increase of 10.0 percent over the $0.10
per share dividend declared in the first quarter of 1995. The Corporation's
cash dividend policy is continually reviewed by management and the Board of
Directors. The Corporation currently intends to continue its policy of paying
quarterly dividends, however, such payments will depend upon a number of
factors, including capital requirements, regulatory limitations, the
Corporation's financial condition and results of operations, and the Bank's
ability to pay dividends to the Corporation. Presently, the Corporation has no
significant source of income other than dividends from the Bank. Consequently,
the Corporation depends upon dividends from the Bank to accumulate earnings for
payment of cash dividends to its stockholders.
ACCOUNTING STANDARD
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation (SFAS 123). This statement
encourages all entities to adopt a fair value based method of accounting for
their employee stock-based compensation plans. The statement also allows an
entity 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).
Entities electing to remain with the accounting in Opinion 25 must make pro
forma disclosures of net income and earnings per share, as if the fair value
based method of accounting defined in SFAS 123 had been applied. The
accounting and disclosure requirements of SFAS 123 are generally effective for
transactions entered into in fiscal years that begin after December 15, 1995,
though they may be adopted on issuance. Pro forma disclosures required for
entities that elect to continue to measure compensation cost using Opinion 25
must include the effects of all awards granted in fiscal years that begin after
December 15, 1994. The Corporation adopted the provisions of SFAS 123
effective January 1, 1996, and will elect the pro forma disclosure method in
its year-end 1996 Consolidated Financial Statements and Notes thereto.
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CFSB BANCORP, INC.
Part II
Other Information
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults in Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a.) List of Exhibits
(27) Financial Data Schedule
b.) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter for
which this report is filed.
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CFSB BANCORP, INC.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CFSB BANCORP, INC.
(Registrant)
Date: May 10, 1996 By: /s/ Robert H. Becker
--------------------
Robert H. Becker
President and
Chief Executive Officer
(Duly Authorized Officer)
Date: May 10, 1996 By: /s/ John W. Abbott
------------------
John W. Abbott
Executive Vice President,
Chief Operating Officer,
and Secretary
(Principal Financial and
Accounting Officer)
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Exhibit Index
-------------
Exhibit No. Description
- - ----------- -----------
27 Financial Data Schedule