-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, APEua7n8iW/Mmvw9oLEpoSyH9d5Nd730VLmdxkBXf35eCPqZiKKz0vKUXtD6I7kF lHeysJmMSuHwJh3JblV8EQ== 0000928385-97-001293.txt : 19970813 0000928385-97-001293.hdr.sgml : 19970813 ACCESSION NUMBER: 0000928385-97-001293 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970812 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CFSB BANCORP INC CENTRAL INDEX KEY: 0000859083 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 382920051 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-18609 FILM NUMBER: 97657214 BUSINESS ADDRESS: STREET 1: 112 E ALLEGAN ST CITY: LANSING STATE: MI ZIP: 48933 BUSINESS PHONE: 5174834871 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended June 30, 1997 Commission File No. 0-18609 CFSB BANCORP, INC. (Exact name of registrant as specified in its charter) Delaware 38-2920051 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 112 East Allegan Lansing, Michigan 48933 (Address of Principal Executive Offices) Registrant's telephone number, including area code: (517) 371-2911 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- There were 5,096,521 shares of the Registrant's $0.01 par value common stock outstanding as of July 31, 1997. CFSB BANCORP, INC., AND SUBSIDIARY Contents
Pages ----- PART I - FINANCIAL INFORMATION Consolidated Statements of Financial Condition at June 30, 1997, and December 31, 1996 (unaudited) 1 Consolidated Statements of Operations for the three months ended June 30, 1997 and 1996 (unaudited) and for the six months ended June 30, 1997 and 1996 (unaudited) 2 Consolidated Statement of Stockholders' Equity for the six months ended June 30, 1997 (unaudited) 3 Consolidated Statements of Cash Flows for the six months ended June 30, 1997 and 1996 (unaudited) 4-5 Notes to Consolidated Financial Statements (unaudited) 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 7-19 PART II - OTHER INFORMATION 20 SIGNATURES 21
CFSB BANCORP, INC., AND SUBSIDIARY Consolidated Statements of Financial Condition
June 30, December 31 1997 1996 -------------- -------------- (unaudited) ASSETS Cash and amounts due from depository institutions $ 3,686,931 $ 7,479,722 Interest-earning deposits with Federal Home Loan Bank and other depository institutions, at cost which approximates market 13,176,570 15,270,241 Investment securities available for sale, at fair value 26,041,788 31,093,494 Mortgage-backed securities available for sale, at fair value 24,344,469 27,220,567 Loans receivable, net 745,057,491 717,714,636 Accrued interest receivable, net 5,198,656 4,349,240 Real estate, net 401,787 - Premises and equipment, net 10,749,314 10,985,199 Stock in Federal Home Loan Bank of Indianapolis, at cost 10,766,600 10,632,000 Deferred federal income tax benefit 337,772 317,270 Other assets 5,676,707 4,737,177 -------------- -------------- Total assets $ 845,438,085 $ 829,799,546 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits $ 560,353,267 $ 553,574,001 Advances from Federal Home Loan Bank 204,430,743 202,639,323 Advance payments by borrowers for taxes and insurance 6,374,171 1,356,507 Accrued interest payable 4,327,349 4,233,799 Federal income taxes payable 914,163 740,242 Other liabilities 4,592,778 4,785,647 -------------- -------------- Total liabilities 780,992,471 767,329,519 -------------- -------------- Stockholders' equity: Serial preferred stock, $0.01 par value; authorized 2,000,000 shares; issued - none - - Common stock, $0.01 par value; authorized 10,000,000 shares; issued 5,103,843 shares - 1997 and 4,849,611 shares - 1996 51,038 48,496 Additional paid-in capital 48,409,958 41,422,898 Retained income - substantially restricted 16,337,218 23,863,600 Net unrealized gains on available-for-sale securities, net of tax expense of $90,046 - 1997 and $110,548 - 1996 174,796 214,594 Employee Stock Ownership Plan (343,465) (459,408) Treasury stock, at cost; 7,911 shares - 1997 and 157,927 shares - 1996 (183,931) (2,620,153) -------------- -------------- Total stockholders' equity 64,445,614 62,470,027 -------------- -------------- Total liabilities and stockholders' equity $ 845,438,085 $ 829,799,546 ============== ==============
See accompanying notes to consolidated financial statements. 1 CFSB BANCORP, INC., AND SUBSIDIARY Consolidated Statements of Operations
Three Months Ended Six Months Ended June 30, June 30, 1997 1996 1997 1996 ------------ ----------- ----------- ----------- (unaudited) (unaudited) INTEREST INCOME: Loans receivable $ 14,196,567 $12,593,062 $28,098,939 $24,707,604 Mortgage-backed securities 474,419 598,085 985,607 1,247,338 Investment securities 468,024 594,740 923,683 1,262,453 Other 320,181 279,654 621,682 633,750 ------------ ----------- ----------- ----------- Total interest income 15,459,191 14,065,541 30,629,911 27,851,145 INTEREST EXPENSE: Deposits, net 6,035,135 5,849,951 12,071,249 11,850,728 Federal Home Loan Bank advances 3,080,632 2,494,168 5,999,894 4,912,189 ------------ ----------- ----------- ----------- Total interest expense 9,115,767 8,344,119 18,071,143 16,762,917 Net interest income before provision for loan losses 6,343,424 5,721,422 12,558,768 11,088,228 Provision for loan losses 90,000 60,000 180,000 120,000 ------------ ----------- ----------- ----------- Net interest income after provision for loan losses 6,253,424 5,661,422 12,378,768 10,968,228 OTHER INCOME (LOSS): Service charges and other fees 1,069,355 814,474 1,996,514 1,582,328 Loan servicing income 81,580 102,960 161,619 213,944 Losses on sales of investment securities available for sale, net (51,031) (11,419) (31,372) (11,419) Gains (losses) on sales of loans, net 71,826 (4,378) 141,683 101,821 Real estate operations, net (15,000) (15,000) (30,000) (30,000) Gains on sales of branches, net 351,740 - 351,740 - Other, net 213,018 20,305 325,457 71,369 ------------ ----------- ----------- ----------- Total other income 1,721,488 906,942 2,915,641 1,928,043 GENERAL AND ADMINISTRATIVE EXPENSES: Compensation, payroll taxes, and fringe benefits 2,052,029 2,035,444 4,098,105 4,015,949 Office occupancy and equipment 633,102 554,818 1,341,680 1,140,536 Federal insurance premiums 89,553 302,060 177,287 603,027 Data processing 110,314 89,022 211,988 173,086 Marketing 236,092 196,947 448,665 392,996 Other, net 798,611 676,003 1,587,869 1,326,690 ------------ ----------- ----------- ----------- Total general and administrative expense 3,919,701 3,854,294 7,865,594 7,652,284 ------------ ----------- ----------- ----------- Income before federal income tax expense 4,055,211 2,714,070 7,428,815 5,243,987 Federal income tax expense 1,260,000 863,000 2,326,000 1,678,000 ------------ ----------- ----------- ----------- Net income $ 2,795,211 $ 1,851,070 $ 5,102,815 $ 3,565,987 ============ =========== =========== =========== EARNINGS PER SHARE: Primary $ 0.52 $ 0.33 $ 0.95 $ 0.64 ============ =========== =========== =========== Fully diluted $ 0.52 $ 0.33 $ 0.95 $ 0.64 ============ =========== =========== =========== DIVIDENDS PAID PER SHARE $ 0.14 $ 0.09 $ 0.25 $ 0.18 ============ =========== =========== ===========
See accompanying notes to consolidated financial statements. 2 CFSB BANCORP, INC. AND SUBSIDIARY Consolidated Statement of Stockholders' Equity Six Months Ended June 30, 1997 (unaudited)
Net Unrealized Additional Gains (Losses) Commitment Total Common Paid-in Retained On Available-For- for ESOP Treasury Stockholders' Stock Capital Income Sale Securities Debt Stock Equity ------- ----------- ----------- ----------------- ---------- ----------- ------------ Balance at December 31, 1996 48,496 $41,422,898 $23,863,600 $ 214,594 $ (459,408) $(2,620,153) $ 62,470,027 Net income - - 5,102,815 - - - 5,102,815 Stock options exercised - - (96,727) - - 150,696 53,969 Repayment of ESOP debt - - - - 115,943 - 115,943 Cash dividends on common stock - $0.29 per share - - (1,469,052) - - - (1,469,052) 10% common stock dividend 2,542 6,987,060 (11,063,418) - - 4,062,759 (11,057) Treasury stock purchased - - - - - (1,777,23) (1,777,233) Change in market value of available-for-sale securities, net - - - (39,798) - - $ (39,798) -------- ----------- ------------- ------------- ------------ ----------- ----------- Balance at June 30, 1997 $51,038 $48,409,958 $ 16,337,218 $ 174,796 $ (343,465) (183,931) 64,445,614 ======== =========== ============= ============= =========== =========== ===========
See accompanying notes to consolidated financial statements. 3 CFSB BANCORP, INC., AND SUBSIDIARY Consolidated Statements of Cash Flows
Six Months Ended June 30, 1997 1996 ------------ ------------ (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 5,102,815 $ 3,565,987 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 821,198 657,499 Provision for loan losses 180,000 120,000 Provision for real estate losses 30,000 30,000 Net amortization of premiums and accretion of discounts 43,274 268,142 Loan origination fees, net of costs deferred 21,915 58,494 Amortization of loan fees (112,467) (144,977) Amortization of mortgage servicing rights 54,174 8,141 Loans originated for sale (7,344,077) (18,588,895) Proceeds from sales of loans originated for sale 7,759,645 13,924,936 Net gains on sales of loans and securities (110,311) (90,402) Net (gains) losses on sales and disposals of premises and equipment (325,667) 27,716 Net gains on sales of repossessed assets - (430) Recoveries of losses 22,292 18,868 Increase in accrued interest receivable (849,416) (228,210) Increase in accrued interest payable 93,550 74,394 Increase in federal income taxes payable 173,921 143,000 Decrease in other liabilities (276,687) (551,490) Increase in other assets (910,790) (6,121,518) ------------ ------------ Net cash provided by operating activities 4,373,369 (6,828,745) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investment securities available for sale (20,000,781) (10,041,125) Proceeds from sales of investment securities available for sale 20,037,696 10,042,188 Principal repayments and maturities of investment securities available for sale 5,000,000 18,420,000 Loan originations (net of undisbursed loans in process) (80,637,802) (78,102,486) Loans purchased (9,215,305) (31,733,987) Proceeds from sales of loans 2,172,845 1,977,550 Principal repayments on loans 59,335,828 52,696,783 Principal repayments and maturities on mortgage-backed securities available for sale 2,755,944 609,993 Principal repayments and maturities on mortgage-backed securities held to maturity - 4,214,179 Proceeds from sales, redemptions, and settlements of real estate owned, net 79,194 374,341 Proceeds from sales of repossessed assets 47,571 5,510 Capitalized additions to real estate owned, net of recoveries (26,253) (23,518) Purchases of premises and equipment (1,307,387) (865,645) Proceeds from sales and disposals of premises and equipment 1,047,741 4,624 Purchases of Federal Home Loan Bank stock (134,600) (283,900) ------------ ------------ Net cash used by investing activities (20,845,309) (32,705,493)
4 CFSB BANCORP, INC., AND SUBSIDIARY Consolidated Statements of Cash Flows, Continued
Six Months Ended June 30, 1997 1996 ------------ ------------ (unaudited) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits $ 6,779,266 $ 9,709,546 Stock options exercised 53,969 92,281 Purchases of treasury stock (1,777,233) (103,750) Net increase in advance payments by borrowers for taxes and insurance 5,017,663 4,382,879 Federal Home Loan Bank advance repayments (46,672,961) (9,721,539) Federal Home Loan Bank advances 48,464,381 23,746,959 Dividends paid on common stock (1,279,607) (982,523) ------------ ------------ Net cash provided by financing activities 10,585,478 27,123,853 ------------ ------------ Net decrease in cash and cash equivalents (5,886,462) (12,410,385) Cash and cash equivalents at beginning of period 22,749,963 29,724,175 ------------ ------------ Cash and cash equivalents at end of period $ 16,863,501 $ 17,313,790 ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for: Interest expense $ 17,977,593 $ 16,688,523 Federal income taxes 2,195,000 1,535,000 Transfers of loans to real estate owned 583,996 107,733 Transfers of loans to repossessed assets 110,232 26,226 Loans charged-off 225,579 36,194 Loans to facilitate the sale of real estate owned - 279,700
See accompanying notes to consolidated financial statements. 5 CFSB BANCORP, INC., AND SUBSIDIARY Notes to Consolidated Financial Statements (unaudited) 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements are prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation are included. The results of operations for the three and six months ended June 30, 1997, are not necessarily indicative of the results to be expected for the full year. These Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto, for the year ended December 31, 1996, included in the Corporation's 1996 Annual Report. 2. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts and transactions of CFSB Bancorp, Inc. (Corporation) and its wholly-owned subsidiary, Community First Bank (Bank), and the Bank's wholly-owned subsidiary, Capitol Consolidated Financial Corporation (Capitol Consolidated), and Capitol Consolidated's wholly- owned subsidiary, Community First Insurance and Investment Services. Intercompany transactions and account balances are eliminated. 3. EARNINGS PER SHARE Earnings per share of common stock are based on the weighted average number of common shares and common share equivalents outstanding during the period. 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following sections are designed to provide a more thorough discussion of the Corporation's financial condition and results of operations as well as to provide additional information on the Corporation's asset/liability management strategies, sources of liquidity, and capital resources. Management's discussion and analysis should be read in conjunction with the consolidated financial statements and supplemental data contained elsewhere in this report. GENERAL CFSB Bancorp, Inc. (Corporation) is the holding company for Community First Bank (Bank). Substantially all of the Corporation's assets are currently held in, and operations conducted through its sole subsidiary, Community First Bank. The Bank is a community-oriented financial institution offering a variety of financial services to meet the needs of the communities it serves. The Bank's primary market area is the greater Lansing area, which is composed of the tri- county area of Clinton, Eaton, and Ingham counties, the western townships of Shiawassee County, and the southwest corner of Ionia County. The Bank's business consists primarily of attracting deposits from the general public and using such deposits, together with Federal Home Loan Bank (FHLB) advances, to make loans for the purchase and construction of residential properties. To a lesser extent, the Bank also makes income-producing property loans, commercial business loans, home equity loans, and various types of consumer loans. The Bank's revenues are derived principally from interest income on mortgage and other loans, mortgage-backed securities, investment securities, and to a lesser extent, from fees and commissions. The operations of the Bank, and the financial services industry generally, are significantly influenced by general economic conditions and related monetary and fiscal policies of financial institution regulatory agencies. Deposit flows and cost of funds are impacted by interest rates on competing investments and market rates of interest. Lending activities are affected by the demand for financing of real estate and other types of loans, which in turn is affected by the interest rates at which such financing is offered. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1997, COMPARED TO THE THREE MONTHS ENDED JUNE 30, 1996 Net income for the three months ended June 30, 1997, was $2,795,000, or $0.52 per fully diluted share, a net increase of 51.0 percent, or $944,000, from $1,851,000, or $0.33 per fully diluted share, for the corresponding period in 1996. The Corporation's strong financial performance for the quarter reflected an improved net interest margin, increased fee income, and non-recurring gains generated from the sales of two branches, partially offset by increased general and administrative expenses. Net income for the 1997 second quarter represented a return on average assets of 1.34 percent, an increase from 0.95 percent for the 1996 second quarter and a return on average stockholders' equity of 17.46 percent compared to 11.51 percent in 1996. The Corporation's return on stockholders' equity excluding the gains on the sales of branches was 16.01 percent for the quarter ended June 30, 1997. The Corporation's efficiency ratio, or operating expenses over recurring operating revenues, was 51.0 percent for the quarter ended June 30, 1997, an improvement from 58.0 percent for the quarter ended June 30, 1996. 7 Net Interest Income - ------------------- The most significant component of the Corporation's earnings is net interest income, which is the difference between interest earned on loans, mortgage- backed securities, investment securities and other earning assets, and interest paid on deposits and FHLB advances. This amount, when annualized and divided by average earning assets, is referred to as the net interest margin. Net interest income and net interest margin are directly impacted by changes in volume and mix of earning assets and interest-bearing liabilities, market rates of interest, the level of non-performing assets, demand for loans, and other market forces. The following table presents the yields on the Corporation's earning assets and costs of the Corporation's interest-bearing liabilities, the interest rate spread, and the net interest margin for the three and six months ended June 30, 1997 and 1996, and at June 30, 1997, and December 31, 1996. The costs include the annualized effect of the Corporation's interest rate exchange agreement.
For the For the Three Months Six Months Ended Ended At At June 30, June 30, June 30, December 31, 1997 1996 1997 1996 1997 1996 ------ ------ ------ ------ -------- ------------ Weighted average yield: Loans receivable, net 7.66% 7.66% 7.65% 7.69% 7.70% 7.60% Mortgage-backed securities 7.60 7.58 7.71 7.60 7.68 7.82 Investment securities 6.07 5.73 5.97 5.55 6.11 5.89 Interest-earning deposits 2.79 3.71 2.66 4.04 2.01 4.93 Other 7.50 7.22 7.50 7.40 7.54 7.55 ----- ----- ----- ----- ----- ----- Total earning assets 7.52 7.49 7.51 7.49 7.55 7.47 Weighted average cost: Savings, checking, and money market accounts 2.51 2.45 2.54 2.52 2.49 2.65 Certificates of deposit 5.70 5.75 5.70 5.82 5.78 5.73 FHLB advances 6.08 6.02 6.05 6.05 6.06 5.97 ----- ----- ----- ----- ----- ----- Total interest-bearing liabilities 4.82 4.78 4.82 4.86 4.83 4.86 ----- ----- ----- ----- ----- ----- Interest rate spread 2.70% 2.71% 2.69% 2.63% 2.72% 2.61% ===== ===== ===== ===== ===== ===== Net interest margin 3.07% 3.04% 3.05% 2.96% 3.08% 2.95% ===== ===== ===== ===== ===== =====
8 Net interest income before provision for loan losses was $6.3 million during the second quarter of 1997, and represented a $622,000 increase compared to the second quarter of 1996. Net interest income was positively affected by strong growth in earning assets. The Corporation's net interest margin was 3.07 percent for the three months ended June 30, 1997, an improvement from 3.04 percent for the comparable quarter of 1996. Because the Corporation is liability sensitive, pressure may be felt on the Corporation's net interest margin if short-term market interest rates rise. In a falling interest rate environment, competition may pressure the Corporation's net interest margin. A shift in the composition of average earning assets from lower yielding more liquid assets toward higher-earning, longer-term assets also contributed to an improved net interest margin during 1997. Average loans receivable were $741.3 million in the second quarter of 1997 representing growth of $83.1 million, or 12.6 percent, over average loans receivable of $658.2 million in the same quarter a year earlier. The increased level of loans outstanding resulted from originations of adjustable-rate mortgage loans and purchases of adjustable- and fixed-rate, medium-term mortgage loans all of which are held in the Corporation's portfolio. The future trend of the Corporation's net interest margin and net interest income may further be impacted by the level of mortgage loan originations, purchases, repayments, and refinancings and a resulting change in the composition of the Corporation's earning assets. As the slope of the yield curve steepened in the first quarter, customer preferences in the Corporation's local market favored adjustable-rate mortgage loans. During the second quarter the yield curve began to flatten, in response, customer's demand for fixed rate loans increased. Additional factors affecting the Corporation's net interest income will continue to be the volatility of interest rates, slope of the yield curve, asset size, maturity/repricing activity, and competition. Provision for Loan Losses - ------------------------- The allowance for loan losses, established through provisions for losses charged to expense, is increased by recoveries of loans previously charged off and reduced by charge-offs of loans. During the second quarter of 1997, the provision for loan losses was $90,000 compared to $60,000 during the year-ago period. Increasing the provision resulted from management's evaluation of the adequacy of the allowance for loan losses including consideration of the growth in the loan portfolio, perceived risk exposure among all loan types, actual loss experience, delinquency rates, borrower circumstances, current and projected economic conditions, and other relevant factors. Management believes the current provision and related allowance for loan losses is adequate to meet current and potential credit risks in the current loan portfolio. For more information on the Corporation's allowance for loan losses and activity therein, reference is made to "Asset Quality." 9 Other Income - ------------ Other income totaled $1.7 million for the three months ended June 30, 1997, up from $907,000 for the three months ended June 30, 1996. During the second quarter of 1997 the Bank had non-recurring gains on the sales of two of its branches totaling $352,000. Increased deposit fees assessed on a higher level of transaction account activity favorably impacted other income. Also favorably affecting the comparison of other income was increased fees associated with the use of debit cards introduced in April 1996, increased gains on the sales of loans, and increased check printing income. Partially offsetting these increases in other income was decreased servicing income resulting from lower balances of loans serviced for other parties and amortization of capitalized mortgage servicing costs. General and Administrative Expenses - ----------------------------------- Total general and administrative expenses remained relatively unchanged at $3.9 million for the three months ended June 30, 1997 and 1996. Compensation and fringe benefits expense rose between periods as a result of upward merit-based salary adjustments partly offset by the effect of fewer full-time equivalent employees. Increased office occupancy and equipment expense resulted from increases in real estate taxes. FDIC insurance, $213,000 lower in 1997, reflects the lower premium of 6.3 cents per $100 of domestic deposits versus 23 cents per $100 of domestic deposits in 1996. An increase in Michigan Single Business tax expense also occurred between periods as a result of higher taxable income during the period ended June 30, 1997. The continued promotion of the Corporation's checking account products has resulted in a significant expansion of its customer base. Partially as a consequence, the expanded account base has led to more operating losses in the second quarter of 1997 than in the same quarter a year ago. Somewhat offsetting these increases are reduced supervisory and assessment fees as regulation by the Michigan Financial Institutions Bureau resulted in lower supervisory fees than similar fees assessed by the Office of Thrift Supervision. A refund of Michigan intangibles tax in the second quarter of 1996 also reduced other general and administrative expense for the quarter ended June 30, 1996. Federal Income Tax Expense - -------------------------- Federal income tax expense was $1.3 million for the three months ended June 30, 1997, compared to $863,000 for the comparable 1996 quarter. The increase in federal income tax expense resulted primarily from a higher level of pre-tax earnings. The Corporation's federal income tax expense is, for the most part, recorded at the federal statutory rate of 34 percent less a pro rata portion of the anticipated low-income housing tax credits expected to be available based upon the Corporation's limited partnership investments. 10 RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997, COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1996 Net income for the six months ended June 30, 1997, was $5.1 million compared to $3.6 million for the same period in 1996, a net increase of $1.5 million. Principally accounting for this increase in net income between years was significant growth in the Corporation's 1997 net interest margin, gains generated from the sales of two branches, and improved fee income partially offset by increased general and administrative expenses. Net income for the six months ended June 30, 1997, represented a return on average stockholders' equity of 16.14 percent, an increase from 11.18 percent in the 1996 period and a return on average assets of 1.23 percent, an increase from 0.93 percent in the 1996 period. The Corporation's return on stockholders' equity excluding the gains on the sales of branches was 15.41 percent for the six months ended June 30, 1997. The Corporation's efficiency ratio, or operating expenses over recurring operating revenues, was 52.4 percent for the six months ended June 30, 1997, an improvement from 59.2 percent in the year earlier period. Net Interest Income - ------------------- Net interest income before provision for loan losses was $12.6 million during the first six months of 1997, and represented a $1.5 million increase compared to the same period of 1996. Net interest income was positively affected by lower deposit rates in 1997 and strong growth in earning assets. The Corporation's net yield on average earning assets was 3.05 percent for the six months ended June 30, 1997, an improvement from 2.96 percent for the comparable six-month period of 1996. A shift in the composition of average earning assets from lower yielding, more liquid assets toward higher earning, longer term assets also contributed to an improved net interest margin. Provision for Loan Losses - ------------------------- The provision for loan losses was $180,000 during the six months ended June 30, 1997 compared to $120,000 for the 1996 period. Management believes the current provision and related allowance for loan losses is adequate to meet current and potential credit risks in the current loan portfolio. Other Income - ------------ Other income was $2.9 million for the six months ended June 30, 1997, an increase of $988,000 compared to $1.9 million for the six months ended June 30, 1996. Growth in other income resulted primarily from increased deposit fees assessed on a higher level of transaction account activity. Also contributing to the higher level of other income were non-recurring gains on the sales of two branches and increased gains on the sales of loans. Prior to the adoption of SFAS 122, the Corporation had no assets capitalized for originated or purchased servicing rights. Effective January 1, 1996, the Corporation adopted the provisions of SFAS 122. As a result, the amortization of the originated servicing asset has led to a decrease in loan servicing income. Also reducing other income were increased losses on the sales of investment securities. 11 General and Administrative Expenses - ----------------------------------- General and administrative expenses were $7.9 million for the six months ended June 30, 1997, an increase of $213,000 compared to $7.7 million for the same period a year ago. Compensation rose between periods as a result of upward merit-based salary adjustments and an increased provision for the management incentive program partly offset by the effect of fewer full-time equivalent employees. Furniture and equipment depreciation increased as a result of accelerating the depreciation on computer equipment to more closely reflect the remaining useful life of this equipment. Marketing expense also increased compared to the 1996 period principally as the result of the continued promotion of the Corporation's checking account products. Increases in single business tax, operating losses, and ATM network fees also contributed to the increase in other general and administrative expense. Federal deposit insurance premiums were substantially reduced as a result of a 16.7 cent reduction in the rates paid per $100 of assessable deposits. Reductions in supervisory fees occurred as a result of the lower fees charged by the Michigan Financial Institutions Bureau. Federal Income Tax Expense - -------------------------- Federal income tax expense was $2.3 million for the six months ended June 30, 1997, an increase of $648,000 from $1.7 million for the comparable 1996 period. The increase in federal income tax expense resulted from a higher level of pre- tax earnings plus a higher tax rate applied to annualized taxable income in excess of $10 million. The corporation's effective tax rate decreased from 32.0 percent to 31.3 percent during the period primarily due to an increase in the expected annual use of an additional $132,000 of low-income housing federal tax credits. ASSET QUALITY The Corporation had no impaired loans at June 30, 1997 as defined by Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan and as amended by Statement of Financial Accounting Standards No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures. The Corporation's nonaccrual loans include residential mortgage and consumer installment loans, for which SFAS 114 does not apply. The Corporation's respective average investment in impaired loans was $31,000 and $208,000 during the three and six-month periods ended June 30, 1997. Interest income recognized on impaired loans for the six-month period ended June 30, 1997, totaled $1,000. The following table presents the Corporation's nonperforming assets. Management normally considers loans to be nonperforming when payments are 90 days or more past due, when credit terms are renegotiated below market levels, or when an analysis of an individual loan indicates repossession of the collateral may be necessary to satisfy the loan. 12
June 30, December 31, 1997 1996 -------- -------- (dollars in thousands) Nonaccruing loans: One- to four-family residential mortgages $ 898 $ 892 Income-producing property - 359 FHA-partially insured and VA-partially guaranteed 110 183 Commercial - 195 Consumer installment 64 158 -------- -------- Total $1,072 $1,787 ======== ======== Percentage of total assets 0.13% 0.21% ======== ======== Real estate owned:/(1)/ One-to four-family residential mortgages $ 368 $ 205 Income-producing property 359 - Construction and development - 7 -------- -------- Total $ 727 $ 212 ======== ======== Percentage of total assets 0.08% 0.03% ======== ======== Total nonaccruing loans and real estate owned $ 1,799 $ 1,999 ======== ======== Percentage of total assets 0.21% 0.24% ======== ========
/(1)/Real estate owned includes properties in redemption and acquired through foreclosure. 13 The following is a summary of the Corporation's loan and real estate owned loss experience from December 31, 1993, through June 30, 1997.
Real Loans Estate Total ----------- ----------- ------------ Balance at December 31, 1993 $3,846,733 $ 167,087 $4,013,820 Provision for losses 240,000 565,000 805,000 Charges against the allowance (153,263) (711,937) (865,200) Recoveries 190,448 55,823 246,271 ---------- --------- ---------- Balance at December 31, 1994 4,123,918 75,973 4,199,891 Provision for losses 240,000 120,000 360,000 Charges against the allowance (55,107) (34,614) (89,721) Recoveries 54,328 62,218 116,546 ---------- --------- ---------- Balance at December 31, 1995 4,363,139 223,577 4,586,716 Provision for losses 240,000 60,000 300,000 Charges against the allowance (76,528) (187,214) (263,742) Recoveries 36,983 115,796 152,779 ---------- --------- ---------- Balance at December 31, 1996 4,563,594 212,159 4,775,753 Provision for losses 180,000 30,000 210,000 Charges against the allowance (225,579) (34,665) (260,244) Recoveries 22,292 117,834 140,126 ---------- --------- ---------- Balance at June 30, 1997 $4,540,307 $ 325,328 $4,865,635 ========== ========= ==========
The Corporation continues to demonstrate strong credit quality. The Corporation's ratio of nonperforming assets to total assets was 0.21 percent and 0.24 percent at June 30, 1997, and December 31, 1996, respectively, all well below the industry average. In addition, at June 30, 1997, the Corporation's allowances for loan and real estate losses represent 270 percent of its nonperforming assets, significantly above the industry average. Management believes the current provisions and related allowances for loan and real estate owned losses are adequate to meet current and potential credit risks in the current loan and real estate owned portfolios, although there can be no assurances the related allowances may not have to be increased in the future. ASSET/LIABILITY MANAGEMENT The operating results of the Corporation are dependent, to a large extent, upon its net interest income, which is the difference between its interest income from interest-earning assets, such as loans, mortgage-backed securities and investment securities, and interest expense on interest-bearing liabilities, such as deposits and FHLB advances. 14 The Corporation's current asset/liability management objective is to provide an acceptable balance between interest rate risk, credit risk, and maintenance of yield. The principal operating strategy of the Corporation is to manage the repricing of its interest-sensitive assets and liabilities to reduce the sensitivity of the Corporation's earnings to changes in interest rates. The Corporation generally implements this strategy by: (i) originating and retaining or purchasing adjustable-rate mortgages; (ii) originating construction and consumer loans which typically have shorter terms to maturity or repricing than long-term, fixed-rate residential mortgages; (iii) maintaining liquidity levels adequate to allow flexibility in reacting to the interest rate environment; and (iv) selling upon origination certain long-term, fixed-rate, residential mortgages in the secondary mortgage market. The Corporation's one-year gap, one-to-three year gap, and three-to-five year gap was a negative 7.3 percent, positive 4.5 percent, and a positive 2.6 percent, respectively at June 30, 1997, compared to a negative 9.3 percent, negative 5.6 percent, and negative 1.9 percent, respectively at December 31, 1996. The change in the Corporation's gap position between periods is primarily the result of using medium-term Federal Home Loan Bank borrowings to fund the origination of adjustable-rate mortgages. LIQUIDITY AND CAPITAL RESOURCES Total assets rose to $845.4 million at June 30, 1997, an increase of $15.6 million from $829.8 million at December 31, 1996. The Corporation anticipates it will have sufficient funds available to meet current commitments either through operations, deposit growth, or borrowings from the FHLB. At June 30, 1997, the Corporation had total outstanding mortgage loan commitments of $24.3 million of which $20.7 million were for adjustable- rate loans and $3.6 million were for fixed-rate loans. The interest rate on fixed-rate loans generally is not determined until the approximate closing date. Loans in process at quarter-end June 1997 totaled $16.4 million and primarily represented undrawn funds on adjustable- and fixed-rate construction loans of $14.9 million and $1.5 million, respectively. In addition at quarter end, there were $1.4 million of commitments to make consumer and commercial business loans. The Corporation also had commitments to extend adjustable-rate home equity lines of credit in the amount of $34.9 million at June 30, 1997. There were additionally $2.5 million of loans in process or undrawn lines of credit on installment and commercial business loans as of June 30, 1997. The Corporation had no firm commitments to purchase mortgage loans and had commitments to sell $1.2 million of fixed-rate, residential mortgage loans at June 30, 1997. One- to four-family residential mortgage loans totaling $1.3 million with a weighted average interest rate of 8.2 percent were held for sale at June 30, 1997. Lending - ------- Loans receivable increased $27.4 million, or 3.8 percent, to $745.1 million at June 30, 1997, from $717.7 million at December 31, 1996, and increased $75.1 million, or 11.2 percent from $670.0 million at June 30, 1996. 15 The Corporation originated $51.7 million and $88.0 million of loans during the second quarter and first six months of 1997, respectively, a decrease from $59.0 million and $96.5 million during the comparable periods of 1996, respectively. Loan demand remains strong in the Corporation's local market. As rates fell during the second quarter loan demand began to increase resulting in greater origination activity and more refinancings. The Corporation received principal repayments on loans of $34.8 million and $59.4 million during the three and six months ended June 30, 1997, respectively, compared to $24.2 million and $52.7 million during the second quarter and first six months of 1996, respectively. The following schedule sets forth the Corporation's loan originations for the three and six months ended June 30, 1997 and 1996.
Three Months Ended Six Month Ended June 30, June 30, 1997 1996 1997 1996 -------- -------- -------- -------- (in thousands) Fixed-rate: One- to four-family residential $ 5,593 $ 9,798 $12,375 21,332 Income-producing 295 - 295 758 FHA-insured and VA-partially guaranteed - 78 115 143 Construction and development: One- to four-family residential 2,065 1,805 3,274 3,414 Commercial 315 253 445 263 Consumer 6,314 5,510 9,901 8,924 ------- ------- ------- ------- 14,582 17,444 26,405 34,834 Adjustable-rate: One- to four-family residential 15,172 21,512 23,547 28,897 Income-producing - 610 - 610 Construction and development: One- to four-family residential 12,696 11,679 22,728 18,617 Income-producing 2,547 1,705 3,013 2,305 Commercial 643 730 1,258 1,750 Consumer 6,060 5,338 11,031 9,490 ------- ------- ------- ------- 37,118 41,574 61,577 61,669 ------- ------- ------- ------- Total originations $51,700 $59,018 $87,982 $96,503 ======= ======= ======= =======
During the quarters ended June 30, 1997 and 1996, the Corporation sold primarily fixed-rate loans, aggregating $4.3 million and $6.6 million, respectively. Loan sales for the six-month periods ended June 30, 1997 and 1996, were $9.9 million and $15.9 million, respectively. The level of loan sales is partially a function of the interest rate environment. The spread between fixed and adjustable mortgage rates was narrower in 1996 and there was a proportionately higher concentration of fixed-rate mortgage loan applications and subsequent closings. Consequently, there were a higher level of sales in 1996. As the spread between fixed and adjustable mortgage 16 interest rates increased during the first six months of 1997, customer preferences in the Corporation's market area favored adjustable-rate loans which are retained in the Corporation's portfolio. During the three months ended June 30, 1997 and 1996, the Corporation purchased from an unaffiliated financial institution $4.2 million and $11.6 million, respectively of one-to-four family residential, fixed and adjustable-rate, medium-term mortgage loans. Loans purchased during the six months ended June 30, 1997 and 1996, totaled $9.2 million and $31.7 million, respectively. The Corporation purchases residential loans to supplement and complement its own mortgage loan production; purchases are also dependent upon product availability and the Corporation's liquidity position. Investment and Mortgage-Backed Securities - ----------------------------------------- At December 31, 1996, investment and mortgage-backed securities available for sale included unrealized net gains of $325,000 reported net of $110,000 of federal income tax expense as a separate component of stockholders' equity. Throughout the first half of 1997, market interest rates generally climbed which unfavorably impacted the market value of the principally fixed-rate investment and mortgage-backed securities available for sale. At June 30, 1997, investment and mortgage-backed securities available for sale included unrealized net gains of $175,000 reported net of $90,000 of federal income tax expense as a separate component of stockholders' equity. The Corporation had no investment or mortgage-backed securities classified as held-to-maturity or trading securities as of June 30, 1997. Included in the composition of the Corporation's earning assets at June 30, 1997, were $24.3 million of mortgage-backed securities, a 10.6 percent decline from the $27.2 million held at December 31, 1996. The Corporation did not purchase or sell any mortgage-backed securities during the quarters or six months ended June 30, 1997 or 1996. The approximate fair value of the mortgage- backed securities portfolio was $24.3 million at June 30, 1997, with gross unrealized gains and losses of $415,000 and $192,000, respectively. At June 30, 1997, the level of the Corporation's investment securities portfolio declined to $26.0 million from $31.1 million at December 31, 1996. During the first half of 1997, $20.0 million of U.S. Treasury securities were sold at gross losses of $31,000. The proceeds from the sales were reinvested in $20.0 million of U.S. Treasury securities with slightly longer maturities. The approximate fair value of the Corporation's investment securities was $26.0 million at June 30, 1997, with gross unrealized gains and losses of $43,000 and $1,000, respectively. Deposits - -------- Total deposits grew $6.8 million from $553.6 million at December 31, 1996, to $560.4 million at June 30, 1997. The increase resulted from transaction and savings account growth of $5.4 million and $2.9 million, respectively, partially offset by $1.5 million of net certificate of deposit withdrawals. During 1995, the Corporation introduced Really Free Checking and five other highly competitive checking account programs. To support these checking account programs, the Corporation conducts comprehensive marketing campaigns. The continued promotion of 17 Really Free Checking has resulted in an expansion of the Corporation's deposit base through attracting new customers and cross-selling other Bank products to existing customers. Borrowings - ---------- Since mid-1993, borrowings from the FHLB have been an integral component of the Corporation's funding strategy. Borrowings replace maturing certificates of deposit and other deposit withdrawals, fund asset growth, and are used to manage interest rate risk. FHLB advances grew from $77.8 million at December 31, 1993, to $202.6 million at December 31, 1996, and increased to $204.4 million at June 30, 1997. Of the outstanding FHLB advances at June 30, 1997, $169.6 million carried a weighted average fixed-rate of 6.13 percent. Adjustable-rate advances at June 30, 1997, totaled $34.8 million, all of which reprice based upon three- month LIBOR or prime. Capital - ------- Total stockholders' equity was $64.4 million at June 30, 1997, a $1.9 million increase, compared to the 1996 year-end total of $62.5 million. Book value per share correspondingly increased to $12.65 at June 30, 1997, from $12.06 per share at December 31, 1996. The increases were primarily the result of net income for the first half of 1997 offset in part by dividend declarations and downward market adjustments on available-for-sale securities. Principally as the result of the increase in total stockholders' equity during the first half of the year, the ratio of stockholders' equity to assets increased to 7.6 percent at June 30, 1997, from 7.5 percent at December 31, 1996. Community First Bank's regulatory capital ratios are well in excess of minimum capital requirements specified by federal banking regulations. The Bank's tangible, core and risk-based capital ratios were 7.3 percent, 7.3 percent, and 13.1 percent at June 30, 1997, respectively. The Corporation's Board of Directors declared a cash dividend of $0.15 per share in the second quarter of 1997, an increase of 50.0 percent over the $0.10 per share dividend declared in the second quarter of 1996. The Corporation's cash dividend policy is continually reviewed by management and the Board of Directors. The Corporation currently intends to continue its policy of paying quarterly dividends, however, such payments will depend upon a number of factors, including capital requirements, regulatory limitations, the Corporation's financial condition and results of operations, and the Bank's ability to pay dividends to the Corporation. Presently, the Corporation has no significant source of income other than dividends from the Bank. Consequently, the Corporation depends upon dividends from the Bank to accumulate earnings for payment of cash dividends to its stockholders. The Corporation's Board of Directors also declared a 10 percent stock dividend on May 20, 1997. The additional shares as a result of the dividend were distributed on June 16, 1997, to stockholders of record as of May 30, 1997. Although the stock dividend represents a component of the Corporation's established dividend practices and the Corporation intends to issue similar dividends in the future, such declarations will depend on several factors similar to the cash dividend. 18 During April 1997, the Corporation's Board of Directors approved a stock repurchase program pursuant to which the Corporation may repurchase up to 5 percent or 258,500 shares of CFSB Bancorp, Inc. common stock. Through the June 30, 1997, the Corporation repurchased 62,690 shares of CFSB Bancorp, Inc. common stock on the open market for $1.3 million, or an average purchase price of $20.54 per share. The program has a one-year term. ACCOUNTING STANDARDS In February 1997, the FASB issued Statement of Financial Accounting Standards No. 128, Earnings Per Share (SFAS 128). The statement specifies the computation, presentation, and disclosure requirements for earnings per share (EPS) for entities with publicly held common stock. SFAS 128 was issued to simplify the computation of EPS and to make the U.S. standard more compatible with the EPS standards of other countries and that of the International Accounting Standards Committee. It replaces Primary EPS and Fully Diluted EPS with Basic EPS and Diluted EPS, respectively. It also requires dual presentation of Basic EPS and Diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the Basic EPS computation to the numerator and denominator of the Diluted EPS computation. The Corporation currently reports Primary EPS and Fully Diluted EPS. SFAS 128 is effective for financial statements for both interim and annual periods ended after December 15, 1997. Earlier application is not permitted. The impact of implementation is not quantified; however, the Corporation expects upon adoption, Basic EPS will be slightly higher than Primary EPS and Diluted EPS will be approximately the same as Fully Diluted EPS. 19 CFSB BANCORP, INC. Part II Other Information Item 1. Legal Proceedings None Item 2. Changes in Securities None Item 3. Defaults in Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K On May 22, 1997, the registrant filed a Form 8-K current report announcing the registrant's Board of Directors approved a ten percent common stock dividend. The common stock dividend was distributed June 16, 1997, to stockholders of record as of May 30, 1997. The common stock dividend increased the outstanding common stock of the registrant by ten percent to approximately 5.1 million shares. Stockholders of record received one share of common stock for each ten shares held. 20 CFSB BANCORP, INC. Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CFSB BANCORP, INC. (Registrant) Date: August 6, 1997 By: /s/ Robert H. Becker --------------------------- Robert H. Becker President and Chief Executive Officer (Duly Authorized Officer) By: /s/ John W. Abbott --------------------------- John W. Abbott Executive Vice President, Chief Operating Officer, and Secretary (Principal Financial and Accounting Officer) 21 EX-27 2 FINANCIAL DATA SCHEDULE
9 6-MOS DEC-31-1997 JUN-30-1997 3,686,931 13,176,570 0 0 50,386,257 0 0 745,057,491 4,540,307 845,438,085 560,353,267 60,358,932 16,208,461 144,071,811 0 0 48,460,996 15,984,618 845,438,085 14,196,567 942,443 320,181 15,459,191 6,035,135 9,115,767 6,343,424 90,000 (51,031) 3,919,701 4,055,211 4,055,211 0 0 2,795,211 0.52 0.52 3.07 1,052,539 19,189 0 937,206 4,566,475 130,800 14,632 4,540,307 4,089,266 0 451,041
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