<PAGE> 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 September 30, 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 4,720,541 shares of the Registrant's $0.01 par value common stock
outstanding as of October 31, 1996.
<PAGE> 2
CFSB BANCORP, INC., AND SUBSIDIARY
Contents
<TABLE>
<CAPTION>
Pages
<S> <C>
PART I - FINANCIAL INFORMATION
Consolidated Statements of Financial Condition
at September 30, 1996, and December 31, 1995 (unaudited) 1
Consolidated Statements of Operations for the three months
ended September 30, 1996 and 1995 (unaudited) and for the
nine months ended September 30, 1996 and 1995 (unaudited) 2
Consolidated Statement of Stockholders' Equity for the nine
months ended September 30, 1996 (unaudited) 3
Consolidated Statements of Cash Flows for the nine months
ended September 30, 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 7-22
PART II - OTHER INFORMATION 23
SIGNATURES 24
</TABLE>
<PAGE> 3
CFSB BANCORP, INC., AND SUBSIDIARY
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and amounts due from depository institutions $ 6,254,619 $ 7,070,041
Interest-earning deposits with Federal Home
Loan Bank and other depository institutions,
at cost which approximates market 11,633,045 22,654,134
Investment securities available for sale, at fair value 32,001,781 55,109,533
Mortgage-backed securities available for sale, at fair value 28,743,403 607,895
Mortgage-backed securities held to maturity, net
(fair value $35,160,963 - 1995) - 34,548,012
Loans receivable, net 699,866,393 610,284,070
Accrued interest receivable, net 4,793,089 4,883,233
Real estate, net - 21,717
Premises and equipment, net 11,110,157 11,223,147
Stock in Federal Home Loan Bank of Indianapolis, at cost 9,782,400 8,536,800
Deferred federal income tax benefit 348,423 326,258
Other assets 7,430,700 6,152,932
------------ ------------
Total assets $811,964,010 $761,417,772
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $542,464,528 $527,816,178
Advances from Federal Home Loan Bank 190,647,476 160,649,376
Advance payments by borrowers for taxes and insurance 4,375,750 1,281,043
Accrued interest payable 3,965,313 3,474,063
Federal income taxes payable - 783,000
Other liabilities 7,656,775 4,671,091
------------ ------------
Total liabilities 749,109,842 698,674,751
------------ ------------
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 4,849,611 shares - 1996 and 4,518,478 shares - 1995 48,496 45,185
Additional paid-in capital 41,422,898 34,389,162
Retained income - substantially restricted 22,310,797 29,852,980
Net unrealized gains on available-for-sale securities,
net of tax expense of $14,751 - 1996 and $36,917 - 1995 28,635 71,661
Employee Stock Ownership Plan (517,380) (691,294)
Treasury stock, at cost; 24,070 shares - 1996 and
68,935 shares - 1995 (439,278) (924,673)
------------ ------------
Total stockholders' equity 62,854,168 62,743,021
------------ ------------
Total liabilities and stockholders' equity $811,964,010 $761,417,772
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE> 4
CFSB BANCORP, INC., AND SUBSIDIARY
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
------------------------------ -------------------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable $ 13,210,181 $ 11,377,138 $ 37,917,785 $ 32,697,750
Mortgage-backed securities 558,653 1,043,068 1,805,991 3,245,866
Investment securities 488,415 872,926 1,750,868 3,100,861
Other 291,991 307,509 925,741 805,854
------------- ------------ ------------ ------------
Total interest income 14,549,240 13,600,641 42,400,385 39,850,331
INTEREST EXPENSE:
Deposits, net 5,914,510 6,133,070 17,765,238 17,622,201
Federal Home Loan Bank advances 2,769,005 2,349,153 7,681,194 6,959,163
------------- ------------ ------------ ------------
Total interest expense 8,683,515 8,482,223 25,446,432 24,581,364
Net interest income before provision
for loan losses 5,865,725 5,118,418 16,953,953 15,268,967
Provision for loan losses 60,000 60,000 180,000 180,000
------------- ------------ ------------ ------------
Net interest income after provision
for loan losses 5,805,725 5,058,418 16,773,953 15,088,967
OTHER INCOME (LOSS):
Service charges and other fees 916,359 716,995 2,498,687 1,926,623
Loan servicing income 95,755 115,762 309,699 359,579
Losses on sales of investment securities
available for sale, net (52,769) - (64,188) (2,975)
Gains on sales of loans, net 7,711 23,616 109,532 52,173
Real estate operations, net (15,000) (30,000) (45,000) (90,000)
Other, net 131,676 45,558 203,045 239,738
------------- ------------ ------------ ------------
Total other income 1,083,732 871,931 3,011,775 2,485,138
GENERAL AND ADMINISTRATIVE EXPENSES:
Compensation, payroll taxes, and fringe benefits 1,977,330 1,919,002 5,993,279 5,882,437
Office occupancy and equipment 747,841 567,383 1,888,377 1,610,614
Federal insurance premiums 305,871 293,627 908,898 873,563
FDIC special assessment 3,355,000 - 3,355,000 -
Marketing 196,304 161,124 589,300 459,186
Data processing 99,325 78,203 272,411 231,497
Other, net 738,235 590,131 2,064,925 1,769,486
------------- ------------ ------------ ------------
Total general and administrative expenses 7,419,906 3,609,470 15,072,190 10,826,783
------------- ------------ ------------ ------------
Income before federal income tax expense (benefit) (530,449) 2,320,879 4,713,538 6,747,322
Federal income tax expense (benefit) (237,000) 719,000 1,441,000 2,092,000
------------- ------------ ------------ ------------
Net income (loss) $ (293,449) $ 1,601,879 $ 3,272,538 $ 4,655,322
============= ============ ============ ============
EARNINGS (LOSS) PER SHARE:
Primary $ (0.06) $ 0.32 $ 0.64 $ 0.92
============= ============ ============ ============
Fully diluted $ (0.06) $ 0.32 $ 0.64 $ 0.92
============= ============ ============ ============
DIVIDENDS PAID PER SHARE $ 0.11 $ 0.09 $ 0.31 $ 0.27
============= ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 5
CFSB BANCORP, INC. AND SUBSIDIARY
Consolidated Statement of Stockholders' Equity
Nine Months Ended September 30, 1996
(unaudited)
<TABLE>
<CAPTION>
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
------- ---------- ----------- ----------------- --------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1995 $45,185 $34,389,162 $ 29,852,980 $ 71,661 $ (691,294) $(924,673) $62,743,021
Net income - - 3,272,538 - - - 3,272,538
Stock options exercised - - (223,926) - - 323,020 99,094
Repayment of ESOP debt - - - - 173,914 - 173,914
Cash dividends on common
stock - $0.33 per share - - (1,610,320) - - - (1,610,320)
10% common stock dividend 3,311 6,971,456 (8,980,475) 1,995,912 (9,796)
Treasury stock purchased - - - - - (1,833,537) (1,833,537)
Tax benefit of ESOP dividends - 28,730 - - - - 28,730
Tax benefit associated with
exercise of stock options - 33,550 - - - - 33,550
Change in market value
of available-for-sale
securities, net - - - (43,026) - - (43,026)
-------- ----------- ------------ --------- ----------- ---------- -----------
Balance at
September 30, 1996 $48,496 $41,422,898 $ 22,310,797 $ 28,635 $ (517,380) $ (439,278) $62,854,168
======== =========== ============ ========= =========== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 6
CFSB BANCORP, INC., AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1996 1995
------------ -----------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,272,538 $ 4,655,322
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,137,092 900,479
Provision for loan losses 180,000 180,000
Provision for real estate losses 45,000 90,000
Net amortization of premiums and accretion of discounts 319,541 921,429
Loan origination fees, net of costs deferred 193,843 308,378
Amortization of loan fees (145,751) (252,811)
Amortization of mortgage loan servicing rights 21,435 -
Loans originated for sale (20,321,373) (5,560,182)
Proceeds from sales of loans originated for sale 19,355,877 5,394,455
Net gains on sales of loans and securities (45,344) (49,198)
Net (gains) losses on sales and disposals of premises and equipment 27,616 (6,752)
Net (gains) losses on sales of repossessed assets (430) 11,330
Recoveries of loan losses 25,892 44,090
Decrease (increase) in accrued interest receivable 90,144 (81,712)
Increase in accrued interest payable 491,250 767,841
Increase (decrease) in federal income taxes payable (1,009,000) 527,000
Increase in other liabilities 3,043,977 62,959
Decrease (increase) in other assets (1,392,955) 2,824,602
---------- ----------
Net cash provided by operating activities 5,289,352 10,737,230
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities available for sale (20,060,266) (5,065,650)
Proceeds from sales of investment securities available for sale 23,135,173 13,906,169
Principal repayments and maturities of investment
securities held to maturity - 12,450,000
Principal repayments and maturities of investment
securities available for sale 19,420,000 10,000,000
Loan originations (net of undisbursed loans in process) (145,998,355) (95,295,760)
Loans purchased (31,733,987) (32,202,697)
Proceeds from sales of loans 2,440,356 2,814,828
Principal repayments on loans 86,499,155 60,996,044
Principal repayments and maturities on mortgage-backed
securities available for sale 609,993 2,819,394
Principal repayments and maturities on mortgage-backed
securities held to maturity 5,967,777 6,057,106
Proceeds from sales, redemptions, and settlements of
real estate owned, net 391,589 364,105
Proceeds from sales of repossessed assets 51,010 46,296
Capitalized additions to real estate owned, net of recoveries (29,370) 7,348
Purchases of premises and equipment (1,056,443) (293,354)
Proceeds from sales and disposals of premises and equipment 4,724 13,455
Purchases of Federal Home Loan Bank stock (1,245,600) (374,000)
---------- ----------
Net cash used by investing activities (61,604,244) (23,756,716)
</TABLE>
<PAGE> 7
CFSB BANCORP, INC., AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1996 1995
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(unaudited)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits $ 14,648,350 $ 22,377,254
Stock options exercised 99,094 68,684
Purchases of treasury stock (1,833,537) -
Net increase in advance payments by
borrowers for taxes and insurance 3,094,707 2,194,502
Federal Home Loan Bank advance repayments (70,342,701) (128,291,770)
Federal Home Loan Bank advances 100,340,801 121,995,247
Dividends paid on common stock (1,528,333) (1,331,378)
------------- ---------------
Net cash provided by financing activities 44,478,381 17,012,539
------------- ---------------
Net increase (decrease) in cash and cash equivalents (11,836,511) 3,993,053
Cash and cash equivalents at beginning of period 29,724,175 15,662,465
------------- ---------------
Cash and cash equivalents at end of period $ 17,887,664 $ 19,655,518
============= ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: 11,836,511
Cash paid for:
Interest expense $ 24,955,182 $ 23,813,523
Federal income taxes 2,450,000 1,565,000
Transfers of loans to real estate owned 152,418 264,637
Transfers of loans to repossessed assets 51,226 18,600
Loans charged-off 58,020 37,829
Loans to facilitate the sale of real estate owned 279,700 -
Transfer of mortgage-backed securities to available
for sale classification 28,553,035 -
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 8
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 nine months ended September 30, 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.
4. STOCK DIVIDEND
The Corporation's Board of Directors declared a 10 percent stock dividend on
August 20, 1996. The additional shares as a result of the dividend were
distributed on September 12, 1996, to stockholders of record as of August 30,
1996. Common shares outstanding, per common share amounts, and price per
common share have been restated for all periods presented, to give retroactive
effect to the stock dividend.
6
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following sections are designed to provide a more thorough discussion of
the Corporation's financial condition and results of operations as well as to
provide additional information on the Corporation's asset/liability management
strategies, sources of liquidity, and capital resources. Management's
discussion and analysis should be read in conjunction with the consolidated
financial statements and supplemental data contained elsewhere in this report.
GENERAL
CFSB Bancorp, Inc. (Corporation) is the holding company for Community First
Bank, 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 originate loans for the purchase and construction
of residential properties. To a lesser extent, the Bank also makes
income-producing property loans, commercial business loans, home equity loans,
and various types of consumer loans. The Bank's revenues are derived
principally from interest income on mortgage and other loans, mortgage-backed
securities, investment securities, and to a lesser extent, from fees and
commissions. The operations of the Bank, and the financial services industry
generally, are significantly influenced by general economic conditions and
related monetary and fiscal policies of financial institution regulatory
agencies. Deposit flows and cost of funds are impacted by interest rates on
competing investments and market rates of interest. Lending activities are
affected by the demand for financing of real estate and other types of loans,
which in turn is affected by the interest rates at which such financing is
offered.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996, COMPARED
TO THE THREE MONTHS ENDED SEPTEMBER 30, 1995
Net loss for the third quarter of 1996 was $293,000, or $0.06 cents per fully
diluted share, compared to net income of $1,601,000, or $0.32 per fully diluted
share, in the similar 1995 quarter. Third quarter earnings were significantly
impacted by a non-recurring, pre-tax charge of $3,355,000 resulting from recent
federal legislation to recapitalize the Federal Deposit Insurance Corporation's
(FDIC) Savings Association Insurance Fund (SAIF). As a result of this charge,
third quarter and year-to-date after-tax earnings were reduced $2,214,000, or
$0.44 per fully diluted share.
Pre-tax core earnings for the 1996 third quarter, which exclude the special
deposit premium assessment and net gains on asset sales, increased 25 percent
over 1995 third quarter pre-tax core earnings. The Corporation's solid
financial performance for the third quarter and the full year is attributable
to strong mortgage loan production, improved net interest margins, increased
deposits, and substantial growth in fee income.
7
<PAGE> 10
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 nine months ended
September 30, 1996 and 1995, and at September 30, 1996, and December 31, 1995.
The costs include the annualized effect of the Corporation's interest rate
exchange agreement.
<TABLE>
<CAPTION>
For the For the
Three Months Nine Months
Ended Ended At At
September 30, September 30, September 30, December 31,
1996 1995 1996 1995 1996 1995
------- ------ ----- ------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Weighted average yield:
Loans receivable, net 7.61% 7.86% 7.66% 7.87% 7.59% 7.75%
Mortgage-backed securities 7.56 6.90 7.59 6.86 7.59 7.86
Investment securities 5.91 5.40 5.65 5.44 5.76 5.37
Interest-earning deposits 2.01 4.21 3.23 4.03 4.63 4.92
Other 7.49 7.64 7.43 7.52 7.50 7.61
---- ---- ---- ---- ----- -----
Total earning assets 7.41 7.49 7.46 7.47 7.47 7.49
Weighted average cost:
Savings, checking, and money
market accounts 2.46 2.76 2.50 2.82 2.44 2.76
Certificates of deposit 5.70 5.92 5.78 5.76 5.72 5.97
FHLB advances 6.00 6.17 6.03 6.25 5.95 6.02
---- ---- ---- ---- ----- -----
Total interest-bearing
liabilities 4.80 4.99 4.84 4.95 4.80 5.00
---- ---- ---- ---- ----- -----
Interest rate spread 2.61% 2.50% 2.62% 2.52% 2.67% 2.49%
==== ==== ==== ==== ===== =====
Net interest margin 2.98% 2.84% 2.98% 2.85% 3.00% 2.81%
==== ==== ==== ==== ===== =====
</TABLE>
8
<PAGE> 11
Net interest income before provision for loan losses was $5.9 million during
the third quarter of 1996, and represented a $747,000 increase compared to the
third quarter of 1995. Net interest income was positively affected by lower
deposit rates in 1996 and strong growth in earning assets. The Corporation's
net interest margin was 2.98 percent for the three months ended September 30,
1996, an improvement from 2.84 percent for the comparable quarter of 1995.
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 also 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
1996. Average loans receivable were $693.4 million in the third quarter of
1996 representing growth of $114.0 million, or 19.7 percent, over average loans
receivable of $579.4 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. The relatively flat yield
curve during the first quarter resulted in a shift toward more customers
exhibiting a preference for fixed-rate mortgage loans, most of which were
originated for sale in the secondary market. As the slope of the yield curve
began to steepen in the second and third quarters, customer preferences in the
Corporation's local market again favored 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 third 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."
9
<PAGE> 12
Other Income
Other income totaled $1.1 million for the three months ended September 30,
1996, up 24.3 percent from $872,000 for the three months ended September 30,
1995. During 1995, the Corporation introduced several highly competitive
checking account programs, and as a result, the Corporation has since opened a
record number of new accounts. The growing customer base has produced a
correspondingly higher level of transaction and account activity and generated
incremental fee income in 1996 as compared to 1995. Partially offsetting the
impact of additional fee income was reduced other income from net losses on
sales of investment securities and non-recurring transactions in both periods.
General and Administrative Expenses
Excluding the FDIC special assessment of $3.4 million, general and
administrative expenses were $4.1 million for the three months ended September
30, 1996, an increase of $455,000 compared to $3.6 million for the same quarter
a year ago. The increase in office occupancy and equipment expense primarily
resulted from accelerating the depreciation on computer equipment to more
closely reflect the estimated remaining life of this equipment. The increase
in general and administrative expense also resulted from marketing costs to
attract new deposit accounts and increased compensation costs to maintain the
expanded account base. During 1996, the Corporation opened a new branch office
adjacent to Michigan State University's campus and introduced its MoneyCard to
its current ATM customer base. This card serves as both an ATM card and a
debit card allowing customers to make direct withdrawals from their checking
accounts when making purchases at merchants accepting MasterCard. Costs
incurred with the promotion of the branch and the introduction of the MoneyCard
are expected to be recovered through the generation of additional fee income in
future periods.
The Bank is required to pay assessments based on a percentage of its insured
deposits to the FDIC for insurance of its deposits by the FDIC through the
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 FDIC also
administers the Bank Insurance Fund (BIF), which has the same designated
reserve ratio as the SAIF. The BIF achieved the designated reserve ratio
during 1995, and 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. The new BIF assessment schedule resulted in a substantial disparity in
the deposit insurance premiums paid by BIF and SAIF members and placed
SAIF-insured savings associations such as the Bank at a competitive
disadvantage to BIF-insured institutions.
As a result of the omnibus appropriations bill signed into law by President
Clinton on September 30, 1996, the thrift industry was assessed an one-time
special assessment of 65.7 basis points on their assessable March 31, 1995,
deposit base to fully capitalize the SAIF. The Bank's one-time pre-tax
assessment was $3,355,000 and this non-recurring charge was recorded in the
third
10
<PAGE> 13
quarter. Third quarter and year-to-date after-tax earnings were reduced
$2,214,000, or $0.44 per fully diluted share. Prospectively, however, the
Bank's deposit insurance assessment is expected to decline more than 70
percent, or $900,000, in calendar year 1997. This recent legislation also
provides for a full pro-rata sharing of the FICO obligation no later than
January 1, 2000, the merging of the BIF and SAIF funds on January 1, 1999, and
having a framework for merging the bank and thrift charters.
Federal Income Tax Expense
Federal income tax benefit was $237,000 for the three months ended September
30, 1996, compared to expense of $719,000 for the comparable 1995 quarter. The
substantial reduction reflects the expected tax benefit on the FDIC special
assessment. The Corporation's federal income tax expense is, for the most
part, recorded at the federal statutory rate of 34 percent less a pro rata
portion of the anticipated low-income housing tax credits expected to be
available based upon the Corporation's limited partnership investments.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996, COMPARED TO
THE NINE MONTHS ENDED SEPTEMBER 30, 1995
Net income for the nine months ended September 30, 1996, was $3,273,000, or
$0.64 per fully diluted share, a net decrease from $4,655,000, or $0.92 per
fully diluted share, for the same 1995 period. As a result of the
non-recurring FDIC premium assessment, year-to-date 1996 earnings were reduced
$2,214,000, or $0.44 per fully diluted share. Pre-tax core earnings for 1996,
which exclude the special deposit premium assessment and net gains on asset
sales, increased 20 percent over 1995 pre-tax core earnings. Principally
accounting for the increase in pre-tax core earnings between years was
significant growth in the Corporation's net interest margin and improved fee
income partially offset by increased general and administrative expenses. The
Corporation's efficiency ratio, or operating expenses over recurring operating
revenues, was 58.8 percent for the nine months ended September 30, 1996, an
improvement from 61.2 percent in the year earlier period.
Net Interest Income
Net interest income before provision for loan losses was $17.0 million during
the first nine months of 1996, and represented a $1.7 million increase compared
to the same period of 1995. Net interest income was positively affected by
lower deposit rates in 1996 and strong growth in earning assets. The
Corporation's net yield on average earning assets was 2.98 percent for the nine
months ended September 30, 1996, an improvement from 2.85 percent for the
comparable nine-month period of 1995. 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.
11
<PAGE> 14
Provision for Loan Losses
The provision for loan losses was $180,000 during both the nine months ended
September 30, 1996 and 1995. 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 $3.0 million for the nine months ended September 30, 1996,
$527,000 greater than the $2.5 million recognized for the nine months ended
September 30, 1995. Growth in other income resulted primarily from increased
deposit fees assessed on a higher level of transaction account activity.
Although offset in part by a lower-of-cost or market adjustment on loans held
for sale in the secondary market, increased gains on loan sales, including the
impact of adopting SFAS 122, also contributed to the higher level of other
income. Net losses on sales of investment securities and reduced other income
resulted from several non-recurring transactions in both periods.
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 $158,000
of originated mortgage servicing rights during the nine months ended September
30, 1996, of which $21,000 has been amortized. No valuation allowances for
capitalized originated mortgage servicing rights were considered necessary as
of September 30, 1996.
General and Administrative Expenses
Excluding the FDIC special assessment of $3.4 million, general and
administrative expenses were $11.7 million for the nine months ended September
30, 1996, up $890,000 compared to $10.8 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 over the comparable 1995 period primarily
as a result of accelerating the depreciation on the computer equipment
purchased in conjunction with the May
12
<PAGE> 15
1994 conversion to more closely reflect the estimated remaining life of this
equipment. The 1996 introduction of the MoneyCard resulted in debit card
embossment and servicing charges not previously incurred in the 1995 period.
Marketing expense also increased over the 1995 period principally as the result
of the continued promotion of the Corporation's checking account products.
Federal Income Tax Expense
Federal income tax expense was $1.4 million for the nine months ended September
30, 1996, a decrease of $651,000 from $2.1 million for the comparable 1995
period. The decrease in federal income tax expense primarily resulted from a
lower level of pre-tax earnings and a slightly lower effective tax rate. The
Corporation's federal income tax expense was favorably impacted during both
periods by the expected annual use 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 September 30, 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. Impaired loans totaled
$497,000 at September 30, 1996, and include one income-producing property loan
and one commercial business loan. The $360,000 income-producing property loan
is included as a nonaccruing loan in the following table and the $137,000
commercial business loan will be placed on nonaccrual status in the fourth
quarter. Additionally, management, after reviewing the Corporation's
commercial business and income-producing loan portfolios, does not believe it
has any nor has had any other 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 September 30, 1996. The
Corporation's respective average investment in impaired loans was $507,000 and
$504,000 during the three and nine-month periods ended September 30, 1996.
Interest income recognized on impaired loans during the three- and nine-month
periods ended September 30, 1996, totaled $4,000 and $27,000, respectively.
The Corporation had $6,000 and $17,000 of loans on accrual status as of
September 30, 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.
13
<PAGE> 16
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
(dollars in thousands)
<S> <C> <C>
Nonaccruing loans:
One- to four-family
residential mortgages $ 867 $ 68
Income-producing property 359 -
FHA-partially insured
and VA-partially guaranteed 208 253
Consumer installment 161 28
------ -----
Total $1,595 $ 349
====== =====
Percentage of total assets 0.19% 0.05%
==== ====
Real estate owned:(1)
One-to four-family
residential mortgages $ 60 $ 238
Construction and development 7 7
------ -----
Total $ 67 $ 245
====== =====
Percentage of total assets 0.01% 0.03%
====== =====
Total nonaccruing loans
and real estate owned $1,662 $ 594
====== =====
Percentage of total assets 0.20% 0.08%
==== ====
</TABLE>
(1) Real estate owned includes properties in redemption and acquired through
foreclosure.
14
<PAGE> 17
The following is a summary of the Corporation's loan and real estate owned loss
experience from December 31, 1992, through September 30, 1996.
<TABLE>
<CAPTION>
Real
Loans Estate Total
----------- ---------- -----------
<S> <C> <C> <C>
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 180,000 45,000 225,000
Charges against the allowance (58,020) (82,557) (140,577)
Recoveries 25,892 113,918 139,810
---------- --------- ----------
Balance at September 30, 1996 $4,511,011 $ 299,938 $4,810,949
========== ========= ==========
</TABLE>
While the $4.5 million allowance for loan losses at September 30, 1996, grew
from $4.4 million at December 31, 1995, the allowance for loan losses as a
percentage of total loans as of September 30, 1996, declined to 0.62 percent
compared to 0.69 percent at December 31, 1995, and 0.72 percent at September
30, 1995. Nonperforming assets as a percentage of total assets declined from
0.41 percent at September 30, 1995, to 0.08 percent at December 31, 1995, and
increased slightly to 0.20 percent at September 30, 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 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. In recent years, financial institutions
15
<PAGE> 18
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 11.6
percent at September 30, 1996, compared to a negative 7.1 percent at December
31, 1995, and the Corporation's three-to-five-year gap was a negative 2.4
percent at September 30, 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, the proceeds from maturities and repayments of investment
and mortgage-backed securities, and short-term FHLB borrowings 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 $812.0 million at September 30, 1996, an increase of $50.6
million, or 6.6 percent, from $761.4 million at December 31, 1995.
The Corporation's regulatory liquidity ratios at September 30, 1996, and
December 31, 1995, were 8.9 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 September 30, 1996, the Corporation had total outstanding mortgage
loan commitments of $34.5 million of which $29.4 million were for
adjustable-rate loans and $5.1 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 September 1996 totaled $16.4
million and primarily represented undrawn funds on adjustable- and fixed-rate
construction loans of $15.1 million and $1.3 million, respectively. In
addition at quarter end, there were $0.9 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 $31.2
million at September 30, 1996. There were $1.6 million of loans in process or
undrawn lines of credit on installment and commercial business loans as of
September 30, 1996. The Corporation had no firm commitments to purchase
mortgage loans and had commitments to sell $1.4 million of fixed-rate,
residential mortgage loans at September 30, 1996. Approximately $5.7 million
of one- to four-family residential, fixed-rate mortgage loans was held for sale
at September 30, 1996, with a weighted average interest rate of 8.3 percent.
Lending
Loans receivable increased $89.6 million, or 14.7 percent, to $699.9 million at
September 30, 1996, from $610.3 million at December 31, 1995, and increased
$117.9 million, or 20.3 percent from $581.9 million at September 30, 1995.
16
<PAGE> 19
The Corporation originated $69.8 million and $166.3 million of loans during the
third quarter and first nine months of 1996, respectively, a substantial
increase from $38.7 million and $100.8 million during the comparable periods of
1995, respectively. The volatility of the interest rate environment during 1996
resulted in significant loan demand. As rates moved lower during early 1996,
customers sought to refinance their mortgages and as market rates edged upward,
customers sought to secure a mortgage loan with a favorable interest rate. As a
result of more refinancings and in general, greater origination activity,
principal repayments on loans were higher. The Corporation received principal
repayments on loans of $33.5 million and $86.2 million during the three and nine
months ended September 30, 1996, respectively, compared to $23.8 million and
$61.0 million during the third quarter and first nine months of 1995,
respectively. The following schedule sets forth the Corporation's loan
originations for the three and nine months ended September 30, 1996 and 1995.
<TABLE>
<CAPTION>
Three Months Ended Nine Month Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C>
Fixed-rate:
One- to four-family residential $ 6,261 $ 6,238 $ 27,593 9,992
Income-producing - - 758 -
FHA-insured and VA-partially guaranteed 54 91 197 91
Construction and development:
One- to four-family residential 2,573 247 5,987 247
Commercial 309 220 572 364
Consumer 5,206 2,983 14,130 10,020
------- ------- -------- --------
14,403 9,779 49,237 20,714
Adjustable-rate:
One- to four-family residential 24,806 10,054 53,703 28,006
Income-producing - - 610 703
Construction and development:
One- to four-family residential 18,530 13,827 37,147 33,976
Income-producing 5,599 400 7,904 4,777
Commercial 843 909 2,593 1,816
Consumer 5,636 3,721 15,126 10,813
------- ------- -------- --------
55,414 28,911 117,083 80,091
------- ------- -------- --------
Total originations $69,817 $38,690 $166,320 $100,805
======= ======= ======== ========
</TABLE>
During the quarters ended September 30, 1996 and 1995, the Corporation sold
primarily fixed-rate loans aggregating $5.9 million and $4.6 million,
respectively. Loan sales for the nine-month periods ended September 30, 1996
and 1995, were $21.8 million and $8.2 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 half of 1995, mortgage loan originations reflected customer preferences in
the Corporation's market area for
17
<PAGE> 20
adjustable-rate loans which are retained in the Corporation's portfolio. In
the first half of 1996, however, the spread between fixed and adjustable
mortgage rates narrowed and there was a proportionately 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 September 30, 1995, the Corporation purchased
from an unaffiliated financial institution $8.1 million of one- to four-family
residential, fixed- and adjustable-rate, medium-term mortgage loans. There
were no purchases during the 1996 third quarter. Loans purchased during the
nine months ended September 30, 1996 and 1995, totaled $31.7 million and $32.2
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, 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 half 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 September 30, 1996, investment and mortgage-backed securities
available for sale included unrealized net gains of $44,000 reported net of
$15,000 of federal income tax expense as a separate component of stockholders'
equity. The Corporation had no investment or mortgage-backed securities
classified as trading securities as of September 30, 1996.
Included in the composition of the Corporation's earning assets at September
30, 1996, were $28.7 million of mortgage-backed securities, an 18.2 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 twice as high in 1995, principal repayments and
maturities of $6.6 million in the first nine months of 1996 outpaced the rate
of repayments during the comparable year-ago period. The level of repayments
for the 1995 period was $8.9 million. The Corporation did not purchase or sell
any mortgage-backed securities during the quarters or nine months ended
September 30, 1996 or 1995. The approximate fair value of the mortgage-backed
securities portfolio was $28.7 million at September 30, 1996, with gross
unrealized gains and losses of $433,000 and $243,000, respectively.
As of September 30, 1996, based upon liquidity and interest rate
considerations, management determined it could no longer assert its intention
to hold all mortgage-backed securities until maturity. Therefore, the entire
mortgage-backed securities portfolio was reclassified to an available-for-sale
classification with unrealized gains being recorded as a favorable adjustment
to stockholders' equity.
At September 30, 1996, the level of the Corporation's investment securities
portfolio declined to $32.0 million from $55.1 million at December 31, 1995.
The decrease in investment securities
18
<PAGE> 21
resulted principally from the maturity of $15.1 million of investment
securities, call options being exercised on $4.3 million of available-for-sale
investment securities, and $23.1 million of sales of investment securities
available for sale. Proceeds from the maturities, calls, and sales were, in
part, used to purchase $13.1 million of available-for-sale medium-term federal
agency securities and $7.0 million of available-for-sale medium-term U.S.
Treasury securities. Gross gains and gross losses of $43,000 and $107,000,
respectively were recognized on the sales of these investment securities. The
proceeds from the maturities, calls, and sales also contributed to funding loan
originations and loan purchases. The approximate fair value of the
Corporation's investment securities was $32.0 million at September 30, 1996,
with gross unrealized gains and losses of $11,000 and $158,000, respectively.
Deposits
Total deposits grew from $527.8 million at December 31, 1995, to $542.5 million
at September 30, 1996. The $14.7 million increase resulted from transaction
account and certificate of deposit growth of $9.5 million and $5.2 million,
respectively. 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 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.
With a certificate of deposit campaign, coinciding with the checking campaign,
the Corporation promoted the competitive rates offered on seven and
eleven-month certificates, also attracting new customers. Although the
majority of the growth in certificates of deposit resulted from external
sources, many certificates were also opened by existing customers with
transfers of funds from their checking, savings, and money market accounts.
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 December 31, 1995, and to $190.6 million at
September 30, 1996. Of the outstanding FHLB advances at September 30, 1996,
$143.9 million carried a weighted average fixed-rate of 6.07 percent.
Adjustable-rate advances at September 30, 1996, totaled $46.7 million, all of
which reprice based upon three-month LIBOR or prime. FHLB advances were
obtained, as needed in the first nine months of 1996, to meet the Corporation's
operating needs which included the funding of three-year adjustable-rate
mortgage loan originations. Recognizing there is additional interest rate risk
associated with funding medium-term assets with shorter-term liabilities in a
rising or volatile interest rate environment, the Corporation emphasized
increasing its deposit base by attracting new customers through various
promotional activities.
19
<PAGE> 22
Capital
Total stockholders' equity was $62.9 million at September 30, 1996, relatively
unchanged from the 1995 year-end total of $62.7 million. Book value per share
was $13.03 at September 30, 1996, compared to $12.80 per share at December 31,
1995. Although 1996 earnings contributed to increases in stockholders' equity,
the affect was mostly offset by dividend declarations and the repurchase of
CFSB Bancorp, Inc. common stock. Because total assets grew at a
proportionately higher rate than stockholders' equity during 1996, the ratio of
stockholders' equity to assets declined to 7.74 percent at September 30, 1996,
from to 8.24 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 indefinitely. If applied as of September 30, 1996, this
regulation would not have significantly impacted the amount of the Bank's
risk-based capital available to meet the requirement. The Bank's risk-based
capital ratio was 13.1 percent at September 30, 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 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 7.13 percent at
September 30, 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 $0.12 per
share in the third quarter of 1996, an increase of 20 percent over the $0.10
per share dividend declared in the third 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.
20
<PAGE> 23
The Corporation's Board of Directors also declared a 10 percent stock dividend
on August 20, 1996. The additional shares as a result of the dividend were
distributed on September 12, 1996, to stockholders of record as of August 30,
1996. 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.
During September 1996, the Corporation's Board of Directors approved a stock
repurchase program pursuant to which the Corporation may repurchase up to 5
percent or approximately 246,000 shares of CFSB Bancorp, Inc. common stock.
Through the repurchase program, the Corporation repurchased 99,320 shares of
CFSB Bancorp, Inc. common stock on the open market for $1.8 million, or an
average purchase price of $18.46 per share. The program has a one-year term.
ACCOUNTING STANDARDS
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.
In June 1996, the FASB issued Statement of Financial Accounting Standards No.
125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities (SFAS 125). This statement is based upon a
financial-components approach that focuses on control to determine the
accounting for transfers of assets. Sales and transfers of assets often divide
financial assets and liabilities into components, some of which are retained
and some which are not. After transfer, an entity recognizes on its balance
sheet the financial and servicing assets it controls and the liabilities it has
incurred, and removes the assets when control has been surrendered, and
derecognizes liabilities when the obligations have been satisfied. Examples of
transactions covered by this standard include, but are not limited to, asset
securitizations, repurchase agreements, wash sales, loan participations,
transfers of loans with recourse, and servicing of loans. This statement
requires liabilities and derivatives incurred or obtained by transferors as
part of a transfer of financial assets be initially measured at fair value, if
practicable. SFAS 125 is effective for transactions occurring after December
31, 1996, and can not be adopted early or applied retroactively. The
Corporation does not expect implementation
21
<PAGE> 24
of this standard to have a material impact on its financial condition or
results of operation.
SUBSEQUENT EVENT
On October 16, 1996, Community First Bank applied to the Michigan Financial
Institutions Bureau to become a state-chartered savings bank. The conversion
from its present federal charter is expected to result in significant savings
in supervisory costs and direct access to a highly qualified, locally-based
financial institutions regulator. The Michigan Financial Institutions Bureau
will be the Bank's primary state regulator and the FDIC will be its primary
federal regulator. Community First Bank's deposits will continue to be insured
by the Federal Deposit Insurance Corporation. The Bank will also continue to
be operated locally and customers will not experience any changes in the Bank's
operations. CFSB Bancorp, Inc., as a unitary savings and loan holding company,
will continue to be regulated by the Office of Thrift Supervision. If the
application is approved, the conversion should occur near the end of this year.
22
<PAGE> 25
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
On August 21, 1996, 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 September 12, 1996, to stockholders of record as of August
30, 1996. The common stock dividend increased the outstanding common
stock of the registrant by ten percent to approximately 4.9 million
shares. Stockholders of record received one share of common stock for
each ten shares held.
23
<PAGE> 26
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: November 12, 1996 By: /s/ Robert H. Becker
--------------------
Robert H. Becker
President and
Chief Executive Officer
(Duly Authorized Officer)
Date: November 12, 1996 By: /s/ John W. Abbott
--------------------
John W. Abbott
Executive Vice President,
Chief Operating Officer,
and Secretary
(Principal Financial and
Accounting Officer)
24
<PAGE> 27
EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 6,254,619
<INT-BEARING-DEPOSITS> 11,633,045
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 60,745,184
<INVESTMENTS-CARRYING> 60,701,798
<INVESTMENTS-MARKET> 60,745,184
<LOANS> 699,866,393
<ALLOWANCE> 4,511,011
<TOTAL-ASSETS> 811,964,010
<DEPOSITS> 542,464,528
<SHORT-TERM> 54,661,802
<LIABILITIES-OTHER> 15,997,838
<LONG-TERM> 135,985,674
0
0
<COMMON> 41,471,394
<OTHER-SE> 21,382,774
<TOTAL-LIABILITIES-AND-EQUITY> 811,964,010
<INTEREST-LOAN> 13,210,181
<INTEREST-INVEST> 1,047,068
<INTEREST-OTHER> 291,991
<INTEREST-TOTAL> 14,549,240
<INTEREST-DEPOSIT> 5,914,510
<INTEREST-EXPENSE> 8,683,515
<INTEREST-INCOME-NET> 5,865,725
<LOAN-LOSSES> 60,000
<SECURITIES-GAINS> (52,769)
<EXPENSE-OTHER> 7,419,906
<INCOME-PRETAX> (530,449)
<INCOME-PRE-EXTRAORDINARY> (530,449)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (293,449)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
<YIELD-ACTUAL> 2.98
<LOANS-NON> 1,588,893
<LOANS-PAST> 6,106
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,465,813
<CHARGE-OFFS> 21,826
<RECOVERIES> 7,024
<ALLOWANCE-CLOSE> 4,511,011
<ALLOWANCE-DOMESTIC> 3,984,896
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 526,115
</TABLE>
