<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED December 31, 1996
Commission File Number: 0-18609
CFSB BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 38-2920051
- -------------------------------------------- ------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
112 East Allegan Street, Lansing, Michigan 48933
- -------------------------------------------- ------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (517) 371-2911
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of Class)
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 .
------- ------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 14, 1997, the aggregate market value of the voting stock held
by non-affiliates of the registrant, computed by reference to the last price at
which the stock was sold ($21.25 per share), was approximately $90,122,334 (for
purposes of this calculation, directors and executive officers are treated as
affiliates).
As of March 14, 1997, there were issued and outstanding 4,695,086 shares
of the registrant's common stock, of which 454,035 shares were held by
affiliates.
DOCUMENT INCORPORATED BY REFERENCE
Portions of Proxy Statement for the 1997 Annual Meeting of Stockholders (the
"Proxy Statement"). (Part III)
<PAGE>
CFSB BANCORP, INC.
INDEX TO FORM 10-K
FISCAL YEAR ENDED DECEMBER 31, 1996
PART I
Item 1 Business
Item 2 Properties
Item 3 Legal Proceedings
Item 4 Submission of Matters to a Vote of Security Holders
PART II
Item 5 Market for the Registrant's Common Equity and
Related Stockholder Matters
Item 6 Selected Financial Data
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 8 Financial Statements and Supplementary Data
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
PART III
Item 10 Directors and Executive Officers of the Registrant
Item 11 Executive Compensation
Item 12 Security Ownership of Certain Beneficial Owners
and Management
Item 13 Certain Relationships and Related Transactions
PART IV
Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K
SIGNATURES
EXHIBITS
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
CFSB Bancorp, Inc. CFSB Bancorp, Inc. (the "Corporation") was incorporated
under the laws of the State of Delaware on November 28, 1989. The historical
information in this report, and the financial statements filed as exhibits,
principally address the financial condition and results of operations of the
Corporation's savings institution subsidiary, Community First Bank ("Community
First" or the "Bank"), through December 31, 1996, with disclosure as appropriate
to reflect the consolidated financial condition and results of operations of the
Corporation.
The Corporation is classified as a unitary savings and loan holding
company subject to regulation by the Office of Thrift Supervision ("OTS") of the
Department of the Treasury. The Corporation's principal business is the business
of Community First and its subsidiary. The holding company structure permits the
Corporation to expand the financial services currently offered through Community
First and its subsidiary. As a holding company, the Corporation has greater
flexibility than Community First to diversify its business activities, through
existing or newly formed subsidiaries, or through acquisition or merger. So long
as the Corporation remains a unitary savings and loan holding company and
Community First satisfies the Qualified Thrift Lender Test, the Corporation may
diversify its activities in such a manner as to include any activities allowed
by regulation to a unitary savings and loan holding company. See "Item 1.
Business -- Regulation of the Corporation."
The Corporation's main office is located at 112 East Allegan Street,
Lansing, Michigan, 48933, and the telephone number is (517) 371-2911. At
December 31, 1996, the Corporation had total assets of $829.8 million and
stockholders' equity of $62.5 million.
Community First Bank. Community First is a Michigan chartered stock
savings bank which commenced operations in 1890 as Capitol Investment Building
and Loan Association, a Michigan-chartered mutual savings and loan association,
and in 1923 became Capitol Savings & Loan Association. The Bank changed its name
to Capitol Federal Savings & Loan Association upon its conversion from a state
to a federal charter in January 1982. In April 1986, the Bank became a federal
mutual savings bank known as Capitol Federal Savings Bank. In June 1990, the
Bank became a federal stock savings bank, and in December 1991 the Bank merged
with Union Federal Savings ("Union Federal") and adopted the name, Community
First Bank, A Federal Savings Bank. On December 9, 1996 the Bank converted to a
Michigan chartered state savings bank under its current name, Community First
Bank.
As a Michigan chartered savings bank, Community First is subject to
extensive regulation and examination by the Financial Institutions Bureau of the
Michigan Department of Consumer and Industry Services (the "Financial
Institutions Bureau") and the Federal Deposit Insurance Corporation ("FDIC"), as
the administrator of the Savings Association Insurance Fund ("SAIF") which
insures Community First's deposits up to applicable limits. See "Item 1.
Business -- Regulation of the Bank" and " -- Recent Development."
Community First conducts its operations through its main office located in
Lansing, Michigan and through 18 branch offices serving the Greater Lansing
Area. The Bank is principally engaged in the business of accepting 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 also invests in government, federal agency and
corporate obligations and mortgage-backed securities.
As a federally insured savings bank, the Bank's deposit accounts are
insured by the FDIC to a maximum of $100,000. The Bank is a member of the FHLB
of Indianapolis, which is one of the 12 regional banks constituting the FHLB
System. The Bank is subject to comprehensive examination, supervision and
regulation by the Financial Institutions Bureau and the FDIC. This regulation is
intended primarily for the protection of depositors.
1
<PAGE>
The executive offices of the Bank are located at 112 East Allegan Street,
Lansing, Michigan 48933, and the telephone number is (517) 371-2911.
MARKET AREA
The Bank is a community-oriented financial institution offering a variety
of financial services to meet the needs of the communities it serves. The Bank's
primary market area is the greater Lansing, Michigan area, which is 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. Lansing is the
capital of Michigan and the fifth largest city in Michigan. The greater Lansing
area is a diversified market with a strong service sector, and, to a lesser
extent, trade and manufacturing sectors. Since 1984 growth in employment in the
greater Lansing area has occurred primarily in the service sector, and such
trends are expected to continue. The largest employers in the Bank's market area
are the State of Michigan, General Motors and Michigan State University. Based
on total deposits at December 31, 1996, Community First was the largest
financial institution headquartered in the greater Lansing area and
historically, has been among the three largest financial institutions serving
the greater Lansing area.
LENDING ACTIVITIES
GENERAL. The principal lending activity of the Bank is the origination of
conventional residential mortgage loans (i.e., loans that are neither insured
nor partially guaranteed by government agencies) for the purpose of financing,
refinancing or constructing one- to four-family residential properties and
income-producing properties, which includes multi-family (over four-family) and
commercial properties. As of December 31, 1996, $598.2 million, or 80.62%, of
the Bank's loan portfolio (before the deduction of undistributed funds, unearned
fees, unearned income and discounts, and loan loss allowance) consisted of loans
secured by one- to four-family residential properties, of which $474.9 million
were loans originated by the Bank. Substantially all loans originated by the
Bank are on properties located in its primary market area. Of the purchased
loans which are serviced by other institutions, $39.1 million, $77.3 million and
$6.9 million represented loans on properties located in Michigan, Texas and
Florida, respectively. The Bank also originates second mortgage loans,
commercial business loans, consumer loans (including home equity loans,
educational loans, automobile loans, loans secured by savings accounts and
personal loans) and land contracts. Substantially all of the Corporation's
income-producing property and consumer loans are based in Michigan.
In recent years, in order to reduce the Bank's vulnerability to volatile
interest rate changes, the Bank has implemented a number of measures designed to
make the yield on its loan portfolio more interest rate sensitive. These
measures include: (i) emphasizing the origination and purchase of
adjustable-rate mortgage loans and loans with call or balloon payment
provisions, (ii) originating construction and consumer loans, which typically
have shorter terms to maturity or repricing than fixed-rate residential mortgage
loans, (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 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 Bank's market area for adjustable-rate
loans which are retained in the Bank'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 loan sales in 1996. During 1996, the Bank purchased from an
unaffiliated financial institution $31.7 million of loans consisting of one- to
four-family residential, fixed- and adjustable-rate, medium-term mortgage loans.
The Bank purchases residential loans to supplement and complement its own
mortgage loan production; purchases are also dependent upon product availability
and the Bank's liquidity position. In addition, during 1996, adjustable-rate
loans originated and purchased which primarily reprice after three, five, and
seven years were retained in the Bank's portfolio. These originations and
purchases were funded principally with a combination of proceeds from loan
repayments, net deposit inflows, short-term adjustable-rate advances,
maturities, calls and sales of investment securities, and mortgage-backed
security repayments and sales. At December 31, 1996, 64.62% of the Bank's total
2
<PAGE>
loans receivable consisted of loans that provided for periodic interest rate
adjustments or had terms to repricing, call provisions or balloon payment
provisions of seven years or less.
As noted above, in an effort to maintain a closer match between the
interest rate sensitivity of its assets and liabilities, the Bank has been
active in the origination of loans on income-producing properties (consisting of
commercial and multi-family real estate loans) in its primary market area and in
the origination of consumer loans. Although income producing property loans and
consumer loans provide for higher interest rates and shorter terms, these loans
have higher credit risks than one-to four-family residential loans. While the
Bank has been relatively successful in its origination of income-producing
property loans, and the real estate market in the greater Lansing area has
remained fairly stable, numerous financial institutions throughout the United
States have incurred significant losses due to delinquencies and foreclosures
resulting from a decline in the value of properties securing income producing
property loans. At December 31, 1996, the Bank's income-producing property loans
of $84.0 million and consumer loans of $54.6 million, respectively, had
increased from $75.0 million and $44.2 million, the respective loan balances at
December 31, 1995. The growth in the Bank's income-producing property loans is
attributable to the generally lower interest rate environment during 1996 and
economic expansion in the Bank's primary market area. Consumer loan growth is a
direct result of home equity loan promotions and expanding the Bank's consumer
lending to include indirect automobile lending through local automobile
dealerships. Any decline in the economy or real estate market in the greater
Lansing area could have a negative effect on the Bank's loan portfolio and on
the Corporation's net interest income and net income. At December 31, 1996, the
Bank's loans contractually delinquent 90 days or more and real estate owned
totaled $2.0 million, or 0.24%, of total assets.
In 1994, the Bank formed a small business commercial loan department. The
business loan department was developed to serve the financial needs of small
businesses in the Bank's tri-county market area. Small businesses are defined by
the Bank as companies with sales under $5.0 million and less than 100 employees.
The Bank believes it can satisfy the financial needs of small business owners by
assisting with both their credit and deposit needs. Also in 1994, a formal
credit department was formed and an active call program was initiated. During
1996, the commercial business loan department originated 42 loans for a total of
$3.7 million. Additional funds of $1.3 million were available for disbursement
at year-end 1996 on the Bank's commercial business loan portfolio. As of
December 31, 1996, commercial business loans totaled $4.6 million compared to
$3.2 million at December 31, 1995.
LOAN PORTFOLIO COMPOSITION. The first of the following two tables sets
forth information concerning the composition of the Bank's loan portfolio
(separately including mortgage-backed securities) in dollar amounts and
percentages by category and presents a reconciliation of total loans receivable
before net items. The second table sets forth information concerning the Bank's
loan portfolio (separately including mortgage-backed securities) in dollar
amounts and percentages by fixed and adjustable rates at the dates indicated.
3
<PAGE>
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------- ------------------- ----------------- ----------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First mortgage loans:
One- to four-family residential. $553,691 74.63% $469,820 74.46% $401,394 75.38% $267,481 69.13% $188,619 61.04%
Income-producing property... 52,584 7.09 57,952 9.19 55,178 10.36 49,435 12.78 50,941 16.49
FHA-insured and VA-partially
guaranteed............... 6,404 0.86 7,458 1.18 3,629 .68 4,240 1.10 6,536 2.12
Construction and development loans:
One- to four-family residential. 38,072 5.13 30,754 4.87 20,485 3.85 15,129 3.91 11,667 3.77
Income-producing property. 31,428 4.24 17,060 2.70 11,677 2.19 14,292 3.69 13,982 4.52
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total first mortgage loans. 682,179 91.95 583,044 92.40 492,363 92.46 350,577 90.61 271,745 87.94
Second mortgage loans......... 510 0.07 571 .09 661 .12 750 .19 1,034 .34
Commercial business loans..... 4,644 0.63 3,195 .51 706 .13 446 .12 278 .09
Consumer loans:
Home equity................. 36,275 4.89 28,126 4.46 26,048 4.89 22,569 5.83 23,933 7.75
Educational................. 1,871 0.25 2,329 .37 2,967 .56 2,633 .68 2,931 .95
Marine and recreational vehicles. 2,192 0.30 2,373 .38 2,420 .45 2,307 .60 1,983 .64
Land contract............... 254 0.03 349 .05 409 .08 808 .21 1,331 .43
Auto........................ 7,925 1.07 6,542 1.04 2,330 .44 1,842 .47 1,246 .40
Savings..................... 452 0.06 338 .05 351 .07 458 .12 696 .23
Mobile home................. 1,519 0.20 1,735 .27 2,144 .40 2,087 .54 1,338 .43
Other....................... 4,090 0.55 2,379 .38 2,090 .40 2,455 .63 2,481 .80
-------- ----- ------- ----- -------- ----- ------- ----- ------- -----
Total consumer loans..... 54,578 7.35 44,171 7.00 38,759 7.29 35,159 9.08 35,939 11.63
-------- ----- ------- ----- -------- ----- ------- ----- ------ -----
Total loans receivable... 741,911 100.00% 630,981 100.00% 532,489 100.00% 386,932 100.00% 308,996 100.00%
====== ====== ====== ====== ======
Less:
Undistributed portion of loans
in process................ (18,147) (15,054) (8,578) (7,201) (5,655)
Deferred origination fees... (1,485) (1,280) (1,196) (1,226) (1,937)
Unearned income and discount
on loans.................. -- -- -- -- (79)
Allowance for loan losses... (4,564) (4,363) (4,124) (3,847) (3,837)
------- ------ ------ ------- ------
Total loans receivable, net. 717,715 610,284 518,591 374,658 297,488
Mortgage-backed securities, net 27,221 35,156 66,151 107,712 113,925
------- ------- ------- ------- -------
Total loans receivable and
mortgage-backed
securities, net........ $744,936 $645,440 $584,742 $482,370 $411,413
======== ======== ======== ======== ========
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- ------- ------- -------- ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed-rate loans:
One-to four-family residential...$192,972 26.01% $201,971 32.01% $211,445 39.71% $163,518 42.26% $89,776 29.05%
Income-producing property........ 32,848 4.43 34,693 5.50 30,247 5.68 30,936 8.00 34,751 11.25
FHA-insured and VA-partially
guaranteed..................... 2,797 0.37 3,560 .56 3,629 .68 4,240 1.10 6,536 2.12
Construction and development:
One- to four-family residential 3,494 0.47 805 .13 2,691 .51 8,726 2.25 2,515 .81
Income-producing property...... 4,878 0.66 7,591 1.20 5,557 1.04 7,395 1.91 8,575 2.77
-------- ----- -------- ----- -------- ----- --------- ----- -------- -----
Total first mortgage loans.... 236,989 31.94 248,620 39.40 253,569 47.62 214,815 55.52 142,153 46.00
Second mortgage loans............ 399 0.06 456 .07 609 .11 750 .19 1,034 .34
Commercial business loans........ 836 0.11 585 .09 290 .05 145 .04 71 .02
Other loans...................... 24,274 3.27 20,097 3.18 16,687 3.14 14,959 3.86 12,230 3.96
-------- ----- -------- ----- ------- ----- --------- ----- -------- -----
Total fixed-rate loans........ 262,498 35.38 269,758 42.74 271,155 50.92 230,669 59.61 155,488 50.32
-------- ----- -------- ----- ------- ----- --------- ----- -------- -----
Adjustable-rate loans:
First mortgage loans:
One- to four-family residential.. 360,719 48.62 267,849 42.45 189,949 35.67 103,963 26.87 98,843 31.99
Income-producing property........ 19,736 2.66 23,259 3.69 24,931 4.68 18,499 4.78 16,190 5.24
FHA-insured and VA-partially
guaranteed..................... 3,607 0.49 3,898 .62 -- -- -- -- -- --
Construction and development:
One- to four-family residential. 34,578 4.66 29,949 4.74 17,794 3.34 6,403 1.66 9,152 2.96
Income-producing property....... 26,550 3.58 9,469 1.50 6,120 1.15 6,897 1.78 5,407 1.75
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total first mortgage loans..... 445,190 60.01 334,424 53.00 238,794 44.84 135,762 35.09 129,592 41.94
Second mortgage loans............. 111 0.01 115 .02 52 .01
Commercial business loans......... 3,808 0.52 2,610 .42 416 .08 301 .08 207 .07
Other loans....................... 30,304 4.08 24,074 3.82 22,072 4.15 20,200 5.22 23,709 7.67
-------- ----- -------- ----- -------- ----- -------- ----- ------- -----
Total adjustable-rate loans.... 479,413 64.62 361,223 57.26 261,334 49.08 156,263 40.39 153,508 49.68
-------- ----- -------- ----- -------- ----- -------- ----- ------- -----
Total loans receivable.... ... 741,911 100.00% 630,981 100.00% 532,489 100.00% 386,932 100.00% 308,996 100.00%
====== ====== ====== ====== ======
Less:
Undistributed portion of loans
in process...................... (18,147) (15,054) (8,578) (7,201)
Deferred origination fees........ (1,485) (1,280) (1,196) (1,226) (1,937)
Unearned income and discount
on loans....................... -- -- -- -- (79)
Allowance for loan losses........ (4,564) (4,363) (4,124) (3,847) (3,837)
------- ------- ------- ------- -------
Total loans receivable, net... 717,715 610,284 518,591 374,658 297,488
Mortgage-backed securities:
Fixed rate mortgage-backed
securities........................ 22,159 51,099 88,856 88,935
Adjustable rate mortgage-backed
securities..................... 12,997 15,052 18,856 24,990
------- ------ ------ ------- ------
Total mortgage-backed
securities, net............ 27,221 35,156 66,151 107,712 113,925
------- ------ ------ ------- -------
Total loans receivable and
mortgage-backed securities,
net.........................$744,936 $645,440 $584,742 $482,370 $411,413
======== ======== ======== ======== ========
</TABLE>
5
<PAGE>
The following table sets forth the contractual maturities of the Bank's
loan and mortgage-backed securities portfolios at December 31, 1996. The table
does not reflect the effects of prepayments or enforcement of due-on-sale
clauses. Loans with balloon or call provisions were assumed to contractually
mature on the call date or the date the balloon provision called for repayment.
<TABLE>
<CAPTION>
First Mortgage Loans
--------------------------------------------------------------------
Construction
and development Total Loans
FHA- ----------------- and
One-to Income- Insured and One- to Income- Second Mortgage- Mortgage-
Four-Family Producing VA-Partially Four-Family Producing Mortgage and Total Backed Backed
Residential Property Guaranteed Residential Property Other Loans Loans Securities Securities
----------- -------- ---------- ----------- -------- ----------- ----- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Maturing During
Year(s) Ended
December 31,
1997................ $21,928 $17,132 $ 94 $4,375 $14,767 $24,527 $82,823 $1,021 $83,844
1998................ 23,370 8,576 100 603 8,289 12,566 53,504 1,102 54,606
1999................ 23,692 1,955 109 399 3,805 9,084 39,044 1,191 40,235
2000-2001........... 44,165 3,800 245 885 1,177 6,438 56,710 2,649 59,359
2002-2006........... 96,710 7,466 710 2,832 1,987 5,633 115,338 6,425 121,763
2007-2011........... 91,398 6,366 992 4,004 1,389 1,402 105,551 6,592 112,143
2012 and following.. 252,428 7,289 4,154 24,974 14 82 288,941 8,241 297,182
------- ------ ----- ------ ----- ----- ------- ----- -------
$553,691 $52,584 $6,404 $38,072 $31,428 $59,732 $741,911 $27,221 769,132
======== ======= ====== ======= ======= ======= ======== ======= -------
Less:
Undistributed portion of loans in process............................................................. $(18,147)
Deferred origination fees............................................................................. (1,485)
Allowance for loan losses............................................................................. (4,564)
Total loans receivable, net......................................................................... $744,936
</TABLE>
At December 31, 1996, the total loans and mortgage-backed securities due
after December 31, 1997, which had fixed interest rates were $242.5 million and
$15.4 million, respectively, while the total loans and mortgage-backed
securities due after such date, which had adjustable interest rates were $416.6
million and $10.8 million, respectively.
6
<PAGE>
RESIDENTIAL REAL ESTATE LOANS. The Bank's primary lending activity is the
origination of mortgage loans secured by one- to four-family, owner-occupied
residential properties located in the Bank's primary market area, the majority
of which are owner-occupied, single-family residences. At December 31, 1996,
$560.1 million, or 75.49%, of the Bank's total loan portfolio consisted of loans
secured by one- to four-family residences. The Bank's loan portfolio also
includes $38.1 million of loans made for the development of unimproved real
estate located in the Bank's primary market area, to be used for residential
housing. At December 31, 1996, approximately 80.62% of the Bank's total loan
portfolio consisted of loans secured by residential real estate.
The Bank's residential mortgage loan originations historically were for
fixed-rate mortgage loans with terms of 15 to 30 years. The Bank has emphasized
the origination of adjustable-rate mortgage loans since 1983. All loans require
monthly payments sufficient to fully amortize principal over the life of the
loan. The Bank generally charges a higher interest rate on such loans if the
property is not owner-occupied. Residential real estate loans often remain
outstanding for significantly shorter periods than their contractual terms, and
borrowers may refinance or prepay loans at their option. Substantially all fixed
rate mortgage loans are underwritten according to Federal Home Loan Mortgage
Corporation ("FHLMC") and Federal National Mortgage Association ("FNMA")
guidelines, so the loans qualify for sale in the secondary market. From January
1989 through early 1993, it had generally been the Bank's intention to sell all
newly originated 30-year and 20-year fixed-rate loans and certain 15-year
fixed-rate loans in the secondary market as soon as possible after their
origination. Newly originated loans held for sale are held at the lower of cost
or market value, as evaluated on a monthly basis, until their sale. Beginning in
the first quarter of 1993, however, the Bank decided to retain in portfolio
fixed-rate mortgage loans with maturities of 15 years or less, and in July 1993
the Bank decided to retain in portfolio substantially all fixed-rate residential
mortgage loan production. FHLB advances were primarily used to fund the 30-year
fixed-rate residential mortgage originations and to assist in managing the
interest rate risk associated with holding these longer-term financial
instruments. Beginning in the second quarter of 1994, the Bank once again began
selling long-term, fixed-rate, residential mortgage loan originations in the
secondary market as a result of the Bank being unable to obtain FHLB borrowings
at acceptable interest rate spreads. Although the Bank's practices during 1995
continued to include selling longer-term fixed-rate mortgage loan originations,
low levels of sales occurred as customer demand was for adjustable-rate rather
than fixed-rate mortgage loans. In 1996, the spread between fixed and adjustable
mortgage rates narrowed and there was a proportionately higher concentration of
fixed-rate mortgage loan originations. Consequently, there was a higher level of
sales in 1996.
The Bank presently offers one-year, three-year and five-year adjustable-rate
residential loans with interest rates that adjust based upon the index of the
weekly average yield on United States Treasury securities adjusted to a constant
maturity of one year. In addition, the Bank offers three-year adjustable-rate
residential loans with interest rates that adjust based upon the index of the
weekly average yield on United States Treasury securities adjusted to a constant
maturity of three years. The Bank offers introductory interest rates on
adjustable-rate loans which are lower than the fully-indexed rate on these
loans. The interest rates on these mortgages generally include a cap of 2% per
adjustment and 6% over the life of the loan. The Bank also provides a conversion
feature which allows borrowers to convert from an adjustable rate to a fixed
rate prior to the 60th payment. Loans which converted to a fixed-rate were sold
to the FHLMC until early 1993, at which time the Bank commenced retaining these
loans in portfolio. Since early 1993, loans converted to a fixed-rate with terms
of 30 years were funded with FHLB advances to assist in managing the interest
rate risk associated with holding these longer-term financial instruments. With
the rise in interest rates in 1994, the Bank was unable to obtain borrowings
from the FHLB to fund its long-term, fixed-rate, residential mortgage loans at
spreads acceptable to the Bank. Therefore, beginning in the second quarter of
1994 and continuing to the present time, the Bank started selling longer-term,
fixed-rate, residential mortgage loans in the secondary market upon conversion
from an adjustable-rate mortgage loan. Adjustable-rate residential mortgage
loans totaled $398.9 million, or 53.77%, of the Bank's total loan portfolio at
December 31, 1996.
Since mid-1987, during periods of increasing or higher market interest
rates, the Bank has been more successful in originating adjustable-rate
mortgages by offering favorable rates and origination fees in comparison to the
rates and fees charged on fixed-rate mortgage loans. In 1994, the Bank
introduced a five-year adjustable-rate mortgage into the market. This product
was added as it became apparent customers of the Bank wanted the
7
<PAGE>
flexibility of an adjustable-rate mortgage with a longer term between
adjustments. Consistently, during 1994, as interest rates increased, the demand
for adjustable-rate mortgage loans also rose. During 1995, market interest rates
were comparatively lower and a flatter yield curve existed as evidenced by the
narrow spread between 30-year fixed-rate and three-year Treasury rates. These
two factors suggest fixed-rate mortgage loans rather than adjustable-rate
mortgage loans may have been more attractive to many borrowers, however,
customer preference in the Bank's local market favored adjustable-rate mortgage
loans throughout most of 1995. The relatively flat yield curve during the first
quarter of 1996 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
subsequent quarters, customer preferences in the Bank's local market again
favored adjustable-rate mortgage loans. During 1996, the Bank originated $23.4
million in fixed rate mortgage loans, $17.4 million of which were sold in the
secondary mortgage market, and $141.2 million in adjustable rate and
shorter-term fixed-rate (15 years or less) mortgage loans, of which $6.9 million
were sold in the secondary mortgage market.
The Bank also offers 7 year and 5 year loans which are convertible to 23 and
25 year amortized loans, respectively. The interest rates are based on the FHLMC
30 year rates at the end of the respective 7th and 5th years. Historically, the
Bank sold substantially all 7 year and 5 year loans on the secondary market.
Beginning in early 1993, the Bank began retaining in portfolio newly originated
7 year and 5 year loans.
The Bank's lending policies generally limit the maximum loan-to-value ratio
on residential mortgage loans to 95% of the lesser of the appraised value of the
property or the purchase price, with the condition private mortgage insurance is
required on loans with loan-to-value ratios in excess of 80%. For certain
adjustable-rate loans, loan-to-value ratios up to and including 85% are
permitted without requiring private mortgage insurance. The majority of the
Bank's residential loan portfolio has loan-to-value ratios of 80% or less.
In underwriting residential real estate loans, the Bank evaluates both the
borrower's ability to make monthly payments and the value of the property
securing the loan. Potential borrowers are qualified for adjustable-rate
mortgage loans based on the fully indexed rate of the loans. Upon receipt of a
completed loan application from a prospective borrower, credit reports are
ordered and income, employment and financial information is verified. An
appraisal of the real estate intended to secure the proposed loan is undertaken
by a Bank appraiser or an independent appraiser previously approved by the Bank.
It is the Bank's policy to obtain title insurance on all mortgage loans.
Borrowers also must obtain hazard (including fire) insurance prior to closing.
Determination as to whether a property is located in a flood zone is
additionally required on new mortgage loan originations. Borrowers are required
to advance funds on a monthly basis together with each payment of principal and
interest through a mortgage escrow account from which the Bank makes
disbursements for items such as real estate taxes and hazard insurance premiums
as they become due. If a loan carries a loan-to-value ratio of 75% or less, the
borrower has the option of not having real estate taxes and hazard insurance
premiums placed in escrow as long as proof of payment for these items is
submitted to the Bank prior to their due dates. These underwriting criteria are
also applied to loans purchased giving the Bank the right to reject any loans
failing to meet underwriting standards. Despite the benefits of adjustable-rate
mortgage loans to the Bank's asset/liability management program, they do pose
potential additional risks, primarily because as interest rates rise, the
underlying payment requirements of the borrower rise, thereby increasing the
potential for default.
Although interest rates charged by the Bank on mortgage loans are primarily
determined by competitive loan rates offered in its market area, interest rates
charged on fixed-rate mortgage loans fluctuate daily and are based on interest
rates offered by FHLMC and FNMA. Mortgage loan rates reflect factors such as
general interest rate levels, the supply of money available to the savings
industry and the demand for such loans. These factors are in turn affected by
general economic conditions, the monetary policies of the Federal government,
including the Federal Reserve Board, the general supply of money in the economy,
tax policies and governmental budget matters.
INCOME-PRODUCING PROPERTY LOANS (COMMERCIAL AND MULTI-FAMILY REAL ESTATE
LOANS). Income- producing property loans originated by the Bank are loans
secured by commercial and multi-family (five or more units) real estate
generally located in the Bank's primary market area. Permanent loans on
income-producing
8
<PAGE>
properties constituted approximately $52.6 million, or 7.09%, of the Bank's
total loans at December 31, 1996. The Bank originates both construction loans
and permanent loans on commercial and multi-family properties. The Bank
generally does not purchase commercial and multi-family real estate loans.
Permanent commercial and multi-family real estate loans are generally made in
amounts up to 75% of the lesser of the appraised value or the purchase price of
the property. Commercial and multi-family real estate loans have been made in
amounts up to $8.7 million, although the majority of the Bank's commercial and
multi-family real estate loans have been originated in amounts ranging from
$250,000 to $2.5 million.
The Bank's commercial real estate loans are secured by office buildings,
motels, medical facilities, retail centers, warehouses, apartment buildings,
condominiums, a country club, and other commercial buildings, principally all of
which are located in the Bank's primary market area. Adjustable-rate commercial
and multi-family real estate loans generally provide for interest rate
adjustments based upon the New York prime lending rate or every one to five
years at a rate indexed to the weekly average yield on United States Treasury
securities, adjusted to a constant maturity of one year or three years.
Additionally, the Bank's commercial and multi-family real estate loans generally
include balloon provisions or call options, which allow the Bank to call a loan
after one to ten years, with principal amortization generally of 20 to 25 years,
with a maximum 30-year period. These balloon provisions and call options provide
the Bank with flexibility to adjust the rates on loans to reflect then current
market conditions, allowing the Bank to better control interest rate risk.
Although adjustable-rate loans assist in managing interest rate risk, they do
increase the potential for default primarily because as interest rates rise, the
underlying payment requirements of the borrower increase.
Loans secured by commercial and multi-family properties are generally larger
and involve greater risks than residential mortgage loans. Because payments on
loans secured by commercial and multi-family residential properties are often
dependent on successful operation or management of the properties, repayment of
such loans may be subject to a greater extent to adverse conditions in the real
estate market or the economy. The Bank seeks to minimize these risks in a
variety of ways, including limiting the size of its commercial and multi-family
real estate loans. In addition, the Bank requires a positive net operating or
rental income to debt service ratio for loans secured by commercial and
multi-family real estate. The Bank generally restricts these lending activities
to properties located in its primary market area. When considered appropriate,
the Bank requires borrowers to provide their personal guarantees on commercial
and multi-family real estate loans.
A loan with an outstanding balance of $4.1 million at December 31, 1996, and
secured by a motel, represents the Bank's largest single commercial real estate
loan to one borrower. At December 31, 1996, the Bank's 10 largest commercial
real estate loans, with balances outstanding ranging from $2.0 million to $4.1
million, totaled $28.6 million.
CONSTRUCTION AND LAND DEVELOPMENT LOANS. The Bank originates loans to
finance the construction of properties in its primary market area, including
one- to four-family dwellings, housing developments, multi-family apartments and
condominiums and commercial real estate. It also originates loans for the
acquisition and development of unimproved property to be used for residential
and commercial purposes. Construction and land development loans totaled $69.5
million or 9.37% of the Bank's total loan portfolio at December 31, 1996. Of
that total, $38.1 million were for the construction of one-to four-family
residential properties. Construction loans have been made in amounts up to $8.7
million. At December 31, 1996, the Bank had $9.1 million outstanding commitments
in construction and land development loans.
Construction loans generally have construction terms of up to 12 months.
Loan proceeds are disbursed in increments as construction progresses and as
inspections warrant. Inspections are carried out under the direction of the
Bank's Chief Lending Officer, although qualified architects are retained to
perform inspections on larger projects. The Bank also finances the construction
of individual owner-occupied residences. Construction loans are either converted
to permanent loans at the completion of construction or are paid off upon
receiving permanent financing from another financial institution. Construction
loans on residential properties are generally made in amounts up to
9
<PAGE>
80% of the appraised value of the completed property, and construction loans on
commercial properties are generally made in amounts up to 75% of the appraised
value of the completed property.
The Bank's underwriting criteria are designed to evaluate and minimize the
risks of each construction loan. Among other things, the Bank considers the
reputation of the borrower and the contractor, the amount of the borrower's
equity in the project, independent valuations and reviews of cost estimates,
pre-construction sale and leasing information, and cash flow projections of the
borrower. Personal guarantees of the principals of each borrower are also
usually obtained. Generally, all construction loans made by the Bank are within
its primary market area.
Construction loans generally afford the Bank the opportunity to increase the
yield and interest rate sensitivity of its loan portfolio. These higher yields
correspond to the higher risks associated with construction lending. The Bank's
risk of loss on a construction loan is largely dependent upon the accuracy of
the initial estimate of the property's value at completion of construction and
the estimated cost (including interest) of completion. If the estimate of the
completed cost proves to be inaccurate, the Bank may be confronted, at or prior
to the maturity of the loan, with a property having a value which is
insufficient to assure full repayment of the loan. At December 31, 1996, the
Bank had no construction loans outstanding which were non-performing and $7,000
of construction loans classified as real estate owned.
CONSUMER LOANS. The Bank has offered consumer loans since 1983. As of
December 31, 1996, total consumer loans were $54.6 million, or 7.35%, of the
Bank's total loan portfolio. Consumer loans originated by the Bank include home
equity loans, educational loans, automobile loans, land contracts, personal
loans (secured and unsecured), marine and recreational vehicle loans, mobile
home loans, and loans secured by savings accounts.
The Bank believes the shorter terms and the normally higher interest rates
available on various types of consumer loans have been helpful in maintaining a
profitable spread between the Bank's average loan yield and its cost of funds.
Consumer loans do, however, pose additional risks of collectibility when
compared to traditional types of loans granted by thrift institutions such as
residential mortgage loans. The Bank has sought to reduce this risk by primarily
granting secured consumer loans.
LOAN SOLICITATION AND PROCESSING. Loan originations are derived from a
number of sources including "walk-in" customers at the Bank's offices, the
Bank's marketing efforts, the Bank's present customers, referrals from real
estate professionals, and building contractors. Loan applications are reviewed
in accordance with the underwriting standards approved by the Bank's Board of
Directors which generally conform to FHLMC and FNMA standards.
Upon receipt of a loan application, a credit report is ordered to verify
specific information relating to the loan applicant's employment, income and
credit standing. In the case of a real estate loan, an appraisal of the real
estate intended to secure the proposed loan is undertaken by the Bank's in-house
appraiser or by independent appraisers approved by the Bank. In the case of
commercial and multi-family properties only independent appraisers are used. The
loan application file is then reviewed, depending upon the dollar amount of the
loan, by either (i) the Bank's loan underwriters, (ii) the Chief Lending Officer
or the Bank's Senior Loan Committee approved by the Board of Directors, or (iii)
the Bank's Executive Loan Committee, consisting of the President and other
Directors of the Bank.
The Bank's Manager of Consumer Lending is authorized to approve unsecured
and secured consumer loans of up to $50,000 and $60,000, respectively. Other
consumer lending staff and branch managers are authorized to approve secured
consumer loans of up to $35,000, depending on individual lending authorities.
The staff loan committee is authorized to approve residential mortgage loans of
up to $214,600. Loans between $214,600 and $500,000 require the approval of the
Bank's Director of Lending Operations or Residential Lending Manager and the
approval of the Bank's President or Chief Lending Officer. Loans in excess of
$500,000 or multiple loans to
10
<PAGE>
the same borrower in an aggregate amount exceeding $500,000 must be approved by
the Bank's Senior Loan Committee.
LOAN ORIGINATIONS, PURCHASES AND SALES. The Bank retains in its portfolio
substantially all adjustable-rate loans. All residential loans are originated on
documentation permitting their sale in the secondary market. The Bank previously
originated such loans with a forward commitment for their sale and held these
loans in portfolio at the lower of cost or market, as valued on an aggregate
basis, until their sale. Since the second quarter of 1994, the Bank has sold all
longer-term, fixed-rate, residential mortgage loan originations in the secondary
market upon origination or conversion from an adjustable-rate mortgage loan.
Although the Bank's practices during 1995 and 1996 continued to include selling
longer-term fixed-rate mortgage loan originations, low levels of sales occurred
in 1995 as customer demand was for adjustable-rate rather than fixed-rate
mortgage loans. In 1996, however, the spread between fixed and adjustable
mortgage rates narrowed and there was a proportionately higher concentration of
fixed-rate mortgage loan originations. Consequently, there was a higher level of
loan sales in 1996.
The Bank has engaged, from time to time, in the sale of participation
interests in residential, commercial and multi-family real estate loans in the
secondary mortgage market. Such participation interests are sold in an effort to
reduce the Bank's amount loaned to one borrower. The Bank's decision on whether
to sell loans or participation interests, and on which loans to sell, are
generally based upon the size of the project and amount loaned, for a commercial
or multi-family real estate loan, the Bank's need for funds, and market
opportunities that permit loan sales on terms favorable to the Bank. The Bank
also sells loans or loan participations, in private sales to savings
institutions. In recent years such sales have been without recourse. The Bank
generally retains the servicing on the loans sold, for which it receives a
servicing fee of .25%.
Effective January 1, 1996, the Bank adopted the provisions of SFAS 122. This
statement requires the Bank 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 Bank 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 Bank 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 Bank's lending
market for fixed-rate residential mortgage loans salable in the secondary
mortgage market. The Bank capitalized $234,000 of originated mortgage servicing
rights during 1996, of which $43,000 has been amortized. No valuation allowances
for capitalized originated mortgage servicing rights were considered necessary
as of December 31, 1996. The balance at December 31, 1996, of loans sold during
the year was $30.1 million.
In addition to originating loans, the Bank also purchases loans and
mortgage-backed securities in the secondary market. The Bank's purchases in the
secondary market are made on the same criteria and must satisfy the same
underwriting procedures as loans directly originated by the Bank. The Bank's
secondary market purchases are dependent upon the demand for mortgage credit in
the Bank's market area and the inflow of funds from traditional sources. During
1996, the Bank, to supplement and complement its own mortgage loan production,
purchased from an unaffiliated financial institution $31.7 million of loans
consisting principally of one- to four-family residential, fixed and
adjustable-rate, medium term mortgages.
11
<PAGE>
The following table sets forth information concerning the loan origination,
purchase, sale and repayment activity of the Bank's portfolio of loans and
mortgage-backed securities:
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------
1996 1995 1994
------ ------ ------
(In Thousands)
<S> <C> <C> <C>
Originations:
Fixed-rate loans:
First mortgage loans:
One- to four-family residential......... $36,990 $18,507 $23,115
Income-producing property............... 758 337 188
FHA-insured and VA-partially
guaranteed........................... 217 141 362
Construction and development:
One- to four-family residential....... 8,456 856 14,339
Income-producing property............. -- 314 1,822
Commercial business loans................ 634 568 --
Other loans.............................. 18,706 12,788 10,413
------ ------ ------
Total fixed-rate loans................. 65,761 33,511 50,239
------ ------ ------
Adjustable-rate loans:
First mortgage loans:
One- to four-family residential......... 68,063 40,183 40,056
Income-producing property............... 610 4,380 4,166
Construction and development:
One- to four-family residential....... 50,889 47,784 42,096
Income-producing property............. 18,630 9,052 2,742
Second mortgage loans.................... -- 60 --
Commercial business loans................ 3,049 2,566 252
Other loans.............................. 19,600 14,015 12,304
------ ------ ------
Total adjustable-rate loans............ 160,841 118,040 101,616
------- ------- -------
Total loans originated................. 226,602 151,551 151,855
------- ------- -------
Purchases:
Loans:
Fixed-rate............................... 2,905 4,860 31,937
Adjustable-rate.......................... 28,829 38,732 42,977
------ ------ ------
Total purchased........................ 31,734 43,592 74,914
------ ------ ------
Sales:
Fixed-rate:
Mortgage loans........................... 31,246 13,515 3,138
Student loans............................ 739 1,293 1,102
Mortgage-backed securities............... -- 19,587 --
------ ------ ------
Total sales............................ 31,985 34,395 4,240
------ ------ ------
Principal repayments:
Loans.................................... 115,079 84,278 76,077
Mortgage-backed securities............... 7,935 11,408 41,561
------ ------ ------
Total principal repayments............. 123,014 95,686 117,638
------- ------ -------
Transfers to real estate owned............. (342) (265) (895)
Transfers from real estate owned........... -- 2,700 --
Decrease due to other items, net........... (3,499) (6,799) (1,624)
------ ------ ------
Net increases.............................. $99,496 $60,698 $102,372
======= ======= ========
</TABLE>
12
<PAGE>
LOAN SERVICING AND LOAN FEES. As of December 31, 1996, Community First was
servicing approximately $156.6 million of loans for others. The Bank generally
receives a servicing fee ranging from .25% to .50% for these loans, with average
servicing fees of approximately .28%. In addition to interest earned on loans
and income from servicing of loans, the Bank receives fees in connection with
loan commitments and originations, loan modifications, late payments, changes of
property ownership and for miscellaneous services related to its loans. Income
from these activities varies from period to period with the volume and type of
loans originated, sold and purchased, which in turn is dependent on prevailing
mortgage interest rates and their effect on the demand for loans in the markets
served by the Bank.
In accordance with Statement of Financial Accounting Standards No. 91, to
the extent loans are originated or acquired for the portfolio, the Bank limits
immediate recognition of loan origination or acquisition fees as revenues and
recognizes such income, net of certain loan origination or acquisition costs,
over the estimated lives of such loans as an adjustment to yield.
LOAN COMMITMENTS. Applicants for adjustable-rate one- to four-family
residential loans may lock in an interest rate for 50 days at any time prior to
the issuance of a loan commitment. The period between the applicant locking a
rate and the Bank's issuance of a commitment may be up to 21 days. The period of
time between issuance of a commitment to a borrower by the Bank through closing
of a loan generally ranges from 30 to 45 days. When selling loans to the
secondary market, the Bank protects itself from rising interest rates through
the purchase of mandatory commitments at the time a loan rate is locked or a
loan commitment is made. Funding generally occurs at or shortly after the time
the interest rate is locked. The Bank does not use financial futures or options
to protect against rising interest rates. Historically, less than 5% of the
Bank's commitments expire before being funded. At December 31, 1996, the Bank's
outstanding mortgage commitments totaled approximately $19.3 million.
NON-PERFORMING LOANS. Residential and commercial mortgage loans are
reviewed on a regular basis and are placed on nonaccrual status when either
principal or interest is more than 90 days past due. Consumer loans are
generally charged off when or before the loan becomes 120 days delinquent.
Interest accrued and unpaid at the time a loan is placed on nonaccrual status is
charged against interest income. Subsequent payments are either applied to the
outstanding principal balance or recorded as interest income, depending on the
assessment of the ultimate collectibility of the loan.
When a loan becomes 15 days delinquent, the Bank institutes internal
collection procedures and will contact the customer directly. As to residential
and commercial real estate loans, if a borrower has not made payment within 15
days of the due date, a past due notice is mailed and a late charge of 5% is
generally assessed as permitted by the Bank's mortgage documentation. The Bank
seeks to determine the reason for the delinquency and attempts to effect a cure
for the delinquency on any loan which becomes more than 60 days past due. The
Bank will then regularly review the loan status, the condition of the property
and circumstances of the borrower. Based upon the results of its review, the
Bank may negotiate and accept a repayment program with the borrower, accept a
voluntary deed in lieu of foreclosure or, when deemed necessary, initiate
foreclosure proceedings. The decision on whether to initiate foreclosure
proceedings is based upon the amount of the loan outstanding in relation to the
original indebtedness, the extent of the delinquency and the borrower's ability
and willingness to cooperate in curing the default or delinquency.
Real estate acquired by the Bank as a result of foreclosure or by deed in
lieu of foreclosure is classified as real estate owned until such time as it is
sold. At the time title is received and in certain cases prior to title
transfer, the Bank will transfer the former loan to real estate owned. When such
property is acquired, it is recorded at the lower of the unpaid principal
balance of the related loan or its estimated fair market value less estimated
costs to sell. Any subsequent write-down of the property is charged directly to
income or against the appropriate allowance account.
13
<PAGE>
As of December 31, 1996, there were no loans which are not included in the
tables below or described thereafter where known information about the possible
credit problems of borrowers caused management to have serious doubts as to the
ability of the borrower to comply with present loan repayment terms and which
may result in classification of such loans in the future. As of December 31,
1996, there were no concentrations of loans in any type of industry which
exceeded 10% of the Bank's total loans that are not included as a loan category
in the table below.
Real estate loans originated by the Bank and delinquent loans are
generally collateralized by real estate in the Bank's primary market area.
The following table sets forth information concerning the Bank's
delinquent loans at December 31, 1996. The table represents the total remaining
principal balances of the related loans rather than the actual payment amounts
which are overdue:
<TABLE>
<CAPTION>
30-59 Days 60-89 Days 90 Days or Greater
--------------- --------------- ------------------
Number Amount Number Amount Number Amount
------ ------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family residential 100 $4,423 19 $ 922 16 $ 892
Income-producing property.... -- -- 1 5 1 359
FHA-insured and VA-partially
guaranteed................. 6 277 1 74 3 183
Construction and development:
One- to four-family residential 3 218 1 142 -- --
Income-producing property.. -- -- -- -- -- --
Land development............ 1 400 -- -- -- --
Commercial................... 1 10 -- -- 3 195
Other........................ 52 400 11 95 13 158
----- ------ ---- ----- ----- -----
Total...................... 163 $5,728 33 $1,238 36 $1,787
===== ====== ==== ====== ===== ======
Percentage of total assets 0.69% 0.15% 0.21%
====== ===== =====
</TABLE>
14
<PAGE>
The following table sets forth information concerning the amounts of the
Bank's non-accruing loans and real estate owned by category. At December 31,
1996, the Bank had no loans which were "troubled debt restructurings" as defined
in Statement of Financial Accounting Standards No. 15.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One- to four-family residential
mortgages...................... $ 892 $ 68 $ 108 $ 571 $ 937
Income-producing property........ 359 -- -- 1 322
FHA-insured and VA-partially
guaranteed..................... 183 253 192 140 357
Construction and development..... -- -- -- 182 --
Commercial....................... 195 -- -- -- --
Other............................ 158 28 93 160 472
------ ------- ------- ------- -------
Total.......................... $1,787 $ 349 $ 393 $ 1,054 $ 2,088
====== ======= ======= ======= =======
Percentage of total assets..... 0.21% 0.05% 0.05% 0.16% 0.33%
====== ======= ======= ======= =======
Real estate owned:
One- to four-family residential
mortgages...................... $ 205 $ 238 $ 139 $ 1,046 $ 1,100
Income-producing property........ -- -- 1,700 2,380 2,579
Construction and development..... 7 7 981 1,060 1,427
------ ------- ------- ------- -------
Total.......................... $ 212 $ 245 $ 2,820 $ 4,486 $ 5,106
====== ======= ======= ======= =======
Percentage of total assets..... 0.03% 0.03% 0.39% 0.67% 0.80%
====== ======= ======= ======= =======
Total non-accruing loans and real
estate owned................. $1,999 $ 594 $ 3,213 $ 5,540 $ 7,194
====== ======= ======= ======= =======
Percentage of total assets........ 0.24% 0.08% 0.44% 0.83% 1.13%
====== ========= ======= ======= =======
</TABLE>
Loans on which the accrual of interest was discontinued or reduced
amounted to $1,757,000 at December 31, 1996. For the year ended December 31,
1996, $46,000 of additional interest income would have been recorded if these
non-accruing loans were current in accordance with their original terms.
Approximately $118,000 of interest income relating to these loans was collected
and included in interest income for the year ended December 31, 1996.
Certain other income-producing property loans in the Bank's loan portfolio
are being closely monitored but are not included in non-performing loans above.
These loans cause management some concern as to the ability of such borrowers to
comply with the present loan repayment terms and which may result in their being
classified as non-accruing at some point in the future. These other loans
include a $168,000 loan secured by an apartment building and a loan totaling
$393,000 secured by an office building. These loans were current as of December
31, 1996.
In May 1993, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 114, Accounting by Creditors for
Impairment of a Loan (SFAS 114). SFAS 114, as amended in October 1994 by
Statement of Financial Accounting Standards No. 118, Accounting by Creditors for
Impairment of
15
<PAGE>
a Loan - Income Recognition and Disclosures (SFAS 118), requires impaired loans
to be measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate or, as a practical expedient,
at the loan's observable market price, or the fair value of the collateral if
the loan is collateral dependent. This statement also applies to all loans
restructured in troubled debt restructuring involving a modification of terms as
well as clarifies that a creditor should evaluate the collectibility of both
contractual interest and contractual principal of all receivables when assessing
the need for a loss accrual. The Bank adopted the provisions of SFAS 114, as
amended by SFAS 118, on a prospective basis as of January 1, 1995. Neither the
initial adoption nor the ongoing effect of SFAS 114 has had, or is expected to
have, a material impact on the financial condition or results of operations of
the Bank.
Impaired loans as defined by SFAS 114 totaled $554,000 and $0 at December
31, 1996 and 1995, respectively, and include one income-producing property loan
and three commercial business loans. These loans are included in nonaccrual
loans at December 31, 1996. 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
$559,000 and $0 during 1996 and 1995, respectively. Interest income recognized
on impaired loans during 1996 and 1995, totaled $27,000 and $0, respectively.
Impaired loans had specific allocations of the allowance for loan losses in
accordance with SFAS 114 approximating $150,000 and $0 at December 31, 1996 and
1995, respectively.
CLASSIFICATION OF ASSETS. Under federal regulations, the Bank is required
to classify its own assets as to quality on a regular basis. In addition, in
connection with examinations of the Bank, FDIC and Michigan Financial
Institutions Bureau examiners have authority to identify problem assets and, if
appropriate, classify them. Assets are subject to evaluation under a
classification system with three categories: (i) Substandard, (ii) Doubtful and
(iii) Loss. An asset could fall within more than one category and a portion of
the asset could remain unclassified.
An asset is classified Substandard if it is determined to involve a
distinct possibility the Bank could sustain some loss if deficiencies associated
with the loan, such as inadequate documentation, were not corrected. An asset is
classified as Doubtful if full collection is highly questionable or improbable.
An asset is classified as Loss if it is considered uncollectible, even if a
partial recovery could be expected in the future. At December 31, 1996, the Bank
classified $2.0 million of non-accruing loans and real estate owned as
Substandard. Included in the $7.5 million of loans classified as Special Mention
were $7.0 million of loans 30-89 days delinquent. The Bank had no assets
classified as Doubtful and no assets classified as Loss as of December 31, 1996.
ALLOWANCE FOR LOSSES. The Bank's management establishes allowances for
loan losses. On a quarterly basis, management evaluates the loan portfolio and
determines the amount that must be added to the allowance account. These
allowances are charged against income in the year they are established.
Additionally, accrual of interest on problem loans is discontinued when a loan
becomes ninety days past due as to principal or interest or when, in the opinion
of management, full collection of principal and interest is unlikely. At the
time a loan is placed on nonaccrual status, interest previously accrued but not
collected is charged against current income. Income on such loans is then
recognized only to the extent cash is received and where future collections of
principal are probable. A nonaccrual loan may be restored to accrual status when
interest and principal payments are current and the loan appears otherwise
collectible.
When establishing the appropriate levels for the provision and the
allowance for loan losses, management considers a variety of factors, in
addition to the fact an inherent risk of loss always exists in the lending
process. Consideration is given to the current and future impact of economic
conditions, the diversification of the loan portfolio, historical loss
experience, the review of loans by the loan review personnel, the individual
borrower's financial and managerial strengths, and the adequacy of underlying
collateral. Consideration is also given to examinations performed by regulatory
authorities.
16
<PAGE>
Each quarter, the Bank determines the adequacy of the allowance for loan
losses based on factors such as the size and risk exposure of each portfolio,
current economic conditions, past loss experience, delinquency rates and current
collateral values, and other relevant factors. While available information is
used in evaluating the adequacy of the allowance for loan losses, future
additions to the allowance may be necessary if economic conditions change. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowances for losses on loans and real
estate owned. Such agencies may require the Bank to recognize additions to the
allowances based on their judgments about information available to them at the
time of their examination.
17
<PAGE>
The following table provides a summary of the allowance for losses on
loans and real estate:
<TABLE>
<CAPTION>
Allowance for Losses on
-------------------------
Real
Loans Estate Total
----- ------ -----
(In Thousands)
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1992............... $3,837 $ 237 $4,074
Provision for loan losses................ 240 330 570
Charges against the allowance:
One- to four-family residential........ (249) (100) (349)
FHA-insured and VA partially guaranteed (70) -- (70)
Income-producing property.............. -- (436) (436)
Consumer............................... (28) -- (28)
Recoveries:
One- to four-family residential........ 1 67 68
FHA-insured and VA partially guaranteed 24 -- 24
Income-producing property.............. -- 69 69
Consumer............................... 92 -- 92
----- ----- ------
BALANCE, DECEMBER 31, 1993............... $3,847 $ 167 $4,014
Provision for losses..................... 240 565 805
Charges against the allowance:
One- to four-family residential........ (21) (122) (143)
FHA-insured and VA partially guaranteed (62) -- (62)
Income-producing property.............. (23) (590) (613)
Consumer............................... (47) -- (47)
Recoveries:
One-to four-family residential......... 80 55 135
FHA-insured and VA partially guaranteed 36 -- 36
Income-producing property.............. -- 1 1
Consumer............................... 74 -- 74
----- ----- ------
BALANCE, DECEMBER 31, 1994............... $4,124 $ 76 $4,200
Provision for losses..................... 240 120 360
Charges against the allowance:
One- to four-family residential........ (10) (26) (36)
FHA-insured and VA partially guaranteed -- (2) (2)
Income-producing property.............. -- (7) (7)
Consumer............................... (45) -- (45)
Recoveries:
One-to four-family residential......... 11 11 22
FHA-insured and VA partially guaranteed -- 1 1
Income-producing property.............. -- 51 51
Consumer............................... 43 -- 43
----- ----- ------
BALANCE, DECEMBER 31, 1995............... $4,363 $ 224 $4,587
Provision for losses..................... 240 60 300
Charges against the allowance:
One- to four-family residential........ (9) (77) (86)
FHA-insured and VA partially guaranteed (10) (110) (120)
Consumer............................... (57) -- (57)
Recoveries:
One-to four-family residential......... 2 4 6
FHA-insured and VA partially guaranteed 7 102 109
Income-producing property.............. -- 9 9
Consumer............................... 28 -- 28
----- ----- ------
BALANCE, DECEMBER 31, 1996............... $4,564 $ 212 $4,776
====== ===== ======
</TABLE>
The ratio of net loan charge-offs (recoveries) to average loans
outstanding during the respective periods were (.05)% for 1992, .07% for 1993,
(.01)% for 1994, .00% for 1995 and .01% for 1996.
18
<PAGE>
The following table represents the allocation of the allowance for loan
losses at the dates indicated:
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------------------
1996 1995
----------------------------------------- ------------------------------------------
Percent Allowance Percent Allowance
of Total Allocation as % of Total Allocation as %
Balance Loan of of Loan Balance Loan of of Loan
of Loans Balance Allowance Balance of Loans Balance Allowance Balance
-------- ------- --------- ------- -------- ------- --------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
First mortgage loans:
One- to four-family residential (including
construction and development loans and
loans sold with recourse)(1)............. $593,163 79.80% $1,252 .21% $502,374 79.39% $ 1,401 .28%
FHA-insured and VA-partially
guaranteed............................... 6,404 .86 47 .73 7,458 1.18 319 4.28
Income-producing property (including
construction and development loans)...... 84,012 11.30 2,100 2.50 75,012 11.85% 1,875 2.50%
------- ------ ------- ------ -------- ------ ------- -----
Total first mortgage loans............... 683,579 91.96 3,399 .50 584,844 92.42 3,595 .61
Second mortgage loans........................ 510 .07 5 .98 571 .09 4 .70
Commercial business loans.................... 4,644 .62 325 7.00 3,195 .51 96 3.00
Other loans.................................. 54,578 7.35 835 1.53 44,171 6.98% 668 1.51%
------- ------- ------- ----- ------- ------ ------ -----
Total.................................... $743,311 100.00% $ 4,564 .61% $632,781 100.00% $4,363 .69%
======== ====== ======= ===== ======== ====== ====== =====
At December 31,
---------------------------------------------------------------------------------------
1994 1993
-------------------------------------------- -----------------------------------------
Percent Allowance Percent Allowance
of Total Allocation as % of Total Allocation as %
Balance Loan of of Loan Balance Loan of of Loan
of Loans Balance Allowance Balance of Loans Balance Allowance Balance
-------- ------- --------- ------- -------- ------- --------- -------
(Dollars in Thousands)
First mortgage loans:
One- to four-family residential (including
construction and development loans and
loans sold with recourse)(1).............$424,079 79.32% $1,296 .31% $285,610 73.25% $943 .33%
FHA-insured and VA-partially
guaranteed............................... 3,629 .68 421 11.60 4,240 1.09 582 13.73
Income-producing property (including
construction and development loans)...... 66,855 12.50 1,775 2.65 63,727 16.34 1,670 2.62
-------- ------ ----- ----- ------- ------- ------- -------
Total first mortgage loans............... 494,563 92.50 3,492 .71 353,577 90.68 3,195 .90
Second mortgage loans........................ 661 .12 5 .76 750 .19 7 .93
Commercial business loans.................... 706 .13 21 2.97 446 .12 14 3.14
Other loans.................................. 38,759 7.25 606 1.56 35,159 9.01 631 1.79
------- ------ ------ ----- ------- ------- ------- -------
Total....................................$534,689 100.00% $4,124 .77% $389,932 100.00% $ 3,847 .99%
======== ====== ====== ===== ======== ====== ======= =======
------------------------------------------
1992
------------------------------------------
Percent Allowance
of Total Allocation as %
Balance Loan of of Loan
of Loans Balance Allowance Balance
-------- ------- --------- -------
First mortgage loans:
One- to four-family residential (including
construction and development loans and
loans sold with recourse)(1)............. $205,086 65.36% $723 .35%
FHA-insured and VA-partially
guaranteed............................... 6,536 2.08 918 14.05
Income-producing property (including
construction and development loans)...... 64,923 20.69 1,498 2.31
------- ------ ------ ------
Total first mortgage loans............... 276,545 88.13 3,139 1.14
Second mortgage loans........................ 1,034 .33 .11 1.06
Commercial business loans.................... 278 .09 9 3.24
Other loans.................................. 35,939 11.45 678 1.89
------- ------ ------ ------
Total.................................... $313,796 100.00% $3,837 1.22%
======== ====== ====== ======
</TABLE>
(1) Loans sold with recourse totaled $1.4 million, $1.8 million, $2.2
million, $3.0 million and $4.8 million at December 31, 1996, 1995, 1994, 1993
and 1992, respectively.
19
<PAGE>
INVESTMENT ACTIVITIES
Community First is required under federal regulations to maintain a
minimum amount of liquid assets which can be invested in specified short-term
securities and is also permitted to make certain other investments. See "Item 1.
Business -- Regulation of the Bank." It has generally been Community First's
policy to maintain a liquidity portfolio in excess of regulatory requirements.
Liquidity levels may be increased or decreased depending upon the yields on
investment alternatives, management's judgment as to the attractiveness of the
yields then available in relation to other opportunities, its expectations of
the level of yield that will be available in the future and management's
projections as to the short-term demand for funds to be used in the Bank's loan
origination and other activities. At December 31, 1996, Community First had an
investment portfolio of $31.1 million consisting of U.S.
government, federal agency obligations and corporate notes and bonds.
In July 1989, the Bank retained SS&H Financial Advisors, of Bingham Farms,
Michigan, to act as its investment advisor and to execute all related
transactions. In June 1988, the Bank's Board of Directors adopted an investment
policy which is annually reviewed by the Board. Pursuant to this policy, which
is binding upon the investment advisor, two of the four members of the Bank's
Investment Committee must approve all investment transactions. The policy also
outlines the approved investment securities in which the Bank may invest, within
each investment category.
As part of the Bank's asset/liability management program, the Bank had
previously entered into a series of interest rate exchange agreements in order
to lengthen the maturity of its liabilities by, in effect, converting variable-
rate liabilities to fixed-rate liabilities. In November 1994, the Bank
terminated, at a loss of $229,000, its one remaining interest rate exchange
agreement with an aggregate notional amount of $15.0 million and a maturity date
of December 23, 1996. The deferred loss from the termination of the interest
rate exchange agreement totaled $0 and $107,000 at December 31, 1996 and 1995,
respectively. Amortization of the loss as interest expense totaled $107,000 in
1996 and $109,000 in 1995.
During the years ended December 31, 1996, 1995 and 1994, the cost of the
Bank's interest rate exchange agreements was $107,000, $109,000 and $568,000,
respectively, and is included as interest expense on deposits.
Statement of Financial Accounting Standards No. 115, Accounting for
Certain Investments in Debt and Equity Securities ("SFAS 115") addresses the
accounting and reporting for equity securities having readily determinable fair
values and for all investments in debt securities. SFAS 115 requires investment
and mortgage-backed securities to be classified as follows:
o Debt securities the Bank has the positive intent and ability to hold
to maturity are classified as held-to-maturity securities and
reported at amortized cost.
o Debt and equity securities bought and held principally for the
purpose of selling them in the near term are classified as trading
securities and reported at fair value, with unrealized gains and
losses included in earnings.
o Debt and equity securities not classified as either held-to-maturity
securities or trading securities are classified as
available-for-sale securities and reported at fair value, with
unrealized gains and losses excluded from earnings and reported, net
of tax, as a separate component of stockholders' equity.
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 latter part of 1996, market interest
rates generally fell which favorably impacted the market value of the
principally fixed-rate investment and mortgage-backed securities available for
sale. At December 31, 1996, the Bank reported $58.3 million in
20
<PAGE>
investment and mortgage-backed securities available for sale at fair value, with
unrealized net gains of $325,000 reported net of $110,000 of federal income tax
expense as a separate component of stockholders' equity. The Bank had no
investment or mortgage-backed securities classified as held-to-maturity or
trading securities as of December 31, 1996.
In November 1995, the FASB issued A Guide to Implementation of Statement
115 on Accounting for Certain Investments in Debt and Equity Securities (Guide).
The Guide permitted an institution to reassess the appropriateness of the
classifications of all securities held at the time and account for any resulting
reclassifications at fair value in accordance with Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities (SFAS 115). The Bank, in order to allow further flexibility in
future asset/liability management decisions relating to securities, reclassified
$18.1 million of corporate notes and U.S. Treasury securities from a
held-to-maturity classification to an available-for-sale classification with
unrealized pretax losses of $103,000 on these securities recorded as a negative
adjustment to stockholders' equity.
As of September 30, 1996, based upon liquidity and interest rate
considerations, management determined it could no longer assert its intention to
hold all mortgage-backed securities until maturity. Therefore, the entire
mortgage-backed securities portfolio totalling $28.6 million was reclassified to
an available-for-sale classification with unrealized pre-tax gains of $190,000
being recorded as a favorable adjustment to stockholders' equity. As a result,
the Bank intends to classify any investment or mortgage-backed securities
currently held or purchased in the subsequent two years as available for sale.
21
<PAGE>
The table below sets forth certain information regarding the amortized
cost, weighted average rates and maturities of the Bank's investment securities
available for sale at the date indicated. At December 31, 1996, the Bank did not
have any investment securities available for sale with maturities greater than
five years.
<TABLE>
<CAPTION>
At December 31, 1996
-------------------------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years More than Ten Years
----------------------- ----------------------- ----------------------- ---------------------
Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average
Cost Rate Cost Rate Cost Rate Cost Rate
--------- --------- ---------- --------- ---------- --------- ---------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
United States
government and
agency obligations... $20,097 5.47% $ -- -- % $ -- -- % $ -- -- %
Federal agency
obligations.......... -- -- 7,000 6.83 -- -- -- --
Corporate bonds...... 4,000 6.38 -- -- -- -- -- --
------ ------ ----- ------
$24,097 5.62% $7,000 6.83% $ -- -- $ -- --
======= ====== ===== ======
At December 31, 1996
----------------------------------------
Total Investment Securities
----------------------------------------
Average Weighted
Life Amortized Market Average
in Years Cost Value Rate
-------- ---------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
United States
government and
agency obligations... 0.81 $20,097 $20,071 5.47%
Federal agency
obligations.......... 4.31 7,000 7,015 6.83
Corporate bonds...... 0.50 4,000 4,007 6.38
------ ------
1.56% $31,097 $31,093 5.89%
======= =======
</TABLE>
The Bank's $4.0 million of corporate bonds available for sale at December
31, 1996, are of investment grade, rated from A1 by Moody's Rating Service.
At December 31, 1996, the Bank did not have any investment securities held
to maturity.
<PAGE>
During 1994, the Bank purchased investment securities available for sale
in the amount of $7.7 million. These securities had a weighted average yield of
6.33%. The available-for-sale investment securities purchased consisted of
corporate notes and treasuries with maturities of 12 to 23 months. In addition,
the Bank purchased investment securities held to maturity in the amount of $0.2
million. These securities had a weighted average yield of 3.25%. The
held-to-maturity investment securities purchased consisted of deposit notes with
a maturity of six months. Investment securities held to maturity in the amount
of $0.4 million matured in 1994. Also in 1994, the Bank sold $20.0 million of
available-for-sale investment securities and recognized gross gains of $13,000
and gross losses of $46,000. During 1995, the Bank purchased a $5.1 million
available-for-sale corporate note with a maturity of 50 months and a weighted
average yield of 7.08%. Investment securities available for sale in the amount
of $13.9 million were sold during 1995, resulting in gross gains of $30,000 and
gross losses of $33,000. During 1996, the Bank purchased $20.1 million of
available-for-sale investment securities. These securities had a weighted
average yield of 6.19%. The available-for-sale investment securities purchased
consisted of federal agency obligations and U.S. Treasury securities with
maturities of 11 to 61 months. Investment securities available for sale in the
amount of $23.1 million were sold during 1996, resulting in gross gains of
$43,000 and gross losses of $107,000.
The following table sets forth certain information about the Bank's held
to maturity investment securities and related fair values.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------
1996 1995 1994
---------------------- ------------------- -----------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
---- ----- ---- ----- ---- -----
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
United States government
and agency obligations:
From one to five years... $ -- $ -- $ -- $ -- $15,372 $14,283
Greater than five years.. -- -- -- -- 5,037 5,019
------ ------ ------ ------ ------ ------
-- -- -- -- 20,409 19,302
Corporate bonds
From one to five years... -- -- -- -- 11,018 10,899
More than five years
to ten years.............. -- -- -- -- 1,490 1,471
------ ------ ------ ------ ------ -------
-- -- -- -- 12,508 12,370
------ ------ ------ ------ ------ ------
$ -- $ -- $ -- $ -- $32,917 $31,672
====== ====== ====== ====== ======= =======
Weighted average interest
rate...................... -- % -- % 5.66%
====== ======= =======
Federal Home Loan Bank
of Indianapolis stock.... $10,632 $8,537 $8,163
======= ======= =======
</TABLE>
23
<PAGE>
The following table sets forth certain information about the Bank's
available-for-sale investment securities and related fair values.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------
1996 1995 1994
----------------- ------------------ ---------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
---- ----- ---- ----- ---- -----
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
United States government
and agency obligations:
Maturing within one year $20,097 $20,071 $15,139 $15,102 $ 4,863 $ 4,853
From one to five years -- -- 15,253 15,225 15,391 14,801
------ ------- ------ ------- ------ ------
20,097 20,071 30,392 30,327 20,254 19,654
Federal agency obligations:
Maturing from one to
five years............ 7,000 7,015 -- -- -- --
Corporate bonds (a)
Maturing within one year 4,000 4,007 12,686 12,682 20,036 19,771
From one to five years -- -- 11,921 12,100 16,991 16,371
------ ------- ------ ------- ------ ------
4,000 4,007 24,607 24,782 37,027 36,142
$31,097 $31,093 $54,999 $55,109 $57,281 $55,796
======= ======= ======= ======= ======= =======
Weighted average interest
rate.................... 5.89% 5.37% 5.38%
====== ====== =======
</TABLE>
(a) At December 31, 1996, the Corporation had no available-for-sale corporate
notes of one issuer which were in excess of ten percent of stockholders'
equity.
DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS
GENERAL. Retail customer deposits are the major source of the Bank's funds
for lending and other investment purposes. In addition to deposits, Community
First derives funds from loan and mortgage-backed securities principal
repayments, the sale of loans or participation interests therein and FHLB
borrowings. Loan repayments are a relatively stable source of funds while
deposit inflows and outflows and loan prepayments are significantly influenced
by general interest rates and money market conditions. Borrowings may be used on
a short-term basis to compensate for reductions in the availability of funds
from other sources. In 1993 and early 1994, medium-term, fixed-rate FHLB
borrowings were principally used to fund fixed-rate mortgage loan originations
retained in the Bank's portfolio and to assist in managing the interest rate
risk associated with holding these longer-term financial instruments. During
most of 1994, short-term adjustable-rate borrowings were used to fund the
origination of primarily three-year adjustable-rate mortgage loans and the
purchase of principally adjustable-rate mortgage loans which reprice after five
and seven years and medium-term fixed-rate loans. Available liquidity from net
deposit inflows and the proceeds from investment and mortgage-backed security
repayments and maturities were used by the Bank during 1995 to repay short-term
adjustable-rate FHLB advances combined with holding in portfolio three-year
adjustable-rate mortgage loan originations and medium-term fixed- and
adjustable-rate mortgage loan purchases. Borrowings were also used on a
longer-term basis for general business purposes. FHLB advances were obtained, as
needed in 1996, to meet the Bank'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
Bank emphasized increasing its deposit base by attracting new customers through
various promotional activities.
24
<PAGE>
DEPOSITS. Deposits are attracted primarily from within the Bank's primary
market area through the offering of a broad selection of deposit instruments
including checking accounts, money market accounts, savings accounts,
certificates of deposit, retirement savings plans and pension investment
accounts. Deposit account terms vary according to the minimum balance required,
the time period funds must remain on deposit and the interest rate, among other
factors. The Bank attempts to control its cost of funds by emphasizing checking,
savings and money market accounts. At December 31, 1996, such accounts totaled
$229.4 million, or 41.43%, of the Bank's total deposits.
While the deregulation of interest rates has allowed the Bank to be more
competitive in obtaining funds and given it more flexibility to meet the threat
of deposit outflows, it has also resulted in a higher and more volatile cost of
funds. During 1993 and early 1994, upon maturity of their certificates of
deposit, many customers chose to reinvest the proceeds into savings and money
market accounts possessing shorter terms and enhanced liquidity. As market
interest rates, however, climbed to a two-year high, some customers chose to
withdraw these short-term, liquid funds held in the Bank to seek higher returns
in non-bank financial products. Non-bank competition similarly affected the
level of certificates of deposit maintained in the Bank and, generally
consistent with an industry-wide trend, the Bank experienced declines in
certificates of deposit. Total deposits grew 4.9 percent from $527.8 million at
December 31, 1995, to $553.6 million at December 31, 1996. The $25.8 million
increase resulted from transaction account, savings account, and certificate of
deposit growth of $6.2 million, $13.8 million, and $5.8 million, respectively.
During 1995, the Bank introduced Really Free Checking and five other highly
competitive checking account programs. To support these checking account
programs, the Bank 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
Bank'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 Bank promoted the competitive rates
offered on seven and eleven-month certificates, also attracting new customers.
In addition, in late 1996, the Bank introduced and heavily promoted a high yield
money market savings product. Although the majority of the growth in
certificates of deposit and the money market savings products was obtained from
external sources, many accounts were also opened by existing customers with
transfers of funds from their checking, savings and money market checking
accounts.
Bank management meets weekly to evaluate the internal cost of funds,
review a survey of rates offered by major competitors in the market, review the
Bank's cash flow requirements for lending and liquidity and execute rate changes
when deemed appropriate. At the present time, the Bank's primary strategy for
attracting and retaining deposits is to emphasize competitive rates which are
generally comparable to those offered by other market leaders. This pricing
strategy is complemented by the introduction of new deposit products designed to
differentiate the Bank from its competition, such as the offering of "Really
Free Checking." The Bank does not actively solicit brokered deposits, but does
accept brokered deposits at rates appropriate for institutional investors, which
are less than the amount paid for retail deposits. At December 31, 1996, the
Bank had a total of $100,000 in brokered deposits, or .02% of total deposits.
25
<PAGE>
The following table sets forth the change in dollar amount of deposits in
the various types of accounts offered by the Bank between the dates indicated.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------------------
1996 1995 1994
-------------------------- ---------------------------- --------------------------
Percent of Increase Percent of Increase Percent of Increase
Amount Portfolio (Decrease) Amount Portfolio (Decrease) Amount Portfolio (Decrease)
------ --------- ---------- ------ --------- ---------- ------ --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Regular savings....... $65,214 11.78% $(2,376) $67,590 12.80% $(4,104) $71,694 14.29% $(6,440)
Money market savings... 16,136 2.91 16,136 -- -- -- -- -- --
Consumer checking...... 86,723 15.67 7,092 79,631 15.09 11,269 68,362 13.63 4,570
Commercial checking.... 9,324 1.68 1,666 7,658 1.45 (1,553) 9,211 1.83 (476)
Money market checking.. 51,963 9.39 (2,561) 54,524 10.33 (9,884) 64,408 12.84 (4,197)
------ -------- ------ ------ ------ ------ ------ ------ ------
229,360 41.43 19,957 209,403 39.67 (4,272) 213,675 42.59 (6,543)
Certificates of
deposit:
0.00 - 4.99%......... 37,823 6.83 13,333 24,490 4.64 (100,297) 124,787 24.87 (46,900)
5.00 - 5.99%.........157,753 28.50 9,970 147,783 28.00 72,103 75,680 15.08 28,063
6.00 - 6.99%.........126,097 22.78 (2,469) 128,566 24.36 86,363 42,203 8.41 17,260
7.00 - 7.99%......... 1,153 .21 (14,849) 16,002 3.03 (7,704) 23,706 4.73 (4,872)
8.00 - 8.99%......... 826 .15 (197) 1,023 .19 (11,599) 12,622 2.52 (8,466)
9.00 - 9.99%......... 562 .10 13 549 .11 (5,781) 6,330 1.26 (5,692)
10.00 - 10.99%........ -- -- -- -- -- (2,687) 2,687 .54 2,622
------ -------- ------ ------ ------- ------ ------ ------ ------
324,214 58.57 5,801 318,413 60.33 30,398 288,015 57.41 (17,985)
------- -------- ------ ------- ------- ------ ------- ------ --------
Totals............... $553,574 100.00% $25,758 $527,816 100.00% $26,126 $501,690 100.00% $(24,528)
======= ====== ======= ======= ====== ====== ======= ====== ========
</TABLE>
26
<PAGE>
The following table sets forth certain information regarding the Bank's
deposit flows for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1996 1995 1994
---- ---- ----
(Dollars in Thousand )
<S> <C> <C> <C>
Beginning balance.......................... $ 527,816 $ 501,690 $ 526,218
Deposits, net of interest credited......... 1,889,523 1,392,217 1,331,298
Withdrawals................................ (1,879,791) (1,381,961) (1,369,664)
Interest credited.......................... 16,026 15,870 13,838
-------- -------- --------
Ending balance............................. $ 553,574 $ 527,816 $ 501,690
======== ======== ========
Net increase (decrease).................... $ 25,758 $ 26,126 $ (24,528)
======== ======== ========
Percentage increase (decrease)............. 4.88% 5.21% (4.66)%
======== ======= ========
</TABLE>
The following table sets forth the average balances (based on daily
balances) and interest rates for demand deposits and time deposits for the
periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------------
1996 1995 1994
---------------------------- -------------------------- --------------------------
Savings, Savings, Savings,
Checking and Certificates Checking and Certificates Checking and Certificates
Money Market of Money Market of Money Market of
Accounts Deposit Accounts Deposit Accounts Deposit
-------- ------- -------- ------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Average balance.... $217,316 $319,491 $207,635 $310,253 $220,125 $291,989
Average rate paid.. 2.50% 5.76% 2.79% 5.80% 2.68% 5.09%
</TABLE>
The following table indicates the amount, at December 31, 1996, of the Bank's
certificates of deposit of $100,000 or more by the time period remaining until
maturity.
<TABLE>
<CAPTION>
Certificates
Maturity Period of Deposit
--------------- ----------
(In Thousands)
<S> <C>
Three months or less.............. $ 6,900
Over three months through six months 7,200
Over six months through twelve months 8,500
Over twelve months................ 10,200
--------
$ 32,800
</TABLE>
27
<PAGE>
The following table presents, by various interest rate categories, the
amounts of certificate of deposit accounts at December 31, 1996, maturing during
the periods reflected below:
<TABLE>
<CAPTION>
0.00- 5.00- 6.00- 7.00- 9.00- Percent
4.99% 5.99% 6.99% 8.99% 10.99% Total of Total
------- ------- ------- ------- ------ ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts
maturing in the period
ending:
June 30, 1997........... $29,589 $74,996 $25,379 $ 426 $ 5 $130,395 40.22%
December 31, 1997....... 1,613 31,835 54,938 216 25 88,627 27.33
June 30, 1998........... 3,009 13,915 12,017 440 87 29,468 9.09
December 31, 1998....... 767 11,297 10,033 162 74 22,333 6.89
December 31, 1999....... 1,564 15,484 12,788 209 369 30,414 9.38
December 31, 2000....... 105 3,734 9,685 501 -- 14,025 4.33
Thereafter.............. 1,176 6,492 1,257 25 2 8,952 2.76
------ ------ ------ ----- ----- ------- -----
$37,823 $157,753 $126,097 $1,979 $ 562 $324,214 100.00%
======= ======== ======== ====== ===== ======== ======
</TABLE>
At December 31, 1996, accounts having balances of $100,000 or more totaled
$60.8 million representing 10.98% of total deposits.
INDIVIDUAL RETIREMENT ACCOUNTS AND KEOGH/CORPORATE QUALIFIED PLAN FUNDS.
The Bank seeks to attract Individual Retirement Accounts ("IRAs"). In addition
to the establishment of an IRA department, the Bank has a Retirement Accounts
Product Manager with previous experience in insurance, pension plan design and
personal sales. The Bank has maintained its commitment to retirement accounts by
developing a professional IRA staff and an extensive record-keeping system to
supply necessary customer information as required under current IRA provisions.
As of December 31, 1996, the Bank administered 4,173 IRAs and 5 Tax Qualified
Retirement Plans totaling $50.8 million, or 9.17%, of all deposits.
BORROWINGS. Deposits are the primary source of funds for the Bank's
lending and investment activities and for its general business purposes. The
Bank does, however, rely upon advances from the FHLB of Indianapolis to
supplement its supply of lendable funds and to meet deposit withdrawal
requirements. Advances from the FHLB are typically secured by the Bank's stock
in the FHLB and substantially all of the Bank's residential mortgage loans.
Since mid-1993, borrowings from the FHLB have been an integral component of the
Bank'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 $160.6 million at December 31, 1995,
to $202.6 million at year-end 1996. Of the outstanding FHLB advances at December
31, 1996, $150.9 million carried a weighted average fixed-rate of 6.08%.
Adjustable-rate advances at December 31, 1996, totaled $51.7 million, all of
which reprice based upon three-month LIBOR.
FHLB advances were obtained, as needed in 1995, to meet the Bank's
operating needs which included the funding of three-year adjustable-rate
mortgage loan originations and the purchase of medium-term fixed- and
adjustable-rate residential mortgage loans. 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 Bank focused
its efforts on increasing its deposit base by attracting new customers through
various promotional activities. Beginning in February 1995 and after a decrease
in short-term rates by the Federal Reserve Bank, customers started to perceive
the Bank's offered rates on certificate of deposits as attractive. As a result
of changing customer preferences and a competitive campaign to attract new
customers, certificates of deposit increased $30.4 million during 1995. As
incremental deposits were gathered during the year and funds were available, the
Bank repaid its short-term overnight adjustable-rate FHLB advances. Repayment of
short-term adjustable-rate FHLB advances has had the effect of minimizing the
volatility of the Bank's overall cost of funds. As additional funds were needed
throughout the latter part of 1995, fixed-rate medium-term FHLB advances were
obtained.
28
<PAGE>
FHLB advances were obtained, as needed in 1996, to meet the Bank's
operating needs which included the funding of three-year adjustable-rate
mortgage loan originations. Recognizing there is additional interest rate
associated with funding medium-term assets with shorter-term liabilities in a
rising or volatile interest rate environment, the Bank emphasized increasing its
deposit base by attracting new customers through various promotional activities.
The FHLB of Indianapolis functions as a central reserve bank providing
credit for savings institutions and certain other member financial institutions.
As a member, Community First is required to own capital stock in the FHLB and is
authorized to apply for advances on the security of such stock and certain of
its home mortgages and other assets (principally, securities which are
obligations of, or guaranteed by, the United States), provided certain standards
related to creditworthiness have been met.
The following tables set forth certain information regarding borrowings at
the dates and during the periods indicated.
<TABLE>
<CAPTION>
At December 31,
------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Weighted average rate paid on:
FHLB advances............................ 5.97% 6.02% 6.19%
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Maximum amount of borrowings
outstanding at any month end:
FHLB advances........................... $203,330 $165,787 $161,143
Approximate average borrowing
outstanding with respect to:
FHLB advances............................$176,943 $150,998 $115,106
Approximate weighted average rate paid on:
FHLB advances............................ 6.02% 6.21% 5.41%
</TABLE>
SUBSIDIARY ACTIVITIES
Community First is permitted to invest an amount equal to 5% of its assets
in service entities where such entities are authorized to engage in those
activities incidental to the conduct of the Bank. As of December 31, 1996,
Community First's investment in its subsidiary was $287,000.
In October 1982, the Bank formed a wholly owned subsidiary, Capitol
Consolidated Financial Corporation ("CCFC"), for the purpose of engaging in real
estate development activities. Subsequent to its organization CCFC was involved
in one real estate development project beginning in 1985 and concluding in 1986,
and also was engaged in limited securities investment activities in 1986. CCFC
has engaged in no significant activities since May 1986, although in 1986 it did
purchase approximately $26,000 of stock in an insurance company, of which it
held $17,000 at December 31, 1996. During 1993, the Bank entered into a lease
agreement with a third-provider of investment products. The Bank, in 1995 and
1994, respectively, recognized $15,000 and $150,000 of rental income in
conjunction with this agreement. In addition, CCFC entered into a brokerage
services agreement with the same third-party vendor whereby $15,000 and $53,000
and $29,000 of commissions were received and included in CCFC's income in 1995,
1994 and 1993, respectively. Both the lease and the brokerage services agreement
were terminated
29
<PAGE>
in 1995. CCFC entered into a brokerage services agreement with another
third-party vendor in late 1995. Through the Bank's branch offices, this
third-party provides customers seeking alternative non-FDIC insured investment
services the opportunity to invest in bonds, mutual funds, stocks, annuities,
and other investment products. The offices occupied by the third party are
separate and distinct from the Bank's offices, and Bank customers are alerted to
the fact that the third party is not affiliated with the Bank, and is not
offering deposit or savings accounts insured by the SAIF or the FDIC. In
conjunction with the brokerage service agreement, CCFC received $16,000 in
commissions in 1996. The Bank also received $27,000 in rental income in 1996
from the third-party. In early 1997, the brokerage services agreement with the
third-party vendor was terminated.
In late 1995, CCFC purchased the Allegan Insurance Agency. No activity was
conducted through this agency during 1995 or 1996. In early 1997, a licensed
agent was hired to operate the Allegan Insurance Agency. During 1997, the
Allegan Insurance Agency will conduct business as Community First Insurance and
Investment Services and will offer customers and non-customers the opportunity
to invest in non-FDIC-insurance products such as bonds, mutual funds, stocks,
annuities, and life insurance.
SAIF-insured savings associations are required to give the FDIC 30 days'
prior notice before establishing or acquiring a new subsidiary, or commencing
any new activity through an existing subsidiary. The FDIC has the authority to
order termination of subsidiary activities determined to pose a risk to the
safety or soundness of the association. In addition, savings associations are
required to phase-out the amount of their investments in and extensions of
credit to subsidiaries engaged in activities not permissible to national banks
from capital in determining regulatory capital compliance. CCFC's investment
activities are not permissible to national banks, but the Bank does not
anticipate that any resulting deduction from capital will materially affect its
capital for regulatory compliance purposes. See "Item 1. Business -- Regulation
of the Bank -- Regulatory Capital Requirements."
KEY OPERATING RATIOS
Set forth below are certain key operating ratios for the Corporation at
the dates and for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Interest rate spread....................... 2.63% 2.52% 2.69%
Net yield on earning assets................ 2.98 2.85 2.98
Return on average equity (net income
as a percentage of average
stockholders' equity).................... 8.55 11.47 10.18
Return on average assets (net income
as a percentage of average assets)...... 0.69 0.92 0.80
Dividend payout ratio...................... 41.28 28.38 30.14
</TABLE>
<TABLE>
<CAPTION>
At December 31,
------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Equity to assets ratio (average
stockholders' equity as a percentage
of average total assets)................. 8.06% 8.00% 7.87%
</TABLE>
Additional performance ratios are set forth in the "Five Year Summary of
Selected Consolidated Financial Data," incorporated herein by reference to Part
II, Item 6 of this Form 10-K. Any significant changes in the current
30
<PAGE>
trend of the above ratios are reviewed in "Management's Discussion and Analysis
of Financial Condition and Results of Operations," incorporated herein by
reference to Part II, Item 7 of this Form 10-K.
COMPETITION
Community First encounters strong competition both in the attraction of
deposits and in the origination of real estate and other loans. Its most direct
competition for deposits has historically come from commercial banks, other
savings institutions and credit unions in its market area. As of December 31,
1996, Community First had the largest market share of deposits for financial
institutions with corporate headquarters in the greater Lansing area, and the
third largest market share of financial institutions with branches or
subsidiaries in that market.
Legislation passed by the U.S. Congress since 1980 and an increasingly
sophisticated investing public have dramatically increased competition for
deposits between thrift institutions and other types of investments (such as
money market mutual funds, Treasury securities and municipal bonds) and
increased competition with commercial banks in regard to loans, checking
accounts and other types of financial services. In addition, large conglomerates
and securities firms have entered the market for financial services.
Community First competes for loans primarily through the interest rates
and loan fees it charges and the efficiency and quality of services it provides
borrowers, real estate brokers and builders. Factors which affect competition
include general and local economic conditions, current interest rate levels and
volatility in the mortgage markets.
REGULATION OF THE BANK
GENERAL. As a Michigan chartered state savings bank with deposits insured
by the SAIF, Community First is subject to extensive regulation by the Financial
Institutions Bureau and the FDIC. The lending activities and other investments
of the Bank must comply with various federal and state regulatory requirements.
The Financial Institutions Bureau periodically examines the Bank for compliance
with various regulatory requirements. The FDIC also has the authority to conduct
special examinations of SAIF members. The Bank must file reports with the
Financial Institutions Bureau and the FDIC describing its activities and
financial condition. Community First is also subject to certain reserve
requirements promulgated by the Board of Governors of the Federal Reserve System
(the "Federal Reserve Board"). This supervision and regulation is intended
primarily for the protection of depositors. As a savings and loan holding
company, the Corporation is subject to the OTS' regulation, examination,
supervision and reporting requirements. Certain of these regulatory requirements
are referred to below or appear elsewhere herein.
CAPITAL REQUIREMENTS. Under FDIC regulations, state-chartered banks that
are not members of the Federal Reserve System ("state nonmember banks") are
required to maintain a minimum leverage capital requirement consisting of a
ratio of Tier 1 capital to total assets of 3% if the FDIC determines that the
institution is not anticipating or experiencing significant growth and has
well-diversified risk, including no undue interest rate risk exposure, excellent
asset quality, high liquidity, good earnings and in general a strong banking
organization, rated composite 1 under the Uniform Financial Institutions Rating
System (the CAMEL rating system) established by the Federal Financial
Institutions Examination Council. For all but the most highly rated institutions
meeting the conditions set forth above, the minimum leverage capital ratio is 3%
plus an additional "cushion" amount of at least 100 to 200 basis points. Tier 1
capital is the sum of common stockholders' equity, noncumulative perpetual
preferred stock (including any related surplus) and minority interests in
consolidated subsidiaries, minus all intangible assets (other than certain
purchased mortgage servicing rights and purchased credit card relationships),
minus identified losses and minus investments in securities subsidiaries.
In addition to the leverage ratio, state nonmember banks must maintain a
minimum ratio of qualifying total capital to risk-weighted assets of at least
8.0% of which at least four percentage points must be Tier 1 capital. Qualifying
total capital consists of Tier 1 capital plus Tier 2 or supplementary capital
items, which include allowances for loan losses in an amount of up to 1.25% of
risk-weighted assets, perpetual preferred stock that does not qualify as Tier 1
capital and long-term preferred stock with an original maturity of at least 20
years and certain
31
<PAGE>
other capital instruments. The includable amount of Tier 2 capital cannot exceed
the institution's Tier 1 capital. Qualifying total capital is further reduced by
the amount of the bank's investments in banking and finance subsidiaries that
are not consolidated for regulatory capital purposes, reciprocal cross-holdings
of capital securities issued by other banks and certain other deductions. Under
the FDIC risk-weighting system, all of a bank's balance sheet assets and the
credit equivalent amounts of certain off-balance sheet items are assigned to one
of four broad risk weight categories. The aggregate dollar amount of each
category is multiplied by the risk weight assigned to that category. The sum of
these weighted values equals the bank's risk-weighted assets.
At December 31, 1996, the Bank's ratio of Tier 1 capital to total assets
was 7.18%, its ratio of Tier 1 capital to risk-weighted assets was 12.27% and
its ratio of total capital to risk-weighted assets was 13.21%.
DIVIDEND LIMITATIONS. The Bank may not pay dividends on its capital stock
if its regulatory capital would thereby be reduced below the amount then
required for the liquidation account established for the benefit of certain
depositors of the Bank at the time of its conversion to stock form.
Earnings of the Bank appropriated to bad debt reserves and deducted for
Federal income tax purposes are not available for payment of cash dividends or
other distributions to stockholders without payment of taxes at the then current
tax rate by the Bank on the amount of earnings removed from the reserves for
such distributions. See "Federal and State Taxation." The Bank intends to make
full use of this favorable tax treatment and does not contemplate use of any
earnings in a manner which would create federal tax liabilities.
Under FDIC regulation, the Bank is prohibited from making any capital
distributions if after making the distribution, the Bank would have: (i) a total
risk-based capital ratio of less than 8.0%; (ii) a Tier 1 risk-based capital
ratio of less than 4.0%; or (iii) a leverage ratio of less than 4.0%.
SAFETY AND SOUNDNESS STANDARDS. Under FDICIA, as amended by the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "CDRI Act"),
each Federal banking agency is required to establish safety and soundness
standards for institutions under its authority. On July 10, 1995, the federal
banking agencies, including the FDIC and the Federal Reserve Board, released
Interagency Guidelines Establishing Standards for Safety and Soundness and
published a final rule establishing deadlines for submission and review of
safety and soundness compliance plans. The final rule and the guidelines went
into effect on August 9, 1995. The guidelines require depository institutions to
maintain internal controls and information systems and internal audit systems
that are appropriate for the size, nature and scope of the institution's
business. The guidelines also establish certain basic standards for loan
documentation, credit underwriting, interest rate risk exposure, and asset
growth. The guidelines further provide that depository institutions should
maintain safeguards to prevent the payment of compensation, fees and benefits
that are excessive or that could lead to material financial loss, and should
take into account factors such as comparable compensation practices at
comparable institutions. If the appropriate federal banking agency determines
that a depository institution is not in compliance with the safety and soundness
guidelines, it may require the institution to submit an acceptable plan to
achieve compliance with the guidelines. A depository institution must submit an
acceptable compliance plan to its primary federal regulator within 30 days of
receipt of a request for such a plan. Failure to submit or implement a
compliance plan may subject the institution to regulatory sanctions. Management
believes that the Bank already meets substantially all the standards adopted in
the interagency guidelines, and therefore does not believe that implementation
of these regulatory standards will materially affect the operations of the Bank.
Additionally under FDICIA, as amended by the CDRI Act, the federal banking
agencies are required to establish standards relating to the asset quality and
earnings that the agencies determine to be appropriate. On July 10, 1995, the
federal banking agencies, including the FDIC and the Federal Reserve Board,
issued proposed guidelines relating to asset quality and earnings. Under the
proposed guidelines, an FDIC insured depository institution should maintain
systems, commensurate with its size and the nature and scope of its operations,
to identify problem assets and prevent deterioration in those assets as well as
to evaluate and monitor earnings and ensure earnings are sufficient to maintain
adequate capital and reserves. Management believes the asset quality and
earnings
32
<PAGE>
standards, in the form proposed by the banking agencies, would not have a
material effect on the operations of the Bank.
FEDERAL HOME LOAN BANK SYSTEM. Community First is a member of the FHLB
System. The FHLB System consists of 12 regional FHLBs subject to supervision and
regulation by the Federal Housing Finance Board ("FHFB"), as successor in this
respect to the Federal Home Loan Bank Board. The Federal Home Loan Banks provide
a central credit facility primarily for member institutions. As a member of the
FHLB of Indianapolis, the Bank is required to acquire and hold shares of capital
stock in its FHLB in an amount at least equal to the greater of 1% of the
aggregate unpaid principal of its residential mortgage loans, home purchase
contracts and similar obligations at the beginning of each year, or 5% of
outstanding advances (borrowings) from the FHLBs. The Bank was in compliance
with this requirement at December 31, 1996, with investments in FHLB stock of
$10.6 million.
The FHLBs serve as reserve or central banks for their member institutions
within their assigned regions. They are funded primarily from proceeds derived
from the sale of consolidated obligations of the FHLB System. They make advances
to members in accordance with policies and procedures established by the FHFB
and their Boards of Directors. Long-term advances may be made only for the
purpose of providing funds for residential housing finance. As of December 31,
1996, the Bank had $202.6 million in advances from its FHLB.
LIQUIDITY REQUIREMENTS. Although not required by regulation, Community
First maintains average daily balances of liquid assets (cash, certain time
deposits, bankers' acceptances, highly rated corporate debt and commercial
paper, securities of certain mutual funds, and specified United States
government, state or federal agency obligations) equal to a monthly average of
not less than a specified percentage (currently 5%) of its net withdrawable
savings deposits plus short-term borrowings. The Bank also maintains average
daily balances of short-term liquid assets at a specified percentage (currently
1%) of the total of its net withdrawable savings accounts and borrowings payable
in one year or less. The average daily liquidity and short-term liquidity ratios
of the Bank at December 31, 1996, were 8.60% and 4.01%, respectively. A
substantial sustained decline in savings deposits could adversely affect the
Bank's liquidity which could result in restricted operations and additional
borrowings from the FHLB.
DEPOSIT INSURANCE. The Bank is required to pay assessments to the FDIC
based on a percent of its insured deposits for insurance of its deposits by the
SAIF. Under the Federal Deposit Insurance Act, the FDIC is required to set
semi-annual assessments for SAIF-insured institutions to maintain the designated
reserve ratio of the SAIF at 1.25% of estimated deposits or at a higher
percentage of estimated insured deposits that the FDIC determines to be
justified for that year by circumstances raising a significant risk of
substantial future losses to the SAIF.
Under the risk-based deposit insurance system adopted by the FDIC, the
assessment rate for an insured depository institution depends on the assessment
risk classification assigned to the institution by the FDIC which is determined
by the institution's capital level and supervisory evaluations. Based on the
data reported to regulators for the date closest to the last day of the seventh
month preceding the semi-annual assessment period, institutions are assigned to
one of three capital groups -- well capitalized, adequately capitalized or
undercapitalized -- using the same percentage criteria used under the prompt
corrective action regulations. Within each capital group, institutions are
assigned to one of three subgroups on the basis of supervisory evaluations by
the institution's primary supervisory authority and such other information as
the FDIC determines to be relevant to the institution's financial condition and
the risk posed to the deposit insurance fund.
For the past several semi-annual periods, institutions with
SAIF-assessable deposits, like the Bank, have been required to pay higher
deposit insurance premiums than institutions with deposits insured by the BIF.
In order to recapitalize the SAIF and address the premium disparity, the
recently-enacted Deposit Insurance Funds Act of 1996 authorized the FDIC to
impose a one-time special assessment on institutions with SAIF-assessable
deposits based on the amount determined by the FDIC to be necessary to increase
the reserve levels of the SAIF to the designated reserve ratio of 1.25% of
insured deposits. Institutions were assessed at the rate of 65.7 basis points
based on the amount of their SAIF-assessable deposits as of March 31, 1995. As a
result of the special assessment the Bank incurred an after-tax expense of
$2,214,000 during the quarter ended September 30, 1996.
33
<PAGE>
The FDIC has proposed a new assessment schedule for SAIF deposit insurance
pursuant to which the assessment rate for well-capitalized institutions with the
highest supervisory ratings would be reduced to zero and institutions in the
lowest risk assessment classification will be assessed at the rate of 0.27% of
insured deposits. Until December 31, 1999, however, SAIF-insured institutions,
will be required to pay assessments to the FDIC at the rate of 6.5 basis points
to help fund interest payments on certain bonds issued by the Financing
Corporation ("FICO") an agency of the federal government established to finance
takeovers of insolvent thrifts. During this period, BIF members will be assessed
for these obligations at the rate of 1.3 basis points. After December 31, 1999,
both BIF and SAIF members will be assessed at the same rate for FICO payments.
RESTRICTIONS ON CERTAIN ACTIVITIES. Under FDICIA, state-chartered banks
with deposits insured by the FDIC are generally prohibited from acquiring or
retaining any equity investment of a type or in an amount that is not
permissible for a national bank. The foregoing limitation, however, does not
prohibit FDIC-insured state banks from acquiring or retaining an equity
investment in a subsidiary in which the bank is a majority owner. State-
chartered banks are also prohibited from engaging as principal in any type of
activity that is not permissible for a national bank and subsidiaries of
state-chartered, FDIC-insured state banks may not engage as principal in any
type of activity that is not permissible for a subsidiary of a national bank
unless in either case the FDIC determines that the activity would pose no
significant risk to the appropriate deposit insurance fund and the bank is, and
continues to be, in compliance with applicable capital standards.
The FDIC has adopted regulations to clarify the foregoing restrictions on
activities of FDIC-insured state-chartered banks and their subsidiaries. Under
the regulations, the term activity refers to the authorized conduct of business
by an insured state bank and includes acquiring or retaining any investment
other than an equity investment. A bank or subsidiary is considered acting as
principal when conducted other than as an agent for a customer, as trustee, or
in a brokerage, custodial, advisory or administrative capacity. An activity
permissible for a national bank includes any activity expressly authorized for
national banks by statute or recognized as permissible in regulations, official
circulars or bulletins or in any order or written interpretation issued by the
Office of the Comptroller of the Currency ("OCC"). In its regulations, the FDIC
indicates that it will not permit state banks to directly engage in commercial
ventures or directly or indirectly engage in any insurance underwriting activity
other than to the extent such activities are permissible for a national bank or
a national bank subsidiary or except for certain other limited forms of
insurance underwriting permitted under the regulations. Under the regulations,
the FDIC permits state banks that meet applicable minimum capital requirements
to engage as principal in certain activities that are not permissible to
national banks including guaranteeing obligations of others, activities which
the Federal Reserve Board has found by regulation or order to be closely related
to banking and certain securities activities conducted through subsidiaries.
PROMPT CORRECTIVE REGULATORY ACTION. FDICIA requires the federal banking
regulators to take prompt corrective action in the event an FDIC-insured
institution fails to meet certain minimum capital requirements. Under FDICIA, as
implemented by regulations adopted by the FDIC, an institution is assigned to
one of the following five capital categories:
o well-capitalized -- total risk-based capital ratio of 10% or
greater, Tier 1 risk-based capital ratio of 6% or greater, leverage
ratio of 5% or greater, and no written FDIC directive or order
requiring the maintenance of specific levels of capital;
o adequately capitalized -- total risk-based capital ratio of 8% or
greater, Tier 1 risk-based capital ratio of 4% or greater, and
leverage ratio of 4% or greater (or 3% or greater if the
institution's composite rating under the FDIC's supervisory rating
system is 1);
o undercapitalized -- total risk-based capital ratio of less than 8%,
or Tier 1 risk-based capital ratio of less than 4%, or leverage
ratio of less than 4% (or less than 3% if the institution's
composite rating under the FDIC's supervisory rating system is 1);
o significantly undercapitalized -- total risk-based capital ratio of
less than 6%, or Tier 1 risk-based capital ratio of less than 3% or
leverage ratio of less than 3%; and
34
<PAGE>
o critically undercapitalized -- ratio of tangible equity to total
assets of 2% or less.
Under FDICIA, an "undercapitalized institution" generally is: (i) subject
to increased monitoring by the appropriate federal banking regulator; (ii)
required to submit an acceptable capital restoration plan within 45 days; (iii)
subject to asset growth limits; and (iv) required to obtain prior regulatory
approval for acquisitions, branching and new lines of businesses. A
significantly undercapitalized institution, as well as any undercapitalized
institution that does not submit an acceptable capital restoration plan, may be
subject to regulatory demands for recapitalization, broader application of
restrictions on transactions with affiliates, limitations on interest rates paid
on deposits, restrictions on asset growth and other activities, possible
replacement of directors and officers, and restrictions on capital distributions
by any bank holding company controlling the institution. Any company controlling
the institution may also be required to divest the institution. The senior
executive officers of such an institution may not receive bonuses or increases
in compensation without prior approval and the institution is prohibited from
making payments of principal or interest on its subordinated debt, with certain
exceptions. If an institution's ratio of tangible capital to total assets falls
below a level established by the appropriate federal banking regulator, which
may not be less than 2% of total assets nor more than 65% of the minimum
tangible capital level otherwise required (the "critical capital level"), the
institution is subject to conservatorship or receivership within 90 days unless
periodic determinations are made that forbearance from such action would better
protect the deposit insurance fund. Unless appropriate findings and
certifications are made by the appropriate federal bank regulatory agencies, a
critically undercapitalized institution must be placed in receivership if it
remains critically undercapitalized on average during the calendar quarter
beginning 270 days after the date it became critically undercapitalized. At
December 31, 1996, the Bank was classified as "well capitalized" under the
FDIC's regulations.
UNIFORM LENDING STANDARDS. As required by FDICIA, the federal banking
agencies adopted regulations effective March 19, 1993 that require banks to
adopt and maintain written policies establishing appropriate limits and
standards for extensions of credit that are secured by liens or interests in
real estate or are made for the purpose of financing permanent improvements to
real estate. These policies must establish loan portfolio diversification
standards, prudent underwriting standards, including loan-to-value limits, that
are clear and measurable, loan administration procedures and documentation,
approval and reporting requirements. A bank's real estate lending policy must
reflect consideration of the Interagency Guidelines for Real Estate Lending
Policies (the "Interagency Guidelines") that have been adopted by the banking
agencies. The Interagency Guidelines, among other things, call upon depository
institutions to establish internal loan-to-value limits for real estate loans
that are not in excess of the loan-to-value limits specified in the Guidelines
for the various types of real estate loans. The Interagency Guidelines state,
however, that it may be appropriate in individual cases to originate or purchase
loans with loan-to-value ratios in excess of the supervisory loan-to-value
limits. The Bank does not believe that the Interagency Guidelines materially
affect its lending activities.
LIMITS ON LOANS TO ONE BORROWER. The Home Owners' Loan Act ("HOLA")
provides that the loans-to- one-borrower limits applicable to national banks
apply to savings associations in the same manner and to the same extent. Under
these rules, with certain limited exceptions, loans and extensions of credit to
a person outstanding at one time generally shall not exceed 15% of the
unimpaired capital and surplus of the savings association. Loans and extensions
of credit fully secured by readily marketable collateral may comprise an
additional 10% of unimpaired capital and surplus. HOLA additionally authorizes
savings associations to make loans to one borrower, for any purpose, in an
amount not to exceed $500,000 or, in an amount not to exceed the lesser of
$30,000,000 or 30% of unimpaired capital and surplus, to develop residential
housing, provided: (i) the purchase price of each single-family dwelling in the
development does not exceed $500,000; (ii) the savings association is in
compliance with its fully phased-in capital requirements; (iii) the loans comply
with applicable loan-to-value requirements, and; (iv) the aggregate amount of
loans made under this authority does not exceed 150% of unimpaired capital and
surplus.
FEDERAL RESERVE SYSTEM. Pursuant to regulations of the Federal Reserve
Board, all FDIC-insured depository institutions must maintain average daily
reserves against their transaction accounts. No reserves are required to be
maintained on the first $4.4 million of transaction accounts, reserves equal to
3% must be maintained on transaction accounts between $4.4 million and $49.3
million of transaction accounts, and a reserve of 10% must be maintained against
transaction accounts above $49.3 million. These reserve requirements are subject
to adjustment
35
<PAGE>
by the Federal Reserve Board. Because required reserves must be maintained in
the form of vault cash or in a noninterest bearing account at a Federal Reserve
Bank, the effect of the reserve requirement is to reduce the amount of the
institution's interest-earning assets. At December 31, 1996, Community First met
its reserve requirements.
MICHIGAN STATE LAW. As a state-chartered savings bank, the Bank is subject
to the applicable provisions of Michigan law and the regulations of the
Financial Institutions Bureau adopted thereunder. The Bank derives its lending
and investment powers from these laws, and is subject to periodic examination
and reporting requirements by and of the Financial Institutions Bureau. In
addition, it is required to make periodic reports to the Financial Institutions
Bureau.
REGULATION OF THE CORPORATION
GENERAL. The Corporation is registered as a savings and loan holding
company with the OTS and subject to OTS regulations, examinations, supervision
and reporting requirements. As a subsidiary of a savings and loan holding
company, the Bank is subject to certain restrictions in its dealings with the
Corporation and affiliates thereof.
ACTIVITIES RESTRICTIONS. The Board of Directors of the Corporation
presently operates the Corporation as a unitary savings and loan holding
company. There are generally no restrictions on the activities of a unitary
savings and loan holding company. However, if the Director of the OTS determines
that there is reasonable cause to believe that the continuation by a savings and
loan holding company of an activity constitutes a serious risk to the financial
safety, soundness, or stability of its subsidiary savings association, the
Director of the OTS may impose such restrictions as deemed necessary to address
such risk and limiting (i) payment of dividends by the savings association, (ii)
transactions between the savings association and its affiliates, and (iii) any
activities of the savings association that might create a serious risk that the
liabilities of the holding company and its affiliates may be imposed on the
savings association. Notwithstanding the above rules as to permissible business
activities of unitary savings and loan holding companies, if the savings
association subsidiary of such a holding company fails to meet the QTL Test,
then such unitary holding company shall also presently become subject to the
activities restrictions applicable to multiple holding companies and unless the
savings association requalifies as a Qualified Thrift Lender within one year
thereafter, register as, and become subject to, the restrictions applicable to a
bank holding company.
If the Corporation were to acquire control of another savings association,
other than through merger or other business combination with the Bank, the
Corporation would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings association meets the QTL
Test, the activities of the Corporation and any of its subsidiaries (other than
the Bank or other subsidiary savings institutions) would thereafter be subject
to further restrictions. The Home Owners' Loan Act, as amended by FIRREA,
provides that, among other things, no multiple savings and loan holding company
or subsidiary thereof which is not a savings association shall commence or
continue for a limited period of time after becoming a multiple savings and loan
holding company or subsidiary thereof, any business activity, upon prior notice
to, and no objection by the OTS, other than (i) furnishing or performing
management services for a subsidiary savings association, (ii) conducting an
insurance agency or escrow business, (iii) holding, managing, or liquidating
assets owned by or acquired from a subsidiary savings institution, (iv) holding
or managing properties used or occupied by a subsidiary savings institution, (v)
acting as trustee under deeds of trust, (vi) those activities previously
directly authorized by the FSLIC by regulation as of March 5, 1987 to be engaged
in by multiple holding companies or (vii) those activities authorized by the
Federal Reserve Board as permissible for bank holding companies, unless the
Director of the OTS by regulation prohibits or limits such activities for
savings and loan holding companies. Those activities described in (vii) above
must also be approved by the Director of the OTS prior to being engaged in by a
multiple holding company.
Legislation has been recently introduced into the U.S. Congress which
would subject all unitary holding companies to the same restrictions on
activities as are currently applied to multiple holding companies. If such
legislation is enacted in its current form, the ability of the Corporation to
engage in certain activities that are currently permitted to the Corporation may
be restricted. The Corporation, however, does not believe that it will be
required to discontinue any current activity. In addition, such legislation
would preclude companies that are
36
<PAGE>
engaged in activities not permitted to multiple holding companies from acquiring
control of the Corporation. No prediction can be made at this time as to whether
such legislation will be enacted or whether it will be enacted in its current
form.
TRANSACTIONS WITH AFFILIATES. Transactions between savings associations
and any affiliate are governed by Sections 23A and 23B of the Federal Reserve
Act. An affiliate of a savings association is any company or entity which
controls, is controlled by or is under common control with the savings
association. In a holding company context, the parent holding company of a
savings association (such as the Corporation) and any companies which are
controlled by such parent holding company are affiliates of the savings
association. Generally, Sections 23A and 23B (i) limit the extent to which the
savings institution or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such institution's capital
stock and surplus, and contain an aggregate limit on all such transactions with
all affiliates to an amount equal to 20% of such capital stock and surplus and
(ii) require that all such transactions be on terms substantially the same, or
at least as favorable, to the institution or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar other types of
transactions. In addition to the restrictions imposed by Sections 23A and 23B,
no savings association may (i) loan or otherwise extend credit to an affiliate,
except for any affiliate which engages only in activities which are permissible
for bank holding companies, or (ii) purchase or invest in any stocks, bonds,
debentures, notes or similar obligations of any affiliate, except for affiliates
which are subsidiaries of the savings association.
Savings associations are also subject to the restrictions contained in
Section 22(h) of the Federal Reserve Act on loans to executive officers,
directors and principal stockholders. Under Section 22(h), loans to an executive
officer and to a greater than 10% stockholder of a savings association (18% in
the case of institutions located in an area with less than 30,000 in
population), and certain affiliated entities of either, may not exceed, together
with all other outstanding loans to such person and affiliated entities the
association's loan to one borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus and an additional 10% of such
capital and surplus for loans fully secured by certain readily marketable
collateral). Section 22(h) also prohibits loans, above amounts prescribed by the
appropriate federal banking agency, to directors, executive officers and greater
than 10% stockholders of a savings association, and their respective affiliates,
unless such loan is approved in advance by a majority of the board of directors
of the association with any "interested" director not participating in the
voting. The Federal Reserve Board has prescribed the loan amount (which includes
all other outstanding loans to such person), as to which such prior board of
director approval is required, as being the greater of $25,000 or 5% of capital
and surplus (up to $500,000). Further, the Federal Reserve Board pursuant to
Section 22(h) requires that loans to directors, executive officers and principal
stockholders be made on terms substantially the same as offered in comparable
transactions to other persons.
Savings associations are also subject to the requirements and restrictions
of Section 22(g) of the Federal Reserve Act on loans to executive officers and
the restrictions of 12 U.S.C. ss. 1972 on certain tying arrangements and
extensions of credit by correspondent banks. Section 22(g) of the Federal
Reserve Act requires that loans to executive officers of depository institutions
not be made on terms more favorable than those afforded to other borrowers,
requires approval for such extensions of credit by the board of directors of the
institution, and imposes reporting requirements for and additional restrictions
on the type, amount and terms of credits to such officers. Section 1972
prohibits (i) a depository institution from extending credit to or offering any
other services, or fixing or varying the consideration for such extension of
credit or service, on the condition that the customer obtain some additional
service from the institution or certain of its affiliates or not obtain services
of a competitor of the institution, subject to certain exceptions, and (ii)
extensions of credit to executive officers, directors, and greater than 10%
stockholders of a depository institution by any other institution which has a
correspondent banking relationship with the institution, unless such extension
of credit is on substantially the same terms as those prevailing at the time for
comparable transactions with other persons and does not involve more than the
normal risk of repayment or present other unfavorable features.
RESTRICTIONS ON ACQUISITIONS. Savings and loan holding companies are
generally prohibited from acquiring, without prior approval of the Director of
the OTS, (i) control of any other savings association or savings and loan
37
<PAGE>
holding company or substantially all the assets thereof or (ii) more than 5% of
the voting shares of a savings association or holding company thereof which is
not a subsidiary. Except with the prior approval of the Director of the OTS, no
director or officer of a savings and loan holding company or person owning or
controlling by proxy or otherwise more than 25% of such company's stock, may
also acquire control of any savings association, other than a subsidiary savings
association, or of any other savings and loan holding company.
The Director of the OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state if: (i) the multiple savings and loan
holding company involved controls a savings institution which operated a home or
branch office in the state of the association to be acquired as of March 5,
1987; (ii) the acquiror is authorized to acquire control of the savings
association pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act; or (iii) the statutes of the state in which the
association to be acquired is located specifically permit institutions to be
acquired by state-chartered associations or savings and loan holding companies
located in the state where the acquiring entity is located (or by a holding
company that controls such state-chartered savings institutions).
Federal associations may branch in any state or states of the United
States and its territories. Except in supervisory cases or when interstate
branching is otherwise permitted by state law or other statutory provision, a
federal association may only establish an out-of-state branch under such OTS
regulation if (i) the federal association qualifies as a "domestic building and
loan association" under ss.7701(a)(19) of the Internal Revenue Code and the
total assets attributable to all branches of the association in the state would
qualify such branches taken as a whole for treatment as a domestic building and
loan association and (ii) such branch would not result in (a) formation of a
prohibited multi-state multiple savings and loan holding company or (b) a
violation of certain statutory restrictions on branching by savings association
subsidiaries of banking holding companies. Federal associations generally may
not establish new branches unless the association meets or exceeds minimum
regulatory capital requirements. The OTS will also consider the association's
record of compliance with the Community Reinvestment Act of 1977 in connection
with any branch application.
The Bank Holding Company Act of 1956 specifically authorizes the Federal
Reserve Board to approve an application by a bank holding company to acquire
control of any savings association. Pursuant to rules promulgated by the Federal
Reserve Board, owning, controlling or operating a savings association is a
permissible activity for bank holding companies, if the savings association
engages only in deposit-taking activities and lending and other activities that
are permissible for bank holding companies.
A bank holding company that controls a savings association may merge or
consolidate the assets and liabilities of the savings association with, or
transfer assets and liabilities to, any subsidiary bank which is a member of the
BIF with the approval of the appropriate federal banking agency and the Federal
Reserve Board. The resulting bank will be required to continue to pay
assessments to the SAIF at the rates prescribed for SAIF members on the deposits
attributable to the merged savings association plus an annual growth increment.
In addition, the transaction must comply with the restrictions on interstate
acquisitions of commercial banks under the Bank Holding Company Act.
TAXATION
GENERAL. The Corporation and the Bank currently file a consolidated
federal income tax return on a calendar year basis. Consolidated returns have
the effect of eliminating intercompany distributions, including dividends, from
the computation of consolidated taxable income for the taxable year in which the
distributions occur.
FEDERAL INCOME TAXATION. Thrift institutions are subject to the provisions
of the Code in the same general manner as other corporations. Prior to recent
legislation, institutions such as the Bank which met certain definitional tests
and other conditions prescribed by the Code benefitted from certain favorable
provisions regarding their deductions from taxable income for annual additions
to their bad debt reserve. For purposes of the bad debt reserve deduction, loans
were separated into "qualifying real property loans," which generally are loans
secured by interests in certain real property, and nonqualifying loans, which
are all other loans. The bad debt reserve deduction with
38
<PAGE>
respect to nonqualifying loans was based on actual loss experience, however, the
amount of the bad debt reserve deduction with respect to qualifying real
property loans could be based upon actual loss experience (the "experience
method") or a percentage of taxable income determined without regard to such
deduction (the "percentage of taxable income method"). The percentage of taxable
income method was repealed for taxable years beginning after December 31, 1995.
For taxable years beginning on or after January 1, 1996, savings institutions
will be treated the same as commercial banks. Institutions such as the Bank that
are part of a consolidated group with $500 million or more in assets will only
be able to take a tax deduction when a loan is actually charged off.
Institutions in groups with less than $500 million in assets will still be
permitted to make deductible bad debt additions to reserves, but only using the
experience method.
The legislation also requires savings institutions to recapture the excess
of their tax bad debt reserves for the last taxable year beginning before
January 1, 1996, over their tax bad debt reserves for the last taxable year
beginning before January 1, 1988 ("base year"), adjusted downward for any
decline in outstanding loans from the base year. This excess will be taken into
income over six years, generally for taxable years beginning in 1996, but
subject to potential deferral up to two years.
The base year tax bad debt reserves are generally not subject to
recapture, but they are frozen, not forgiven. Earnings that represent amounts
appropriated to an institution's bad debt reserve and claimed as a tax deduction
are not available for the payment of cash dividends or for distribution to
shareholders (including distributions made on dissolution or liquidation),
unless such amount was included in taxable income, along with the amount deemed
necessary to pay the resulting federal income tax.
The Corporation's federal income tax returns were audited through December
1992 by the IRS, without material adjustments.
STATE TAXATION. Under Michigan law, Community First is subject to a
"Single Business Tax," a value-added tax for the privilege of doing business in
the state of Michigan. The major components of the tax base are: compensation,
federal taxable income and depreciation, less the cost of acquisition of
tangible assets during the year. The tax rate is 2.30% of the Michigan adjusted
tax base for 1996. Community First is also subject to an "Intangibles Tax" of
$.10 on each $1,000 of savings deposits for 1996.
The Bank's state tax returns have been audited through December 1991 by
the Michigan Department of Treasury.
For additional information regarding federal taxes, see Notes 1 and 13 of
the Notes to Consolidated Financial Statements in the Annual Report.
PERSONNEL
As of December 31, 1996, the Bank, including its subsidiaries, had 187
full-time employees and 79 part-time employees. The employees are not
represented by a collective bargaining unit. The Bank believes its relationship
with its employees to be good.
39
<PAGE>
EXECUTIVE OFFICERS
The following table sets forth information regarding the Corporation's
and/or the Bank's executive officers.
<TABLE>
<CAPTION>
Name Age(1) Position
<S> <C> <C>
Robert H. Becker 61 President and Chief Executive Officer of the Corporation and the Bank
John W. Abbott 49 Executive Vice President, Chief Operating Officer, and Secretary of the
Corporation and the Bank
Carl C. Farrar 47 Senior Vice President -- Chief Lending Officer of the Bank
Jane M. Judge 35 Vice President -- Director of Human Resources of the Bank
Jack G. Nimphie 47 Senior Vice President -- Director of Operations of the Bank
Sally A. Peters 44 Vice President -- Director of Marketing of the Bank
Holly L. Schreiber 31 Vice President and Treasurer of the Corporation and Vice President
-- Chief Financial Officer and Treasurer of the Bank
C. Wayne Weaver 43 Senior Vice President -- Director of Retail Banking of the Bank
</TABLE>
- ----------------
(1) At December 31, 1996
The principal occupation of each executive officer of the Corporation
and/or the Bank is set forth below.
ROBERT H. BECKER joined Community First in November 1987 as the President
and Chief Executive Officer. Mr. Becker also serves as the Corporation's
President and Chief Executive Officer. Mr. Becker began his banking career in
1957, and from 1976 to 1987, Mr. Becker served as President and Chief Executive
Officer of MetroBanc located in Grand Rapids, Michigan. Mr. Becker is a past
Director of the Federal Home Loan Bank of Indianapolis and a past Chairman of
the Michigan League of Savings Institutions. He is also past chair of the
Lansing Community College Foundation, a Board member of the Rotary Club of
Lansing, and a member of the Finance Committee of the Capital Region Community
Foundation.
JOHN W. ABBOTT joined Community First in February 1989 as the Executive
Vice President and Chief Operating Officer. Mr. Abbott also serves as the
Corporation's Executive Vice President and Chief Operating Officer. In October
1993, Mr. Abbott also began serving as the Corporation's Secretary. From 1985
until January 1989, Mr. Abbott was Vice President -- Finance of Union Bancorp,
Inc., located in Grand Rapids, Michigan, a subsidiary of NBD Bancorp, Inc., and
prior to August 1985 he was a C.P.A. with a national accounting firm.
CARL C. FARRAR joined Community First in March 1994 as Senior Vice
President -- Chief Lending Officer. Mr. Farrar began his career in banking in
1965 and from 1991 until joining Community First in March 1994, he worked as a
Vice President in Corporate Lending at Huntington National Bank in Columbus,
Ohio. From 1988 to 1991, Mr. Farrar served as Senior Vice President -- Chief
Lending Officer at Central Trust Company in Columbus, Ohio.
JANE M. JUDGE joined Community First in May 1995 as Vice President --
Director of Human Resources. Ms. Judge holds a Masters Degree in Labor and
Industrial Relations and prior to May 1995 served as manager of human resources
for a clinical reference laboratory headquartered in Southfield, Michigan.
JACK G. NIMPHIE joined Community First in 1971 as a management trainee and
became Senior Vice President -- Director of Retail Banking in 1986. In February
1989 he became Senior Vice President -- Director of Banking Operations, and in
December 1991 he became Senior Vice President -- Director of Operations and
Retail Banking. In October 1996, Mr. Nimphie became Senior Vice President --
Director of Operations of the Bank.
SALLY A. PETERS joined Community First in February 1994 as Vice President
- -- Director of Marketing. Prior to February 1994, Ms. Peters, for fifteen years,
was responsible for marketing and communications at an insurance company in
Lansing, Michigan.
40
<PAGE>
HOLLY L. SCHREIBER joined Community First in July 1993 as Vice President --
Chief Financial Officer. In October 1996, Ms. Schreiber also began serving as
the Treasurer of both the Bank and the Corporation. Ms. Schreiber is a C.P.A.
and prior to July 1993, she served as an audit manager for KPMG Peat Marwick LLP
in Detroit, Michigan.
C. WAYNE WEAVER joined Community First in 1975 as a management trainee and
became Senior Vice President -- Director of Corporate Planning in 1986. In
December 1989 he became Senior Vice President -- Director of Retail Banking and
Investments, and in December 1991 he became Senior Vice President -- Director of
Finance. In October 1993, Mr. Weaver became Treasurer of the Corporation and
Senior Vice President -- Director of Corporate Planning and Treasurer of the
Bank. In October 1996, Mr. Weaver became Senior Vice President -- Director of
Retail Banking of the Bank.
ITEM 2. PROPERTIES
Community First owns all of its offices, except as noted. The following
table sets forth the location of the Bank's offices, as well as certain
additional information relating to those offices as of December 31, 1996.
<TABLE>
<CAPTION>
Net Book
Year Approximate Value at
Facility Office Area December 31,
Opened (Square Feet) 1996 (1)
------ ------------- --------
<S> <C> <C> <C>
Community First Main Office:
112 East Allegan Street
Lansing, Michigan (4)...............1922 46,368 $4,333,732
Branch Offices:
101 East Lawrence Street
Charlotte, Michigan.................1981 1,700 214,321
6333 West St. Joseph Street
Delta Township, Michigan............1986 1,200 404,665
250 East Saginaw Street
East Lansing, Michigan..............1977 2,100 429,665
401 South Bridge Street
Grand Ledge, Michigan...............1966 1,700 369,989
4440 West Saginaw Street
Lansing, Michigan...................1977 2,100 467,669
6510 South Cedar Street
Lansing, Michigan (2)...............1974 3,000 567,777
606 West Columbia Street
Mason, Michigan.....................1971 1,700 163,958
2119 Hamilton Road
Okemos, Michigan (9)................1961 2,500 234,528
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
Net Book
Year Approximate Value at
Facility Office Area December 31,
Opened (Square Feet) 1996 (1)
------ ------------- --------
<S> <C> <C> <C>
301 North Clinton Avenue
St. Johns, Michigan.................1978 2,700 403,674
225 West Grand River Avenue
Williamston, Michigan...............1978 1,500 95,361
121 West Allegan Street
Lansing, Michigan (3)...............1922 16,800 422,623
5620 Pennsylvania Avenue
Lansing, Michigan...................1970 1,250 126,347
100 North Dexter Street
Ionia, Michigan.....................1975 1,248 121,458
709 S. U.S. 27
St. Johns, Michigan.................1981 1,454 246,572
2285 W. Grand River
Okemos, Michigan (9)................1976 1,200 164,854
2801 E. Grand River
Lansing, Michigan...................1978 1,454 182,229
5610 W. Saginaw Street
Lansing, Michigan (5)...............1991 4,158 464,027
13007 S. U.S. 27
DeWitt, Michigan....................1994 2,420 1,181,131
515 E. Grand River Avenue, Suite E
East Lansing, Michigan (6)..........1996 2,500 110,603
4815 Okemos Road
Okemos, Michigan (7)................ 2,635 45,000
Ledges Commerce Park, Unit 2A
Grand Ledge, Michigan (8)........... 198,635
</TABLE>
(1) Represents the book value of land, building, fixtures, equipment and
furniture at the premises and owned or leased by the Bank.
(2) Building has a second floor with an additional 2,200 square feet rented as
office space.
(3) This office was closed effective May 1, 1992, and is currently held for
future expansion and offers for interim rental are considered.
(4) This location has attached buildings with an additional 2,444 square
feet rented as retail space. (5) Branch office was closed effective
December 1, 1996, and was held for sale as of December 31, 1996.
(footnotes continued on next page)
42
<PAGE>
(6) Branch office was opened April 29, 1996. Property is leased and net book
value at December 31, 1996, represents building improvements and furniture
and equipment.
(7) Net book value at December 31, 1996, represents an earnest deposit made on
the purchase of a branch office at said location. The Bank has committed to
purchase this property for $900,000. The transaction is expected to close in
March 1997.
(8) Net book value at December 31, 1996, represents the purchase price of land
which is held for future development of a branch office.
(9) These two locations will be sold in 1997. The offices will be relocated and
consolidated into the purchased location at 4815 Okemos Road described in
(7) above.
The net book value of the Bank's investment in premises and equipment
totaled $11.0 million at December 31, 1996. For additional information regarding
the Bank's premises and equipment, see Note 9 of the Notes to Consolidated
Financial Statements in the Annual Report.
ITEM 3. LEGAL PROCEEDINGS
There are various claims and lawsuits in which the Bank is periodically
involved, such as claims to enforce liens, condemnation proceedings on
properties in which the Bank holds security interests, claims involving the
making and servicing of real property loans and other issues incident to the
Bank's business. Management of the Corporation and the Bank does not consider
any of these legal proceedings material to the Corporation's or the Bank's
financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1996.
43
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
COMMON STOCK
The Corporation's common stock is traded on the NASDAQ National Market
System. The trading symbol is CFSB. As of February 28, 1997, there were
approximately 1,205 stockholders of record which does not include stockholders
holding their stock in street name or nominee's name.
QUARTERLY STOCK PRICE AND DIVIDEND INFORMATION
The following table summarizes quarterly stock prices and dividends
declared for:
<TABLE>
<CAPTION>
1996 1995
-------------------------------------------------------------------
DIVIDENDS Dividends
HIGH LOW CLOSE DECLARED High Low Close Declared
---- --- ----- -------- ---- --- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Quarter:
First $21 7/8 $18 1/8 $19 1/2 $0.10 $17 $13 3/8 $16 5/8 $0.09
Second 20 17 3/4 18 7/8 0.11 17 3/8 16 1/8 16 1/2 0.09
Third 19 1/2 17 3/4 18 0.12 20 1/2 16 1/8 18 5/8 0.10
Fourth 20 3/4 18 19 1/2 0.12 19 1/2 17 3/4 19 1/2 0.10
-----------------------------------------------------------------------
Year $21 7/8 $17 3/4 $19 1/2 $0.45 $20 1/2 $13 3/8 $19 1/2 $0.38
</TABLE>
On August 20, 1996, the Corporation's Board of Directors declared a 10
percent stock dividend payable on September 12, 1996, to stockholders of record
on August 30, 1996. In addition, on September 19, 1995, the Corporation's Board
of Directors declared a 10 percent stock dividend payable on October 13, 1995,
to stockholders of record on September 30, 1995. As a result, per share amounts
have been restated for all periods to reflect the stock dividends.
For information regarding restrictions on the payments of dividends, see
"Item 1. Business -- Regulation - - Dividend Restrictions" in this report.
44
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
FIVE YEAR SUMMARY OF CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
At and For the Years Ended December 31, 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
SUMMARY OF FINANCIAL CONDITION:
(Dollars in Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Total assets $829,800 $761,418 $727,243 $669,910 $633,872
Interest-earning deposits 15,270 22,654 10,524 11,639 25,289
Investment securities, net 31,093 55,109 88,712 142,736 162,407
Mortgage-backed securities, net 27,221 35,156 66,151 107,712 113,925
Loans receivable, net 717,715 610,284 518,591 374,658 297,488
Deposits 553,574 527,816 501,690 526,218 560,428
FHLB advances 202,639 160,649 160,351 77,830 13,334
Stockholders' equity 62,470 62,743 55,607 54,835 49,277
SUMMARY OF OPERATIONS:
Interest income $ 57,402 $ 53,621 $ 47,080 $ 44,644 $ 51,715
Interest expense 34,498 33,188 26,978 25,771 33,036
-------- -------- -------- -------- --------
Net interest income before provision
for loan losses 22,904 20,433 20,102 18,873 18,679
Provision for loan losses 240 240 240 240 240
--------- --------- --------- -------- --------
Net interest income after provision
for loan losses 22,664 20,193 19,862 18,633 18,439
Other income 4,242 3,966 2,349 5,678 5,274
General and administrative expenses 15,669 14,427 14,473 14,672 15,335
FDIC special assessment 3,355 -- -- -- --
--------- --------- --------- -------- ---------
Income before federal income tax
expense and cumulative effect of
accounting change 7,882 9,732 7,738 9,639 8,378
Federal income tax expense 2,435 2,929 2,149 2,947 3,090
--------- --------- --------- -------- ---------
Income before cumulative effect of
accounting change 5,447 6,803 5,589 6,692 5,288
Cumulative effect of change in
accounting for postretirement
benefits -- -- -- (436) --
--------- --------- --------- --------- --------
Net income $ 5,447 $ 6,803 $ 5,589 $ 6,256 $ 5,288
========= ========= ========= ========= ========
PER SHARE DATA: (1)
Primary earnings:
Before cumulative effect of
accounting change $ 1.09 $ 1.35 $ 1.09 $ 1.31 $ 1.05
Net income 1.09 1.35 1.09 1.22 1.05
Fully diluted earnings:
Before cumulative effect
of accounting change 1.09 1.35 1.09 1.30 1.04
Net income 1.09 1.35 1.09 1.21 1.04
Stockholders' equity 13.27 12.80 11.40 11.12 10.01
RATIOS AND OTHER DATA:
Interest rate spread 2.63% 2.52% 2.69% 2.71% 2.56%
Net yield on average earning assets 2.98 2.85 2.98 3.04 2.92
Return on average assets 0.69 0.92 0.80 0.96 0.81
Return on average stockholders' equity 8.55 11.47 10.18 12.02 11.27
Average earning assets to average
interest-bearing liabilities 107.78 107.23 107.41 107.92 106.87
Efficiency ratio 58.13 60.73 64.51 66.33 70.18
General and administrative expenses
to average assets 1.98 1.95 2.08 2.25 2.35
Stockholders' equity to total assets 7.53 8.24 7.65 8.19 7.77
Nonaccruing loans and real estate owned
to total assets 0.24 0.08 0.44 0.83 1.13
Dividend payout ratio 41.28 28.38 30.14 21.43 19.02
Number of full-service offices 18 18 18 18 19
</TABLE>
(1) The financial information for per share amounts has been restated to
reflect the ten percent stock dividend declared August 20, 1996, as well
as previous stock dividends paid in 1995 and 1994 and stock splits
distributed in 1993 and 1992.
45
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following sections are designed to provide a more thorough discussion
of the Corporation's financial condition and results of operations as well as to
provide additional information on the Corporation's asset/liability management
strategies, sources of liquidity, and capital resources. Management's discussion
and analysis should be read in conjunction with the consolidated financial
statements and supplemental data contained elsewhere in this report.
GENERAL
CFSB Bancorp, Inc. (Corporation) is the holding company for Community
First Bank (Bank). Substantially all of the Corporation's assets are currently
held in, and operations conducted through its sole subsidiary, Community First
Bank. The Bank is a community-oriented financial institution offering a variety
of financial services to meet the needs of the communities it serves. The Bank's
primary market area is the greater Lansing, Michigan area, which is 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 YEAR ENDED DECEMBER 31, 1996, COMPARED TO THE YEAR
ENDED DECEMBER 31, 1995
Net income for the year ended December 31, 1996, was $5.4 million, or
$1.09 per fully diluted share, compared to $6.8 million, or $1.35 per fully
diluted share, for 1995, a net decrease of $1.4 million. Earnings were
significantly impacted by a non-recurring, pre-tax charge of $3.4 million
resulting from federal legislation to recapitalize the Federal Deposit Insurance
Corporation's (FDIC) Savings Association Insurance Fund (SAIF). As a result of
this charge, 1996 after-tax earnings were reduced $2.2 million, or $0.44 per
fully diluted share.
Pre-tax core earnings for 1996, which exclude the special deposit
insurance assessment and net gains on asset sales, increased 22 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 1996
general and administrative expenses and a non-recurring gain recognized in 1995
on the sale of real estate owned.
46
<PAGE>
The following table reconciles net income to pre-tax core earnings:
<TABLE>
<CAPTION>
1996 1995
---- ----
(In Thousands)
<S> <C> <C>
Net income $ 5,447 $ 6,803
Federal income tax expense 2,435 2,929
Net gains on loan and security sales (192) (56)
Gain on sale of real estate owned -- (587)
FDIC special assessment 3,355 --
-------- --------
Pre-tax core earnings $11,045 $ 9,089
======= =======
</TABLE>
Net income for 1996 represents a return on average assets of 0.69 percent,
a decrease from 0.92 percent for 1995 and a return on average stockholders'
equity of 8.55 percent compared to 11.47 percent for 1995. The Corporation's
efficiency ratio, or recurring operating expenses over recurring operating
revenues, was 58.1 percent for the year ended December 31, 1996, an improvement
from 60.7 percent for the year ended December 31, 1995.
NET INTEREST INCOME
The most significant component of the Corporation's earnings is net
interest income, which is the difference between interest earned on loans,
mortgage-backed securities, investment securities and other earning assets, and
interest paid on deposits and FHLB advances. This amount, when divided by
average earning assets, is referred to as the net yield on average earning
assets. Net interest income and net yield on average earning assets are directly
impacted by changes in volume and composition of earning assets and
interest-bearing liabilities, market rates of interest, the level of
nonperforming assets, demand for loans, and other market forces.
47
<PAGE>
ANALYSIS OF NET INTEREST INCOME
The following table sets forth, for the periods indicated, information
regarding: (i) the total dollar amount of interest income from average earning
assets and the resultant average yields; (ii) the total dollar amount of
interest expense on average interest-bearing liabilities and the resultant
average cost; (iii) net interest income; (iv) interest rate spread; and (v) net
yield on average earning assets. Average balances are based on daily average
balances.
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
INTEREST Interest Interest
AVERAGE EARNED YIELD/ Average Earned/ Yield/ Average Earned/ Yield/
BALANCE PAID RATE Balance Paid Rate Balance Paid Rate
------- ---- ---- ------- ---- ---- ------- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EARNING ASSETS:
Loans receivable(1) $674,437 $51,612 7.65% $566,249 $44,449 7.85% $458,896 $35,495 7.73%
Mortgage-backed
securities 30,714 2,342 7.62 60,789 4,188 6.89 81,465 4,449 5.46
Investment securities 38,848 2,189 5.63 71,191 3,862 5.43 117,237 6,424 5.48
Interest-earning
deposits with FHLB
and other depository
institutions 14,598 465 3.18 9,122 374 4.10 8,762 302 3.45
Other 10,680 794 7.44 9,918 748 7.55 7,356 410 5.58
------- ------- ---- ------- ------ ---- ------- ------ ----
Total earning assets 769,277 57,402 7.46 717,269 53,621 7.48 673,716 47,080 6.99
======= ======= ==== ======= ====== ==== ======= ====== ====
INTEREST-BEARING LIABILITIES:
Savings, checking,
and money
market accounts(2) 217,316 5,435 2.50 207,635 5,802 2.79 220,125 5,896 2.68
Certificates of
deposits(2) 319,491 18,403 5.76 310,253 18,008 5.80 291,989 14,860 5.09
FHLB advances 176,943 10,660 6.02 150,998 9,378 6.21 115,106 6,222 5.41
Total interest-
bearing
liabilities 713,750 34,498 4.83 668,886 33,188 4.96 627,220 26,978 4.30
======= ====== ==== ======= ====== ==== ======= ====== ====
Excess earning assets $ 55,527 $ 48,383 $ 46,496
======== ======== ========
Net interest income $22,904 $20,433 $20,102
======= ======= =======
Interest rate spread (3) 2.63% 2.52% 2.69%
==== ==== ====
Net yield on average
earning assets (4) 2.98% 2.85% 2.98%
==== ==== ====
Average earning assets
to average interest-
bearing liabilities 107.78% 107.23% 107.41%
====== ====== ======
</TABLE>
(1)The average balance for loans receivable includes average balances for
nonaccrual loans. The amortization of loan fees, net of capitalized costs, is
included as an adjustment to yield but does not significantly affect the
yield calculation.
(2)Interest expense includes the cost of the Bank's interest rate exchange
agreements.
(3)Represents the weighted average yield on earning assets for the year less the
weighted average cost of interest-bearing liabilities for the year.
(4)Net interest income divided by average outstanding balances of earning
assets.
48
<PAGE>
The following table presents information concerning yields on the
Corporation's earning assets and costs of the Corporation's interest-bearing
liabilities, the interest rate spread, and the net yield on earning assets at
the dates and for the periods indicated. Yields and costs for the period were
computed using daily average balances.
<TABLE>
<CAPTION>
Year Ended December 31, 1996 1995 1994
---- ---- ----
FOR THE END OF For the End of For the End of
YEAR YEAR Year Year Year Year
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
WEIGHTED AVERAGE YIELD:
Loans receivable (1) 7.65% 7.60% 7.85% 7.75% 7.73% 7.69%
Mortgage-backed securitie 7.62 7.82 6.89 7.86 5.46 6.84
Investment securities 5.63 5.89 5.43 5.37 5.48 5.48
Interest-earning deposits
with FHLB and other
depository institutions 3.18 4.93 4.10 4.92 3.45 4.76
Other 7.44 7.55 7.55 7.61 5.58 6.73
---- ---- ---- ---- ---- ----
Total earning assets 7.46 7.47 7.48 7.49 6.99 7.27
==== ==== ==== ==== ==== ====
WEIGHTED AVERAGE COST:
Savings, checking, and
money market accounts(2) 2.50 2.65 2.79 2.76 2.68 2.88
Certificates of deposit(2) 5.76 5.73 5.80 5.97 5.09 5.35
FHLB advances 6.02 5.97 6.21 6.02 5.41 6.19
---- ---- ---- ---- ---- ----
Total interest-bearing
liabilities 4.83 4.86 4.96 5.00 4.30 4.76
==== ==== ==== ==== ==== ====
Interest rate spread(3) 2.63% 2.61% 2.52% 2.49% 2.69% 2.51%
==== ==== ==== ==== ==== ====
Net yield on earning
assets(4) 2.98% 2.95% 2.85% 2.81% 2.98% 2.77%
==== ==== ==== ==== ==== ====
</TABLE>
(1)The amortization of loan fees, net of capitalized costs, is included as an
adjustment to yield but does not significantly affect the yield calculation.
(2)Includes the effect of the applicable interest rate exchange agreements.
(3)Represents the weighted average yield on earning assets less the weighted
average cost of interest-bearing liabilities.
(4)Net yield on earning assets for the period represents net interest income
divided by average earning assets. Net yield on earning assets at the period
represents net interest income computed using the end of period balance and
rate, divided by earning assets at the end of the period.
Net interest income before provision for loan losses was $22.9 million
during 1996, a $2.5 million increase from $20.4 million during 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 1996, an improvement from 2.85 percent for 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. Average loans receivable were $674.4 million in
1996 representing growth of 19.1 percent over average loans receivable of $566.2
million in 1995. The increased level of loans outstanding resulted from
originations of adjustable-rate mortgage loans and purchases of adjustable- and
fixed-rate, medium-term mortgage loans all of which are held in the
Corporation's portfolio. Because the Corporation is liability sensitive,
pressure may be felt on the Corporation's net interest margin if short-term
market interest rates rise.
The future trend of the Corporation's net interest margin and net interest
income may further be impacted by the level of mortgage loan originations,
purchases, repayments, refinancings, and sales and a resulting change in the
composition of the Corporation's earning assets. The relatively flat yield curve
during the first quarter of 1996 resulted in a shift toward more customers
exhibiting a preference for fixed-rate mortgage loans, most of which were
49
<PAGE>
originated for sale in the secondary market. As the slope of the yield curve
began to steepen in the subsequent 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.
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
The following table presents the dollar amount of changes in interest
income and interest expense for major components of earning assets and
interest-bearing liabilities, distinguishing between changes related to
outstanding balances and changes due to interest rates. For each category of
earning assets and interest-bearing liabilities, information is provided on
changes attributable to: (i) changes in rate (i.e., changes in rate multiplied
by prior volume); and (ii) changes in volume (i.e., changes in volume multiplied
by prior rate). For purposes of this table, changes attributable to both rate
and volume which cannot be segregated have been allocated proportionately to the
change due to volume and the change due to rate.
<TABLE>
<CAPTION>
Year Ended December 31, 1996 vs. 1995 1995 vs. 1994
- ----------------------- ------------- -------------
Increase (Decrease) Due to Increase (Decrease) Due to
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable $ 8,319 $(1,156) $ 7,163 $ 8,397 $ 557 $ 8,954
Mortgage-backed securities (2,251) 405 (1,846) (1,275) 1,014 (261)
Investment securities (1,811) 138 (1,673) (2,503) (58) (2,561)
Interest-earning deposits
with FHLB and other
depository institutions 188 (97) 91 13 59 72
Other 57 (11) 46 168 170 338
------- ------- ------- ------- ------- -------
Total interest income 4,502 (721) 3,781 4,800 1,742 6,542
======= ======= ======= ======= ====== =======
INTEREST EXPENSE:
Savings, checking, and money
market accounts 259 (626) (367) (336) 242 (94)
Certificates of deposit 522 (127) 395 975 2,174 3,149
FHLB advances 1,575 (293) 1,282 2,141 1,015 3,156
------- ------- ------- ------- ------- -------
Total interest expense 2,356 (1,046) 1,310 2,780 3,431 6,211
======= ======= ======= ======= ======= =======
Net interest income $ 2,146 $ 325 $ 2,471 $ 2,020 $(1,689) $ 331
======= ======= ======= ======= ======= =======
</TABLE>
PROVISION FOR LOAN LOSSES
The allowance for loan losses, established through provisions for losses
charged to expense, is increased by recoveries of loans previously charged off
and reduced by charge-offs of loans. The provision for loan losses was $240,000
during both 1996 and 1995.
The Corporation maintains the allowance for loan losses at a level
determined to be adequate by management based on a review of the loan portfolio.
While management uses available information to determine the allowance for
losses on loans, future additions to the allowance may be necessary based on
changes in economic conditions and borrower circumstances. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Corporation's allowance for losses on loans. Such
agencies may require the Corporation to record additions to the allowance based
on their judgments about information available to them at the time of their
examination.
For more information on the Corporation's allowance for loan losses and
activity therein, reference is made to "Asset Quality."
50
<PAGE>
OTHER INCOME
Other income, a significant component of the Corporation's earnings, was
$4.2 million for the year ended December 31, 1996, an increase of $276,000
compared to $4.0 million for the year ended December 31, 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.
Growth in other income resulted principally from $769,000 more deposit fees
assessed on a higher level of transaction account activity. Although offset in
part by lower-of-cost or market adjustments on loans intended for sale in the
secondary market, increased gains on loan sales, including the impact of
adopting Statement of Financial Accounting Standards No. 122, Accounting for
Mortgage Servicing Rights, an amendment of FASB Statement No. 65 (SFAS 122),
also contributed to the higher level of other income. Partially offsetting these
increases in other income were decreased servicing income resulting from lower
balances of loans serviced for other parties and the amortization of capitalized
mortgage servicing costs. In addition, a $587,000 non-recurring gain on the sale
of real estate owned was recognized in 1995. A gain on the redemption of an
equity security and non-recurring distributions on equity investments in 1996
were substantially offset by net losses on the sales of investment securities
during the year.
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 $234,000 of
originated mortgage servicing rights during 1996, of which $43,000 has been
amortized. No valuation allowances for capitalized originated mortgage servicing
rights were considered necessary as of December 31, 1996. The balance at
December 31, 1996, of loans sold during the year was $30.1 million.
GENERAL AND ADMINISTRATIVE EXPENSES
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.
The Deposit Insurance Fund Act of 1996 (DIFA) was enacted on September 30,
1996, and this legislation addressed the inadequate funding of the SAIF. In
order to recapitalize the SAIF, DIFA imposed a one-time assessment on all thrift
institutions. The Bank's pre-tax assessment was $3.4 million and this
non-recurring charge
51
<PAGE>
was recognized in the third quarter of 1996. DIFA also addressed the funding for
the Financing Corporation (FICO) bonds. Thrifts will pay 6.4 basis points per
$100 of domestic deposits from January 1, 1997, to December 31, 1999. From
January 1, 2000, until the FICO bonds are retired in 2019, the estimated
assessment to retire the FICO bonds is expected to be 2.5 basis points per $100
of domestic deposits. Based upon this legislation, the Bank's assessment is
expected to decline 70 percent, or $800,000, in 1997.
DIFA proposed the BIF and SAIF be merged on January 1, 1999, provided no
insured depository institution is a savings association on that date. DIFA also
directed the Treasury Department to present recommendations to Congress for
establishment of a common depository institution charter by March 31, 1997.
Excluding the FDIC special assessment of $3.4 million, general and
administrative expenses were $15.7 million for 1996, up $1.3 million compared to
$14.4 million for 1995. Compensation and fringe benefits expense rose $204,000
between periods as a result of upward merit-based salary adjustments, an
increased provision for the management incentive program, and increased
employment taxes on a higher compensation base partly offset by the effect of
fewer full-time equivalent employees. Furniture and equipment depreciation
increased $374,000, or 48 percent, over 1995 primarily as a result of
accelerating the depreciation on computer equipment to more closely reflect the
estimated remaining lives of this equipment. Postage expense rose in 1996 as a
result of an increased number of accounts and more frequent statement renderings
for savings accounts. Also, the increased telephone expense reflects customer
usage of the 800 numbers for the Integrated Voice Response System and the
Customer Service Center. 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
1996 introduction of the Moneycard resulted in debit card embossment and
servicing charges not incurred during 1995. Marketing expense also increased
over 1995 as the result of the continued promotion of the Corporation's checking
account products. In addition, the expanded account base resulted in more
operating losses than in the prior year.
FEDERAL INCOME TAX EXPENSE
Federal income tax expense was $2.4 million for the year ended December
31, 1996, compared to $2.9 million for 1995. The 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 YEAR ENDED DECEMBER 31, 1995, COMPARED TO THE YEAR
ENDED DECEMBER 31,1994
Net income for the year ended December 31, 1995, was $6.8 million, or
$1.35 per fully diluted share, compared to $5.6 million, or $1.09 per fully
diluted share, for 1994, a net increase of $1.2 million. Partially accounting
for this increase in net income was substantially improved fee income and growth
in the Corporation's 1995 net interest margin. Although the Corporation's cost
of funds rose at a more rapid rate than the yields on its earning assets during
1995 as compared to 1994, the impact on the Corporation's net interest margin
was more than offset by growth in earning assets. In addition, the 1995
provision for real estate owned was comparably lower and a significant
non-recurring gain on the sale of real estate owned was recognized during the
year. The comparability of net earnings was also significantly influenced by the
Corporation's effective tax rate of 30.1 percent in 1995 compared to 27.8
percent a year earlier. The increase in the effective tax rate is the result of
accounting for changes in the Corporation's tax reserves under Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109)
partly offset by the use in 1995 of low-income housing tax credits. Net income
for 1995
52
<PAGE>
represents a return on average assets of 0.92 percent, an increase from 0.80
percent for 1994 and a return on average stockholders' equity of 11.47 percent
compared to 10.18 percent for 1994. The Corporation's efficiency ratio, or
recurring operating expenses over recurring operating revenues, was 60.7 percent
for the year ended December 31, 1995, an improvement from 64.5 percent for the
year ended December 31, 1994.
Core earnings, or pre-tax earnings less non-recurring items, were $9.1
million in 1995 compared to $7.7 million in 1994, an increase of 17.6 percent.
The following table reconciles net income to pre-tax core earnings:
<TABLE>
<CAPTION>
1995 1994
---- ----
(In Thousands)
<S> <C> <C>
Net income $6,803 $5,589
Federal income tax expense 2,929 2,149
Net gains on loan and security sales (56) (9)
Gain on sale of real estate owned (587) --
------ --------
Pre-tax core earnings $9,089 $7,729
====== ======
</TABLE>
NET INTEREST INCOME
Net interest income before provision for loan losses was $20.4 million
during 1995, an increase of $331,000, from $20.1 million during 1994.
Principally as a result of the flatter yield curve, the Corporation's funding
costs rose more rapidly than its yield on earning assets; and accordingly, net
interest income was adversely affected. The impact of the interest rate
environment was somewhat mitigated by strong growth in earning assets in both
1995 and 1994. A shift in the composition of average earning assets from lower
yielding more liquid assets toward higher-earning, longer-term assets also
lessened the effects of the interest rate environment, thus stabilizing net
interest income. Average loans receivable were $566.2 million in 1995
representing growth of 23.4 percent over average loans receivable of $458.9
million in 1994. 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. Also favorably affecting net interest income between
years was the termination, at a loss of $229,000, in November 1994 of the
Corporation's one remaining interest rate exchange agreement with an aggregate
notional amount of $15.0 million and a maturity date of December 23, 1996.
Amortization of the loss as interest expense totaled $109,000 for 1995 compared
to the $568,000 cost of the interest rate exchange agreement in 1994, a decline
of $459,000. The Corporation's net yield on average earning assets was 2.85
percent for 1995, a decline from 2.98 percent for 1994. The net yield on average
earning assets decreased to 2.81 percent as of December 31, 1995.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $240,000 during both 1995 and 1994. The
Corporation maintains the allowance for loan losses at a level determined to be
adequate by management based on a review of the loan portfolio. Factors
considered in this review include the historical loss experience, recovery
levels of loans previously charged off, the financial condition of the
borrowers, the perceived risk exposure among loan types, delinquency rates,
present and projected economic conditions as well as other relevant factors.
While the allowance for loan losses increased to $4.4 million at December
31, 1995, compared to $4.1 million at December 31, 1994, and the Corporation's
level of nonperforming assets as a percentage of total assets improved by
declining from 0.44 percent at December 31, 1994, to 0.08 percent at December
31, 1995, the allowance for loan losses as a percentage of total loans as of
December 31, 1995, declined to 0.69 percent compared to 0.77 percent at December
31, 1994. The ratio of net loan charge-offs (recoveries) to the average loans
outstanding during the years ended December 31, 1995 and 1994, was 0.00 percent
and (0.01) percent, respectively.
53
<PAGE>
OTHER INCOME
Other income totaled $4.0 million in 1995 compared to $2.3 million in
1994, a substantial increase of $1.7 million. During the first quarter of 1995,
the Corporation introduced Really Free Checking and five other highly
competitive checking account programs, and as a result, the Corporation opened a
record number of new checking accounts during the year. The growing customer
base produced a correspondingly higher level of transaction account activity and
generated $579,000 of incremental fee income in 1995 as compared to 1994.
Although the Corporation's practices during 1995 included selling longer-term
fixed-rate mortgage loan originations, low levels of sales occurred as customer
demand was for primarily adjustable-rate rather than fixed-rate mortgage loans.
As a result of the low level of sales, reductions in the portfolio of loans the
Corporation services for other parties occurred and adversely impacted loan
servicing income. The comparison of other income between years was also impacted
by fewer commissions on security sales from the Corporation's third-party
provider of alternative investment services and an increase in the level of net
non-recurring losses on sales of mortgage-backed securities, the impact of which
was more than offset by a reduced provision for real estate owned losses of
$445,000 and the recognition of a $587,000 non-recurring gain on the favorable
disposition of real estate owned.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $14.4 million for the year ended
December 31, 1995, a slight decrease from $14.5 million for the year ended
December 31, 1994. During 1994, the Corporation converted to a new computer
system with enhanced software and hardware capabilities. Depreciation of the
Corporation's computer hardware contributed to $151,000 of increased office
occupancy and equipment expense during 1995. In addition, compensation expense
rose as a result of inflation and bringing the Corporation's data processing
operations in house concurrent with the computer conversion. Primarily resulting
from a change in procedures and forms in connection with the conversion, office
supplies and printing expense also rose between years. These additional expenses
were more than offset by reduced data processing expense which mostly consisted
of $525,000 paid to an outside servicer through mid-1994 to manage the
Corporation's data processing operations under a facilities management
agreement. Other efficiencies and cost reductions were achieved in the areas of
real estate taxes, deposit insurance, corporate insurance, Michigan intangibles
tax, and single business tax expense. In addition, the use in 1995 of $103,000
more of dividends received on unallocated ESOP shares to reduce the
Corporation's ESOP contribution than in 1994 had a positive impact on
compensation and fringe benefits expense. There was also a lower level of net
operating losses during 1995 which were substantially offset by fewer
environmental recoveries and higher check processing fees. Also affecting the
comparability of the two periods were the receipt of rental income from the
Corporation's third-party provider of alternative investment services in 1994
but not in 1995 and $206,000 of non-recurring costs incurred during 1994 in
connection with the computer conversion. Marketing expense also increased by
$210,000 over 1994 principally as the result of the introduction and continued
promotion throughout the year of the Corporation's new checking account
products.
FEDERAL INCOME TAX EXPENSE
Federal income tax expense was $2.9 million for the year ended December
31, 1995, compared to $2.1 million for 1994. The increase in federal income tax
expense resulted from a higher level of pre-tax earnings combined with an
increase in the Corporation's effective tax rate from 27.8 percent for 1994 to
30.1 percent for 1995. SFAS 109 generally requires the Corporation to establish
a deferred tax asset related to its provision for losses on loans and real
estate and a deferred tax liability for the excess of its tax bad debt reserves
over the amount of such reserves as of December 31, 1987 (base year). To the
extent the Corporation's loan and mortgage-backed security portfolio
subsequently declined below the base-year level, additional deferred tax
liability was recognized. To the extent the Corporation's loan and
mortgage-backed security portfolio increased, this additional liability was
reduced. The Corporation's adjusted base-year tax bad debt reserves increased
during 1995 to the level of the Corporation's actual base-year tax bad debt
reserves. Accordingly, further reductions in the Corporation's deferred tax
liability will not result from future growth, if any, in the Corporation's loan
and mortgage-backed securities portfolio. The
54
<PAGE>
Corporation's federal income tax expense was favorably impacted in 1995 by the
use of $228,000 of low-income housing federal income tax credits.
ASSET QUALITY
In May 1993, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 114, Accounting by Creditors for
Impairment of a Loan (SFAS 114). SFAS 114, as amended in October 1994 by
Statement of Financial Accounting Standards No. 118, Accounting by Creditors for
Impairment of a Loan -- Income Recognition and Disclosures (SFAS 118), requires
impaired loans to be measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate or, as a practical
expedient, at the loan's observable market price, or the fair value of the
collateral if the loan is collateral dependent. This statement also applies to
all loans restructured in troubled debt restructurings involving a modification
of terms as well as clarifies that a creditor should evaluate the collectibility
of both contractual interest and contractual principal of all receivables when
assessing the need for a loss accrual. The Corporation adopted the provisions of
SFAS 114, as amended by SFAS 118, on a prospective basis as of January 1, 1995.
Neither the initial adoption nor the ongoing effect of SFAS 114 has had, or is
expected to have, a material impact on the financial condition or results of
operations of the Corporation.
Impaired loans as defined by SFAS 114 totaled $554,000 and $0 at December
31, 1996 and 1995, respectively and include one income-producing property loan
and three commercial business loans. These loans are included in nonaccrual
loans at December 31, 1996. 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
$559,000 and $0 during 1996 and 1995, respectively. Interest income recognized
on impaired loans during 1996 and 1995, totaled $27,000 and $0, respectively.
Impaired loans had specific allocations of the allowance for loan losses in
accordance with SFAS 114 approximating $150,000 and $0 at December 31, 1996 and
1995, respectively.
55
<PAGE>
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 December 31, 1996, the
Corporation had no loans which were "troubled debt restructurings" as defined in
Statement of Financial Accounting Standards No. 15, Accounting by Debtors and
Creditors for Troubled Debt Restructurings.
<TABLE>
<CAPTION>
December 31, 1996 1995
- ------------ ---- ----
(Dollars in Thousands)
<S> <C> <C>
Nonaccruing loans:
One- to four-family residential mortgages $ 892 $ 68
Income-producing property 359 --
FHA-partially insured and VA-partially
guaranteed 183 253
Commercial 195 --
Consumer installment 158 28
------- ------
Total $1,787 $ 349
====== =====
Percentage of total assets 0.21% 0.05%
======= ======
Real estate owned:(1)
One-to four-family residential mortgages $ 205 $ 238
Construction and development 7 7
-------- ------
Total $ 212 $ 245
====== =====
Percentage of total assets 0.03% 0.03%
======= ======
Total nonaccruing loans and real estate
owned $1,999 $ 594
====== =====
Percentage of total assets 0.24% 0.08%
====== =====
</TABLE>
(1) Real estate owned includes properties in redemption and acquired through
foreclosure.
The following is a summary of the Corporation's loan and real estate owned
loss experience from December 31, 1993, through December 31, 1996. The ratio of
net loan charge-offs (recoveries) to the average loans outstanding during the
years ended December 31, 1996 and 1995, was 0.01 percent and 0.00 percent,
respectively.
<TABLE>
<CAPTION>
Loans Real Estate Total
----- ----------- -----
<S> <C> <C> <C>
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
========== ========= ==========
</TABLE>
While the $4.6 million allowance for loan losses at December 31, 1996,
grew from $4.4 million at December 31, 1995, the allowance for loan losses as a
percentage of total loans as of December 31, 1996, declined to 0.62 percent
compared to 0.69 percent at December 31, 1995. Nonperforming assets as a
percentage of total assets was 0.08 percent at December 31, 1995, and increased
slightly to 0.24 percent at December 31, 1996.
56
<PAGE>
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.
The Corporation's current asset/liability management objective is to
provide an acceptable balance between interest rate risk, credit risk, and
maintenance of yield. The principal operating strategy of the Corporation has
been to manage the repricing of its interest-sensitive assets and liabilities to
reduce the sensitivity of the Corporation's earnings to changes in interest
rates. The Corporation generally implemented this strategy by: (i) originating
and retaining adjustable-rate mortgages; (ii) originating construction and
consumer loans which typically have shorter terms to maturity or repricing than
long-term, fixed-rate residential mortgages; (iii) maintaining liquidity levels
adequate to allow flexibility in reacting to the interest rate environment; and
(iv) selling upon origination certain long-term, fixed-rate, residential
mortgages in the secondary mortgage market.
The Corporation has used interest rate exchange agreements to manage
interest rate exposure on its interest-bearing liabilities. In November, 1994,
the Corporation terminated, at a loss of $229,000, its one remaining interest
rate exchange agreement with an aggregate notional amount of $15.0 million and a
maturity date of December 23, 1996. The deferred loss from the termination of
the interest rate exchange agreement totaled $0 and $107,000 at December 31,
1996 and 1995, respectively. Amortization of the loss as interest expense
totaled $107,000, $109,000, and $13,000 in 1996, 1995, and 1994, respectively.
During the years ended December 31, 1996, 1995, and 1994, the cost of the
Corporation's interest rate exchange agreements was $107,000, $109,000, and
$568,000, respectively, and is included as interest expense on deposits.
The following table sets forth the interest rate sensitivity of the
Corporation's interest-earning assets and interest-bearing liabilities at
December 31, 1996. One indicator used to measure interest rate risk is the
one-year gap which represents the difference between interest-earning assets
which mature or reprice within one year and interest-bearing liabilities which
mature or reprice within one year. The Corporation's one-year gap was a negative
9.3 percent at December 31, 1996, compared to a negative 7.1 percent at December
31, 1995, and the Corporation's three-to-five-year gap was a negative 1.9
percent at December 31, 1996, compared to a negative 0.6 percent at December 31,
1995. The change in the Corporation's negative gap position between periods is
primarily the result of using available liquidity from shorter-term net deposit
inflows, 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. Fixed-rate loans and
mortgage-backed securities are shown on the basis of contractual amortization
adjusted for prepayments at rates estimated by available industry sources.
Adjustable-rate loans and investment and mortgage-backed securities are
determined to reprice at the earlier of maturity, call date or the next
contractual repricing date. The allocation of savings, checking, and money
market account balances between the various maturity/repricing periods
approximates the Corporation's current withdrawal experience. The assumptions
used should not be regarded as indicative of the actual prepayments and
withdrawals which may be experienced by the Corporation.
The data presented in the table represents a static measure of assets and
liabilities maturing over various time periods. The table does not necessarily
indicate the impact of general interest rate movements on the Corporation's net
yield, because the repricing of certain categories of assets and liabilities is
subject to competitive and other pressures beyond the Corporation's control. As
a result, certain assets and liabilities indicated as maturing or otherwise
repricing within a stated period may, in fact, mature or reprice at different
times or at different volumes.
57
<PAGE>
<TABLE>
<CAPTION>
Maturity/Rate Sensitivity 0-6 7-12 1-3 3-5 Over 5
At December 31, 1996 Months Months Years Years Years Total
- -------------------- ------ ------ ----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
First mortgage loans $116,917 $ 82,094 $230,733 $103,471 $129,298 $662,513
Second mortgage and
other loans 38,353 4,971 8,176 4,497 3,769 59,766
Mortgage-backed securities 13,909 2,100 6,261 4,622 -- 26,892
Investment securities 10,011 19,086 -- 2,000 -- 31,097
Other 15,270 -- -- -- -- 15,270
-------- -------- -------- -------- -------- --------
Interest-earning assets 194,460 108,251 245,170 114,590 133,067 795,538
-------- -------- -------- -------- -------- --------
Non-interest earning
assets 34,262
-------- -------- -------- -------- -------- --------
Total assets $829,800
========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Savings 6,514 5,867 10,043 8,126 34,664 65,214
Money market savings 16,136 16,136
Checking 14,714 11,692 24,188 6,474 14,371 71,439
Money market checking 16,887 5,257 2,984 26,835 -- 51,963
Certificates of deposit 137,044 84,082 80,111 21,940 1,037 324,214
Advances from Federal 0
Home Loan Bank 57,983 20,438 98,548 21,882 3,788 202,639
------- ------- ------- ------- ------- --------
Interest-bearing
liabilities 249,278 127,336 215,874 85,257 53,860 731,605
------- ------- ------- ------ ------ --------
Stockholders' equity
and non-interest
bearing liabilities 98,195
------- ------- ------- ------ ------ --------
Total liabilities and
stockholders' equity $829,800
======= ======= ======= ====== ====== ========
RATE SENSITIVITY GAP AND RATIOS:
Gap for period (interest-
earning assets less
interest-bearing
liabilities) $(54,818) $(19,085) $ 29,296 $ 29,333 $ 79,207 $ 63,933
-------- -------- -------- -------- -------- --------
Cumulative gap $(54,818) $(73,903) $(44,607) $(15,274) $ 63,933 --
======== ======== ======== ======== ======== ========
Gap as a percentage of
interest-earning assets -6.89% -2.40% 3.68% 3.69% 9.96% 8.04%
-------- -------- -------- -------- -------- --------
Cumulative gap as a
percentage of interest-
earning assets -6.89% -9.29% -5.61% -1.92% 8.04% --
======== ======== ======== ======== ========= ========
Cumulative gap at
December 31, 1995 -3.26% -7.05% 2.34% -0.63% 7.98% --
======== ======== ======== ======== ========= ========
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Total assets rose to $829.8 million at December 31, 1996, an increase of
$68.4 million, or 9.0 percent, from $761.4 million at December 31, 1995.
The Corporation's regulatory liquidity ratios at December 31, 1996, and
December 31, 1995, were 8.6 percent and 12.7 percent, respectively. The
Corporationanticipates it will have sufficient funds available to meet current
commitments either through operations, deposit growth, or borrowings from the
FHLB. At December 31, 1996, the Corporation had total outstanding mortgage loan
commitments of $19.3 million of which $13.4 million were for adjustable-rate
loans and $5.9 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 year-end 1996 totaled $18.1 million and primarily
represented undrawn funds on adjustable- and fixed-rate construction loans of
$16.8 million and $1.3 million, respectively. In addition at year end, there
were $798,000 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 $32.9 million at December 31, 1996. There were
additionally $2.1 million of loans in process or undrawn lines of credit on
installment and commercial business loans as of December 31, 1996. The
Corporation had no firm commitments to purchase mortgage loans and had
commitments to sell $1.3 million of fixed-rate, residential mortgage loans at
December 31, 1996. Approximately $2.6 million of one- to four-family
residential, fixed-rate mortgage loans was held for sale at December 31, 1996,
with a weighted average interest rate of 7.3 percent.
58
<PAGE>
LENDING
Loans receivable increased $107.4 million, or 17.6 percent, to $717.7
million at December 31, 1996, from $610.3 million at December 31, 1995.
The Corporation originated $226.6 million of loans during 1996, a
substantial increase from $151.6 million during 1995. The volatility of the
interest rate environment during 1996 resulted in significant loan demand. As
rates moved lower during 1996, customers sought to refinance their mortgages and
as market rates edged upward, customers sought to secure mortgage loans with
favorable interest rates. 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 $118.0 million during 1996
compared to $84.2 million during 1995. The following schedule sets forth the
Corporation's loan originations for 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
---- ----
(Dollars in Thousands)
<S> <C> <C>
FIXED-RATE:
One- to four-family residential $ 36,990 $ 18,507
Income-producing 758 337
FHA-insured and VA-partially guaranteed 217 141
Construction and development:
One- to four-family residential 8,456 856
Income-producing -- 314
Commercial 634 568
Consumer 18,706 12,788
-------- --------
65,761 33,511
ADJUSTABLE-RATE:
One- to four-family residential 68,063 40,183
Income-producing 610 4,380
Construction and development:
One- to four-family residential 50,889 47,784
Income-producing 18,630 9,052
Commercial 3,049 2,566
Second mortgage -- 60
Consumer 19,600 14,015
-------- --------
160,841 118,040
-------- --------
Total originations $226,602 $151,551
======== ========
</TABLE>
During the years ended December 31, 1996 and 1995, the Corporation sold
primarily fixed-rate loans aggregating $32.0 million and $14.8 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
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 years ended December 31, 1996 and 1995, the Corporation
purchased from an unaffiliated financial institution $31.7 million and $42.0
million, respectively of loans consisting of one- to four-family residential,
fixed- and adjustable-rate, medium-term mortgage loans. 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.
59
<PAGE>
INVESTMENT AND MORTGAGE-BACKED SECURITIES
In November 1995, the FASB issued A Guide to Implementation of Statement
115 on Accounting for Certain Investments in Debt and Equity Securities (Guide).
The Guide permitted an institution to reassess the appropriateness of the
classifications of all securities held at the time and account for any resulting
reclassifications at fair value in accordance with Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities (SFAS 115). The Corporation, in order to allow further
flexibility in future asset/liability management decisions relating to
securities, reclassified $18.1 million of corporate notes and U.S. Treasury
securities from a held-to-maturity classification to an available-for-sale
classification with unrealized pre-tax losses of $103,000 on these securities
recorded as a negative adjustment to stockholders' equity.
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 latter part of 1996, market interest
rates generally fell which favorably impacted the market value of the
principally fixed-rate investment and mortgage-backed securities available for
sale. 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. The
Corporation had no investment or mortgage-backed securities classified as
trading securities as of December 31, 1996.
Included in the composition of the Corporation's earning assets at
December 31, 1996, were $27.2 million of mortgage-backed securities, an $8.0
million, or 22.6 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 average
outstanding balances of mortgage-backed securities were twice as high in 1995,
principal repayments and maturities of $8.2 million in 1996 outpaced the rate of
repayments during 1995. The level of repayments for 1995 was $12.3 million. The
Corporation did not purchase any mortgage-backed securities during the years
ended December 31, 1996 or 1995. During 1996, there were no sales of
mortgage-backed securities, but during 1995, $19.6 million of available-for-sale
mortgage-backed securities were sold. Gross gains and gross losses of $9,000 and
$51,000, respectively were recognized on those sales. The approximate fair value
of the mortgage-backed securities portfolio was $27.2 million at December 31,
1996, with gross unrealized gains and losses of $541,000 and $213,000,
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 totalling $28.6 million was reclassified to
an available-for-sale classification with unrealized pre-tax gains of $190,000
being recorded as a favorable adjustment to stockholders' equity. As a result,
the Corporation intends to classify any investment or mortgage-backed securities
currently held or purchased in the subsequent two years as available for sale.
At December 31, 1996, the level of the Corporation's investment securities
portfolio declined $24.0 million, or 43.6 percent to $31.1 million from $55.1
million at December 31, 1995. The decrease in investment securities resulted
principally from the maturity of $16.1 million of investment securities, call
options being exercised on $4.3 million of available-for-sale investment
securities, and sales of $23.1 million of available-for-sale investment
securities. Proceeds from the maturities, calls, and sales were, in part, used
to purchase $7.0 million of available-for-sale medium-term federal agency
securities and $13.1 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 of $226.6 million and $31.7 million, respectively. During
1995, $13.9 million of available-for-sale investment securities were sold. Gross
gains and gross losses of $30,000 and $33,000, respectively were recognized on
those sales. Proceeds from the sales were, in part, used to purchase a $5.0
million available-for-sale corporate note containing a lengthened maturity but a
higher yield compared to the securities sold.
60
<PAGE>
The approximate fair value of the Corporation's investment securities was $31.1
million at December 31, 1996, with gross unrealized gains and losses of $44,000
and $47,000, respectively.
DEPOSITS
Total deposits grew 4.9 percent from $527.8 million at December 31, 1995,
to $553.6 million at December 31, 1996. The $25.8 million increase resulted from
transaction account, savings account, and certificate of deposit growth of $6.2
million, $13.8 million, and $5.8 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. In addition, in late 1996, the Corporation introduced
and heavily promoted a high yield money market savings product. Although the
majority of the growth in certificates of deposit and the money market savings
product was obtained from external sources, many accounts were also opened by
existing customers with transfers of funds from their checking, savings, and
money market checking 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 $202.6 million at December
31, 1996. Of the outstanding FHLB advances at year-end 1996, $150.9 million
carried a weighted average fixed-rate of 6.08 percent. Adjustable-rate advances
at December 31, 1996, totaled $51.7 million, all of which reprice based upon
three-month LIBOR. FHLB advances were obtained, as needed in 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.
CAPITAL
Total stockholders' equity was $62.5 million at December 31, 1996,
relatively unchanged from the 1995 year-end total of $62.7 million. Book value
per share was $13.27 at December 31, 1996, compared to $12.80 per share at
December 31, 1995. Although 1996 earnings contributed to increases in
stockholders' equity, the effect 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 7.53 percent at December 31, 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. The Bank's tangible, core and risk-based capital
ratios were 7.2 percent, 7.2 percent, and 13.2 percent at December 31, 1996,
respectively.
The Corporation's Board of Directors declared cash dividends of $0.45 per
share in 1996, an increase of 18.4 percent over 1995 dividends declared of $0.38
per share. 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
61
<PAGE>
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 ten 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 June 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 222,920 shares of
CFSB Bancorp, Inc. common stock on the open market for $4.1 million, or an
average purchase price of $18.34 per share. The program has a one-year term.
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 elected the pro forma disclosure method in its year-end
1996 Consolidated Financial Statements and Notes thereto.
ACCOUNTING STANDARDS
As discussed in "Liquidity and Capital Resources -- Capital," the
Corporation changed its method of disclosure for stock-based compensation in
1996 to adopt the provisions of the FASB's Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation. As discussed in
"Results of Operations for the Year Ended December 31, 1996, Compared to the
Year Ended December 31, 1995," the Corporation changed its method of accounting
for mortgage servicing rights in 1996 to adopt the provisions of the FASB's
Statement of Financial Accounting Standards No. 122, Accounting for Mortgage
Servicing Rights, an amendment of FASB Statement No. 65. As discussed in "Asset
Quality," the Corporation changed its method of accounting for impaired loans in
1995 to adopt the provisions of the FASB's Statement of Financial Accounting
Standards No. 114, Accounting by Creditors for Impairment of a Loan and
Statement of Financial Accounting Standards No. 118, Accounting by Creditors for
Impairment of a Loan -- Income Recognition and Disclosures.
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
62
<PAGE>
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 of this standard to have a
material impact on its financial condition or results of operation.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------
<S> <C>
Independent Auditors' Report 64
Consolidated Statements of Financial Condition at
December 31, 1996 and 1995 65
Consolidated Statements of Operations for the
Years Ended December 31, 1996, 1995 and 1994 66
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1996, 1995 and 1994 67
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994 68
Notes to Consolidated Financial Statements 70
SUPPLEMENTARY DATA
Quarterly Financial Information 99
</TABLE>
63
<PAGE>
INDEPENDENT AUDITORS' REPORT
KPMG PEAT MARWICK LLP
The Board of Directors and Stockholders
CFSB Bancorp, Inc.:
We have audited the consolidated statements of financial condition of CFSB
Bancorp, Inc., and subsidiary as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CFSB Bancorp, Inc.,
and subsidiary as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
As discussed in notes 1 and 5 to the consolidated financial statements, the
Corporation changed its method of accounting for impairment of loans in 1995 to
adopt the provisions of the Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 114, Accounting by Creditors for Impairment
of a Loan, and Statement of Financial Accounting Standards No. 118, Accounting
by Creditors for Impairment of a Loan--Income Recognition and Disclosures. As
discussed in notes 1 and 5 to the consolidated financial statements, the
Corporation changed its method of accounting for mortgage servicing rights in
1996 to adopt the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 122, Accounting for Mortgage
Servicing Rights, an Amendment of FASB Statement No. 65.
/s/ KPMG Peat Marwick LLP
Lansing, Michigan
January 21, 1997
64
<PAGE>
<TABLE>
<CAPTION>
CFSB BANCORP, INC., AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1996 1995
- ------------ ---- ----
<S> <C> <C>
ASSETS:
Cash and amounts due from depository institutions $ 7,479,722 $7,070,041
Interest-earning deposits with Federal Home Loan
Bank and other depository institutions, at cost,
which approximates market 15,270,241 22,654,134
Investment securities available for sale, at
fair value 31,093,494 55,109,533
Mortgage-backed securities available for sale,
at fair value 27,220,567 607,895
Mortgage-backed securities held to maturity, net
(fair value $35,160,963 - 1995) -- 34,548,012
Loans receivable, net 717,714,636 610,284,070
Accrued interest receivable, net 4,349,240 4,883,233
Real estate, net -- 21,717
Premises and equipment, net 10,985,199 11,223,147
Stock in Federal Home Loan Bank of Indianapolis,
at cost 10,632,000 8,536,800
Deferred federal income tax benefit 317,270 326,258
Other assets 4,737,177 6,152,932
------------ ------------
Total assets $829,799,546 $761,417,772
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:
Deposits $553,574,001 $527,816,178
Advances from Federal Home Loan Bank 202,639,323 160,649,376
Advance payments by borrowers for taxes and
insurance 1,356,507 1,281,043
Accrued interest payable 4,233,799 3,474,063
Federal income taxes payable 740,242 783,000
Other liabilities 4,785,647 4,671,091
------------ ------------
Total liabilities 767,329,519 698,674,751
------------ ------------
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 in
1996 and 4,518,478 shares in 1995 48,496 45,185
Additional paid-in capital 41,422,898 34,389,162
Retained income - substantially restricted 23,863,600 29,852,980
Net unrealized gains on available-for-sale
securities, net of tax of $110,548 - 1996 and
$36,917 - 1995 214,594 71,661
Employee Stock Ownership Plan (459,408) (691,294)
Treasury stock, at cost; 143,570 shares - 1996
and 68,935 shares - 1995 (2,620,153) (924,673)
------------ ------------
Total stockholders' equity 62,470,027 62,743,021
------------ ------------
Commitments and contingent liabilities
Total liabilities and stockholders' equity $829,799,546 $761,417,772
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
65
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
- ------------------------ -------- -------- --------
<S> <C> <C> <C>
INTEREST INCOME:
Loans receivable $51,612,087 $44,448,774 $35,494,675
Mortgage-backed securities 2,341,727 4,187,867 4,448,900
Investment securities 2,188,967 3,862,157 6,423,718
Other 1,259,274 1,122,512 712,388
----------- ----------- -----------
Total interest income 57,402,055 53,621,310 47,079,681
----------- ----------- -----------
INTEREST EXPENSE:
Deposits, net 23,837,494 23,810,254 20,755,632
Federal Home Loan Bank advances 10,660,383 9,377,784 6,222,181
----------- ----------- -----------
Total interest expense 34,497,877 33,188,038 26,977,813
----------- ----------- -----------
Net interest income before
provision for loan losses 22,904,178 20,433,272 20,101,868
Provision for loan losses 240,000 240,000 240,000
----------- ----------- -----------
Net interest income after
provision for loan losses 22,664,178 20,193,272 19,861,868
----------- ----------- -----------
OTHER INCOME (LOSS):
Service charges and other fees 3,449,537 2,688,164 2,073,219
Loan servicing income 399,446 476,292 553,609
Losses on sales of investment
securities available for sale, net (64,188) (2,975) (32,688)
Losses on sales of mortgage-backed
securities available for sale, net -- (42,056) --
Gains on sales of loans, net 256,343 100,885 41,152
Real estate operations, net (60,000) 467,478 (565,000)
Other, net 260,529 278,138 279,079
----------- ----------- -----------
Total other income 4,241,667 3,965,926 2,349,371
----------- ----------- -----------
GENERAL AND ADMINISTRATIVE EXPENSES:
Compensation, payroll taxes, and
fringe benefits 8,010,714 7,807,029 7,705,606
Office occupancy and equipment 2,609,958 2,170,139 2,019,382
Federal insurance premiums 1,150,117 1,174,941 1,207,890
FDIC special assessment 3,355,000 -- --
Marketing 792,083 626,657 417,078
Data processing 365,704 316,188 895,968
Other, net 2,739,977 2,332,341 2,227,497
----------- ----------- -----------
Total general and administrative
expenses 19,023,553 14,427,295 14,473,421
Income before federal income
tax expense 7,882,292 9,731,903 7,737,818
Federal income tax expense 2,435,000 2,929,000 2,149,000
----------- ----------- -----------
NET INCOME $ 5,447,292 $ 6,802,903 $ 5,588,818
=========== =========== ===========
EARNINGS PER SHARE:
Primary $ 1.09 $ 1.35 $ 1.09
Fully diluted 1.09 1.35 1.09
=========== =========== ===========
DIVIDENDS PAID PER SHARE $ 0.43 $ 0.37 $ 0.31
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
66
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net Unrealized
Gains
(Losses) on
Additional Available- Commitment Total
Common Paid-In Retained for-Sale for ESOP Treasury Stockholders'
Stock Capital Income Securities Debt Stock Equity
----- ------- ------ ---------- ---- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $37,352 $17,610,623 $38,037,832 $793,001 $(1,155,066) $(488,753) $54,834,989
Net income for the year 1994 -- -- 5,588,818 -- -- -- 5,588,818
10% common stock dividend 3,730 6,990,722 (7,003,569) -- -- -- (9,117)
Treasury stock purchased -- -- -- -- -- (1,100,607) (1,100,607)
Stock options exercised -- -- (231,442) -- -- 347,072 115,630
Repayment of ESOP debt -- -- -- -- 231,886 -- 231,886
Cash dividends on common stock -
$0.33 per share -- -- (1,616,914) -- -- -- (1,616,914)
Tax benefit of ESOP dividends -- 27,928 -- -- -- -- 27,928
Tax benefit associated with
exercise of stock options -- 49,411 -- -- -- -- 49,411
Change in market value of
available-for-sale securities,
net of tax of $1,295,449 -- -- -- (2,514,696) -- -- (2,514,696)
------ ---------- ---------- ----------- ----------- ----------- ------------
Balance at December 31, 1994 41,082 24,678,684 34,774,725 (1,721,695) (923,180)(1,242,288) 55,607,328
Net income for the year 1995 -- -- 6,802,903 -- -- -- 6,802,903
10% common stock dividend 4,103 9,638,552 (9,654,329) -- -- -- (11,674)
Stock options exercised -- -- (203,543) -- -- 317,615 114,072
Repayment of ESOP debt -- -- -- -- 231,886 -- 231,886
Cash dividends on common stock -
$0.38 per share -- -- (1,866,776) -- -- -- (1,866,776)
Tax benefit of ESOP dividends -- 45,220 -- -- -- -- 45,220
Tax benefit associated with
exercise of stock options -- 26,706 -- -- -- -- 26,706
Change in market value of
available-for-sale securities,
net of tax of $923,851 -- -- -- 1,793,356 -- -- 1,793,356
------ ---------- --------- ---------- -------- ---------- -----------
Balance at December 31, 1995 45,185 34,389,162 29,852,980 71,661 (691,294) (924,673) 62,743,021
Net income for the year 1996 -- -- 5,447,292 -- -- -- 5,447,292
10% common stock dividend 3,311 6,971,456 (8,980,475) -- -- 1,995,912 (9,796)
Treasury stock purchased -- -- -- -- -- (4,089,237) (4,089,237)
Stock options exercised -- -- (283,171) -- -- 397,845 114,674
Repayment of ESOP debt -- -- -- -- 231,886 -- 231,886
Cash dividends on common stock -
$0.45 per share -- -- (2,173,026) -- -- -- (2,173,026)
Tax benefit of ESOP dividends -- 28,730 -- -- -- -- 28,730
Tax benefit associated with
exercise of stock options -- 33,550 -- -- -- -- 33,550
Change in market value of
available-for-sale securities,
net of tax of $73,631 -- -- -- 142,933 -- -- 142,933
------ ---------- ----------- ----------- ---------- ----------- -----------
Balance at December 31, 1996 $48,496 $41,422,898 $23,863,600 $ 214,594 $( 459,408)$(2,620,153)$62,470,027
======= =========== =========== =========== ========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
67
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
- ------------------------ ---------- ---------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,447,292 $ 6,802,903 $ 5,588,818
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation 1,605,669 1,217,594 1,027,081
Provision for loan losses 240,000 240,000 240,000
Provision for real estate losses 60,000 120,000 565,000
Net amortization of premiums and
accretion of discounts 370,832 1,178,859 2,514,766
Loan origination fees, net of costs
deferred 409,760 431,996 397,166
Amortization of loan fees (211,242) (342,228) (426,427)
Amortization of mortgage servicing rights 43,470 -- --
Loans originated for sale (25,856,898) (10,755,582) (3,117,000)
Proceeds from sales of loans
originated for sale 24,219,028 10,080,914 2,400,907
Net gains on sales of loans and securities (192,155) (55,854) (8,464)
Net gains on sales of real estate owned -- (587,478) --
Net (gains) losses on sales and disposal
of premises and equipment 83,101 (6,752) (9,927)
Net (gains) losses on sales of repossessed
property (430) 11,975 18,954
Recoveries of losses 36,983 54,328 190,448
Decrease (increase) in accrued interest
receivable 533,993 (399,843) 223,781
Increase in accrued interest payable 759,736 722,010 317,760
Increase (decrease) in federal income
taxes payable 273,902 506,999 (379,363)
Increase (decrease) in other liabilities (192,161) 458,314 (1,066,954)
Decrease (increase) in other assets 1,498,361 3,339,724 (5,920,829)
------------ ----------- -----------
Net cash provided by operating
activities 9,129,241 13,017,879 2,555,717
------------ ----------- -----------
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
- ------------------------ ---------- ---------- -------
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities held to maturity -- -- (200,000)
Purchases of investment securities available for sale (20,060,266) (5,065,650) (7,725,595)
Proceeds from sales of investment securities
available for sale 23,135,173 13,906,169 20,013,488
Principal repayments and maturities of investment
securities held to maturity -- 14,450,000 400,000
Principal repayments and maturities of investment
securities available for sale 20,420,000 11,000,000 37,350,000
Loan originations (net of undisbursed loans
in process) (200,744,785) (134,320,368) (147,359,594)
Loans purchased (31,733,987) (43,592,182) (74,914,350)
Proceeds from sales of loans 7,853,490 4,822,738 1,878,809
Principal repayments on loans 118,041,259 84,170,348 75,883,951
Proceeds from sales of mortgage-backed securities
available for sale -- 19,545,420 --
Principal repayments and maturities on mortgage-backed
securities available for sale 2,271,581 4,035,345 7,971,409
Principal repayments and maturities on mortgage-backed
securities held to maturity 5,967,777 8,219,953 31,417,894
Proceeds from sales, redemptions, and settlements of
real estate owned, net 437,935 742,358 2,434,215
Proceeds from sales of repossessed property 54,010 50,251 10,950
Capitalized additions to real estate owned,
net of recoveries 59,702 11,884 (529,214)
Purchases of premises and equipment (1,456,346) (463,318) (2,674,410)
Proceeds from sales and disposals of premises
and equipment 5,524 13,455 86,540
Purchases of Federal Home Loan Bank stock (2,095,200) (374,000) (3,489,000)
------------- ------------ -------------
Net cash used in investing activities (77,844,133) (22,847,597) (59,444,907)
------------- ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 25,757,823 26,126,642 (24,528,089)
Stock options exercised 114,674 114,072 115,630
Purchases of Treasury stock (4,089,237) -- (1,100,607)
Net increase (decrease) in advance payments
by borrowers for taxes and insurance 75,464 (815,970) (195,382)
Federal Home Loan Bank advance repayments (98,262,720)(147,218,103) (77,819,874)
Federal Home Loan Bank advances 140,252,667 147,516,795 160,340,727
Dividends paid on common stock (2,107,991) (1,832,008) (1,516,405)
------------- ----------- -----------
Net cash provided by financing activities 61,740,680 23,891,428 55,296,000
------------- ----------- -----------
Net increase(decrease)in cash and cash equivalents (6,974,212) 14,061,710 (1,593,190)
Cash and cash equivalents at beginning of period 29,724,175 15,662,465 17,255,655
------------- ----------- -----------
Cash and cash equivalents at end of period $22,749,963 $ 29,724,175 $ 15,662,465
============= =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid for:
Interest expense $ 33,738,141 $ 32,466,028 $ 26,660,053
Federal income taxes 2,450,000 2,285,000 2,528,363
Transfers of loans to real estate owned 342,408 264,637 894,615
Transfers of loans to repossessed property and
accounts receivable 69,673 53,600 39,626
Loans charged off 76,528 55,107 153,263
Loans to facilitate the sale of real estate owned 279,700 2,724,120 259,600
Transfers of securities to available-for-sale
classification:
Investment securities -- 18,081,023 --
Mortgage-backed securities 28,553,035 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
69
<PAGE>
CFSB BANCORP, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
CFSB Bancorp, Inc. (the Corporation), is the holding company for Community
First Bank, a state chartered stock savings bank (the 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 and 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 general 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.
The consolidated financial statements include the accounts and
transactions of CFSB Bancorp, Inc., and its wholly owned subsidiary, Community
First Bank, and the Bank's wholly owned subsidiary, Capitol Consolidated
Financial Corporation (Capitol Consolidated), and Capitol Consolidated's wholly
owned subsidiary, Allegan Insurance Agency. Intercompany transactions and
account balances are eliminated.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements are prepared in conformity with
generally accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities as of the date of the balance sheet and the reported amounts of
income and expenses for the period. Actual results could differ from those
estimates.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
Investment and mortgage-backed securities held to maturity represent those
securities for which the Corporation has the positive intent and ability to hold
to maturity and are reported at cost, adjusted for amortization of premiums and
accretion of discounts using the effective-interest method over the period to
maturity.
Investment and mortgage-backed securities available for sale represent
those securities not classified as held to maturity. Unrealized holding gains
and losses, net of tax, on available-for-sale securities are reported as a net
amount in a separate component of stockholders' equity until realized. Gains and
losses on the sale of securities are determined using the
specific-identification method and are recognized on a trade-date basis.
Premiums and discounts are recognized in interest income using the
effective-interest method over the period to maturity.
In November 1995, the Financial Accounting Standards Board (FASB) issued A
Guide to Implementation of Statement 115 on Accounting for Certain Investments
in Debt and Equity Securities (Guide). The Guide permitted
70
<PAGE>
an institution to reassess the appropriateness of the classifications of all
securities held at the time and account for any resulting reclassifications at
fair value in accordance with Statement of Financial Accounting Standards No.
115, Accounting for Certain Investments in Debt and Equity Securities. As of
November 30, 1995, the Corporation, in order to allow further flexibility in
future asset liability management decisions relating to securities, reclassified
certain corporate notes and U.S. Treasury securities from a held-to-maturity
classification to an available-for-sale classification with unrealized pre-tax
losses on these securities recorded as a negative adjustment to stockholders'
equity.
In September 1996, based upon liquidity and interest rate considerations,
the Corporation determined it could no longer assert its intention to hold all
mortgage-backed securities until maturity. Therefore, the entire mortgage-backed
securities portfolio was transferred from a held-to-maturity classification to
an available-for-sale classification. As a result, the Corporation intends to
classify any investment or mortgage-backed securities currently held or
purchased in the subsequent two years as available for sale.
LOANS RECEIVABLE
Loans receivable for which the Corporation has the intent and ability to
hold for the foreseeable future or until maturity or payoff are reported at
their outstanding unpaid principal balances, net of any undistributed portion of
loans in process, deferred origination fees, and the allowance for loan losses.
LOAN ORIGINATION AND COMMITMENT FEES
Fees received in connection with loan commitments are deferred in other
liabilities until the loan is advanced, and are then recognized over the term of
the loan as an adjustment to the yield. Fees on commitments that expire unused
are recognized as fee income at expiration.
Loan origination fees, net of certain loan origination costs, are deferred
and recognized over the lives of the related loans as an adjustment to the
yield. When loans are sold, any remaining unamortized deferred fees are
generally recognized as an adjustment of gain (loss) on sale of loans.
Loan origination and commitment fees charged on adjustable-rate mortgages
are generally deemed to be adjustments to the first adjustment period yield of
the mortgage, to the extent the interest rate during the first adjustment period
on the mortgage is less than the index rate plus the contractual spread.
NONACCRUAL ASSETS
Nonaccrual assets are comprised of loans for which the accrual of interest
has been discontinued, loans for which the terms have been renegotiated to less
than market rates as a result of a serious weakening of the borrower's financial
condition, and real estate, which has been acquired primarily through
foreclosure and is awaiting disposition.
Loans are generally placed on a nonaccrual basis when principal or
interest is past due 90 days or more or when, in the opinion of management, full
collection of principal and interest is unlikely. At the time a loan is placed
on nonaccrual status, interest previously accrued but not collected is charged
against current income. Income on such loans is then recognized only to the
extent that cash is received and where future collections of principal are
probable. A nonaccrual loan may be restored to accrual status when interest and
principal payments are current and the loan appears otherwise collectible.
71
<PAGE>
ALLOWANCE FOR LOSSES ON LOANS AND REAL ESTATE
Provisions for losses on loans and real estate are charged to operations
based upon management's evaluation of potential losses in the portfolio. In
addition to providing reserves on specific assets where a decline in value has
been identified, general provisions for losses are established based upon the
overall portfolio composition and general market conditions. In establishing
both specific and general valuation allowances, management reviews individual
loans, recent loss experience, current economic conditions, the overall balance
and composition of the portfolio, and such other factors which, in management's
judgment, deserve recognition in estimating possible losses.
Management believes the allowance for losses on loans and real estate is
adequate. While management uses available information to recognize losses on
loans and real estate, future additions to the allowance may be necessary based
on changes in economic conditions and borrower circumstances.
In May of 1993, the FASB issued Statement of Financial Accounting
Standards No. 114, Accounting by Creditors for Impairment of a Loan (SFAS 114).
SFAS 114, as amended in October 1994 by Statement of Financial Accounting
Standards No. 118, Accounting by Creditors for Impairment of a Loan--Income
Recognition and Disclosures (SFAS 118), requires impaired loans to be measured
based on the present value of expected future cash flows, discounted at the
loan's effective interest rate or as a practical expedient at the loan's
observable market price, or the fair value of the collateral if the loan is
collateral dependent. This statement also applies to all loans restructured in
troubled debt restructurings involving a modification of terms, as well as
clarifies that a creditor should evaluate the collectibility of both contractual
interest and contractual principal of all receivables when assessing the need
for a loss accrual. The Corporation adopted the provisions of SFAS 114, as
amended by SFAS 118, on a prospective basis as of January 1, 1995. Neither the
initial adoption nor the ongoing effect of SFAS 114 has had, or is expected to
have, a material impact on the financial condition or results of operations of
the Corporation.
REAL ESTATE
Real estate acquired through foreclosure is carried at the lower of
estimated fair value less costs to sell or cost (estimated fair value at the
time of foreclosure). Such determination is made on an individual-asset basis.
At the time of acquisition, any excess of carrying amount over estimated fair
value is recorded as a reduction in the allowance for loan losses, with the
estimated costs to sell recorded through the establishment of a valuation
allowance. Subsequent declines in fair value less estimated costs to sell are
recognized as increases in the valuation allowance. If the estimated fair value
of the asset minus the estimated costs to sell the asset is more than its
carrying amount, the valuation allowance is reduced, but not below zero.
Increases or decreases in the valuation allowance are charged or credited to
income. Generally, expenditures relating to the development and improvement of
real estate acquired through foreclosure are capitalized.
LOANS HELD FOR SALE
Additional funds for lending are periodically provided by selling mortgage
loans. Mortgage loans intended for sale in the secondary market are carried at
the lower of cost or estimated market value in the aggregate. These loans are
classified as held for sale and are included in loans receivable in the
consolidated statements of financial condition. Net unrealized losses are
recorded by charges to income.
LOAN SERVICING
The Corporation services for investors mortgage loans that are not
included in the consolidated statements of financial condition. Fees earned for
servicing loans owned by investors are reported as income when the related
mortgage loan payments are collected. Loan servicing costs are charged to
expense as incurred.
72
<PAGE>
In May 1995, the FASB issued Statement of Financial Accounting Standards
No. 122, Accounting for Mortgage Servicing Rights, An Amendment of FASB
Statement No. 65 (SFAS 122). 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. SFAS 122 also requires the Corporation to assess
its capitalized mortgage servicing rights for impairment based on the fair value
of those rights, with impairment recognized through a valuation allowance. 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. For purposes of
measuring impairment, the risk characteristics used by the Corporation include
the underlying loans' interest rates, terms, and types. 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.
FEDERAL INCOME TAXES
The Corporation and its subsidiary file a consolidated federal income tax
return. The provision for federal income taxes is based upon income for
financial statement purposes, rather than amounts reported on the Corporation's
income tax return.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized as income in the
period that includes the enactment date.
PREMISES AND EQUIPMENT
Office property and equipment are carried at cost, less accumulated
depreciation and amortization. Depreciation and amortization of office
properties and equipment is charged to operations on a straight-line basis over
the estimated useful lives of the related assets as follows: office buildings --
25 to 50 years; building improvements -- 7 to 25 years; and furniture, fixtures,
and equipment -- 3 to 8 years.
INTEREST RATE EXCHANGE AGREEMENTS
Interest rate exchange agreements, designated as hedges against future
fluctuations in the interest rates of specifically identified assets or
liabilities, are not marked to market. Net interest income (expense) resulting
from the differential between exchanging floating and fixed-rate interest
payments is recorded as an addition to or reduction of the interest income
(expense) on the associated asset or liability. Gains and losses on terminated
interest rate exchange agreements are amortized over the remaining terms of the
agreements.
INTEREST ON DEPOSITS
Penalty income on early withdrawal of certificates of deposit is
recognized as a reduction of interest expense on deposits.
73
<PAGE>
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
year.
STATEMENT OF CASH FLOWS
For the purpose of presentation in the consolidated statement of cash
flows, cash and cash equivalents include cash and amounts due from depository
institutions and interest-earning deposits with the Federal Home Loan Bank and
other depository institutions.
STOCK-BASED COMPENSATION
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 elected the pro forma disclosure method in these year-end
1996 Consolidated Financial Statements and Notes thereto.
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.
RECLASSIFICATIONS
Certain prior years' financial statement amounts have been reclassified to
conform to the current year financial statement presentation.
(2) RESTRICTIONS ON CASH AND AMOUNTS DUE FROM DEPOSITORY INSTITUTIONS
The Bank is required to maintain certain daily reserve balances in
accordance with Federal Reserve Board requirements. The reserve balances
maintained in accordance with such requirements were $5,684,000 and $5,137,000
at December 31, 1996 and 1995, respectively.
74
<PAGE>
(3) INVESTMENT SECURITIES
Investment securities available for sale consist of the following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
AMORTIZED FAIR Amortized Fair
COST VALUE Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
United States government and agency obligations:
Maturing within one year ..................... $20,096,712 $20,071,094 $15,138,350 $15,102,344
Maturing from one to five years .............. -- -- 15,253,082 15,225,000
----------- ----------- ----------- -----------
20,096,712 20,071,094 30,391,432 30,327,344
Federal agency obligations:
Maturing from five to ten years .............. 7,000,000 7,015,200 -- --
Corporate bonds:
Maturing within one year ..................... 4,000,000 4,007,200 12,686,283 12,682,333
Maturing from one to five years .............. -- -- 11,921,142 12,099,856
----------- ----------- ----------- -----------
4,000,000 4,007,200 24,607,425 24,782,189
----------- ----------- ----------- -----------
$31,096,712 $31,093,494 $54,998,857 $55,109,533
=========== =========== =========== ===========
Weighted average interest rate ................. 5.89% 5.37%
=========== ===========
</TABLE>
Unrealized gains and losses on investment securities available for sale
are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1996 1995
- ------------ ---- ----
GROSS GROSS Gross Gross
UNREALIZED UNREALIZED Unrealized Unrealized
GAINS LOSSES Gains Losses
----- ------ ----- ------
<S> <C> <C> <C> <C>
United States government and
agency obligations $21,205 $46,823 $ -- $64,088
Federal agency obligations 15,200 -- -- --
Corporate bonds 7,200 -- 204,990 30,226
-------- --------- -------- -------
$43,605 $46,823 $204,990 $94,314
======= ======= ======== =======
</TABLE>
Proceeds from sales of investment securities available for sale during the
years ended December 31, 1996, 1995, and 1994, were $23,135,173, $13,906,169,
and $20,013,488, respectively. Gross gains of $43,207, $29,872, and $13,440, and
gross losses of $107,395, $32,847, and $46,128, were realized on those sales
during 1996, 1995, and 1994, respectively.
During the years ended December 31, 1996 and 1994, call provisions were
exercised on $4,295,000 and $2,000,000, respectively, of investment securities
available for sale. No gains or losses were recognized during the respective
periods. There were no call provisions exercised on investment securities
available for sale during 1995.
During the year ended December 31, 1995, call provisions were exercised on
$14,450,000 of investment securities held to maturity. No gains or losses were
recognized during the respective period. There were no call provisions exercised
on investment securities held to maturity during 1996 and 1994.
In accordance with the Guide, the Corporation, in order to allow further
flexibility in future asset liability management decisions relating to
securities, in 1995 reclassified $18,081,023 of corporate notes and U.S.
Treasury securities from a held-to-maturity classification to an
available-for-sale classification, with unrealized pretax losses of $103,210 on
these securities recorded as a negative adjustment to stockholders' equity.
75
<PAGE>
Expected maturities may differ from the contractual maturities above
because certain borrowers have the right to call or prepay obligations with or
without call or prepayment penalties.
Accrued interest receivable related to investment securities approximated
$293,000 and $1,162,000 at December 31, 1996 and 1995, respectively.
At December 31, 1996, the Bank had no commitments to purchase or sell
investment securities.
(4) MORTGAGE-BACKED SECURITIES
Mortgage-backed securities available for sale consist of the following:
<TABLE>
<CAPTION>
December 31, 1996 1995
- ------------ ---- ----
GROSS GROSS Gross Gross
UNREALIZED UNREALIZED Unrealized Unrealized
GAINS LOSSES Gains Losses
----- ------ ----- ------
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage Corporation
participation certificates $19,438,088 $19,845,510 $ -- $ --
Fannie Mae guaranteed mortgage
pass-through certificates 2,547,019 2,468,209 -- --
Government National Mortgage
Association modified pass-
through certificates 92,490 95,265 -- --
Conventional pass-through certificates 3,982,504 3,981,597 -- --
Collateralized mortgage obligations 832,106 829,986 609,993 607,895
----------- ----------- ----------- --------
$26,892,207 $27,220,567 $ 609,993 $607,895
=========== =========== =========== ========
Weighted average interest rate 7.82% 6.50%
</TABLE>
Unrealized gains and losses on mortgage-backed securities available for
sale are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1996 1995
- ------------ ---- ----
GROSS GROSS Gross Gross
UNREALIZED UNREALIZED Unrealized Unrealized
GAINS LOSSES Gains Losses
----- ------ ----- ------
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage
Corporation participation
certificates $538,105 $130,683 $ -- $ --
Fannie Mae guaranteed mortgage
pass-through certificates 629 79,439 -- --
Government National Mortgage
Association modified pass-
through certificates 2,775 -- -- --
Conventional pass-through certificates -- 907 -- --
Collateralized mortgage obligations -- 2,120 -- 2,098
----------- --------- --------- ------
$541,509 $213,149 $ -- $2,098
======== ======== ========= ======
</TABLE>
Proceeds from the sales of mortgage-backed securities available for sale
during the year ended December 31, 1995, were $19,545,420. Gross gains of $8,889
and gross losses of $50,945 were realized on those 1995 sales. There was no
sales of mortgage-backed securities during the years ended December 31, 1996 and
1994.
As of September 30, 1996, based upon liquidity and interest rate
considerations, the Corporation determined it could no longer assert its
intention to hold all mortgage-backed securities until maturity. Therefore, the
entire
76
<PAGE>
mortgage-backed securities portfolio totaling $28,553,035 was reclassified to an
available-for-sale classification with unrealized pretax gains of $190,368 being
recorded as a favorable adjustment to stockholders' equity.
Mortgage-backed securities held to maturity at December 31, 1995, consist
of the following:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
---- -----
<S> <C> <C>
Federal Home Loan Mortgage Corporation
participation certificates $24,252,454 $24,889,396
Fannie Mae guaranteed mortgage pass-through
certificates 2,720,969 2,681,031
Government National Mortgage Association modified
pass-through certificates 146,553 150,217
Conventional pass-through certificates 5,099,482 5,100,570
Collateralized mortgage obligations 2,328,554 2,339,749
----------- -----------
$34,548,012 $35,160,963
=========== ===========
Weighted average interest rate 7.89%
====
</TABLE>
Unrealized gains and losses on mortgage-backed securities held to maturity
at December 31, 1995, are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Gains Losses
----- ------
<S> <C> <C>
Federal Home Loan Mortgage Corporation
participation certificates $779,765 $142,823
Fannie Mae guaranteed mortgage pass-through
certificates 842 40,780
Government National Mortgage Association modified
pass-through certificates 3,664 --
Conventional pass-through certificates 1,088 --
Collateralized mortgage obligations 11,237 42
-------- --------
$796,596 $183,645
======== ========
</TABLE>
Accrued interest receivable on mortgage-backed securities was
approximately $316,000 and $399,000 at December 31, 1996 and 1995, respectively.
The amortized cost of mortgage-backed securities at December 31, 1996 and
1995, included net unamortized premiums of $119,000 and $147,000, respectively.
Variable-rate mortgage-backed securities approximated $11,286,000 and
$12,997,000, with weighted average rates of 6.95 percent and 7.08 percent, at
December 31, 1996 and 1995, respectively.
At December 31, 1996, the Bank had no commitments to buy or sell
mortgage-backed securities.
77
<PAGE>
(5) LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
December 31, 1996 1995
- ------------ -------- ------
<S> <C> <C>
First mortgage:
One- to four-family residential $553,690,395 $469,819,906
Income-producing property 52,583,762 57,951,827
FHA-insured and VA-partially guaranteed 6,404,211 7,458,269
Construction and development:
One- to four-family residential 38,072,036 30,753,942
Income-producing property 31,428,040 17,059,597
------------ ------------
682,178,444 583,043,541
Second mortgage 510,458 570,848
Other loans:
Land contract 254,068 348,763
Auto 7,925,413 6,542,273
Commercial 4,644,308 3,195,292
Educational 1,870,672 2,328,681
Marine 1,307,903 1,374,754
Home equity 36,275,330 28,126,371
Mobile home 1,518,817 1,735,048
Other 5,425,604 3,715,802
------------ ------------
59,222,115 47,366,984
------------ ------------
741,911,017 630,981,373
Less:
Undistributed portion of loans in process (18,147,704) (15,054,150)
Deferred origination fees (1,485,083) (1,280,014)
Allowance for losses on loans (4,563,594) (4,363,139)
------------ ------------
$717,714,636 $610,284,070
============ ============
Weighted average interest rate 7.60% 7.75%
==== ====
</TABLE>
Accrued interest receivable on loans receivable, net of the allowance for
uncollectible interest, approximated $3,703,000 and $3,268,000 at December 31,
1996 and 1995, respectively.
The Corporation had approximately $1,787,000 and $349,000 of nonaccruing
loans as of December 31, 1996 and 1995, respectively. Interest received and
included as income on these loans for the years ended December 31, 1996, 1995,
and 1994, was $118,000, $26,000, and $15,000, respectively. The Corporation
would have recorded $46,000, $39,000, and $27,000 of additional interest income
on these nonaccrual loans for the years ended December 31, 1996, 1995, and 1994,
respectively, if these loans had been current in accordance with their original
terms and had been outstanding throughout the periods or since origination.
Impaired loans as defined by SFAS 114 totaled $554,000 and $0 at December
31, 1996 and 1995, respectively, and includes one income-producing property loan
and three commercial business loans. These loans are included in nonaccrual
loans at December 31, 1996. 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
$559,000 and $0 during 1996 and 1995, respectively. Interest income recognized
on impaired loans during 1996 and 1995, totaled $27,000 and $0, respectively.
Impaired loans had specific allocations of the allowance for loan losses in
accordance with SFAS 114 approximating $150,000 and $0 at December 31, 1996 and
1995, respectively.
78
<PAGE>
The Corporation had no troubled debt restructured loans at December 31,
1996 and 1995.
Included in one- to four-family residential, first-mortgage loans were
approximately $395,300,000 and $297,800,000 of adjustable-rate mortgages at
December 31, 1996 and 1995, respectively.
Included in income-producing property loans were approximately $46,300,000
and $32,700,000 of adjustable-rate mortgages at December 31, 1996 and 1995,
respectively.
The Corporation serviced loans for others of approximately $156,600,000,
$154,900,000, and $163,900,000 at December 31, 1996, 1995, and 1994,
respectively.
Of the loans serviced for others, approximately $30,100,000 represent the
December 31, 1996, balance of loans sold during 1996. The Corporation
capitalized approximately $234,000 of originated mortgage servicing rights
during the year ended December 31, 1996, of which $43,000 has been amortized. No
valuation allowances for capitalized originated mortgage servicing rights were
considered necessary as of December 31, 1996.
The Corporation previously sold certain one- to four-family residential
loans with recourse. At December 31, 1996, 1995, and 1994, the outstanding
balance of these loans was approximately $1,400,000, $1,800,000, and $2,200,000.
The Corporation has not repurchased any of these loans during the three years
ended December 31, 1996.
The Corporation had commitments to originate the following mortgage loans
at December 31, 1996:
<TABLE>
<CAPTION>
WEIGHTED
AMOUNT AVERAGE
------ -------
RATE
- ----
<S> <C> <C>
One- to four-family residential:
Fixed rate $ 5,916,000 8.10%
Adjustable rate 11,738,000 7.32
Ajustable-rate income-producing property 1,627,000 9.13
----------- ----
$19,281,000 7.71%
=========== ====
</TABLE>
The Corporation had commitments to sell one- to four-family residential,
fixed-rate mortgage loans of $1,298,000 at December 31, 1996. As of December 31,
1996, the Corporation had no commitments to buy mortgage loans, and $2,558,000
of one- to four-family residential, fixed-rate mortgage loans were held for
sale. Loans held for sale, after consideration of the aforementioned
commitments, were valued at the lower of cost or market, as determined on an
aggregate basis.
(6) CONCENTRATION OF CREDIT RISK
The Corporation considers its primary market area for lending and savings
activities to be greater Lansing in mid-Michigan. The Corporation's one- to
four-family residential real estate loans totaled $598,200,000 and $508,000,000
at December 31, 1996 and 1995, respectively, and included $474,900,000 and
$400,200,000 of originated loans, respectively. Substantially all of the
originated loans were on properties located in Michigan. Of the purchased loans
which are serviced by other institutions, at December 31, 1996, $39,100,000,
$77,300,000 and $6,900,000 represented loans on properties located in Michigan,
Texas, and Florida, respectively. Substantially all of the Corporation's
income-producing property and consumer loans are based in Michigan. Although the
Corporation has a diversified loan portfolio, a substantial portion of its
debtors' ability to honor their contractual obligations is reliant upon the
economic stability of the area. The greater Lansing area is a diversified market
with a strong service sector and, to a lesser extent, trade and manufacturing
sectors. The three major employers in the
79
<PAGE>
area are the State of Michigan, General Motors, and Michigan State University.
The Corporation is not dependent upon any single industry or business for its
banking opportunities.
Collateral securing the Corporation's income-producing loan portfolio
consists of the following property types:
<TABLE>
<CAPTION>
December 31, 1996 1995
- ------------ ---- ----
<S> <C> <C>
Apartments $35,340,019 $29,221,437
Office buildings 22,242,915 23,191,802
Restaurants and motels 5,699,844 5,894,737
Retail centers 5,000,860 4,949,755
Residential land development 7,490,957 5,222,112
Residential and condominiums 3,552,506 2,105,091
Other 4,684,701 4,426,490
----------- -----------
$84,011,802 $75,011,424
=========== ===========
</TABLE>
(7) REAL ESTATE
Real estate held by the Corporation is summarized as follows:
<TABLE>
<CAPTION>
December 31, 1996 1995
- ------------ ---- ----
<S> <C> <C>
Real estate in judgment, subject to redemption $ 189,990 $ 88,552
Real estate acquired through foreclosure 22,169 156,742
--------- ---------
212,159 245,294
Less: Allowance for losses (212,159) (223,577)
--------- ---------
$ -- $ 21,717
=========== =========
</TABLE>
The following is a summary of the results of real estate operations for
the years indicated:
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
- ------------------------ ---- ---- ----
<S> <C> <C> <C>
Income from sales of real estate
acquired through foreclosure, net $ -- $ 587,478 $ --
Provision for losses on real estate (60,000) (120,000) (565,000)
-------- --------- ---------
$(60,000) $ 467,478 $(565,000)
======== ========= =========
</TABLE>
80
<PAGE>
(8) ALLOWANCE FOR LOSSES ON LOANS AND REAL ESTATE
The following is a summary of the allowance for losses on loans and real
estate:
<TABLE>
<CAPTION>
Loans Real Estate Total
----- ----------- -----
<S> <C> <C> <C>
Balance at December 31, 1993 $3,846,733 $ 167,087 $4,013,820
Provision for losses 240,000 565,000 805,000
Losses charged against the allowance (153,263) (711,937) (865,200)
Recoveries of losses 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
Losses charged against the allowance (55,107) (34,614) (89,721)
Recoveries of losses 54,328 62,218 116,546
---------- --------- ----------
Balance at December 31, 1995 4,363,139 223,577 4,586,716
Provision for losses 240,000 60,000 300,000
Losses charged against the allowance (76,528) (187,214) (263,742)
Recoveries of losses 36,983 115,796 152,779
---------- --------- ----------
Balances at December 31, 1996 $4,563,594 $ 212,159 $4,775,753
========== ========= ==========
</TABLE>
(9) PREMISES AND EQUIPMENT
Premises and equipment are carried at cost less accumulated depreciation
and are summarized by major classification as follows:
<TABLE>
<CAPTION>
December 31, 1996 1995
- ------------ ---- ----
<S> <C> <C>
Land $ 3,004,842 $ 2,787,536
Office buildings and improvements 11,901,210 11,344,438
Furniture, fixtures, and equipment 9,205,565 8,930,400
------------ ------------
24,111,617 23,062,374
Less: Accumulated depreciation (13,126,418) (11,839,227)
------------ ------------
$ 10,985,199 $ 11,223,147
============ ============
</TABLE>
(10) INVESTMENT IN FEDERAL HOME LOAN BANK STOCK
The Bank is required to maintain an investment in the stock of the Federal
Home Loan Bank of Indianapolis (FHLB) in an amount equal to at least 1.0 percent
of the unpaid principal balances of the Bank's residential mortgage loans, 0.3
percent of its total assets, or 5.0 percent of its outstanding advances from the
FHLB, whichever is greater. Purchases and sales of stock are made directly with
the FHLB at par value.
81
<PAGE>
(11) DEPOSITS
Deposits in the Corporation, represented by various types of programs, are
presented below:
<TABLE>
<CAPTION>
December 31, 1996 1995
- ------------ ---- ----
WEIGHTED Weighted
AVERAGE Average
RATE AMOUNT Rate Amount
---- ------ ---- ------
<S> <C> <C> <C> <C>
Regular savings 2.14% $ 65,213,797 2.88% $ 67,589,740
Money market savings 6.03 16,136,425 -- --
Consumer checking 1.85 86,722,533 2.02 79,630,855
Commercial checking -- 9,324,314 -- 7,658,521
Money market checking (a) 4.07 51,962,675 4.07 54,523,653
---- ------------ ---- ------------
2.65 229,359,744 2.76 209,402,769
Certificates of deposit(a) 5.73 324,214,257 5.97 318,413,409
---- ------------ ---- ------------
Total deposits 4.46% $553,574,001 4.69% $527,816,178
==== ============ ==== ============
</TABLE>
(a) At December 31, 1995, the weighted average interest rate included the
annualized effect of the amortization of the deferred loss on termination
of an interest rate exchange agreement.
Accrued interest payable on deposits approximated $3,678,000 and
$3,020,000 at December 31, 1996 and 1995, respectively. Contractual maturities
of certificates of deposit are as follows:
<TABLE>
<CAPTION>
December 31, 1996 1995
- ------------ ---- ----
WEIGHTED Weighted
AVERAGE Average
RATE AMOUNT Rate Amount
---- ------ ---- ------
<S> <C> <C> <C> <C>
1996 --% $ -- 5.86% $182,828,902
1997 5.62 219,022,772 6.06 57,684,928
1998 5.88 51,800,281 6.05 42,009,298
1999 5.96 30,414,437 6.22 21,230,407
2000 6.37 14,024,568 6.40 13,727,834
2001 5.63 7,821,907 6.30 152,333
2002 and thereafter 5.97 1,130,292 6.20 779,707
---- ------------ ---- ------------
5.73% $324,214,257 5.97% $318,413,409
==== ============ ==== ============
</TABLE>
Included in total certificates of deposit as of December 31, 1996 and
1995, are approximately $32,800,000 and $32,100,000, respectively, in
certificates of deposit of $100,000 or more in amount, with weighted average
interest rates of 5.85 percent and 6.16 percent, respectively. Contractual
maturities of certificates of deposit of $100,000 or more in amount outstanding
at December 31, 1996, are $6,900,000 within 3 months or less; $7,200,000 within
3 months to 6 months; $8,500,000 within 6 months to 12 months; and $10,200,000
for over 12 months.
At December 31, 1996 and 1995, the Corporation had $100,000 and $600,000
of brokered deposits, respectively, representing 0.02 percent and 0.11 percent
of total deposits, respectively.
82
<PAGE>
By regulation, certain penalties are assessed depositors exercising early
certificate withdrawal privileges. These penalties are accounted for as offsets
to interest expense on deposits in the year they are incurred. Listed below are
interest expense and penalties for the years indicated.
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
- ------------------------ ---- ---- ----
<S> <C> <C> <C>
Interest on deposits (net of penalties):
Savings $ 1,592,132 $ 1,985,791 $ 1,861,653
Checking 3,842,849 3,816,335 4,034,434
Certificates of deposit 18,402,513 18,008,128 14,859,545
----------- ----------- -----------
$23,837,494 $23,810,254 $20,755,632
=========== =========== ===========
Penalties $ 102,000 $ 117,000 $ 92,000
</TABLE>
The cost of the Corporation's interest rate exchange agreements was
$106,927, $109,018 and $568,350 during the years ended December 31, 1996, 1995,
and 1994, respectively, and is included above as interest expense on deposits.
(12) ADVANCES FROM FEDERAL HOME LOAN BANK
FHLB advances at December 31, 1996 and 1995, are secured by the
Corporation's investment in the stock of the Federal Home Loan Bank of
Indianapolis, and substantially all of its first mortgage loans are under a
blanket collateral agreement. Maturities and weighted average interest rates are
as follows:
<TABLE>
<CAPTION>
December 31, 1996 1995
- ------------ ---- ----
WEIGHTED Weighted
Fixed-Rate AVERAGE Average
Advances Maturing In RATE AMOUNT Rate Amount
- -------------------- ---- ------ ---- ------
<S> <C> <C> <C> <C>
1996 --% $ -- 6.62% $22,110,053
1997 6.12 26,746,389 6.12 26,746,389
1998 6.01 61,357,552 6.00 56,357,552
1999 6.17 37,190,257 5.72 8,190,257
2000 5.66 13,586,995 5.66 13,586,995
2001 6.60 8,295,559 5.61 2,095,559
2002 and thereafter 6.34 3,787,571 6.34 3,787,571
---- ------------ ---- ------------
Total fixed-rate
advances 6.08 150,964,323 6.08 132,874,376
---- ------------ ---- ------------
Adjustable-Rate Advances
Maturing In
1996 -- -- 6.00 3,975,000
1997 5.64 51,675,000 5.69 23,800,000
1998 -- -- -- --
1999 -- -- -- --
2000 -- -- -- --
2001 -- -- -- --
2002 and thereafter -- -- -- --
Total adjustable-
rate advances 5.64 51,675,000 5.74 27,775,000
---- ------------ ---- ------------
5.97% $202,639,323 6.02% $160,649,376
==== ============ ==== ============
</TABLE>
83
<PAGE>
At December 31, 1996 and 1995, the portfolio of FHLB advances included
$1,650,000 and $3,650,000 of medium-term borrowings, respectively, which
contractually, the Corporation may, at its option and without prepayment
penalty, repay such advances on the first anniversary date of each borrowing or
semiannually thereafter until maturity.
The Corporation had a $5,000,000 available, but unused line of credit from
the FHLB at December 31, 1996 and 1995.
(13) FEDERAL INCOME TAXES
Total federal income tax expense for the years indicated has been
allocated as follows:
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
- ------------------------ ---- ---- ----
<S> <C> <C> <C>
Current tax expense $2,500,000 $2,792,000 $ 2,276,000
Deferred tax expense (benefit) (65,000) 137,000 (127,000)
---------- ---------- -----------
Income tax expense in the statement
of operations 2,435,000 2,929,000 2,149,000
Income tax expense (benefit) charged
(credited) directly to
stockholders' equity:
Gains (losses) on securities
available for sale 74,000 924,000 (1,296,000)
ESOP dividends (29,000) (45,000) (28,000)
Exercise of stock options (34,000) (27,000) (49,000)
---------- ---------- -----------
$2,446,000 $3,781,000 $ 776,000
========== ========== ===========
</TABLE>
The tax effects of temporary differences between the financial statement
carrying amounts and the tax bases of assets and liabilities that gave rise to
significant portions of the deferred tax asset as of December 31, 1996 and 1995,
are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1996 1995
- ------------ ---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for losses on loans and real estate $ 1,657,000 $ 1,559,000
Postretirement benefits 244,000 242,000
Other 812,000 746,000
----------- -----------
Deferred tax assets 2,713,000 2,547,000
Deferred tax liabilities:
Excess of tax bad debt reserves over base-year
reserves (1,255,000) (1,255,000)
Loan swap amortization -- (124,000)
Unrealized gains on available-for-sale securities (111,000) (37,000)
Federal Home Loan Bank stock dividends (285,000) (285,000)
Deferred loan origination fees (506,000) (313,000)
Deferred loss on termination of interest rate
exchange agreement -- (36,000)
Other (239,000) (171,000)
Deferred tax liabilities (2,396,000) (2,221,000)
----------- -----------
Net deferred tax asset $ 317,000 $ 326,000
=========== ===========
</TABLE>
84
<PAGE>
The deferred tax asset is subject to certain asset realization tests.
Management believes that no valuation allowance is required at December 31, 1996
and 1995, or at the end of any interim quarter during these years, due to the
combination of potential recovery of tax previously paid and the reversal of
certain deductible temporary differences. Federal income taxes of $7,300,000
were paid during the three years ended December 31, 1996.
Federal income tax expense differs from the amounts computed using the
statutory federal income tax rate of 34 percent. The reasons for the differences
are summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
- ------------------------ ---- ---- ----
<S> <C> <C> <C>
Tax expense at federal statutory rate $2,680,000 $3,309,000 $2,631,000
Increase (decrease) resulting from:
Base-year tax bad debt reserves, net -- (174,000) (476,000)
Low-income housing tax credits (228,000) (228,000) --
Other, net (17,000) 22,000 (6,000)
---------- ---------- ----------
$2,435,000 $2,929,000 $2,149,000
========== ========== ==========
</TABLE>
As a result of legislation enacted in 1996, the Bank is not permitted to
use the reserve method previously available to thrift institutions to compute
its tax bad debt deduction for years ending after December 31, 1995. It is
expected the excess of the Bank's December 31, 1995, tax bad debt reserves over
its reserves as of December 31, 1987, will be taken into taxable income ratably
over a six-year period beginning in 1998, and a deferred tax liability has been
recognized related to this amount. No deferred tax liability has been recognized
for the Bank's December 31, 1987, tax bad debt reserves of $8,500,000, since
these reserves would only be taken into taxable income under circumstances the
Corporation is not likely to encounter. Therefore, this temporary difference is
not expected to reverse in the foreseeable future.
(14) STOCK OPTION PLANS
In October 1990, the Corporation adopted the 1990 Stock Option Plan (1990
Plan) for the benefit of directors, selected officers, and other key employees.
The number of shares of common stock reserved for issuance under the 1990 Plan
was equal to 10 percent of the total number of common shares issued pursuant to
the Bank's conversion to capital stock form. The 1990 Plan provides for the
granting of options for up to 380,962 shares of the Corporation's common stock
at the fair market value at the time the options are granted. The 1990 Plan will
remain in effect until June 28, 2000. Each stock option granted under the 1990
Plan must be exercised within ten years of the date the option was granted.
In April 1994, the Corporation adopted the 1994 Stock Option and Incentive
Plan (1994 Plan) to provide select employees and directors the opportunity to
acquire shares. The number of shares of common stock reserved for issuance under
the 1994 Plan was equal to 10 percent of the then-outstanding shares. The 1994
Plan provides for the granting of options for up to 496,221 shares of the
Corporation's common stock at the fair market value at the time the options are
granted. The 1994 Plan will remain in effect until April 19, 2004. Each stock
option granted under the 1994 Plan must be exercised within ten years of the
date the option was granted. The 1994 Plan provides that the Stock Option
Committee (Committee), appointed by the Corporation's board of directors, at its
discretion, may award restricted shares of the Corporation's common stock to
employees. Shares of the Corporation's common stock issued pursuant to the 1994
Plan are restricted for a period of no less than six months and no greater than
five years. The Committee determines the restrictions applicable to the award of
restricted stock, including, but not limited to, requirements of continuous
service for a specified term or the attainment of specific corporate,
divisional, or individual performance standards or goals. As of December 31,
1996, no restricted stock has been awarded.
Both plans also provide for the granting of options with tandem stock
appreciation rights. Stock appreciation rights entitle the grantee to receive
cash equal to the excess of the market value of the shares at the date
85
<PAGE>
the right is exercised over the exercised price. Upon exercise of a stock
appreciation right, the related option, or portion thereof, is canceled. An
expense is accrued for the amount by which the market value of the stock exceeds
the option price for each stock appreciation right outstanding. As of December
31, 1996, no stock appreciation rights have been granted.
Financial Accounting Standard No. 123, which became effective for 1996,
requires pro forma disclosures for companies that do not adopt its fair value
accounting method for stock-based employee compensation. Accordingly, the
following pro forma information presents net income and earnings per share had
the Standard's fair value method been used to measure compensation cost for
stock option plans. Compensation cost actually recognized for stock options was
$0 for 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net income as reported $5,447,292 $6,802,903
Pro forma net income 5,349,009 6,716,873
Primary earnings per share as reported 1.09 1.35
Pro forma primary earnings per share 1.07 1.33
Fully diluted earnings per share as reported 1.09 1.35
Pro forma fully diluted earnings per share 1.07 1.33
</TABLE>
In future years, the pro forma effect of not applying this standard is
expected to increase as additional options are granted.
Options exerciseable at December 31, are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Number of options 200,678 225,643 220,646
Weighted-average exercise price $4.37 $4.20 $4.50
</TABLE>
For options granted during the years indicated, the weighted-average fair
values at grant date are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Options granted at market price:
Exercise price $19.13 $18.85
Fair value 5.60 4.65
</TABLE>
86
<PAGE>
The fair value of options granted during 1996 and 1995 is estimated using
the following weighted average information:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Risk-free interest rate 5.42% 5.57%
Expected life 10 YEARS 10 years
Expected volatility of stock price 17.01% 19.36%
Expected dividends 2.00% 2.00%
</TABLE>
At December 31, 1996, options outstanding were as follows:
<TABLE>
<CAPTION>
<S> <C>
Number of options 328,658
Range of exercise price $3.80 - $19.21
Weighted-average exercise price $9.95
Weighted-average remaining option life 5.77 years
For options now exerciseable:
Number 200,678
Weighted-average exercise price $4.37
</TABLE>
The following table summarizes outstanding grants and stock option
transactions for the three years ended December 31, 1996:
<TABLE>
<CAPTION>
Average
Number of Exercise
Shares Price
------ -----
<S> <C> <C>
Options outstanding at December 31, 1993 277,894 $ 4.18
Options exercised (26,845) 4.31
Options forfeited (3,490) 5.89
Options granted 9,317 13.63
------- ------
Options outstanding at December 31, 1994 256,876 4.48
Options exercised (23,936) 4.76
Options forfeited (1,129) 8.44
Options granted 114,510 18.85
------- ------
Options outstanding at December 31, 1995 346,321 9.20
Options exercised (28,060) 4.09
Options forfeited (397) 14.56
Options granted 10,794 19.13
------- ------
Options outstanding at December 31, 1996 328,658 $ 9.95
======= ======
</TABLE>
At December 31, 1996, 374,381 shares were available for future grants.
(15) EMPLOYEE STOCK OWNERSHIP PLAN
In conjunction with the plan of conversion, the Corporation's board of
directors approved a noncontributory Employee Stock Ownership Plan (ESOP) for
substantially all employees. The ESOP acquired 331,271 and 108,316 shares of
common stock in June 1990 and December 1991, respectively, for $1,260,000 and
$595,088, respectively, financed by loans payable to a nonaffiliated bank. The
loan agreements are secured by pledges of the Corporation's common stock owned
by the ESOP and purchased with the proceeds from these loans. The Corporation
does not guarantee the debt.
87
<PAGE>
On April 25, 1994, the ESOP borrowed from the Corporation funds totaling
$1,097,095, which were used to repay debt outstanding to the nonaffiliated bank.
The repayment schedules for the new loans are the same as those contained in the
original loan agreements; however, the new agreements provide for the payment of
no interest on the unpaid principal balances. As of December 31, 1996, the
outstanding loan balances are reflected as a reduction in stockholders' equity.
The Corporation's contribution to the ESOP was approximately $147,000,
$99,000, and $229,000 for the years ended December 31, 1996, 1995, and 1994,
respectively. These amounts were charged to expense in the accompanying
consolidated statements of operations. Dividends on shares not allocated to
participants and held by the ESOP are utilized to service the ESOP debt and are
tax-deductible by the Corporation to the extent they are utilized to repay the
outstanding principal of the debt. Contributions from dividends on shares held
by the ESOP approximated $85,000, $133,000, and $30,000 for the years ended
December 31, 1996, 1995, and 1994, respectively. The interest portion of the
loan payments approximated $0, $0, and $27,000 for the years ended December 31,
1996, 1995, and 1994, respectively. The remainder of the loan payments was
applied to reduce the outstanding principal balance of the ESOP debt.
(16) PENSION PLAN AND OTHER RETIREMENT BENEFITS
EMPLOYEES' DEFERRED SAVINGS PLAN AND DEFERRED SAVINGS PLAN
The Bank's Employees' Deferred Savings Plan and Deferred Savings Plan
(401(k) plans) cover substantially all of its employees who have attained the
age of 21, have completed at least one year of service, and are a full-time or
part-time employee who has worked at least 1,000 hours during such plan year.
Eligible employees may contribute up to 18 percent of their annual compensation,
subject to certain maximums established by the Internal Revenue Service. The
Corporation will match up to 50 percent of the first 4 percent of the employees'
compensation deferred each year. In 1994, in addition to providing matching
funds under the 401(k) plans, the Bank established a discretionary
profit-sharing plan whereby eligible employees, regardless of their level of
participation in the 401(k) plans, received a contribution to their 401(k)
account in an amount equal to 2 percent of their compensation. The Corporation's
cost of these plans for the years ending December 31, 1996, 1995, and 1994, was
approximately $176,000, $132,000, and $137,000, respectively.
FINANCIAL INSTITUTIONS RETIREMENT FUND
The former Union Federal Savings (Union) was a participant in the multiple
employer Financial Institutions Retirement Fund (FIRF or the Fund), and
substantially all of its officers and employees were covered by the plan. FIRF
provides benefits based on basic compensation and years of service for employees
age 21 and over after one year of service. Union's contributions were determined
by FIRF and generally represented the normal cost of the Fund. No contributions
to the Fund were required during the years ended December 31, 1996, 1995, and
1994.
Union's participation in the FIRF was withdrawn effective February 29,
1992. Employee participants were given the election to either choose continued
participation with the FIRF or to transfer the accrued benefit into the Bank's
401(k) plans. Transfer of excess plan assets to the Bank's 401(k) plans began
during 1993 upon receipt of final regulatory approvals. Transfers of excess plan
assets continued in 1994 and are periodically allocated to remaining eligible
participants as an employer contribution.
POSTRETIREMENT BENEFITS
The Bank's Employees' Retirement Health Care and Life Insurance Plan
(Postretirement Plan) is a contributory defined benefit postretirement health
care plan which covers substantially all employees of the Bank and their covered
dependents. Eligibility for benefits from the Postretirement Plan is age 60 with
at least 25 years of service with the Bank and active employment at retirement.
Retirees' contributions to the Postretirement Plan vary based upon the retiree's
age and election of coverage.
88
<PAGE>
Components of net periodic postretirement benefit cost for the years
indicated are as follows:
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
- ------------------------ ---- ---- ----
<S> <C> <C> <C>
Service cost $21,209 $13,729 $18,032
Interest cost 47,523 49,682 50,489
Amortization and deferral -- (3,470) --
------- ------- -------
Net periodic postretirement benefit cost $68,732 $59,941 $68,521
======= ======= =======
</TABLE>
The weighted average discount rate used in determining the net periodic
postretirement benefit cost for 1996, 1995, and 1994 was 7.25 percent, 8.75
percent, and 7.25 percent, respectively. Additionally, in determining the net
periodic postretirement benefit cost in 1996 was a health care inflation
assumption of 11.06 percent, grading down uniformly to 5.25 percent in 2005 and
all years thereafter. A health care inflation assumption of 11.96 percent,
grading down uniformly to 6.75 percent in 2005 and all years thereafter, was
used in 1995. In 1994, a health care inflation assumption of 12.4 percent,
grading down uniformly to 5.75 percent in 2005 and all years thereafter, was
used. The dental inflation assumption was 5.00 percent, 5.75 percent, and 5.75
percent in 1996, 1995, and 1994, respectively.
The Postretirement Plan's funded status, reconciled with amounts
recognized in the consolidated statements of financial condition, is as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Accumulated postretirement benefit obligation for:
Retirees $433,545 $415,233
Other fully eligible plan participants 41,710 43,057
Other active plan participants 264,113 229,367
-------- --------
Total accumulated postretirement benefit
obligation 739,368 687,657
Plan assets at fair value -- --
-------- --------
Accumulated postretirement benefit obligation in
excess of plan assets 739,368 687,657
Unrecognized net transition obligation -- --
-------- --------
Unrecognized net gains (losses) from experience
different from that assumed (21,872) 23,298
Prior service cost not yet recognized in net periodic
postretirement benefit cost -- --
-------- --------
Accrued postretirement benefit cost $717,496 $710,955
======== ========
</TABLE>
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation at December 31, 1996 and 1995, was 7.50
percent and 7.25 percent, respectively.
For measurement purposes at December 31, 1996, the health care inflation
rate is assumed to decline uniformly from 10.41 percent per year presently to
5.50 percent per year in 2005 and all years thereafter. The dental inflation
assumption is 5.00 percent per year in all future years.
At December 31, 1995, for measurement purposes, the health care inflation
rate is assumed to decline uniformly from 11.06 percent per year to 5.25 percent
per year in 2005 and all years thereafter. The dental inflation assumption is
5.75 percent per year in all future years.
The effect of a one-percentage-point increase in the health care cost
trend rate assumptions on the service and interest components of net periodic
postretirement benefit cost for 1996, 1995, and 1994 and the accumulated
postretirement benefit obligation as of December 31, 1996 and 1995, would be
minimal because of the application of defined dollar caps on employer-provided
benefits.
89
<PAGE>
(17) REGULATORY MATTERS
The Bank is subject to regulatory capital requirements administered by
federal regulatory agencies. Capital adequacy guidelines and prompt corrective
action regulations involve quantitative measures of assets, liabilities, and
certain off-balance-sheet items calculated under regulatory accounting
practices. Capital amounts and classifications are also subject to qualitative
judgments by regulators about components, risk weightings, and other factors,
and the regulators can lower classifications in certain cases. Failure to meet
various capital requirements can initiate regulatory action that could have a
direct material effect on the consolidated financial statements.
The prompt corrective action regulations provide five classifications,
including well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized, although these
terms are not used to represent overall financial condition. If adequately
capitalized, regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required. The minimum
requirements are:
<TABLE>
<CAPTION>
Tier 1 Capital
Capital to Risk- to Adjusted
Weighted Assets Total Assets
--------------- ------------
<S> <C> <C> <C>
Well capitalized 10% 6% 5%
Adequately capitalized 8% 4% 4%
Undercapitalized 6% 3% 3%
</TABLE>
At year end, actual capital levels (in millions) and minimum required
levels were:
<TABLE>
<CAPTION>
Minimum
Required
To Be Well
Minimum Capitalized Under
Required Prompt
For Capital Corrective
Adequacy Action
Actual Purposes Regulations
------ -------- -----------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
1996:
Total capital (to risk weighted assets) $64.1 13.2% $38.9 8.0% $48.6 10.0%
Tier 1 (core) capital (to risk
weighted assets) $59.6 12.3% $19.4 4.0% $29.1 6.0%
Tier 1 (core) capital (to adjusted
total assets) $59.6 7.2% $24.9 3.0% $41.5 5.0%
Tangible capital (to adjusted
total assets) $59.6 7.2% $12.4 1.5% N/A N/A
1995:
Total capital (to risk weighted assets) $64.4 14.3% $36.0 8.0% $45.0 10.0%
Tier 1 (core) capital (to risk
weighted assets) $60.6 13.5% $18.0 4.0% $27.0 6.0%
Tier 1 (core) capital (to adjusted
total assets) $60.6 8.0% $22.8 3.0% $38.0 5.0%
Tangible capital (to adjusted
total assets) $60.6 8.0% $11.4 1.5% N/A N/A
</TABLE>
The Bank at December 31, 1996 and 1995, was categorized as well
capitalized.
90
<PAGE>
The following is a reconciliation of the Corporation's consolidated
stockholders' equity for financial reporting purposes to the Bank's consolidated
tangible, core, and risk-based capital available to meet its regulatory
requirements:
<TABLE>
<CAPTION>
December 31, 1996 1995
- ------------ ---- ----
<S> <C> <C>
Corporation's stockholders' equity as reported in
the accompanying consolidated financial statements $62,470,027 $62,743,021
Plus (less):
Capitalization of parent company (2,683,442) (2,066,669)
Unrealized gains on available-for-sale
securities, net of tax (214,594) (71,661)
----------- -----------
Tangible and core capital 59,571,991 60,604,691
Plus supplementary capital:
General loss reserves 4,563,594 4,586,716
Less: Equity investments and investment in real
property required to be deducted -- (753,874)
----------- -----------
Risk-based capital $64,135,585 $64,437,533
=========== ===========
</TABLE>
The Bank may not declare or pay cash dividends on, or purchase, any of its
shares of common stock if the effect thereof would cause stockholders' equity to
be reduced below applicable regulatory capital maintenance requirements or if
such declaration and payment would otherwise violate regulatory requirements.
The Deposit Insurance Fund Act of 1996 (DIFA) was enacted on September 30,
1996. DIFA addressed inadequate funding of the Savings Association Insurance
Fund (SAIF), which had resulted in a significant deposit insurance premium
disparity between banks insured by the Bank Insurance Fund and SAIF-insured
thrifts, which were required to pay substantially higher deposit insurance
premiums. As a result of the legislation, a one-time special assessment was
imposed. The Bank's one-time pre-tax assessment was $3,355,000 and this
nonrecurring charge was recognized in the third quarter of 1996. The DIFA
provides for a reduction in deposit insurance premiums in subsequent periods and
other regulatory reforms.
(18) 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
year. The effect of common stock equivalent shares applicable to employees' and
directors' stock options has been included in the calculation of earnings per
share for 1996, 1995, and 1994 because their impact was dilutive. The weighted
average number of common and common equivalent shares used in the calculation of
primary and fully diluted earnings per share for 1995 and 1994 was restated to
give retroactive effect to the 10 percent stock dividend declared August 20,
1996.
91
<PAGE>
The following table details the calculation of earnings per share on both
primary and fully diluted bases for the following years:
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
- ------------------------ ---- ---- ----
<S> <C> <C> <C>
Primary:
Net earnings applicable to common stock
and common stock equivalents $5,447,292 $6,802,903 $5,588,818
========== ========== ==========
Average number of common shares
outstanding 4,856,838 4,885,448 4,887,637
Common stock equivalents of stock options 159,873 180,487 180,724
---------- ---------- ----------
5,016,711 5,065,935 5,068,361
========== ========== ==========
Primary earnings per common share $ 1.09 $ 1.35 $ 1.09
========== ========== ==========
Fully diluted:
Net earnings applicable to common
stock and common stock equivalents $5,447,292 $6,802,903 $5,588,818
========== ========== ==========
Average number of common shares
outstanding 4,856,838 4,885,448 4,887,637
Common stock equivalents of stock
options 160,665 183,812 180,733
---------- ---------- ----------
5,017,503 5,069,260 5,068,370
========== ========== ==========
Fully diluted earnings per common share $ 1.09 $ 1.35 $ 1.09
========== ========== ==========
</TABLE>
(19) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In the normal course of business, to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest rates, the
Corporation is a party to financial instruments with off-balance-sheet risk.
These financial instruments include commitments to extend credit and letters of
credit. Those instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the accompanying
consolidated statements of financial condition. The contract or notional amounts
of those instruments reflect the extent of involvement the Corporation has in
particular classes of financial instruments.
The Corporation's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to extend credit
and letters of credit is represented by the contractual amount of that
instrument. The Corporation uses the same credit policies in making commitments
as it does for on-balance-sheet instruments.
Financial instruments whose contract amounts represent credit risk at
December 31, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Commitments to extend credit $73,220,000 $54,469,000
Letters of credit 283,000 486,000
</TABLE>
There were no financial instruments whose notional amounts exceeded the
amount of credit risk at December 31, 1996.
92
<PAGE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Because many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Corporation applies the same
credit standards used in the lending process when extending these commitments
and evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Corporation upon
extension of credit, is based on management's credit evaluation of the
counterparty. Collateral held varies, but may include residential real estate
and income-producing commercial properties.
Letters of credit written are conditional commitments issued by the
Corporation to guarantee the performance of a customer to a third party. Most
guarantees extend for one year and expire in decreasing amounts through December
5, 1997. The extent of collateral held on those commitments at December 31,
1996, is equal to or in excess of the committed amount.
The Corporation has used interest rate exchange agreements to manage
interest rate exposure on its interest-bearing liabilities. Interest rate
exchange transactions generally involve the exchange of fixed- and floating-rate
interest payment obligations without the exchange of the underlying principal
amounts. Entering into interest rate exchange agreements involves the risk of
dealing with counterparties and their ability to meet the terms of the
contracts. The counterparties to the agreements with the Corporation have been
primary dealers. Notional principal amounts often are used to express the volume
of these transactions, but the amounts potentially subject to credit risk are
much smaller.
On November 17, 1994, the Corporation terminated, at a loss of $229,000,
its remaining interest rate exchange agreement with an aggregate notional amount
of $15,000,000 and a maturity date of December 23, 1996. The deferred loss from
the termination of the interest rate exchange agreement totaled $0 and $107,000
at December 31, 1996 and 1995, respectively. Amortization of the loss as
interest expense totaled $107,000 and $109,000 for 1996 and 1995, respectively.
93
<PAGE>
(20) CONDENSED FINANCIAL INFORMATION -- PARENT COMPANY ONLY
The statements of financial condition at December 31, 1996 and 1995, and
the statements of operations and cash flows for the years ended December 31,
1996, 1995, and 1994, of CFSB Bancorp, Inc., follow:
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31, 1996 1995
- ------------ ---- ----
<S> <C> <C>
ASSETS:
Cash on deposit at subsidiary bank $ 1,122,093 $ 1,144,397
Investment in subsidiary bank 59,786,585 60,676,352
Dividends receivable from subsidiary bank 829,050 --
Other assets 1,825,052 1,955,021
----------- -----------
Total assets $63,562,780 $63,775,770
=========== ===========
LIABILITIES:
Dividends payable to stockholders $ 564,629 $ 489,798
Other liabilities 528,124 542,951
----------- -----------
Total liabilities 1,092,753 1,032,749
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock 48,496 45,185
Additional paid-in capital 41,422,898 34,389,162
Retained income 23,863,600 29,852,980
Net unrealized gains on available-for-sale
securities of subsidiary bank, net of tax 214,594 71,661
Employee Stock Ownership Plan (459,408) (691,294)
Treasury stock (2,620,153) (924,673)
----------- -----------
Total stockholders' equity 62,470,027 62,743,021
----------- -----------
Total liabilities and stockholders' equity $63,562,780 $63,775,770
=========== ===========
</TABLE>
94
<PAGE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
- ------------------------ ---- ---- ----
<S> <C> <C> <C>
INCOME:
Dividends from subsidiary bank $6,342,950 $3,022,000 $5,209,702
Loss in equity investment (108,153) (16,651) --
---------- ---------- ----------
Total operating income 6,234,797 3,005,349 5,209,702
EXPENSES:
Compensation, payroll taxes, and
fringe benefits 312,954 333,072 248,880
Other operating expenses 208,621 222,142 282,869
---------- ---------- ----------
Total operating expenses 521,575 555,214 531,749
---------- ---------- ----------
Income before equity in
undistributed net income of
subsidiary bank 5,713,222 2,450,135 4,677,953
Equity in undistributed net income
of subsidiary bank (265,930) 4,352,768 910,865
---------- ---------- ----------
Net income $5,447,292 $6,802,903 $5,588,818
========== ========== ==========
</TABLE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
- ------------------------ ---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,447,292 $ 6,802,903 $ 5,588,818
Adjustments to reconcile net income:
Loss (equity) in undistributed net
income of subsidiary bank 265,930 (4,352,768) (910,865)
Decrease (increase) in other assets 129,969 (634,019) (952,700)
Increase (decrease) in other
liabilities 217,059 257,947 (1,066,287)
----------- ----------- -----------
Net cash provided by operating
activities 6,060,250 2,074,063 2,658,966
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock options exercised 114,674 114,072 115,630
Purchases of Treasury stock (4,089,237) -- (1,100,607)
Dividends paid on common stock (2,107,991) (1,832,008) (1,516,405)
----------- ----------- -----------
Net cash used by financing
activities (6,082,554) (1,717,936) (2,501,382)
----------- ----------- -----------
Net increase (decrease) in cash (22,304) 356,127 157,584
Cash at beginning of period 1,144,397 788,270 630,686
----------- ----------- -----------
Cash at end of period $ 1,122,093 $ 1,144,397 $ 788,270
=========== =========== ===========
</TABLE>
(21) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures About
Fair Value of Financial Instruments (SFAS 107), requires disclosures of
fair-value information about financial instruments, whether or not recognized in
the balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on estimates
using present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate and
estimates of future cash
95
<PAGE>
flows. In that regard, the derived fair-value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument.
Fair-value methods and assumptions for the Corporation's financial
instruments are as follows:
CASH AND CASH EQUIVALENTS
The carrying amounts reported in the consolidated statements of financial
condition for cash and interest-earning deposits with the Federal Home Loan Bank
and other depository institutions reasonably approximate those assets' fair
values.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
Fair values for investment and mortgage-backed securities are based on
quoted market prices.
LOANS RECEIVABLE
For adjustable-rate loans that reprice frequently and with no significant
change in credit risk, fair values are generally based on carrying values. The
fair values for fixed-rate one- to four-family residential mortgage loans are
based on quoted market prices of similar loans sold in conjunction with
securitization transactions, adjusted for differences in loan characteristics.
The fair values for income-producing property loans and consumer loans are
estimated using discounted cash flow analyses, using interest rates currently
being offered for loans with similar terms and similar credit quality. The
carrying amount of accrued interest receivable approximates its fair value.
DEPOSIT LIABILITIES
The fair value of deposits with no stated maturity, such as savings,
checking, and money market accounts, is equal to the amount payable on demand as
of December 31, 1996 and 1995. The fair value of certificates of deposit is
based on the discounted value of contractual cash flows. The discount rate is
estimated using the rates currently offered by the Corporation for deposits of
similar remaining maturities. The fair value of accrued interest payable
approximates its carrying value.
The fair-value estimates of deposit liabilities do not include the benefit
that results from the low-cost funding provided by the deposit liabilities
compared to the cost of borrowing funds in the market.
FEDERAL HOME LOAN BANK ADVANCES
The fair value of the Corporation's borrowings from the Federal Home Loan
Bank are estimated using discounted cash flow analyses, based on the
Corporation's current incremental borrowing rates for similar types of borrowing
arrangements.
OFF-BALANCE-SHEET INSTRUMENTS
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. For fixed-rate loan commitments, fair value also considers the
difference between current levels of interest rates and the committed rates.
96
<PAGE>
The estimated fair value of the Corporation's financial instruments at
December 31, 1996 and 1995, is as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
CARRYING ESTIMATED Carrying Estimated
VALUE FAIR VALUE Value Fair Value
----- ---------- ----- ----------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and short-term
interest-earning
deposits $ 22,749,963 $ 22,700,000 $ 29,724,175 $ 29,700,000
Investment securities 31,093,494 31,100,000 55,109,533 55,100,000
Mortgage-backed securities 27,220,567 27,200,000 35,155,907 35,800,000
Loans receivable, net 717,714,636 717,900,000 610,284,070 616,500,000
Accrued interest receivable 4,349,240 4,300,000 4,883,233 4,900,000
FINANCIAL LIABILITIES
Savings, checking, and
money market accounts 229,359,744 229,400,000 209,402,769 209,400,000
Certificates of deposit 324,214,257 325,300,000 318,413,409 320,500,000
Advances from Federal
Home Loan Bank 202,639,323 202,600,000 160,649,376 162,000,000
Accrued interest payable 4,233,799 4,200,000 3,474,063 3,500,000
OFF-BALANCE-SHEET ITEMS
Commitments to extend credit -- -- -- --
</TABLE>
LIMITATIONS
Fair-value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Corporation's entire holding of a particular
financial instrument. Because no market exists for a significant portion of the
Corporation's financial instruments, fair-value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment, and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
Fair-value estimates are based on existing on- and off-balance-sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. Accordingly, the aggregate fair-value amounts presented
do not represent the underlying value of the Corporation.
97
<PAGE>
(22) QUARTERLY FINANCIAL INFORMATION
The following is a summary of quarterly financial information for the
years ended December 31, 1996 and 1995 (unaudited):
<TABLE>
<CAPTION>
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
(In Thousands, Except Per-Share Data)
<S> <C> <C> <C> <C>
1996:
Interest income $13,786 $14,065 $14,549 $15,002
Net interest income 5,367 5,721 5,866 5,950
Provision for loan
losses 60 60 60 60
Income (loss) before
federal income tax
expense (benefit) 2,530 2,714 (530) 3,168
Net income (loss) 1,715 1,851 (293) 2,174
Earnings (loss) per
share (1):
Primary 0.34 0.36 (0.06) 0.43
Fully diluted 0.34 0.36 (0.06) 0.43
Stock price range (1) $18.13-$21.88 $17.75-$20.00 $17.75-$19.50 $18.00-$20.75
1995:
Interest income $13,029 $13,221 $13,600 $13,711
Net interest income 5,108 5,043 5,118 5,164
Provision for loan losses 60 60 60 60
Income before federal
income tax expense 2,124 2,303 2,320 2,985
Net income 1,466 1,588 1,601 2,148
Earnings per share (1):
Primary 0.29 0.31 0.32 0.43
Fully diluted 0.29 0.31 0.32 0.43
Stock price range (1) $13.38-$17.00 $16.13-$17.38 $16.13-$20.50 $17.75-$19.50
</TABLE>
(1) Per-share data for the first and second quarters of 1996 and all of the
1995 quarters were restated to give retroactive effect to the 10 percent
stock dividend declared August 20, 1996.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
Information concerning the Directors of the Corporation and compliance
with Section 16(a) of the Securities Exchange Act of 1934 is set forth under the
section captioned "Proposal 1 -- Election of Directors" in the Proxy Statement,
which is incorporated herein by reference.
Information concerning the Executive Officers of the Corporation is set
forth under "Item 1. Business --- Executive Officers" which is incorporated
herein by reference.
98
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
The information required by this item is incorporated herein by reference
to the section captioned "Proposal 1 -- Election of Directors -- Executive
Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
The information required by this item is incorporated herein by reference
to the sections captioned "Voting Securities and Principal Holders Thereof" and
"Proposal 1 -- Election of Directors" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The information required by this item is incorporated herein by reference
to the section captioned "Proposal 1 -- Election of Directors -- Transactions
with Management" in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------
(a)(1) Financial Statements - The following financial statements are
---------------------
incorporated by reference to Item 8 of this Annual Report on Form 10-K:
1. Consolidated Statements of Financial Condition at December 31, 1996
and 1995
2. Consolidated Statements of Operations for the Years Ended December
31, 1996, 1995 and 1994.
3. Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1996, 1995 and 1994.
4. Consolidated Statements of Cash Flows for the Years Ended December
31, 1996, 1995 and 1994.
5. Notes to Consolidated Financial Statements
6. Independent Auditors' Report
(a)(2) Financial Statement Schedules - All financial statement schedules
-------------------------------
have been omitted as the required information is either inapplicable or included
in the Consolidated Financial Statements or related notes.
(a)(3) Exhibits - The following exhibits are either filed as part of this
--------
report or are incorporated herein by reference:
3.1 Certificate of Incorporation of CFSB Bancorp, Inc. (incorporated by
reference to Exhibit 3.1 to the Corporation's registration statement
on Form S-1 filed with the SEC on January 9, 1990)
3.2 Bylaws of CFSB Bancorp, Inc. (incorporated by reference to Exhibit
3.2 to the Corporation's registration statement on Form S-1 filed
with the SEC on January 9, 1990)
10.1 Stock Option Plan of CFSB Bancorp, Inc. (incorporated by reference
to Exhibit 10.3 to the Corporation's registration statement on Form
S-1 filed with the SEC on January 9, 1990)
10.2 Employment Agreements between Community First, A Federal Savings
Bank and Robert H. Becker and John W. Abbott (incorporated b
reference to Exhibit 10.2 to Post-Effective Amendment No.2 to the
Corporation's registration statement on Form S-4 filed with the SEC
on May 21, 1990)
10.3 Merger Conversion Agreement with Union Federal Savings dated June
12, 1991 (incorporated by reference to Exhibit 28.2 to the
Corporation's current report on Form 8-K filed with the SEC on June
14, 1992)
99
<PAGE>
21 Subsidiaries
23 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
(b) Reports on Form 8-K - On December 30, 1996, the Registrant filed a
-------------------
Current Report on Form 8-K announcing the conversion of its bank
subsidiary to a Michigan chartered state savings bank.
(c) Exhibits - All exhibits to this report are attached or incorporated
--------
by reference as stated above.
(d) Financial Statement Schedules - None.
-----------------------------
100
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, as of March 18, 1997.
CFSB BANCORP, INC.
By: /s/ Robert H. Becker
---------------------
Robert H. Becker
President and Chief
Executive Officer
(Duly Authorized
Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of March 18, 1997.
/s/ Robert H. Becker /s/ John W. Abbott
- -------------------- ------------------
Robert H. Becker John W. Abbott
President and Executive Vice President, Chief
Chief Executive Officer Operating Officer and Secretary
(Principal Executive Officer (Duly Authorized Representative)
and a Director)
/s/ James L. Reutter /s/ Holly L. Schreiber
- --------------------- ----------------------
James L. Reutter Holly L. Schreiber
Chairman of the Board Vice President and Treasurer
(Director) (Principal Financial and
Accounting Officer)
/s/ Cecil Mackey /s/ David H. Brogan
- --------------------- ----------------------
Cecil Mackey David H. Brogan
(Director) (Director)
/s/ J. Paul Thompson, Jr. /s/ William C. Hollister
- ------------------------ ------------------------
J. Paul Thompson, Jr. William C. Hollister
(Director) (Director)
/s/ Henry W. Wolcott, IV /s/ Donald F. Wall
- ------------------------ ------------------------
Henry W. Wolcott, IV Donald F. Wall
(Director) (Director)
<PAGE>
INDEX TO EXHIBITS
Exhibit Page
3.1 Certificate of Incorporation of CFSB Bancorp, Inc.
(incorporated by reference to Exhibit 3.1 to the
Corporation's registration statement on Form S-1
filed with the SEC on January 9, 1990) --
3.2 Bylaws of CFSB Bancorp, Inc. (incorporated by reference
to Exhibit 3.2 to the Corporation's registration statement
on Form S-1 filed with the SEC on January 9, 1990) --
10.1 Stock Option Plan of CFSB Bancorp, Inc. (incorporated b
reference to Exhibit 10.3 to the Corporation's registration
statement on Form S-1 filed with the SEC on January 9, 1990) --
10.2 Employment Agreements between Community First, A Federal
Savings Bank and Robert H. Becker and John W. Abbot
(incorporated by reference to Exhibit 10.2 to Post-Effectiv
Amendment No. 2 to the Corporation's registration
statement on Form S-1 filed with the SEC on May 21, 1990) --
10.3 Merger Conversion Agreement with Union Federal Saving
dated June 12, 1991 (incorporated by reference to
Exhibit 28.2 to the Corporation's current report on For
8-K filed with the SEC on June 14, 1992) --
21 Subsidiaries
23 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
EXHIBIT 21
SUBSIDIARIES
CFSB Bancorp, Inc. (the "Corporation") owns 100% of the common stock of
Community First Bank ("Community First") and Community First owns 100% of the
common stock of Capitol Consolidated Financial Corporation, a Michigan
corporation. Capital Consolidated Financial Corporation owns 100% of the common
stock of Allegan Insurance Agency, Inc., a Michigan Corporation.
EXHIBIT 23
The Board of Directors
CFSB Bancorp, Inc.
We consent to incorporation by reference in the registration (Nos. 33-37440 and
33078164) on Form S-8s of CFSB Bancorp, Inc. of our report dated January 21,
1997, relating to the consolidated statements of financial condition of CFSB
Bancorp, Inc. and subsidiary as of December 31, 1996, and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1996, which report
appears in the December 31, 1996, annual report on Form 10-K of CFSB Bancorp,
Inc.
/s/ KPMG Peat Marwick LLP
Lansing, Michigan
March 18, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 7,479,722
<INT-BEARING-DEPOSITS> 15,270,241
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 58,314,061
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 717,714,636
<ALLOWANCE> 4,563,594
<TOTAL-ASSETS> 829,799,546
<DEPOSITS> 553,574,001
<SHORT-TERM> 78,421,389
<LIABILITIES-OTHER> 11,116,195
<LONG-TERM> 124,217,934
0
0
<COMMON> 41,471,394
<OTHER-SE> 20,998,633
<TOTAL-LIABILITIES-AND-EQUITY> 829,799,546
<INTEREST-LOAN> 51,612,087
<INTEREST-INVEST> 4,530,694
<INTEREST-OTHER> 1,259,274
<INTEREST-TOTAL> 57,402,055
<INTEREST-DEPOSIT> 23,837,494
<INTEREST-EXPENSE> 34,497,877
<INTEREST-INCOME-NET> 22,904,178
<LOAN-LOSSES> 240,000
<SECURITIES-GAINS> (64,188)
<EXPENSE-OTHER> 19,023,553
<INCOME-PRETAX> 7,882,292
<INCOME-PRE-EXTRAORDINARY> 7,882,292
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,447,292
<EPS-PRIMARY> 1.09
<EPS-DILUTED> 1.09
<YIELD-ACTUAL> 2.98
<LOANS-NON> 1,756,894
<LOANS-PAST> 30,495
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 560,191
<ALLOWANCE-OPEN> 4,363,139
<CHARGE-OFFS> 76,528
<RECOVERIES> 36,983
<ALLOWANCE-CLOSE> 4,563,594
<ALLOWANCE-DOMESTIC> 4,363,924
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 199,670
</TABLE>
