<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K405
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______________ to _______________
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. [X]
As of March 15, 1999, 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 ($27.25 per share), was approximately $198,275,387 (for
purposes of this calculation, directors and executive officers are treated as
affiliates).
As of March 15, 1999, there were issued and outstanding 8,246,901 shares of the
registrant's common stock, of which 970,740 shares were held by affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year Ended
December 31, 1998 (the "Annual Report") (Parts I and II)
2. Portions of Proxy Statement for the 1999 Annual Meeting of Stockholders
(the "Proxy Statement") (Part III)
<PAGE>
CFSB BANCORP, INC.
Index to Form 10-K
Fiscal Year Ended December 31, 1998
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 7a. Quantitative and Qualitative Disclosures About Market Risk
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
Included or incorporated by reference in this Form 10-K are certain forward-
looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Such forward-looking statements are based upon the beliefs of the
Registrant's management as well as on assumptions made by and information
currently available to the Registrant at the time such statements were made.
Readers are cautioned that various factors, including regional and national
economic conditions, substantial changes in levels of market interest rates,
credit and other risks of lending and investment activities and competitive,
regulatory factors and impact of the Year 2000, could affect CFSB Bancorp,
Inc.'s financial performance and could cause actual results for future periods
to differ materially from those anticipated. Investors are cautioned that all
forward-looking statements involve risks and uncertainty.
<PAGE>
PART I
Item 1. Business
- -----------------
General
CFSB Bancorp, Inc. CFSB Bancorp, Inc. ("CFSB" or 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, 1998, 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 subsidiaries. The holding company structure
permits the Corporation to expand the financial services currently offered
through Community First and its subsidiaries. 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, 1998, the Corporation had total assets of $880.3 million and
stockholders' equity of $69.3 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.
Community First conducts its operations through its main office located in
Lansing, Michigan and through 15 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.
Recent Developments
On February 24, 1999, CFSB entered into an Agreement and Plan of Merger
(the "Merger Agreement") with Old Kent Financial Corporation ("Old Kent"),
pursuant to which CFSB is expected to merge with and into Old Kent (the
"Merger"). As a result of the Merger, each outstanding share of CFSB's common
stock, ("CFSB Common Stock"), will be converted into the right to receive 0.6222
shares of common stock of Old Kent. The Merger is conditioned upon, among other
things, approval by holders of a majority of CFSB Common Stock and the receipt
of certain regulatory and governmental approvals. It is intended that the
Merger will be treated as a pooling-of-interests for accounting and financial
reporting purposes. The Merger is to be voted on by CFSB stockholders at a
special meeting of stockholders expected to be held in late Spring or Summer of
1999, and is expected to be consummated in the third quarter of Calendar 1999.
Concurrently with their execution and delivery of the Merger Agreement,
CFSB and Old Kent entered into a stock option agreement (the "Stock Option
Agreement") pursuant to which CFSB granted Old Kent the right, upon the terms
and subject to the conditions set forth in the Stock Option Agreement, to
purchase up to 1,645,364 shares (or 19.99%) of CFSB Common Stock, subject to
certain adjustments.
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 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, 1998, 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, 1998, $658.2 million, or 81.8%, 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 $497.9 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, $40.0 million, $104.2 million
and $16.2 million represented loans on properties located in Michigan, Texas and
other states, 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 order to reduce the Bank's vulnerability to volatile interest rate
changes, the Bank implements 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
2
<PAGE>
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. At December 31, 1998, 49.05% of the Bank's total 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, 1998, the Bank had income-producing property
loans of $69.3 million and consumer loans of $68.3 million. This compares to
$77.2 million in income-producing property loans and $64.5 million in consumer
loans, at December 31, 1997. The decline in the Bank's income-producing
property loans is primarily due to strong competition from insurance companies
and other financial institutions offering lower interest rates for fixed-rate
financing. 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, 1998, the Bank's loans contractually delinquent
90 days or more and real estate owned totaled $1.68 million, or 0.19%, of total
assets.
Since 1994, the Bank has increased its emphasis on originating small
business commercial loans. The business loan department serves 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 $1.0 million
and less than 20 employees. The Bank believes it can satisfy the financial
needs of small business owners by assisting with both their credit and deposit
needs. Also since 1994, the Bank has had a formal credit department and an
active call program. During 1998, the commercial business loan department
originated a total of $9.4 million in loans. Additional funds of $3.6 million
were available for disbursement at year-end 1998 on the Bank's commercial
business loan portfolio. As of December 31, 1998, commercial business loans
totaled $8.2 million compared to $5.1 million at December 31, 1997.
In March 1997, the Bank initiated a 24-hour consumer loan-by-phone program.
A consumer can telephone the Bank and electronically make a loan application for
consumer loan products such as auto, home equity, marine or debt consolidations.
In August 1998, the Bank began taking loan applications for consumer and
mortgage loans via the Bank's internet website. Loans granted are limited to
Michigan residents. To date, loan activity via the Bank's website has been
minimal.
Several years ago, the Bank implemented a preapproval mortgage loan program
called Buyer's Edge. This program allows a potential homeowner to identify,
prior to finding a home, the amount of financing the Bank will approve. A
certificate is issued by the Bank which is valid for three months for a purchase
of a home, and five months for construction of a home. The customer can then
comfortably look for a new home or construct a home knowing the financing has
already been approved. In 1998, the Bank closed 118 loans amounting to $15.9
million under the Buyer's Edge Program.
3
<PAGE>
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.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------------------------
1998 1997 1996 1995
-------------------- ------------------- ------------------ --------------------
Amount Percent Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- ------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
First mortgage loans:
One- to four-family
residential................ $609,447 75.74% $585,267 75.51% $553,691 74.63% $469,820 74.46%
Income-producing property... 38,318 4.76 44,580 5.75 52,584 7.09 57,952 9.19
FHA-insured and
VA-partially guaranteed.... 10,876 1.35 7,607 0.98 6,404 0.86 7,458 1.18
Construction and
development loans:
One- to four-family
residential............... 37,927 4.71 34,821 4.49 38,072 5.13 30,754 4.87
Income-producing property.. 30,965 3.85 32,649 4.21 31,428 4.24 17,060 2.70
-------- ------ -------- ------ -------- ------ -------- ------
Total first mortgage loans 727,533 90.41 704,924 90.94 682,179 91.95 583,044 92.40
Second mortgage loans........ 642 0.08 549 0.07 510 0.07 571 .09
Commercial business loans.... 8,218 1.02 5,087 0.66 4,644 0.63 3,195 .51
Consumer loans:
Home equity................. 42,195 5.24 42,281 5.46 36,275 4.89 28,126 4.46
Educational................. 1,164 0.15 1,348 0.18 1,871 0.25 2,329 .37
Marine and recreational
vehicles................... 2,112 0.26 2,224 0.29 2,192 0.30 2,373 .38
Land contract............... 119 0.02 149 0.02 254 0.03 349 .05
Auto........................ 10,626 1.32 10,219 1.32 7,925 1.07 6,542 1.04
Savings..................... 329 0.04 578 0.07 452 0.06 338 .05
Mobile home................. 801 0.10 1,099 0.14 1,519 0.20 1,735 .27
Other....................... 10,977 1.36 6,585 0.85 4,090 0.55 2,379 .38
-------- ------ -------- ------ -------- ------ -------- ------
Total consumer loans...... 68,323 8.49 64,483 8.33 54,578 7.35 44,171 7.00
-------- ------ -------- ------ -------- ------ -------- ------
Total loans receivable.... 804,716 100.00% 775,043 100.00% 741,911 100.00% 630,981 100.00%
====== ====== ====== ======
Less:
Undistributed portion of
loans in process.......... (12,812) (14,408) (18,147) (15,054)
Deferred origination fees... (489) (1,099) (1,485) (1,280)
Allowance for loan losses... (5,004) (4,730) (4,564) (4,363)
-------- -------- -------- --------
Total loans receivable,
net...................... 786,411 754,806 717,715 610,284
Mortgage-backed securities,
net......................... 16,007 21,598 27,221 35,156
-------- -------- -------- --------
Total loans receivable
and mortgage-
backed securities, net... $802,418 $776,404 $744,936 $645,440
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
--------------------
1994
-------------------
Amount Percent
-------- -------
(Dollars in Thousands)
<S> <C> <C>
First mortgage loans:
One- to four-family
residential................ $401,394 75.38%
Income-producing property... 55,178 10.36
FHA-insured and
VA-partially guaranteed.... 3,629 .68
Construction and
development loans:
One- to four-family
residential............... 20,485 3.85
Income-producing property.. 11,677 2.19
-------- ------
Total first mortgage loans 492,363 92.46
Second mortgage loans........ 661 .12
Commercial business loans.... 706 .13
Consumer loans:
Home equity................. 26,048 4.89
Educational................. 2,967 .56
Marine and recreational
vehicles................... 2,420 .45
Land contract............... 409 .08
Auto........................ 2,330 .44
Savings..................... 351 .07
Mobile home................. 2,144 .40
Other....................... 2,090 .40
-------- ------
Total consumer loans...... 38,759 7.29
-------- ------
Total loans receivable.... 532,489 100.00%
======
Less:
Undistributed portion of
loans in process.......... (8,578)
Deferred origination fees... (1,196)
Allowance for loan losses... (4,124)
--------
Total loans receivable,
net...................... 518,591
Mortgage-backed securities,
net......................... 66,151
--------
Total loans receivable
and mortgage-
backed securities, net... $584,742
========
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------------------------------
1998 1997 1996 1995
-------------------- --------------------- -------------------- -------------------
Amount Percent Amount Percent Amount Percent Amount Percent
--------- --------- --------- --------- --------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed-rate loans:
One- to four-family
residential............... $297,545 36.98% $205,478 26.51% $192,972 26.01% $201,971 32.01%
Income-producing property.. 29,026 3.61 28,222 3.64 32,848 4.43 34,693 5.50
FHA-insured and
VA-partially guaranteed... 8,179 1.01 3,802 0.49 2,797 0.37 3,560 .56
Construction and
development:
One- to four-family
residential............. 30,978 3.85 7,652 0.98 3,494 0.47 805 .13
Income-producing property 5,593 0.70 4,553 0.59 4,878 0.66 7,591 1.20
-------- -------- -------- -------- -------- ------ -------- ------
Total first mortgage
loans................... 371,321 46.15 249,707 32.21 236,989 31.94 248,620 39.40
Second mortgage loans....... 642 0.08 311 0.04 399 0.06 456 .07
Commercial business loans... 3,024 0.37 927 0.12 836 0.11 585 .09
Other loans................. 35,020 4.35 29,926 3.86 24,274 3.27 20,097 3.18
-------- -------- -------- -------- -------- ------ -------- ------
Total fixed-rate loans... 410,007 50.95 280,871 36.23 262,498 35.38 269,758 42.74
-------- -------- -------- -------- -------- ------ -------- ------
Adjustable-rate loans:
First mortgage loans:
One- to four-family
residential............... 311,902 38.76 379,789 49.00 360,719 48.62 267,849 42.45
Income-producing property.. 9,292 1.15 16,358 2.11 19,736 2.66 23,259 3.69
FHA-insured and
VA-partially guaranteed... 2,697 0.34 3,805 0.49 3,607 0.49 3,898 .62
Construction and
development:
One- to four-family
residential............. 6,949 0.86 27,169 3.51 34,578 4.66 29,949 4.74
Income-producing property 25,372 3.15 28,096 3.63 26,550 3.58 9,469 1.50
-------- -------- -------- -------- -------- ------ -------- ------
Total first mortgage
loans................... 356,212 44.26 455,217 58.74 445,190 60.01 334,424 53.00
Second mortgage loans....... -- -- 238 0.03 111 0.01 115 .02
Commercial business loans... 5,194 0.65 4,160 0.54 3,808 0.52 2,610 .42
Other loans................. 33,303 4.14 34,557 4.46 30,304 4.08 24,074 3.82
-------- -------- -------- -------- -------- ------ -------- ------
Total adjustable-rate
loans................... 394,709 49.05 494,172 63.77 479,413 64.62 361,223 57.26
-------- -------- -------- -------- -------- ------ -------- ------
Total loans receivable... 804,716 100.00% 775,043 100.00% 741,911 100.00% 630,981 100.00%
======== ======== ====== ======
Less:
Undistributed portion of
loans in process.......... (12,812) (14,408) (18,147) (15,054)
Deferred origination fees.. (489) (1,099) (1,485) (1,280)
Allowance for loan losses.. (5,004) (4,730) (4,564) (4,363)
-------- -------- -------- --------
Total loans receivable,
net.................... 786,411 754,806 717,715 610,284
Mortgage-backed securities:
Fixed-rate mortgage-backed
securities................ 8,642 12,011 16,138 22,159
Adjustable-rate
mortgage-backed
securities................ 7,365 9,587 11,083 12,997
-------- -------- -------- --------
Total mortgage-backed
securities, net....... 16,007 21,598 27,221 35,156
-------- -------- -------- --------
Total loans receivable
and mortgage-
backed securities, net $802,418 $776,404 $744,936 $645,440
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
--------------------
1994
--------------------
Amount Percent
-------- --------
(Dollars in Thousands)
<S> <C> <C>
Fixed-rate loans:
One- to four-family
residential............... $211,445 39.71%
Income-producing property.. 30,247 5.68
FHA-insured and
VA-partially guaranteed... 3,629 .68
Construction and
development:
One- to four-family
residential............. 2,691 .51
Income-producing property 5,557 1.04
-------- ------
Total first mortgage
loans................... 253,569 47.62
Second mortgage loans....... 609 .11
Commercial business loans... 290 .05
Other loans................. 16,687 3.14
-------- ------
Total fixed-rate loans... 271,155 50.92
-------- ------
Adjustable-rate loans:
First mortgage loans:
One- to four-family
residential............... 189,949 35.67
Income-producing property.. 24,931 4.68
FHA-insured and
VA-partially guaranteed... -- --
Construction and
development:
One- to four-family
residential............. 17,794 3.34
Income-producing property 6,120 1.15
-------- ------
Total first mortgage
loans................... 238,794 44.84
Second mortgage loans....... 52 .01
Commercial business loans... 416 .08
Other loans................. 22,072 4.15
-------- ------
Total adjustable-rate
loans................... 261,334 49.08
-------- ------
Total loans receivable... 532,489 100.00%
======
Less:
Undistributed portion of
loans in process.......... (8,578)
Deferred origination fees.. (1,196)
Allowance for loan losses.. (4,124)
--------
Total loans receivable,
net.................... 518,591
Mortgage-backed securities:
Fixed-rate mortgage-backed
securities................ 51,099
Adjustable-rate
mortgage-backed
securities................ 15,052
--------
Total mortgage-backed
securities, net....... 66,151
--------
Total loans receivable
and mortgage-
backed securities, net $584,742
========
</TABLE>
5
<PAGE>
The following table sets forth the contractual maturities of the Bank's loan
and mortgage-backed securities portfolios at December 31, 1998. 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
------------------------
FHA-
One-to Income- Insured and One- to Income- Second
Four-Family Producing VA-Partially Four-Family Producing Mortgage and Total
Residential Property Guaranteed Residential Property Other Loans Loans
------------ --------- ------------ ------------ --------- ------------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Maturing During
Year(s) Ended
December 31,
- -----------------
1999......................... $ 29,703 $ 9,882 $ 326 $ 4,754 $18,322 $ 40,100 $103,087
2000......................... 26,592 5,001 349 839 5,264 14,431 52,476
2001......................... 26,176 4,965 370 477 2,033 8,460 42,481
2002-2003.................... 51,573 5,050 790 1,057 2,315 5,965 66,750
2004-2008.................... 132,014 4,948 2,481 3,145 1,845 7,044 151,477
2009-2013.................... 102,388 4,790 3,436 4,266 1,149 1,040 117,069
2014 and following........... 241,001 3,682 3,124 23,389 37 143 271,376
-------- ------- ------- ------- ------- -------- --------
$609,447 $38,318 $10,876 $37,927 $30,965 $77,183 $804,716
========= ======= ======= ======= ======= ======= ========
Less:
Undistributed portion of
loans in process......................................................................................................
Deferred origination fees..............................................................................................
Allowance for loan losses..............................................................................................
Total loans receivable
and mortgage-backed
securities, net.....................................................................................................
</TABLE>
<TABLE>
<CAPTION>
Total Loans
and
Mortgage- Mortgage-
Backed Backed
Securities Securities
---------- ----------
(In Thousands)
<S> <C> <C>
Maturing During
Year(s) Ended
December 31,
- -----------------
1999.........................
2000......................... $ 724 $103,811
2001......................... 783 53,259
2002-2003.................... 836 43,317
2004-2008.................... 1,566 68,316
2009-2013.................... 4,201 155,678
2014 and following........... 4,016 121,085
3,881 275,257
-------- --------
$ 16,007 820,723
Less: ========
Undistributed portion of
loans in process........... $(12,812)
Deferred origination fees... (489)
Allowance for loan losses... (5,004)
--------
Total loans receivable
and mortgage-backed
securities, net.......... $802,418
========
</TABLE>
At December 31, 1998, the total loans and mortgage-backed securities due
after December 31, 1999, which had fixed interest rates were $376.2 million and
$8.1 million, respectively, while the total loans and mortgage-backed securities
due after such date which had adjustable interest rates were $325.4 million and
$7.2 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, 1998,
$620.3 million, or 77.09%, of the Bank's total loan portfolio consisted of loans
secured by one-to four-family residences. The Bank's loan portfolio also
includes $37.9 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, 1998, approximately 81.80% 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.
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. In recent years, the Bank has generally
sold 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 $321.5 million, or 40.0%, of the Bank's total
loan portfolio at December 31, 1998.
In 1998, long-term rates remained at relatively low levels, and a large
amount of refinancing occurred. During the fourth quarter, the long-term rates
began to drop again; and refinancing into 30-year, fixed-rate mortgages was
prevalent. During 1998, the Bank originated $111.2 million in fixed-rate
mortgage loans, $63.2 million of which were sold in the secondary mortgage
market, and $135.1 million in adjustable-rate and medium-term fixed-rate (15
years or less) mortgage loans, of which none 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.
For the past several years, the Bank has retained 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
7
<PAGE>
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.
The Bank uses automated loan underwriting utilizing Federal Home Loan Mortgage
Corporation Loan Prospector software. Approximately 70% of mortgage applications
are approved using this software with the remaining 30% referred to traditional
underwriting methods. By using the automated underwriting procedures, the Bank
is able to approve loans faster and decrease the time to loan closing. 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 properties constituted approximately $38.3 million, or 4.76%, of the
Bank's total loans at December 31, 1998. 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 $7.7 million, although the majority of the Bank's commercial and
multi-family real estate loans have been originated in amounts ranging from
$200,000 to $4.0 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
8
<PAGE>
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 $7.7 million at December 31, 1998, and
secured by an apartment complex, represents the Bank's largest single commercial
real estate loan to one borrower. At December 31, 1998, the Bank's ten largest
commercial real estate loans, with balances outstanding ranging from $1.4
million to $7.7 million, totaled $30.2 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 $68.9
million, or 8.56%, of the Bank's total loan portfolio at December 31, 1998. Of
that total, $37.9 million were for the construction of one-to four-family
residential properties. Construction loans have been made in amounts up to $7.7
million. At December 31, 1998, the Bank had $25.8 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
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, 1998, the
Bank had no construction loans outstanding which were non-performing and
$379,000 of construction loans classified as real estate owned.
Consumer Loans. As of December 31, 1998, total consumer loans were $68.3
million, or 8.5%, 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.
9
<PAGE>
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 Director of Lending Operations or the Residential Lending Manager is
authorized to approve residential mortgage loans of up to $240,000. Loans
between $240,000 and $500,000 require the approval of the Bank's President,
Executive Vice President or Chief Lending Officer. Loans in excess of $500,000
or multiple loans to the same borrower in an aggregate amount exceeding $500,000
must be approved by the Bank's Executive 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. During 1998, the Bank continued to sell
long-term, fixed-rate mortgage loan originations. Additionally, because of the
lower fixed rates available, the Bank continued to experience conversions of
existing adjustable-rate mortgages to fixed-rate product. As the conversion
from an adjustable to a long-term, fixed-rate product (over 15 years) occurred,
the Bank sold the loans on the secondary market. This resulted in a reduction
in the loan portfolio with an increase in fixed-rate sales. The Bank retained
servicing rights on these residential loans sold.
Effective January 1, 1997, the Bank adopted the provisions of SFAS No. 125,
which proscribes the accounting for transfers and servicing of financial assets
and extinguishments of liabilities. 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%. Since December 31, 1996, the
Bank has sold one participation interest of $1.0 million.
Effective January 1, 1996, the Bank adopted the provisions of SFAS No. 122,
as superseded by SFAS No. 125. This statement, as superseded, 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 No. 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 may include 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.
10
<PAGE>
The ongoing impact of SFAS No. 125 will depend upon demand in the Bank's
lending market for fixed-rate residential mortgage loans salable in the
secondary mortgage market. The balance of loans serviced for others at December
31, 1998 with capitalized originated mortgage servicing rights approximated
$174.9 million. The Bank capitalized $984,000 of originated mortgage servicing
rights during 1998, of which $93,800 has been amortized. Capitalized originated
mortgage servicing rights at December 31, 1998 approximated $1,047,000. No
valuation allowances for capitalized originated mortgage servicing rights were
considered necessary as of December 31, 1998.
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
1998, the Bank, to supplement and complement its own mortgage loan production,
purchased from unaffiliated financial institutions $71.2 million of loans
consisting principally of one-to four-family residential, fixed- and adjustable-
rate, medium-term mortgages. These loans are purchased without recourse with
servicing retained by the seller.
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,
--------------------------------------
1998 1997 1996
-------------- --------- ---------
Originations: (In Thousands)
<S> <C> <C> <C>
Fixed-rate loans:
First mortgage loans:
One-to four-family residential............. $153,991 $ 38,595 $ 36,990
Income-producing property.................. 1,491 729 758
FHA-insured and VA-partially
guaranteed.............................. -- 329 217
Construction and development:
One-to four-family residential........... 45,884 9,728 8,456
Income-producing property................ 1,368 -- --
Second mortgage loans....................... 331 -- --
Commercial business loans................... 2,810 847 634
Other loans................................. 36,189 23,664 18,706
-------- -------- --------
Total fixed-rate loans.................... 242,064 73,892 65,761
-------- -------- --------
Adjustable-rate loans:
First mortgage loans:
One-to four-family residential............. 30,939 50,859 68,063
Income-producing property.................. 568 424 610
Construction and development:
One-to four-family residential........... 15,466 45,628 50,889
Income-producing property................ 9,464 10,734 18,630
Second mortgage loans....................... 100 100 --
Commercial business loans................... 6,584 3,102 3,049
Other loans................................. 22,065 21,307 19,600
-------- -------- --------
Total adjustable-rate loans............... 85,186 132,154 160,841
-------- -------- --------
Total loans originated.................... 327,250 206,046 226,602
-------- -------- --------
Purchases:
Loans:
Fixed-rate.................................. 34,913 9,559 2,905
Adjustable-rate............................. 36,241 18,288 28,829
Mortgage-backed securities:
Fixed-rate................................. 511 -- --
-------- -------- --------
Total purchased........................... 71,665 27,847 31,734
-------- -------- --------
Sales:
Fixed-rate:
Mortgage loans.............................. 131,259 46,194 31,246
Student loans............................... 512 634 739
-------- -------- --------
Total sales............................... 131,771 46,828 31,985
-------- -------- --------
Principal repayments:
Loans....................................... 235,774 153,259 115,079
Mortgage-backed securities.................. 5,956 5,571 7,935
-------- -------- --------
Total principal repayments................ 241,730 158,830 123,014
-------- -------- --------
Transfers to real estate owned................ (1,187) (672) (342)
Increase (decrease) due to other items, net... 1,787 3,906 (3,499)
-------- -------- --------
Net increases................................. $ 26,014 $ 31,469 $ 99,496
======== ======== ========
</TABLE>
12
<PAGE>
Loan Servicing and Loan Fees. As of December 31, 1998, Community
First was servicing approximately $241.7 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 .26%. 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.
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
five days before closing. The period between the application and the Bank's
issuance of a commitment may be up to 15 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 by obtaining
mandatory commitments at the time a loan rate is locked. Funding generally
occurs at or shortly after the time the loan is closed. 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, 1998, the Bank's outstanding mortgage commitments totaled
approximately $84.1 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. The
Asset Control and Recovery Department reviews with the Chief Lending Officer all
consumer loans presented for chargeoff. 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 against the
appropriate allowance account.
13
<PAGE>
As of December 31, 1998, 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, 1998, 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, 1998. Total remaining principal balances of
the related loans are shown 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... 101 $6,632 18 $1,014 9 $256
Income-producing property........ 1 263 -- -- -- --
FHA-insured and VA-partially
guaranteed..................... 2 82 1 68 2 132
Construction and development:
Income-producing property....... 2 199 -- -- -- --
Commercial....................... 1 35 -- -- -- --
Other............................ 88 1,198 39 465 18 223
------ ---------- ------ ------ -------- -------
Total.......................... 195 $8,409 58 $1,547 29 $611
====== ========== ====== ====== ======== =======
Percentage of total assets.... .96% .18% .07%
========== ====== =======
</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.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One-to four-family residential
mortgages........................... $ 256 $ 697 $ 892 $ 68 $ 108
Income-producing property............. -- -- 359 -- --
FHA-insured and VA-partially
guaranteed.......................... 132 109 183 253 192
Construction and development.......... -- -- -- -- --
Commercial............................ -- -- 195 -- --
Other................................. 223 93 158 28 93
------ ------ ------ ----- ------
Total............................... $ 611 $ 899 $1,787 $ 349 $ 393
====== ====== ====== ===== ======
Percentage of total assets.......... .07% 0.10% 0.21% 0.05% 0.05%
====== ====== ====== ===== ======
Real estate owned:.....................
One-to four-family residential
mortgages........................... $ 686 $ 11 $ 205 $ 238 $ 139
Income-producing property............. -- -- -- -- 1,700
Construction and development.......... 379 141 7 7 981
------ ------ ------ ----- ------
Total............................... $1,065 $ 152 $ 212 $ 245 $2,820
====== ====== ====== ===== ======
Percentage of total assets.......... .12% 0.02% 0.03% 0.03% 0.39%
====== ====== ====== ===== ======
Total non-accruing loans and real
estate owned...................... $1,676 $1,051 $1,999 $ 594 $3,213
====== ====== ====== ===== ======
Percentage of total assets............. .19% 0.12% 0.24% 0.08% 0.44%
====== ====== ====== ===== ======
</TABLE>
Loans on which the accrual of interest was discontinued or reduced
amounted to $611,000 at December 31, 1998. For the year ended December 31,
1998, $25,000 of additional interest income would have been recorded if these
non-accruing loans were current in accordance with their original terms.
Approximately $27,000 of interest income relating to these loans was collected
and included in interest income for the year ended December 31, 1998.
Certain other income-producing property and commercial 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 $153,000 loan secured by an apartment
building, and two commercial loans totaling $550,000 secured by business assets,
an equity guarantee in the owner's home and a separate personal guarantee.
These loans were less than 30 days past due as of December 31, 1998.
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 114, Accounting by Creditors for Impairment
of a Loan (SFAS No. 114), as amended by Statement of Financial Accounting
Standards No. 118, Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures (SFAS No. 118). The Bank adopted the provisions of
SFAS No. 114, as amended by SFAS No. 118, on
15
<PAGE>
a prospective basis as of January 1, 1995. Neither the initial adoption nor the
ongoing effect of SFAS No. 114 has had, or is expected to have, a material
impact on the financial condition or results of operations of the Bank.
The Bank had no impaired loans as defined by SFAS No. 114 at December
31, 1998 and 1997, respectively, and in 1996 had 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 No.
114 does not apply. The Corporation's respective average investment in impaired
loans was $265,000 and $112,000 during 1998 and 1997, respectively. Interest
income recognized on impaired loans during 1998 and 1997, totaled $25,000 and
$1,000, respectively. Impaired loans had no specific allocations of the
allowance for loan losses.
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,
1998, the Bank classified $1.7 million of non-accruing loans and real estate
owned as Substandard. The Bank had no assets classified as Doubtful and no
assets classified as Loss as of December 31, 1998.
Allowance for Loan 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.
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.
16
<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, 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
------ ----- ------
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Allowance for Losses on
-------------------------
Real
Loans Estate Total
----- ------ -----
<S> <C> <C> <C>
(In Thousands)
Balance, December 31, 1996................. $4,564 $ 212 $4,776
Provision for loan losses.................. 360 45 405
Charges against the allowance:
One-to four-family residential............ (3) (225) (228)
FHA-insured and VA partially guaranteed... -- (7) (7)
Land...................................... -- (7) (7)
Income-producing property................. (134) (8) (142)
Consumer.................................. (110) -- (110)
Recoveries:
One-to four-family residential............ 4 130 134
FHA-insured and VA partially guaranteed... 1 3 4
Land...................................... -- 5 5
Income-producing property................. 18 5 23
Consumer.................................. 30 -- 30
------ ----- ------
Balance, December 31, 1997................. $4,730 $ 153 $4,883
Provision for losses....................... 390 -- 390
Charges against the allowance:
One-to four-family residential............ (2) (68) (70)
FHA-insured and VA partially guaranteed... (10) -- (10)
Income-producing property................. -- -- --
Consumer.................................. (155) -- (155)
Recoveries:
One-to four-family residential............ -- -- --
FHA-insured and VA partially guaranteed... -- -- --
Income-producing property................. 3 -- 3
Consumer.................................. 48 -- 48
------ ----- ------
Balance, December 31, 1998................. $5,004 $ 85 $5,089
====== ===== ======
</TABLE>
The ratio of net loan charge-offs (recoveries) to average loans
outstanding during the respective periods were (.01)% for 1994, .00% for 1995,
.01% for 1996, .03% for 1997 and .02% for 1998.
18
<PAGE>
The following table represents the allocation of the allowance for loan
losses at the dates indicated:
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------------------------
1998 1997
--------------------------------------------- ---------------------------------------------
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).............. $648,042 80.47% $1,691 .26% $621,506 80.08% $1,775 .29%
FHA-insured and VA-partially
guaranteed................. 10,876 1.35 253 2.33 7,214 .93 49 .68
Income-producing property
(including
construction and
development loans)........ 69,283 8.60 916 1.32 77,229 9.95 1,468 1.90
-------- ------ ------ ---- -------- ------ ------ -----
Total first mortgage loans. 728,201 90.42 2,860 .39 705,949 90.96 3,292 .47
Second mortgage loans........ 642 .08 13 2.02 549 .07 6 1.09
Commercial business loans.... 8,218 1.02 658 8.01 5,087 .66 138 2.71
Other loans.................. 68,323 8.48 1,473 2.16 64,483 8.31 1,294 2.01
-------- ------ ------ ---- -------- ------ ------ -----
Total...................... $805,384 100.00% $5,004 .62% $776,068 100.00% $4,730 .61%
======== ====== ====== ==== ======== ====== ====== =====
<CAPTION>
At December 31,
--------------------------------------------
1996
--------------------------------------------
Percent Allowance
of Total Allocation as %
Balance Loan of of Loan
of Loans Balance Allowance Balance
-------- -------- ---------- ---------
(Dollars in Thousands)
<S> <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%
FHA-insured and VA-partially
guaranteed................. 6,404 .86 47 .73
Income-producing property
(including
construction and
development loans)........ 84,012 11.30 2,100 2.50
-------- ------- ---------- -------
Total first mortgage loans. 683,579 91.96 3,399 .50
Second mortgage loans........ 510 .07 5 .98
Commercial business loans.... 4,644 .62 325 7.00
Other loans.................. 54,578 7.35 835 1.53
-------- ------- ---------- -------
Total...................... $743,311 100.00% $4,564 .61%
======== ======= ========== =======
</TABLE>
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------------------------
1995 1994
-------------------------------------------- ---------------------------------------------
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).............. $502,374 79.39% $1,401 .28% $424,079 79.32% $1,296 .31%
FHA-insured and VA-partially
guaranteed................. 7,458 1.18 319 4.28 3,629 .68 421 11.60
Income-producing property
(including
construction and
development loans)........ 75,012 11.85 1,875 2.50 66,855 12.50 1,775 2.65
-------- ------ ------ ---- -------- ------ ------ -----
Total first mortgage loans. 584,844 92.42 3,595 .61 494,563 92.50 3,492 .71
Second mortgage loans........ 571 .09 4 .70 661 .12 5 .76
Commercial business loans.... 3,195 .51 96 3.00 706 .13 21 2.97
Other loans.................. 44,171 6.98 668 1.51 38,759 7.25 606 1.56
-------- ------ ------ ---- -------- ------ ------ -----
Total...................... $632,781 100.00% $4,363 .69% $534,689 100.00% $4,124 .77%
======== ====== ====== ==== ======== ====== ====== =====
- --------------------------
</TABLE>
(1) Loans sold with recourse totaled $0.7 million, $1.0 million, $1.4 million,
$1.8 million and $2.2 million at December 31, 1998, 1997, 1996, 1995 and
1994, respectively.
19
<PAGE>
Investment Activities
As a state chartered thrift, Community First is not subject to any
regulatory liquidity requirements. It has generally been Community First's
policy to maintain a liquidity portfolio in excess of Federal 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, 1998, Community
First had an investment portfolio of $22.0 million consisting of federal agency
obligations.
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 in excess of $2
million. 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 was $0 at December 31, 1996. Amortization of the loss
as interest expense totaled $107,000 in 1996.
During the years ended December 31, 1998, 1997 and 1996, the cost of the
Bank's interest rate exchange agreements was $0, $0 and $107,000, 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 No. 115") addresses the
accounting and reporting for equity securities having readily determinable fair
values and for all investments in debt securities. SFAS No. 115 requires
investment and mortgage-backed securities to be classified as follows:
. 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.
. 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.
. 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, 1997, investment and mortgage-backed securities available
for sale included unrealized net gains of $474,000 reported net of $161,000 of
federal income tax expense. Throughout 1998, 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,
1998, the Bank reported $38.0 million in investment and mortgage-backed
securities available for sale at fair value, with unrealized net gains of
$408,000 reported net of $139,000 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, 1998.
20
<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, 1998, the Bank did
not have any investment securities available for sale with maturities greater
than five years.
<TABLE>
<CAPTION>
At December 31, 1998
---------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years
--------------------- --------------------- ---------------------
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average
Cost Rate Cost Rate Cost Rate
--------- --------- --------- --------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Federal agency obligations... $ 9,856 4.74% $12,000 5.78% $ -- -- %
--------- --------- ---------
$ 9,856 4.74 $12,000 5.78 $ -- --
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1998
---------------------------------------------------------------------------
More than Ten Years Total Investment Securities
-------------------------- ---------------------------------------------
Weighted Average Weighted
Amortized Average Life Amortized Market Average
Cost Rate in Years Cost Value Rate
--------- -------- --------- --------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Federal agency obligations... $ -- --% 1.01 $ 21,856 $ 22,019 5.31%
--------- -------- --------- --------
$ -- -- 1.01 $ 21,856 $ 22,019 5.31
========= ======== ========= ========
</TABLE>
At December 31, 1998, the Bank did not have any investment
securities held to maturity.
21
<PAGE>
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. During 1997, the Bank purchased $24.0 million of available-for-sale
investment securities. These securities had a weighted average yield of 5.99%.
The available-for-sale investment securities purchased consisted of U.S.
Treasury securities with maturities of 12 to 16 months. Investment securities
available for sale in the amount of $20.0 million were sold during 1997,
resulting in gross gains of $20,000 and gross losses of $51,000. During 1998,
the Bank purchased $19.8 million of available-for-sale investment securities.
These securities had a weighted average yield of 5.20%. The available-for-sale
investment securities purchased consisted of federal agency securities with
maturities of six to 23 months. There were no sales of investment securities
available for sale during 1998.
At December 31, 1998, 1997 and 1996, the Bank held an investment in
shares of Federal Home Loan Bank Stock, with an amortized cost of $11,451,000,
$11,423,000 and $10,632,000 at those dates, respectively.
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,
------------------------------------------------------------------
1998 1997 1996
------------------ ------------------ -------------------
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.......... $ -- $ -- $24,000 $24,053 $20,097 $20,071
Federal agency obligations:
Maturing within one year.......... 9,856 9,849 -- -- -- --
Maturing from one to five years... 12,000 12,170 2,000 2,027 7,000 7,015
Corporate bonds:
Maturing within one year.......... -- -- -- -- 4,000 4,007
------- ------- --------- ------- --------- -------
$21,856 $22,019 $26,000 $26,080 $31,097 $31,093
======= ======= ========= ======= ========= =======
Weighted average interest rate...... 5.31% 6.02% 5.89%
======= ========= =========
</TABLE>
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 and securities sold under agreement to repurchase. 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.
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. In
1997, loan growth
22
<PAGE>
was funded by maturities of investment and mortgage-backed securities, deposit
growth (primarily in checking and savings accounts) and long-term, fixed-rate
FHLB advances.
In 1998, loan growth occurred primarily in fixed-rate loan products.
This growth was funded primarily through an increase in checking and savings
accounts. In addition, maturing FHLB advances were replaced with longer term
advances to moderate the impact of growth on interest rate risk.
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, 1998,
such accounts totaled $266.0 million, or 45.3%, 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. Since 1993 and early 1994, upon maturity of their certificates
of deposit, many customers have chosen to reinvest the proceeds into savings and
money market accounts possessing shorter terms and enhanced liquidity. As
market interest rates declined during 1998 many customers continued this trend.
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
4.3% from $562.4 million at December 31, 1997, to $586.7 million at December 31,
1998. The $24.3 million increase resulted principally and from transaction
account and savings account growth of $21.1 million and $6.8 million,
respectively partially offset by certificate of deposit decline of $3.6 million.
During 1995, the Bank introduced Really Free Checking and five other highly
competitive checking account programs. To support these checking account
programs, the Bank has conducted comprehensive marketing campaigns during 1996,
1997 and 1998. The continued promotion of Really Free Checking in 1996, 1997
and 1998 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 fourteen-month
certificates, also attracting new customers. The Bank continued to promote
during 1998 a high yield money market savings product, which was originally
introduced during late 1996. Although the majority of the growth in 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, 1998, the
Bank had no brokered deposits.
23
<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,
----------------------------------------------------------------------
1998 1997
---------------------------------- ----------------------------------
Percent of Increase Percent of Increase
Amount Portfolio (Decrease) Amount Portfolio (Decrease)
-------- ---------- ---------- -------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Regular savings.............. $ 66,463 11.33% $ 3,394 $ 63,069 11.21% $ (2,145)
Money market savings......... 25,369 4.37 3,425 21,944 3.90 5,808
Consumer checking............ 113,385 19.33 20,045 93,340 16.60 6,617
Commercial checking.......... 10,631 1.81 1,015 9,616 1.71 292
Money market checking........ 50,122 8.54 23 50,099 8.91 (1,864)
-------- ----- -------- -------- ------ --------
265,970 45.33 27,902 238,068 42.33 8,708
Certificates of deposit:
0.00 - 4.99%............... 53,366 9.10 32,608 20,758 3.69 (17,065)
5.00 - 5.99%............... 209,056 35.63 44,651 164,405 29.23 6,652
6.00 - 6.99%............... 57,072 9.73 (80,153) 137,225 24.40 11,128
7.00 - 7.99%............... 638 0.11 (111) 749 .13 (404)
8.00 - 8.99%............... 178 0.03 (478) 656 .12 (170)
9.00 - 9.99%............... 427 0.07 (124) 551 .10 (11)
-------- ----- -------- -------- ------ --------
320,737 54.67 (3,607) 324,344 57.67 130
-------- ----- -------- -------- ------ --------
Totals....................... $586,707 100.00% $ 24,295 $562,412 100.00% $ 8,838
======== ======= ======== ======== ====== ========
</TABLE>
<TABLE>
<CAPTION>
At December 31,
-----------------------------------
1996
-----------------------------------
Percent of Increase
Amount Portfolio (Decrease)
-------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C>
Regular savings.............. $ 65,214 11.78% $ (2,376)
Money market savings......... 16,136 2.91 16,136
Consumer checking............ 86,723 15.67 7,092
Commercial checking.......... 9,324 1.68 1,666
Money market checking........ 51,963 9.39 (2,561)
-------- ------ --------
229,360 41.43 19,957
Certificates of deposit:
0.00 - 4.99%............... 37,823 6.83 13,333
5.00 - 5.99%............... 157,753 28.50 9,970
6.00 - 6.99%............... 126,097 22.78 (2,469)
7.00 - 7.99%............... 1,153 .21 (14,849)
8.00 - 8.99%............... 826 .15 (197)
9.00 - 9.99%............... 562 .10 13
-------- ------ --------
324,214 58.57 5,801
-------- ------ --------
Totals....................... $553,574 100.00% $ 25,758
======== ====== ========
</TABLE>
24
<PAGE>
The following table sets forth certain information regarding the Bank's
deposit flows for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1998 1997 1996
------------ ------------ ------------
(Dollars In Thousands)
<S> <C> <C> <C>
Beginning balance.................... $ 562,412 $ 553,574 $ 527,816
Deposits, net of interest credited... 1,899,964 2,068,592 1,889,523
Withdrawals.......................... (1,897,671) (2,078,598) (1,879,791)
Interest credited.................... 22,002 18,844 16,026
----------- ----------- -----------
Ending balance....................... $ 586,707 $ 562,412 $ 553,574
=========== =========== ===========
Net increase......................... $ 24,295 $ 8,838 $ 25,758
=========== =========== ===========
Percentage increase.................. 4.32% 1.60% 4.88%
=========== =========== ===========
</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,
---------------------------------------------------------------------------------------------
1998 1997 1996
----------------------------- ----------------------------- -----------------------------
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..... $254,009 $325,400 $235,475 $322,998 $217,316 $319,491
======== ======== ============ ============ ============ ============
Average rate paid... 2.38% 5.75% 2.52% 5.74% 2.50% 5.76%
======== ======== ============ ============ ============ ============
</TABLE>
The following table indicates the amount, at December 31, 1998, 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.................... $ 6,863
Over three months through six months.... 9,545
Over six months through twelve months... 12,304
Over twelve months...................... 9,160
-------
$37,872
=======
</TABLE>
25
<PAGE>
The following table presents, by various interest rate categories, the
amounts of certificate of deposit accounts at December 31, 1998, 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, 1999................... $30,083 $ 70,483 $28,666 $ 187 $ 424 $129,843 40.48%
December 31, 1999............... 16,076 77,700 9,306 48 -- 103,130 32.15
June 30, 2000................... 4,509 27,563 7,165 384 -- 39,621 12.35
December 31, 2000............... 1,211 6,885 2,833 -- -- 10,929 3.41
December 31, 2001............... 1,402 11,915 1,417 18 3 14,755 4.60
December 31, 2002............... 9 3,645 4,889 10 -- 8,553 2.67
Thereafter...................... 76 10,865 2,796 169 -- 13,906 4.34
------- -------- ------- ------ ------ -------- ------
$53,366 $209,056 $57,072 $ 816 $ 427 $320,737 100.00%
======= ======== ======= ====== ====== ======== ======
</TABLE>
At December 31, 1998, accounts having balances of $100,000 or more
totaled $77.7 million representing 13.2% 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, 1998, the Bank administered 3,726 IRAs and six
Tax Qualified Retirement Plans totaling $47.5 million, or 8.1%, 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 declined from $212.7 million at December 31,
1997 to $211.8 million at year-end 1998. Of the outstanding FHLB advances at
December 31, 1998, $209.3 million carried a weighted average fixed-rate of
5.76%. Adjustable-rate advances at December 31, 1998 totaled $2.5 million, all
of which reprice based upon the FHLB overnight Basic Agency Discount Note rate
plus 30 basis points.
Since 1995, FHLB advances have been obtained to meet the Bank's
operating needs which included the funding of adjustable-rate mortgage loan
originations and purchases 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 emphasized using more medium term
fixed-rate FHLB advances.
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.
26
<PAGE>
In 1998, the Bank introduced a commercial sweep account to provide
earnings on excess funds to commercial customers. The sweep accounts are
collateralized by securities sold under agreement to repurchase and are not FDIC
insured. Total securities sold under agreement to repurchase at December 31,
1998 was $1.8 million with a weighted average rate of 3.89%.
The following tables set forth certain information regarding
borrowings at the dates and during the periods indicated.
<TABLE>
<CAPTION>
At December 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C>
Amount of borrowings:
FHLB advances................................... $211,835 $212,693 $202,639
Securities sold under agreement to repurchase... 1,772 -- --
Weighted average rate on:
FHLB advances.................................... 5.75% 6.09% 5.97%
Securities sold under agreement to repurchase... 3.89 -- --
<CAPTION>
Year Ended December 31,
---------------------------------
1998 1997 1996
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Maximum amount of borrowings
outstanding at any month end:
FHLB advances.................................... $214,012 $223,461 $203,330
Securities sold under agreement to repurchase... 1,859 -- --
Approximate average borrowings
outstanding with respect to:
FHLB advances.................................... $197,973 $207,871 $176,943
Securities sold under agreement to repurchase... 456 -- --
Approximate weighted average rate paid on:
FHLB advances.................................... 5.97% 6.12% 6.02%
Securities sold under agreement to repurchase... 4.10 -- --
</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, 1998,
Community First's investment in this subsidiary was $456,000.
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 $14,000 at December 31, 1998. 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
27
<PAGE>
$15,000, $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 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 provided 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 were separate and distinct from the Bank's offices, and Bank
customers were alerted to the fact that the third party was not affiliated with
the Bank, and was 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 conducted business as Community First
Insurance and Investment Services (CFIIS) and offered customers and non-
customers the opportunity to invest in non-FDIC-insurance products such as
bonds, mutual funds, stocks, annuities, and life insurance. CFIIS received
$138,000 in commission income during 1997. During the fourth quarter of 1998,
two additional licensed agents were hired. CFIIS received $181,000 in
commission income during 1998.
Also during 1997, CCFC invested $26,838 to become a member of Michigan
Bankers Title of Mid-Michigan, L.L.C., a Michigan limited liability company, for
the purpose of engaging in the title insurance agency business. As agent for
Investors Title Insurance Company, a North Carolina insurance corporation
headquartered in Chapel Hill, North Carolina, the L.L.C. underwrites and issues
title insurance policies in the name and on behalf of the title insurer. The
Michigan Bankers Title of Mid-Michigan, L.L.C. is comprised of fourteen owners;
subsidiaries of ten state banks, three national banks and one subsidiary of a
state savings bank. CCFC received a dividend distribution of $29,820 in
December 1997, based upon the operation of the L.L.C. during 1997. As a result
of activity during 1998, CCFC received dividend distributions of $82,005.
On January 2, 1998, the Bank formed a wholly-owned subsidiary
Community First Mortgage Corporation ("CFMC"). The subsidiary was formed for
the purpose of performing secondary marketing activities. At December 31, 1998,
CFMC held mortgage loans totaling $380.2 million. Gains on sales of loans
through CFMC during 1998 were $288,000.
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."
28
<PAGE>
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,
--------------------------
1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
Interest rate spread.................... 2.76% 2.70% 2.63%
Net yield on earning assets............. 3.10 3.06 2.98
Return on average equity (net income
as a percentage of average
stockholders' equity)................. 17.59 16.39 8.55
Return on average assets (net income
as a percentage of average assets)... 1.38 1.26 0.69
Dividend payout ratio................... 36.90 31.71 41.28
<CAPTION>
At December 31,
--------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Equity to assets ratio (average stockholders'
equity as a percentage of average total assets) 7.86% 7.70% 8.06%
</TABLE>
Additional performance ratios are set forth in the "Five Year Summary
of Selected Consolidated Financial Data," incorporated herein by reference to
the Annual Report. Any significant changes in the current 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 the
Annual Report.
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. Community
First has 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.
Segments of the Business
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131, Disclosures about Segments
of an Enterprise and Related Information ("SFAS 131"). SFAS 131 establishes
29
<PAGE>
standards for the way that public business enterprises report information about
operating segments in financial statements. Operating segments are components
of an enterprise for which separate financial information is available, and is
evaluated regularly by management in deciding how to allocate resources and in
assessing performance. SFAS 131 establishes standards for related disclosures
about products, services, geographic areas, and major customers. The
Corporation operates as a single segment.
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 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, 1998, the Bank's ratio of Tier 1 capital to total
assets was 7.6%, its ratio of Tier 1 capital to risk-weighted assets was 13.1%
and its ratio of total capital to risk-weighted assets was 14.1%.
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.
30
<PAGE>
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 meets substantially all the standards adopted in the
interagency guidelines.
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 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, 1998, with investments in
FHLB stock of $11.5 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, 1998, the Bank had $211.8 million in advances from its FHLB.
31
<PAGE>
Liquidity Requirements. Although not required by regulation,
Community First maintains average daily balances of short-term liquid assets at
a specified percentage (currently 3%) of the total of its net withdrawable
savings accounts and borrowings payable in one year or less. The short-term
liquidity ratio of the Bank at December 31, 1998 was 4.40%. 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.
Before 1997, 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.
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.
32
<PAGE>
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:
. 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;
. 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);
. 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);
. 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
. 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
33
<PAGE>
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, 1998, 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 State of Michigan Savings Bank Act
No. 354 of the Public Acts of 1996 (the "Act") provides limits on loans and
extensions of credit to one borrower for stock savings banks chartered in the
State of Michigan. The Act limits loans and extensions of credit to one
borrower to 15% of the capital and surplus of the Bank, except that upon two-
thirds vote of its Board of Directors, the limit may be increased not to exceed
25% of the capital and surplus of the Bank.
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 on the
first $4.9 million of transaction accounts. Reserves equal to 3% must be
maintained on the next $41.6 million of transaction accounts and a reserve of
10% must be maintained against the remaining transaction accounts. These
reserve requirements are subject to adjustment 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, 1998, 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
34
<PAGE>
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.
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
35
<PAGE>
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. (S) 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
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 (S)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.
36
<PAGE>
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 Internal Revenue Code of 1986, as amended ("Code") in the same general
manner as other corporations. Prior to 1996 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. The thrift
bad debt reserve 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.
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 Bank began to recapture its
excess reserve of approximately $3.7 million in 1998.
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 reserves 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
amounts are 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, the Corporation, the Bank and its
subsidiaries are 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 1998 and 1997. The Bank was also
subject to an "Intangibles Tax" of $0.05 in 1997 and $0.10 in 1996 on each
$1,000 of savings deposits. The Intangibles Tax has been repealed for 1998 and
subsequent years.
37
<PAGE>
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, 1998, the Bank, including its subsidiaries, had 207
full-time employees and 72 part-time employees. The employees are not
represented by a collective bargaining unit. The Bank believes its relationship
with its employees to be good.
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 63 President and Chief Executive Officer of the Corporation and the Bank
John W. Abbott 51 Executive Vice President, Chief Operating Officer, and Secretary of the
Corporation and the Bank
Jane M. Judge McMillian 37 Vice President -- Director of Human Resources of the Bank
Rick L. Laber 41 Vice President, Chief Financial Officer, and Treasurer of the Corporation
and the Bank
Jack G. Nimphie 49 Senior Vice President -- Director of Operations of the Bank
Sally A. Peters 46 Vice President -- Director of Marketing of the Bank
C. Wayne Weaver 45 Senior Vice President -- Director of Retail Banking of the Bank
- -------------------------
</TABLE>
(1) At December 31, 1998
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
Chairman and a director of the Lansing Community College Foundation, a member of
the Rotary Club of Lansing, and a Board member and Chairman 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.
He is currently a director of the Michigan League of Community Banks.
38
<PAGE>
Jane M. Judge McMillian joined Community First in May 1995 as Vice
President -- Director of Human Resources. Ms. Judge McMillian 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.
Rick L. Laber joined Community First in August 1997 as Vice President,
Chief Financial Officer and Treasurer. Mr. Laber also serves as the
Corporation's Vice President, Chief Financial Officer and Treasurer. From 1996
until July 1997, Mr. Laber was Vice President -- Branch Coordinator of Flagstar
Bank in Jackson, Michigan. From 1992 to 1996, Mr. Laber was Senior Vice
President, Chief Financial Officer and Treasurer of Security Savings Bank
located in Jackson, Michigan. Prior to August 1992, Mr. Laber was a C.P.A. with
a national accounting firm.
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.
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,
1998.
<TABLE>
<CAPTION>
Net Book
Year Approximate Value at
Facility Office Area December 31,
Opened (Square Feet) 1998 (1)
-------- ------------- -------------
<S> <C> <C> <C>
Community First Main Office:
112 East Allegan Street
Lansing, Michigan (2)................ 1922 46,368 $3,901,770
Branch Offices:
101 East Lawrence Street
Charlotte, Michigan.................. 1981 1,700 187,418
6333 West St. Joseph Street
Delta Township, Michigan............. 1986 1,200 358,367
250 East Saginaw Street
East Lansing, Michigan............... 1977 2,100 408,805
401 South Bridge Street
Grand Ledge, Michigan................ 1966 1,700 320,781
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
Net Book
Year Approximate Value at
Facility Office Area December 31,
Opened (Square Feet) 1998 (1)
-------- ------------- -----------
<S> <C> <C> <C>
4440 West Saginaw Street
Lansing, Michigan.................... 1977 2,100 421,954
6510 South Cedar Street
Lansing, Michigan (3)................ 1974 3,000 506,433
606 West Columbia Street
Mason, Michigan...................... 1971 1,700 335,697
301 North Clinton Avenue
St. Johns, Michigan.................. 1978 2,700 384,681
225 West Grand River Avenue
Williamston, Michigan................ 1978 1,500 306,638
121 West Allegan Street
Lansing, Michigan (4)................ 1922 16,800
5620 Pennsylvania Avenue
Lansing, Michigan.................... 1970 1,250 144,841
100 North Dexter Street
Ionia, Michigan...................... 1975 1,248 88,859
709 S. U.S. 27
St. Johns, Michigan.................. 1981 1,454 211,324
2801 E. Grand River
Lansing, Michigan.................... 1978 1,454 165,346
13007 S. U.S. 27
DeWitt, Michigan..................... 1994 2,420 1,092,887
515 E. Grand River Avenue, Suite E
East Lansing, Michigan (5)........... 1996 2,500 59,361
4815 Okemos Road
Okemos, Michigan..................... 1997 2,635 1,048,804
Ledges Commerce Park, Unit 2A
Grand Ledge, Michigan (6)............ 1996 198,735
</TABLE>
_______________
(1) Represents the book value of land, building, fixtures, equipment and
furniture at the premises and owned or leased by the Bank.
(2) This location has attached buildings with an additional 2,444 square feet
rented as retail space.
(3) Building has a second floor with an additional 2,200 square feet rented as
office space.
(4) This office was closed effective May 1, 1992, and sold June 30, 1998.
(5) Branch office was opened April 29, 1996. Property is leased and net book
value at December 31, 1998 represents building improvements and furniture
and equipment. This office was subsequently closed February 20, 1999.
(6) Net book value at December 31, 1998 represents the purchase price of land
which is held for future development of a branch office.
40
<PAGE>
The net book value of the Bank's investment in premises and equipment
totaled $10.3 million at December 31, 1998. 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 1998.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
- --------------------------------------------------------------------------
Matters
- -------
The information contained in this Section captioned "Market
Information" in the Annual Report is hereby incorporated by reference.
Item 6. Selected Financial Data
- --------------------------------
The information contained in the section "Selected Consolidated
Financial and Other Data" in the Annual Report is hereby incorporated by
reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
The information contained in the section "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Annual Report
is hereby incorporated by reference.
Item 7a. Qualitative and Quantitative Disclosures About Mark Risk
- ------------------------------------------------------------------
The information contained in the section "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Annual Report
is hereby incorporated by reference.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
The financial statements contained in the Annual Report which are
listed in Item 14 herein are incorporated herein by reference.
41
<PAGE>
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.
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, and
to "Item 1 -- Business -- Recent Developments" in this Form 10-K.
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,
1998 and 1997
2. Consolidated Statements of Operations for the Years Ended December
31, 1998, 1997 and 1996
3. Consolidated Statements of Stockholders' Equity and Other
Comprehensive Income for the Years Ended December 31, 1998, 1997
and 1996
4. Consolidated Statements of Cash Flows for the Years Ended December
31, 1998, 1997 and 1996
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.
42
<PAGE>
(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 by 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)
10.4 Agreement and Plan of Merger by and between CFSB Bancorp, Inc.
and Old Kent Financial Corporation, dated February 24, 1999
(incorporated by reference to Exhibit 2.1 to the Corporation's
Current Report on Form 8-K filed with the SEC on March 1, 1999)
10.5 Stock Option Agreement by and between CFSB Bancorp, Inc. and
Old Kent Financial Corporation, dated February 24, 1999
(incorporated by reference to Exhibit 2.2 to the Corporation's
Current Report on Form 8-K filed with the SEC on March 1, 1999)
10.6 1994 Stock Option and Incentive Plan
10.7 Employment Agreement between Community First Bank and Rick L.
Laber
10.8 1998 Management Incentive Compensation Plan
13 1998 Annual Report to Stockholders
21 Subsidiaries
23 Consent of KPMG LLP
27 Financial Data Schedule
(b) Reports on Form 8-K. The Registrant did not file any Current
-------------------
Reports on Form 8-K during the last quarter of the fiscal year
ending December 31, 1998.
(c) Exhibits - All exhibits to this report are attached or
--------
incorporated by reference as stated above.
(d) Financial Statement Schedules - None.
-----------------------------
43
<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 16, 1999.
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 16, 1999.
/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/ Rick L. Laber
- ----------------------------- -------------------------------
James L. Reutter Rick L. Laber
Chairman of the Board Vice President, Chief Financial Officer
and Treasurer
(Director) (Principal Financial and Accounting Officer)
/s/ Cecil Mackey
- ----------------------------- -------------------------------
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
- -----------------------------
Henry W. Wolcott, IV
(Director)
<PAGE>
INDEX TO EXHIBITS
Exhibit
- -------
3.1 * Certificate of Incorporation of CFSB Bancorp, Inc.
3.2 * Bylaws of CFSB Bancorp, Inc.
10.1 * Stock Option Plan of CFSB Bancorp, Inc.
10.2 ** Employment Agreements between Community First, A Federal Savings
Bank and Robert H. Becker and John W. Abbott.
10.3 *** Merger Conversion Agreement with Union Federal Savings dated
June 12, 1991.
10.4 **** Agreement and Plan of Merger by and between CFSB Bancorp, Inc.
and Old Kent Financial Corporation, dated February 24, 1999
10.5 ***** Stock Option Agreement by and between CFSB Bancorp, Inc. and Old
Kent Financial Corporation, dated February 24, 1999
10.6 1994 Stock Option and Incentive Plan
10.7 Employment Agreement between Community First Bank and Rick L.
Laber
10.8 1998 Management Incentive Compensation Plan
13 1998 Annual Report to Stockholders
21 Subsidiaries
23 Consent of KPMG LLP
27 Financial Data Schedule
_____________
* Incorporated by reference to the Corporation's registration statement on
Form S-1 filed with the SEC on January 9, 1990.
** Incorporated by reference to Exhibit 10.2 to Post-Effective Amendment No.
2 to the Corporation's registration statement on Form S-1 filed with the
SEC on May 21, 1990.
*** 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.
**** Incorporated by reference to Exhibit 2.1 to the Corporation's Current
Report on Form 8-K filed with the SEC on March 1, 1999.
***** Incorporated by reference to Exhibit 2.2 to the Corporation's Current
Report on Form 8-K filed with the SEC on March 1, 1999.
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EXHIBIT 10.6
CFSB BANCORP, INC.
1994 STOCK OPTION AND INCENTIVE PLAN
1. PURPOSE OF THE PLAN.
The purpose of this CFSB Bancorp, Inc. 1994 Stock Option and Incentive Plan
(the "Plan") is to advance the interests of the Company through providing select
Employees and Directors of the Bank, the Company, and their Affiliates with the
opportunity to acquire Shares. By encouraging such stock ownership, the Company
seeks to attract, retain and motivate the best available personnel for positions
of substantial responsibility and to provide additional incentive to Employees
and Directors of the Company or any Affiliate to promote the success of the
business.
2. DEFINITIONS.
As used herein, the following definitions shall apply.
(a) "Affiliate" shall mean any "parent corporation" or "subsidiary
corporation" of the Company, as such terms are defined in Section 424(e) and
(f), respectively, of the Code.
(b) "Agreement" shall mean a written agreement entered into in accordance
with Paragraph 5(c).
(c) "Awards" shall mean, collectively, Options, SARs, and Restricted
Stock, unless the context clearly indicates a different meaning.
(d) "Bank" shall mean Community First Bank, A Federal Savings Bank.
(e) "Board" shall mean the Board of Directors of the Company.
(f) "Change in Control" shall mean the acquisition of ownership, holding
or power to vote more than 25% of the Bank's or Company's voting stock by any
person (except ownership or control of the Bank by the Company itself shall not
constitute a "Change in Control"). For purposes of this subparagraph only, the
term "person" refers to an individual or a corporation, partnership, trust,
association, joint venture, pool, syndicate, sole proprietorship, unincorporated
organization or any other form of entity not specifically listed herein. The
decision of the Committee as to whether a change in control has occurred shall
be conclusive and binding.
(g) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(h) "Committee" shall mean the Stock Option Committee appointed by the
Board in accordance with Paragraph 5(a) hereof.
(i) "Common Stock" shall mean the common stock, par value $.01 per share,
of the Company.
(j) "Company" shall mean CFSB Bancorp, Inc.
(k) "Continuous Service" shall mean the absence of any interruption or
termination of service as an Employee or Director. Continuous Service shall not
be considered interrupted in the case of sick leave, military leave or any other
leave of absence approved by the Company or in the case of transfers between
payroll locations of the Company or between the Company, an Affiliate or a
successor.
<PAGE>
(l) "Director" shall mean any member of the Board, and any member of the
Board of Directors of an Affiliate.
(m) "Disinterested Person" shall mean any member of the Board who, at the
time discretion under the Plan is exercised, is a "disinterested person" within
the meaning of Rule 16b-3.
(n) "Effective Date" shall mean the date specified in Paragraph 15 hereof.
(o) "Employee" shall mean any person employed by the Company or an
Affiliate.
(p) "Exercise Price" shall mean the price per Optioned Share at which an
Option or SAR may be exercised.
(q) "ISO" means an option to purchase Common Stock which meets the
requirements set forth in the Plan, and which is intended to be and is
identified as an "incentive stock option" within the meaning of Section 422 of
the Code.
(r) "Market Value" shall mean the fair market value of the Common Stock,
as determined under Paragraph 7(b) hereof.
(s) "Non-ISO" means an option to purchase Common Stock which meets the
requirements set forth in the Plan but which is not intended to be and is not
identified as an ISO.
(t) "Option" means an ISO and/or a Non-ISO.
(u) "Optioned Shares" shall mean Shares subject to an Option granted
pursuant to this Plan.
(v) "Participant" shall mean any person who receives an Award pursuant to
the Plan.
(w) "Plan" shall mean this CFSB Bancorp, Inc. 1994 Stock Option and
Incentive Plan.
(x) "Restricted Stock" means Common Stock which is subject to restrictions
against transfer and forfeiture and such other terms and conditions determined
by the Committee, as provided in Paragraph 10.
(y) "Rule 16b-3" shall mean Rule 16b-3 of the General Rules and
Regulations under the Securities Exchange Act of 1934, as amended.
(z) "Share" shall mean one share of Common Stock.
(aa) "SAR" (or "Stock Appreciation Right") means a right to receive the
appreciation in value, or a portion of the appreciation in value, of a specified
number of shares of Common Stock.
3. TERM OF THE PLAN AND AWARDS.
(a) Term of the Plan. The Plan shall continue in effect for a term of ten
years from the Effective Date, unless sooner terminated pursuant to Paragraph 18
hereof. No Award shall be granted under the Plan after ten years from the
Effective Date.
(b) Term of Awards. The term of each Award granted under the Plan shall be
established by the Committee, but shall not exceed 10 years; provided, however,
that in the case of an Employee who owns Shares
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representing more than 10% of the outstanding Common Stock at the time an ISO is
granted, the term of such ISO shall not exceed five years.
4. SHARES SUBJECT TO THE PLAN.
(a) General Rule. Except as otherwise required by the provisions of
Paragraph 12 hereof, the aggregate number of Shares deliverable pursuant to
Awards shall not exceed 372,818. Such Shares may either be authorized but
unissued Shares or Shares held in treasury. If Awards should expire, become
unexercisable or be forfeited for any reason without having been exercised or
without having become vested in full, the Optioned Shares shall, unless the Plan
shall have been terminated, be available for the grant of additional Awards
under the Plan.
(b) Special Rule for SARs. The number of Shares with respect to which an
SAR is granted, but not the number of Shares which the Company delivers or could
deliver to an Employee or individual upon exercise of an SAR, shall be charged
against the aggregate number of Shares remaining available under the Plan;
provided, however, that in the case of an SAR granted in conjunction with an
Option, under circumstances in which the exercise of the SAR results in
termination of the Option and vice versa, only the number of Shares subject to
the Option shall be charged against the aggregate number of Shares remaining
available under the Plan. The Shares involved in an Option as to which option
rights have terminated by reason of the exercise of a related SAR, as provided
in Paragraph 9 hereof, shall not be available for the grant of further Options
under the Plan.
5. ADMINISTRATION OF THE PLAN.
(a) Composition of the Committee. The Plan shall be administered by the
Committee, which shall consist of not less than three (3) members of the Board
who are Disinterested Persons. Members of the Committee shall serve at the
pleasure of the Board. In the absence at any time of a duly appointed Committee,
the Plan shall be administered by those members of the Board who are
Disinterested Persons.
(b) Powers of the Committee. Except as limited by the express provisions
of the Plan or by resolutions adopted by the Board, the Committee shall have
sole and complete authority and discretion (i) to select Participants and grant
Awards, (ii) to determine the form and content of Awards to be issued in the
form of Agreements under the Plan, (iii) to interpret the Plan, (iv) to
prescribe, amend and rescind rules and regulations relating to the Plan, and (v)
to make other determinations necessary or advisable for the administration of
the Plan. The Committee shall have and may exercise such other power and
authority as may be delegated to it by the Board from time to time. A majority
of the entire Committee shall constitute a quorum and the action of a majority
of the members present at any meeting at which a quorum is present, or acts
approved in writing by a majority of the Committee without a meeting, shall be
deemed the action of the Committee.
(c) Agreement. Each Award shall be evidenced by a written agreement
containing such provisions as may be approved by the Committee. Each such
Agreement shall constitute a binding contract between the Company and the
Participant, and every Participant, upon acceptance of such Agreement, shall be
bound by the terms and restrictions of the Plan and of such Agreement. The terms
of each such Agreement shall be in accordance with the Plan, but each Agreement
may include such additional provisions and restrictions determined by the
Committee, in its discretion, provided that such additional provisions and
restrictions are not inconsistent with the terms of the Plan. In particular, the
Committee shall set forth in each Agreement (i) the Exercise Price of an Option
or SAR, (ii) the number of Shares subject to, and the expiration date of, the
Award, (iii) the manner, time and rate (cumulative or otherwise) of exercise or
vesting of such Award, and (iv) the restrictions, if any, to be placed upon such
Award, or upon Shares which may be issued upon exercise of such Award.
The Chairman of the Committee and such other Directors as shall be
designated by the Committee are hereby authorized to execute Agreements on
behalf of the Company and to cause them to be delivered to the recipients of
Awards.
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<PAGE>
(d) Effect of the Committee's Decisions. All decisions, determinations
and interpretations of the Committee shall be final and conclusive on all
persons affected thereby.
(e) Indemnification. In addition to such other rights of indemnification
as they may have, the members of the Committee shall be indemnified by the
Company in connection with any claim, action, suit or proceeding relating to any
action taken or failure to act under or in connection with the Plan or any
Award, granted hereunder to the full extent provided for under the Company's
Charter or Bylaws with respect to the indemnification of Directors.
6. GRANT OF OPTIONS.
(a) General Rule. In its sole discretion, the Committee may grant Options
to Employees (including Employees who are Directors), and to Directors who join
the Board after the Effective Date and who are not members of the Committee on
the date of the Award.
(b) Special Rules for ISOs. The aggregate Market Value, as of the date
the Option is granted, of the Shares with respect to which ISOs are exercisable
for the first time by an Employee during any calendar year (under all incentive
stock option plans, as defined in Section 422 of the Code, of the Company or any
present or future Affiliate) shall not exceed $100,000. Notwithstanding the
prior provisions of this paragraph, the Committee may grant Options in excess of
the foregoing limitations, in which case such Options granted in excess of such
limitation shall be Options which are Non-ISOs.
7. EXERCISE PRICE FOR OPTIONS.
(a) Limits on Committee Discretion. The Exercise Price as to each Option
granted under the Plan shall not be less than the Market Value of the Optioned
Shares on the date of grant. In the case of an Employee who owns Shares
representing more than 10% of the Company's outstanding Shares of Common Stock
at the time an ISO is granted, the Exercise Price for such ISO shall not be less
than 110% of the Market Value of the Optioned Shares at the time the ISO is
granted.
(b) Standards for Determining Exercise Price. If the Common Stock is
listed on a national securities exchange (including the NASDAQ National Market
System) on the date in question, then the Market Value per Share shall be not
less than the average of the highest and lowest selling price on such exchange
on such date, or if there were no sales on such date, then the Exercise Price
shall be not less than the mean between the bid and asked price on such date. If
the Common Stock is traded otherwise than on a national securities exchange on
the date in question, then the Market Value per Share shall be not less than the
mean between the bid and asked price on such date, or, if there is no bid and
asked price on such date, then on the next prior business day on which there was
a bid and asked price. If no such bid and asked price is available, then the
Market Value per Share shall be its fair market value as determined by the
Committee, in its sole and absolute discretion.
8. EXERCISE OF OPTIONS.
(a) Generally. Any Option granted hereunder shall be exercisable at such
times and under such conditions as shall be permissible under the terms of the
Plan and of the Agreement granted to a Participant. An Option may not be
exercised for a fractional Share.
(b) Procedure for Exercise. A Participant may exercise Options, subject
to provisions relative to its termination and limitations on its exercise, only
by (1) written notice of intent to exercise the Option with respect to a
specified number of Shares, and (2) payment to the Company (contemporaneously
with delivery of such notice) in cash, in Common Stock, or a combination of cash
and Common Stock, of the amount of the Exercise Price for the number of Shares
with respect to which the Option is then being exercised. Each such notice (and
payment where required) shall be delivered, or mailed by prepaid registered or
certified mail, addressed to the Treasurer of the Company at the
4
<PAGE>
Company's executive offices. Common Stock utilized in full or partial payment of
the Exercise Price for Options shall be valued at its Market Value at the date
of exercise.
(c) Period of Exercisability. Except to the extent otherwise provided in
the terms of an Agreement, an Option may be exercised by a Participant only
while he is an Employee or Director and has maintained Continuous Service from
the date of the grant of the Option, or within three months after termination of
such Continuous Service (but not later than the date on which the Option would
otherwise expire), except if the Employee's or Director's Continuous Service
terminates by reason of --
(1) "Just Cause" which for purposes hereof shall have the meaning set
forth in any unexpired employment or severance agreement between the
Participant and the Bank and/or the Company (and, in the absence of any
such agreement, shall have the meaning set forth in 12 C.F.R. (S)
563.39(b)(1) as in effect on the Effective Date), then the Participant's
rights to exercise such Option shall expire on the date of such
termination;
(2) death, then to the extent that the Participant would have been
entitled to exercise the Option immediately prior to his death, such Option
of the deceased Participant may be exercised within two years from the date
of his death (but not later than the date on which the Option would
otherwise expire) by the personal representatives of his estate or person
or persons to whom his rights under such Option shall have passed by will
or by laws of descent and distribution;
(3) Permanent and Total Disability (as such term is defined in
Section 22(e)(3) of the Code), then to the extent that the Participant
would have been entitled to exercise the Option immediately prior to his
Permanent and Total Disability, such Option may be exercised within one
year from the date of such Permanent and Total Disability, but not later
than the date on which the Option would otherwise expire.
Notwithstanding the provisions of any Option which provides for its
exercise in installments as designated by the Committee, such Option shall
become immediately exercisable upon the Participant's death or Permanent and
Total Disability.
(d) Effect of the Committee's Decisions. The Committee's determination
whether a Participant's Continuous Service has ceased, and the effective date
thereof shall be final and conclusive on all persons affected there by.
9. SARS (STOCK APPRECIATION RIGHTS)
(a) Granting of SARs. In its sole discretion, the Committee may from time
to time grant SARs to Employees (including Employees who are Directors), and to
Directors who join the Board after the Effective Date and who are not members of
the Committee on the date of the Award. The Committee may grant SARs either in
conjunction with, or independently of, any Options granted under the Plan. An
SAR granted in conjunction with an Option may be an alternative right wherein
the exercise of the Option terminates the SAR to the extent of the number of
shares purchased upon exercise of the Option and, correspondingly, the exercise
of the SAR terminates the Option to the extent of the number of Shares with
respect to which the SAR is exercised. Alternatively, an SAR granted in
conjunction with an Option may be an additional right wherein both the SAR and
the Option may be exercised. An SAR may not be granted in conjunction with an
ISO under circumstances in which the exercise of the SAR affects the right to
exercise the ISO or vice versa, unless the SAR, by its terms, meets all of the
following requirements:
(1) The SAR will expire no later than the ISO;
(2) The SAR may be for no more than the difference between the
Exercise Price of the ISO and the Market Value of the Shares subject
to the ISO at the time the SAR is exercised;
5
<PAGE>
(3) The SAR is transferable only when the ISO is transferable, and
under the same conditions;
(4) The SAR may be exercised only when the ISO may be exercised; and
(5) The SAR may be exercised only when the Market Value of the Shares
subject to the ISO exceeds the Exercise Price of the ISO.
(b) Exercise Price. The Exercise Price as to any particular SAR shall not
be less than the Market Value of the Optioned Shares on the date of grant.
(c) Timing of Exercise. Any election by a Participant to exercise SARs
shall be made during the period beginning on the 3rd business day following the
release for publication of quarterly or annual financial information and ending
on the 12th business day following such date. This condition shall be deemed to
be satisfied when the specified financial data is first made publicly available.
In no event, however, may an SAR be exercised within the six-month period
following the date of its grant.
The provisions of Paragraph 8(c) regarding the period of exercisability of
Options is incorporated by reference herein, and shall determine the period of
exercisability of SARs.
(d) Exercise of SARs. An SAR granted hereunder shall be exercisable at
such times and under such con ditions as shall be permissible under the terms of
the Plan and of the Agreement granted to a Participant, provided that an SAR may
not be exercised for a fractional Share. Upon exercise of an SAR, the
Participant shall be entitled to receive, without payment to the Company except
for applicable withholding taxes, an amount equal to the excess of (or, in the
discretion of the Committee if provided in the Agreement, a portion of) the
excess of the then aggregate Market Value of the number of Optioned Shares with
respect to which the Participant exercises the SAR, over the aggregate Exercise
Price of such number of Optioned Shares. This amount shall be payable by the
Company, in the discretion of the Committee, in cash or in Shares valued at the
then Market Value thereof, or any combination thereof.
(e) Procedure for Exercising SARs. To the extent not inconsistent
herewith, the provisions of Paragraph 8(b) as to the procedure for exercising
Options are incorporated by reference, and shall determine the procedure for
exercising SARs.
10. RESTRICTED STOCK AWARDS.
Any Share of Restricted Stock which the Committee may grant to Employees
(including Employees who are Directors), and to Directors who join the Board
after the Effective Date and who are not members of the Committee on the date of
the Award, shall be subject to the following terms and conditions, and to such
other terms and conditions as are either applicable generally to Awards, or
prescribed by the Committee in the applicable Agreement:
(a) Restriction Period. At the time of each award of Restricted Stock,
there shall be established for the Restricted Stock a restriction period, which
shall be no less than 6 months and no greater than 5 years (the "Restriction
Period"). Such Restriction Period may differ among Participants and may have
different expiration dates with respect to portions of shares of Restricted
Stock covered by the same award.
(b) Vesting Restrictions. The Committee shall determine 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,
which restrictions may differ with respect to each Participant. The Agreement
shall provide for forfeiture of Shares covered thereby if the specified
restrictions are not met during the Restriction Period, and may provide for
early termination of any Restriction Period in the event of satisfaction of the
specified restrictions prior to expiration of the Restricted Period.
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(c) Vesting upon Death, Disability, or Retirement. The Committee shall set
forth in the Agreement the percentage of the award of Restricted Stock which
shall vest in the Participant in the event of death, disability or retirement
prior to the expiration of the Restriction Period or the satisfaction of the
restrictions applicable to an award of Restricted Stock.
(d) Acceleration of Vesting. Notwithstanding the Restriction Period and
the restrictions imposed on the Restricted Stock, as set forth in any Agreement,
the Committee may shorten the Restriction Period or waive any restrictions, if
the Committee concludes that it is in the best interests of the Company to do
so.
(e) Ownership; Voting. Stock certificates shall be issued in respect of
Restricted Stock awarded hereunder and shall be registered in the name of the
Participant, whereupon the Participant shall become a stockholder of the Company
with respect to such Restricted Stock and shall, to the extent not inconsistent
with express provisions of the Plan, have all the rights of a stockholder,
including but not limited to the right to receive all dividends paid on such
Shares and the right to vote such Shares. Said stock certificates shall be
deposited with the Company or its designee, together with a stock power endorsed
in blank, and the following legend shall be placed upon such certificates
reflecting that the shares represented thereby are subject to restrictions
against transfer and forfeiture:
"The transferability of this certificate and the shares of stock
represented thereby are subject to the terms and conditions (including
forfeiture) contained in the CFSB Bancorp, Inc. 1994 Stock Option and
Incentive Plan, and an agreement entered into between the registered owner
and the Stock Option Committee appointed under the CFSB Bancorp, Inc. 1994
Stock Option and Incentive Plan. Copies of such Plan and Agreement are on
file in the offices of the Secretary of CFSB Bancorp, Inc., 112 East
Allegan Street, Lansing, Michigan 48901."
(f) Lapse of Restrictions. At the expiration of the Restricted Period
applicable to the Restricted Stock, the Company shall deliver to the
Participant, or the legal representative of the Participant's estate, or if the
personal representative of the Participant's estate shall have assigned the
estate's interest in the Restricted Stock, to the person or persons to whom his
rights under such Stock shall have passed by assignment pursuant to his will or
to the laws of descent and distribution, the stock certificates deposited with
it or its designee and as to which the Restricted Period has expired and the
requirements of the restrictions have been met. If a legend has been placed on
such certificates, the Company shall cause such certificates to be reissued
without the legend.
(g) Forfeiture of Restricted Stock. The Agreement shall provide for
forfeiture of any Restricted Stock which is not vested in the Participant or for
which the restrictions have not been satisfied during the Restriction Period.
11. CHANGE IN CONTROL
(a) General Rule. Notwithstanding the provisions of any Award which
provides for its exercise or vesting in installments, all Shares of Restricted
Stock shall become fully vested upon a Change in Control, and for a period of 60
days beginning on the date of such Change in Control, all Options and SARs shall
be immediately exercisable and fully vested. With respect to Options, at the
time of a Change in Control, the Participant shall, at the discretion of the
Committee, be entitled to receive cash in an amount equal to the excess of the
Market Value of the Common Stock subject to such Option over the Exercise Price
of such Shares, in exchange for the cancellation of such Options by the
Participant.
(b) Exception to General Rule. Notwithstanding subparagraph (a) of this
Paragraph, in no event may an SAR be exercised, or an Option be cancelled in
exchange for cash, within the six-month period following the date of its grant.
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12. EFFECT OF CHANGES IN COMMON STOCK SUBJECT TO THE PLAN.
(a) Recapitalizations; Stock Splits, Etc. The number and kind of
shares reserved for issuance under the Plan, and the number and kind of shares
subject to outstanding Awards (and the Exercise Price thereof in the case of
Options and SARs), shall be proportionately adjusted for any increase, decrease,
change or exchange of Shares for a different number or kind of shares or other
securities of the Company which results from a merger, consolidation, re
capitalization, reorganization, reclassification, stock dividend, split-up,
combination of shares, or similar event in which the number or kind of shares is
changed without the receipt or payment of consideration by the Company.
(b) Transactions in which the Company is Not the Surviving Entity.
Subject to Paragraph 11 hereof, in the event of (i) the liquidation or
dissolution of the Company, (ii) a merger or consolidation in which the Company
is not the surviving entity, or (iii) the sale or disposition of all or
substantially all of the Company's assets (any of the foregoing to be referred
to herein as a "Transaction"), all outstanding Awards shall be surrendered. With
respect to each Award so surrendered, the Committee shall in its sole and
absolute discretion determine whether the holder of the surrendered Award shall
receive --
(1) for each Share then subject to an outstanding Award the
number and kind of shares into which each outstanding Share (other
than Shares held by dissenting stockholders) is changed or exchanged,
together with an appropriate adjustment to the Exercise Price in the
case of Options and SARs; or
(2) a cash payment (from the Company or the successor
corporation), in an amount equal to the Market Value of the Shares
subject to the Award on the date of the Transaction, less the Exercise
Price of the Award in the case of Options and SARs.
(c) Special Rule for ISOs. Any adjustment made pursuant to subparagraphs
(a) or (b)(1) hereof shall be made in such a manner as not to constitute a
modification, within the meaning of Section 424(h) of the Code, of outstanding
ISOs.
(d) Conditions and Restrictions on New, Additional, or Different Shares or
Securities. If, by reason of any adjustment made pursuant to this Paragraph, a
Participant becomes entitled to new, additional, or different shares of stock or
securities, such new, additional, or different shares of stock or securities
shall thereupon be subject to all of the conditions and restrictions which were
applicable to the Shares pursuant to the Award before the adjustment was made.
(e) Other Issuances. Except as expressly provided in this Paragraph, the
issuance by the Company or an Affiliate of shares of stock of any class, or of
securities convertible into Shares or stock of another class, for cash or
property or for labor or services either upon direct sale or upon the exercise
of rights or warrants to subscribe therefor, shall not affect, and no adjustment
shall be made with respect to, the number, class, or Exercise Price of Shares
then subject to Awards or reserved for issuance under the Plan.
13. NON-TRANSFERABILITY OF AWARDS.
Awards may not be sold, pledged, assigned, hypothecated, transferred or
disposed of in any manner other than by will or by the laws of descent and
distribution, or pursuant to the terms of a "qualified domestic relations order"
(within the meaning of Section 414(p) of the Code and the regulations and
rulings thereunder).
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14. TIME OF GRANTING AWARDS.
The date of grant of an Award shall, for all purposes, be the later of the
date on which the Committee makes the determination of granting such Award, or
the Effective Date. Notice of the determination shall be given to each
Participant to whom an Award is so granted within a reasonable time after the
date of such grant.
15. EFFECTIVE DATE.
The Plan shall become effective immediately upon its adoption by the Board.
Awards may be made prior to approval of the Plan by the stockholders of the
Company if the exercise of Awards in the form of Options and/or SARs, and the
vesting of Awards in the form of Restricted Stock, are conditioned upon
stockholder approval of the Plan.
16. APPROVAL BY STOCKHOLDERS.
The Plan shall be approved by stockholders of the Company within twelve
(12) months before or after the Effective Date.
17. MODIFICATION OF AWARDS.
At any time, and from time to time, the Board may authorize the Committee
to direct execution of an instrument providing for the modification of any
outstanding Award, provided no such modification shall confer on the holder of
said Award any right or benefit which could not be conferred on him by the grant
of a new Award at such time, or impair the Award without the consent of the
holder of the Award.
18. AMENDMENT AND TERMINATION OF THE PLAN.
(a) The Board may from time to time amend the terms of the Plan and,
with respect to any Shares at the time not subject to Awards, suspend or
terminate the Plan; provided that any amendment that is "material" within the
meaning of Rule 16b-3 shall be subject to stockholder approval.
(b) No amendment, suspension or termination of the Plan shall,
without the consent of any affected holders of an Award, alter or impair any
rights or obligations under any Award theretofore granted.
19. CONDITIONS UPON ISSUANCE OF SHARES.
(a) Compliance with Securities Laws. Shares of Common Stock shall
not be issued with respect to any Award unless the issuance and delivery of such
Shares shall comply with all relevant provisions of law, including, without
limitation, the Securities Act of 1933, as amended, the rules and regulations
promulgated thereunder, any applic able state securities law, and the
requirements of any stock exchange upon which the Shares may then be listed. The
Plan is intended to comply with Rule 16b-3, and any provision of the Plan which
the Committee determines in its sole and absolute discretion to be inconsistent
with said Rule shall, to the extent of such inconsistency, be inoperative and
null and void, and shall not affect the validity of the remaining provisions of
the Plan.
(b) Special Circumstances. The inability of the Company to obtain
approval from any regulatory body or authority deemed by the Company's counsel
to be necessary to the lawful issuance and sale of any Shares hereunder shall
relieve the Company of any liability in respect of the non-issuance or sale of
such Shares. As a condition to the exercise of an Option or SAR, the Company may
require the person exercising the Option or SAR to make such representations and
warranties as may be necessary to assure the availability of an exemption from
the registration requirements of federal or state securities law.
9
<PAGE>
(c) Committee Discretion. The Committee shall have the discretionary
authority to impose in Agreements such restrictions on Shares as it may deem
appropriate or desirable, including but not limited to the authority to impose a
right of first refusal or to establish repurchase rights or both of these
restrictions.
20. RESERVATION OF SHARES.
The Company, during the term of the Plan, will reserve and keep available a
number of Shares sufficient to satisfy the requirements of the Plan.
21. WITHHOLDING TAX.
The Company's obligation to deliver dividends on Restricted Stock, or to
deliver Shares upon exercise of Options and/or SARs or upon the vesting of
Restricted Stock (or such earlier time that the Participant makes an election
under Section 83(b) of the Code) shall be subject to the Participant's
satisfaction of all applicable federal, state and local income and employment
tax withholding obligations. The Committee, in its discretion, may permit the
Participant to satisfy the obligation, in whole or in part, by irrevocably
electing to have the Company withhold Shares, or to deliver to the Company
Shares that he already owns, having a value equal to the amount required to be
withheld. The value of Shares to be withheld, or delivered to the Company, shall
be based on the Market Value of the Shares on the date the amount of tax to be
withheld is to be determined. As an alternative, the Company may retain, or sell
without notice, a number of such Shares sufficient to cover the amount required
to be withheld.
22. NO EMPLOYMENT OR OTHER RIGHTS.
In no event shall an Employee's or Director's eligibility to participate or
participation in the Plan create or be deemed to create any legal or equitable
right of the Employee, Director, or any other party to continue service with the
Company, the Bank, or any Affiliate of such corporations. No Employee or
Director shall have a right to be granted an Award or, having received an Award,
the right to again be granted an Award. However, an Employee or Director who has
been granted an Award may, if otherwise eligible, be granted an additional Award
or Awards.
23. GOVERNING LAW.
The Plan shall be governed by and construed in accordance with the laws of
the State of Michigan, except to the extent that federal law shall be deemed to
apply.
10
<PAGE>
CFSB BANCORP, INC.
----------------------------------------------------------
BOARD RESOLUTIONS RE SEC SECTION 16 RULES
----------------------------------------------------------
WHEREAS, CFSB Bancorp, Inc. (the "Company") maintains the CFSB Bancorp,
Inc. 1994 Stock Option and Incentive Plan, as amended, and the 1990 Stock Option
Plan (together, the "Stock Plans"); and
WHEREAS, the Company has determined that said Stock Plans should be amended
to conform with final revisions that the Securities and Exchange Commission
("SEC") has made to its rules and regulations under Section 16 of the Securities
Exchange Act of 1934, as amended; and
WHEREAS, these SEC rule changes took effect on August 15, 1996, and the
Company desires to conform its stock-related plans with these rules; and
WHEREAS, the Board deems it to be in the best interests of the Company and
Community First Bank to amend the Stock Plans to conform with Rule 16b-3 of the
revised Regulations.
NOW, THEREFORE, BE IT RESOLVED, that all stock-related plans of the Company
shall, as of August 15, 1996, become subject to SEC Rule 16b-3, as revised by
the SEC in May of 1996 pursuant to SEC Release No. 34-37261; and be it
RESOLVED FURTHER, that the 1996 Amendments to the Stock Plans,
substantially in the form attached hereto as Exhibits "A" and "B" are approved,
subject to such final adjustments as the Company's President may deem necessary
or appropriate in order to conform said plans with Rule 16b-3; and be it
RESOLVED FURTHER, that the Company's President be and hereby is authorized
and directed to execute said 1996 Amendments and to take such other actions
deemed necessary or appropriate to effect the purposes and the intent of the
foregoing resolutions.
<PAGE>
EXHIBIT A
CFSB BANCORP, INC.
1994 STOCK OPTION AND INCENTIVE PLAN, AS AMENDED
____________________
1996 Amendment
____________________
WHEREAS, CFSB Bancorp, Inc. (the "Company") maintains the CFSB Bancorp,
Inc. 1994 Stock Option and Incentive Plan, as amended (the "Plan"); and
WHEREAS, the Company has determined that said Plan should be amended to
conform with final revisions that the Securities and Exchange Commission ("SEC")
has made to its rules and regulations under Section 16 of the Securities
Exchange Act of 1934, as amended; and
WHEREAS, these SEC rule changes took effect on August 15, 1996, and the
Company desires to immediately conform the Plan with these rules.
NOW, THEREFORE, pursuant to Paragraph 18 of the Plan, the Plan is hereby
amended as follows, effective August 15, 1996.
1. Subparagraph 2(m) of the Plan shall be deleted in its entirety and
subparagraphs 2(n) through 2(r) shall be relettered 2(m) through 2(q),
respectively.
2. Paragraph 2 of the Plan shall be amended further by inserting the
definition of "Non-Employee Director" after new subparagraph 2(q) to provide as
follows:
(r) "Non-Employee Director" shall have the meaning provided in
Rule 16b-3.
3. Paragraph 5(a) of the Plan shall be amended by replacing the words
"three (3) members" with "two (2) members" and the words "Disinterested Persons"
with "Non-Employee Directors."
4. Paragraph 8 of the Plan shall be amended by adding the following
subparagraph 8(e) immediately after subparagraph 8(d):
(e) Six-Month Holding Period. Notwithstanding any other
provision of this Plan to the contrary, Common Stock that is purchased upon
exercise of an Option or SAR may not be sold within the six-month period
following the grant date of that Option or SAR, except in the event of a
Participant's death or Permanent and Total Disability, a Change in Control,
or such other event as the Board may specifically deem appropriate.
<PAGE>
1996 Amendment
1994 Stock Option and Incentive Plan, as amended
Page 2
5. Paragraph 9(c) shall be amended by deleting its last sentence.
6. Paragraph 10 shall be amended by adding the following subparagraph
10(h) immediately at the end thereof:
(h) Six-Month Holding Period. In no event may Restricted Stock
be sold within the six-month period following the award of such
Restricted Stock, except in the event of a Change in Control or such
other event as the Board may specifically deem appropriate.
7. The first sentence in Paragraph 11(a) shall be amended by deleting the
words "for a period of 60 days beginning on the date of such Change in
Control,".
8. Paragraph 11 shall be further amended by deleting subparagraph 11(b).
9. Nothing contained herein shall be held to alter, vary or affect any of
the terms, provisions, or conditions of the Plan or any Option entered into
thereunder, other than as stated above.
WHEREFORE, on this 20th day of November, 1996, the Company hereby executes
this 1996 Amendment to the Plan.
CFSB BANCORP, INC.
By /s/ Robert H. Becker
-----------------------------------
Its President
11/20/96
- --------------------
Date Attest: /s/ Holly L. Schreiber
------------------------------
<PAGE>
EXHIBIT 10.7
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT entered into this 21st day of August, 1997, by and between
Community First Bank (hereafter referred to as the "Bank") and Rick L. Laber
(hereafter referred to as the "Employee").
WHEREAS, the parties desire by this writing to set forth the employment
relationship of the Bank and the Employee.
NOW, THEREFORE, it is AGREED as follows:
1. Employment. The Employee is employed as Vice President, Chief
----------
Financial Officer and Treasurer the Bank and Treasurer of CFSB Bancorp, Inc. The
Employee shall render administrative and management services to the Bank such as
are customarily performed by persons situated in a similar capacity. The
Employee shall also promote, as and to the extent permitted by law, the business
of the Bank. The Employee's other duties shall be such as the Bank and the Board
of Directors of the Bank (the "Board of Directors") may from time to time
reasonably direct, including normal duties as an Officer of the Bank.
2. Base Compensation. The Bank agrees to pay the Employee during the
-----------------
term of this Agreement a salary at the rate of $80,000 per annum, payable in
cash not less frequently than monthly; provided, that the rate of such salary
shall be reviewed by the Bank not less often than annually, and Employee shall
be entitled to receive annually an increase at such percentage or in such an
amount as the Board of Directors in its sole discretion may decide.
3. (a) Participation in Retirement and Medical Plans. The Employee
---------------------------------------------
shall be entitled to participate in any Plan of the Bank relating to pension,
profit-sharing, or other retirement benefits and medical coverage or
reimbursement plans the Bank may adopt for the benefit of its employees.
(b) Employee Benefits; Expenses. The Employee shall be eligible to
---------------------------
participate in any fringe benefits which may be or may become applicable to the
Bank's employees, including by example, participation in incentive and stock
option plans adopted by the Board of Directors, professional memberships and any
other benefits which are commensurate with the responsibilities and functions to
be performed by the Employee under this Agreement. The Bank shall reimburse
Employee for all reasonable out-of -pocket expenses, that are documented with
receipts that are acceptable to the Internal Revenue Service, which Employee
shall incur in connection with his services for the Bank.
(c) Conditions Precedent and Moving Expenses. As a condition
----------------------------------------
precedent to the effective use of this agreement, Employee must move his
residence from Jackson, Michigan to the greater Lansing, Michigan area. The Bank
agrees to pay for or reimburse Employee for travel, lodging, moving and
relocation expenses associated with moving the Employee and Employee's family to
the greater Lansing area. Expenses must be documented with receipts that are
acceptable
1
<PAGE>
to the Internal Revenue Service. The amount of such expense shall not exceed
$3,500. Employee agrees to complete his move by August 21, 1998.
4. Term. The term of employment of the Employee under this Agreement
----
shall be for the period commencing on August 21, 1997 and ending on August 21,
2000 (36 months thereafter).
5. Loyalty; Noncompetion
---------------------
(a) The Employee shall devote his full time and attention to the
performance of his employment under this Agreement. During the term of
Employee's employment under this Agreement, the Employee shall not engage in any
business or activity contrary to the business affairs or interests of the Bank.
(b) Nothing contained in Paragraph 5 shall be deemed to prevent or
limit the right of Employee to lawfully invest in the capital stock or other
securities of any business dissimilar from that of the Bank, or, solely as a
passive investor, in any business.
6. Standards. The Employee shall perform his duties under this Agreement
---------
in accordance with such reasonable standards expected of employees with
comparable positions in comparable organizations and as may be established from
time to time by the Bank. The Bank will provide Employee with the working
facilities and staff customary for similar employees and necessary for him to
perform his duties.
7. Vacation and Sick Leave. At such reasonable times as the Bank shall
-----------------------
in its discretion permit, the Employee shall be entitled, without loss of pay,
to absent himself voluntarily from the performance of his employment under this
Agreement, all such voluntary absences to count as vacation time; provided that:
(a) The Employee shall be entitled to an annual vacation in
accordance with the policies as are periodically established by the Board of
Directors for employees of the Bank.
(b) The Employee shall not be entitled to receive any additional
compensation from the Bank on account of his failure to take a vacation and the
Employee shall not be entitled to accumulate unused vacation from one fiscal
year to the next, except to the extent authorized by the Board of Directors for
employees of the Bank.
(c) In addition to the aforesaid paid vacations, the Employee shall
be entitled without loss of pay, to absent himself voluntarily from the
performance of his employment with the Bank for such additional periods of time
and for such valid and legitimate reasons as the Bank in its discretion may
determine. Further, the Bank shall be entitled to grant to the Employee a leave
or leaves of absence with or without pay at such time or times and upon such
terms and conditions as the Board of Directors in its discretion may determine.
2
<PAGE>
(d) In addition, the Employee shall be entitled to an annual sick
leave benefit as established by the Board of Directors for employees of the
Bank. In the event any sick leave benefit shall not have been used during any
year, such leave shall accrue to subsequent years only to the extent authorized
by the Bank. Upon termination of his employment, the Employee shall not be
entitled to receive any additional compensation from the Bank for any unused
sick leave benefits.
8. Termination and Termination Pay. The Employee's employment under this
-------------------------------
Agreement shall be terminated upon the following occurrences:
(a) The death of the Employee during the term of this Agreement, in
which event the Employee's estate shall be entitled to receive the compensation
due the Employee through the last day of the calendar month in which his death
shall have occurred, and any vested right and benefits of the Employee.
(b) Employee's employment under this Agreement may be terminated at
any time by decision of the Bank for conduct not constituting termination for
Just Cause ["Just Cause" as defined in Paragraph 8(c)]. The Bank also reserves
the right to terminate at-will for any or no reason. Except as provided pursuant
to Section 11 herein, in the event Employee's employment under this Agreement is
terminated by the Bank without Just Cause or at-will, the Bank shall be
obligated to continue to pay the Employee his salary to which he is then
entitled in accordance with Paragraph 2 herein. All benefits will cease upon the
date of termination of his employment except as provided by law.
(c) The Bank reserves the right to terminate this Agreement at any
time for Just Cause. Termination for "Just Cause" shall mean termination for
personal dishonesty, incompetence, willful misconduct, breach of a fiduciary
duty involving personal profit, intentional failure to perform stated duties,
willful violation of any law, rule or regulation (other than a law, rule or
regulation relating to a traffic violation or similar offense) or final cease-
and-desist order, termination under the provisions of Subparagraphs (d), (e) or
(f) below, or material breach of any provision of this Agreement. In the event
this Agreement is terminated for Just Cause, the Bank shall only be obligated to
continue to pay the Employee his salary up to the date of termination of his
employment, and the vested right of the parties shall not be affected. All
benefits will cease upon the date of termination of his employment except as
provided by law.
(d) If the Employee is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by any order issued by the
Federal Deposit Insurance Act ("FDIA"), all obligations of the Bank under this
Agreement shall terminate, as of the effective date of the order, but the vested
rights of the parties shall not be affected.
(e) If the Bank is in default (as defined by the FDIA) all
obligations under this Agreement shall terminate as of the date of default, but
this Paragraph shall not affect any vested rights of the parties.
3
<PAGE>
(f) All obligations under the Agreement shall be terminated, except
to the extent determined that continuation of the contract is necessary for the
continued operation of the Bank, (i) if the Federal Deposit Insurance
Corporation or the Resolution Trust Corporation enters into an agreement to
provide assistance to or on behalf of the Bank or (ii) by the Financial
Institutions Bureau ("FIB") upon approval of a supervisory merger to resolve
problems related to operation of the Bank or when the Bank is determined by the
FIB to be in an unsafe or unsound condition. Any rights of the parties that have
already vested, however, shall not be affected by such action.
(g) The voluntary termination by the Employee during the term of this
Agreement with the delivery of no less than 60 days written notice to the Bank,
other than pursuant to paragraph 11 (b), in which case the Employee shall be
entitled to receive only his compensation, vested rights, and all employee
benefits up to the date of termination of his employment.
9. Suspension of Employment. If the Employee is suspended and/or
------------------------
temporarily prohibited from participating in the conduct of the Bank's affairs
by a notice served under Section 8(e)(3) or (g)(1) of the FDIA [12 U.S.C.
1818(e)(3) and (g)(1)], the Bank's obligations under the Agreement shall be
suspended as of the date of service, unless stayed by appropriate proceedings.
If the charges in the notice are dismissed, the Bank shall (i) pay the Employee
all or part of the compensation withheld while its contract obligations were
suspended and (ii) reinstate any of its obligations which were suspended.
10. Disability. The Board of Directors reserves the discretion to
----------
terminate the Agreement upon the Board's determination that the Employee is
disabled or incapacitated to the extent he is unable to perform his duties for
more than 12 weeks. If the Board were to determine the Employee was
incapacitated, his base compensation would cease. Employee would be eligible,
subject to the provision of the applicable plan description/policy, to receive
compensation through the disability insurance provided by the Bank for Bank
employees.
11. Change in Control.
-----------------
(a) Notwithstanding any provision herein to the contrary, in the
event of involuntary termination of Employee's employment under this Agreement
in connection with, or within one (1) year after, any change in control of the
Bank or the Holding Company of the Bank ("Parent"), or in the event of voluntary
termination by the Employee in connection with, or within one (1) year after,
any change in control of the Bank or the Parent, Employee shall be paid an
amount equal to the Employee's base compensation amount as defined in Paragraph
2 of this Agreement through the term of the Agreement as defined in Paragraph 4
of this Agreement. Said sum shall be paid in one lump sum within thirty (30)
days of such termination and such payments shall be in lieu of any other future
payments which the Employee would be otherwise entitled to receive under Section
8 of this Agreement. The term "change in control" shall refer to the acquisition
of "conclusive control" of the Parent or the Bank within the meaning of 12
C.F.R. Section 574.4(a) as in effect on the effective date of this Agreement.
This limitation shall not apply
4
<PAGE>
to the purchase of shares by underwriters in connection with a public offering,
or the purchase of shares of up to 25% of any class of securities by a tax
qualified employee stock benefit plan which is exempt from the approval
requirements, set forth under 12 C.F.R. Section 574.3 (c)(1)(vii) as now in
effect or as may hereafter be amended. The term "person" means an individual
other than the Employee, or a corporation, partnership, trust, association,
joint venture, pool, syndicate, sole proprietorship, unincorporated organization
or any other form of entity not specifically listed herein. Notwithstanding
anything herein to the contrary, in no event shall Employee be eligible to
receive any payments described in this Paragraph 11 (a) if such Employee is
terminated for "Just Cause" as defined at Paragraph 8(c) herein. Further, the
provisions of Sections 8(b), 8(d), 8(e), 8(f) and 9, herein, shall remain
effective following a change in control.
(b) Notwithstanding any other provision of this Agreement to the
contrary, Employee may voluntarily terminate his employment under this Agreement
following a change in control of the Bank or the Parent, and shall thereupon be
entitled to receive the payment described in Paragraph 11 (a) of this Agreement,
upon the occurrence, or within (60) days thereafter, of any of the following
events, which have not been consented to in advance by the Employee in writing:
(i) if Employee would be required to move his personal residence or perform his
principal functions more than (50) miles from the Employee's primary office as
of the signing of this Agreement; (ii) if the Bank should fail to maintain
existing or substantially similar employee benefits plans, including material
fringe benefits, stock option and retirement plans; (iii) if Employee would be
assigned duties and responsibilities other than those normally associated with
his position as Vice President, Chief Financial Officer and Treasurer of the
Bank and Treasurer of CFSB Bancorp, Inc. or Parent; (iv) if Employee's
responsibilities or authority have in any way been materially diminished or
reduced.
12. Successors and Assigns.
----------------------
(a) This Employment Agreement shall inure to the benefit of and be
binding upon any corporate or other successor of the Bank which shall acquire,
directly or indirectly, by merger, consolidation, purchase or otherwise, all or
substantially all of the assets of the Bank.
(b) Since the Bank is contracting for the unique and personal skills
of the Employee, the Employee shall be precluded from assigning or delegating
his rights or duties hereunder without first obtaining the written consent of
the Bank.
13. Amendments. No amendments or additions to this Agreement shall be
----------
binding unless made in writing and signed by both parties, except as herein
otherwise specifically provided.
14. Applicable Law. This Agreement shall be governed by all respects
--------------
whether as to validity, construction, capacity, performance or otherwise, by the
laws of the State of Michigan, except to the extent that Federal law shall be
deemed to apply.
15. Severability The provisions of tills Agreement shall be deemed
------------
severable and the
5
<PAGE>
invalidity or unenforceability of any provision shall not affect the validity or
enforceability of any other provision hereof.
16. Entire Agreement. This Agreement together with any understanding or
----------------
modifications thereof as approved to in writing by the parties, shall constitute
the entire Agreement between the parties hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and
year first hereinabove written.
Community First Bank
/s/ Robert H. Becker
- -----------------------------------
Robert H. Becker, President and CEO
of Community First Bank
/s/ Rick L. Laber
- -----------------------------------
Rick L. Laber, Employee
/s/ Jane Judge McMillian
- -----------------------------------
Jane Judge McMillian, Vice President,
Director of Human Resources
/s/ Misti M.M. Bragton
- -----------------------------------
Witness
6
<PAGE>
EXHIBIT 10.8
COMMUNITY FIRST BANK
MANAGEMENT INCENTIVE COMPENSATION PLAN
1998
_________________________________________________________________
I. Statement of Purpose
The purpose of the incentive plan is to provide specified incentives for
achievement of defined objectives which promote the success of CFSB Bancorp,
Inc. (CFSB). One objective of the Community First Bank (CFB) incentive plan is
to help CFB senior managers see their success is tied to the success of CFSB as
a whole. Other objectives include improved retention, teamwork, and
understanding of and commitment to corporate financials. This plan ties
individual compensation to the attainment of corporate goals and overall
success. Accompanying base salaries and annual merit adjustments reward
individual effort and achievement.
II. Program Policy and Procedures
A. Duration of Plan. The incentive plan, measures, and targets described
herein are to apply for the period of January 1, 1998, to December 31,
1998. Prudent and justified revisions to the plan during the year are
possible, and revisions for the following year are anticipated.
B. Administration. The Director of Human Resources will serve as the Program
Administrator (PA). The PA is responsible for assuring the accurate,
timely and equitable administration of the incentive plan.
1. Plan Changes. All changes in the plan, at any time, must be reviewed
------------
and approved by the PA with concurrence of the CEO and the
Compensation Committee of the Board of Directors of Community First
Bank. The Compensation Committee retains the right to change or
discontinue the plan or its contents at any time as it, in its sole
discretion, may deem appropriate.
2. Payment Approval. The PA will verify all incentive calculations and
----------------
will approve the final payment form for payroll. Incentives will not
be paid without the approval of the PA and Chief Executive Officer.
<PAGE>
3. Frequency of Payment. Payment of Plan incentives will be made
--------------------
annually, based on performance during the previous calendar year.
Payments will be distributed as soon as possible (approximately 90
days following year end), based upon receipt of necessary company and
peer group financials and verification of incentive calculations.
4. Interim Performance Reports. Each quarter an interim performance
---------------------------
report will be distributed to plan participants. The report will
contain information on the performance of CFSB relative to goals.
5. Payment. The incentive payment will be in the form of a check to be
-------
delivered in one of three ways: a) the CEO will deliver the checks
to each employee, b) the head of each department will deliver checks
to employees, or c) distribution will be made to individuals at a
group meeting. It has been demonstrated that making a celebration of
incentive delivery makes the payment more effective as a reward.
C. Performance Objectives. The plan is driven by two measures of corporate
performance -- return on average assets (ROAA) and return on average equity
(ROAE).
1. Peer Group Comparisons. The Corporation's performance will be
----------------------
compared to other publicly traded thrifts and thrift holding companies
nationally with assets between $500 million and $1 billion as
published by the SNL Securities Thrift Performance Report.
Target is established as 110% of the 50th percentile of the peer
group. Threshold is 95% of target; Maximum is 115% of target. If,
however, the Corporation's ROAA or ROAE for the year is less than
fifty (50%) percent of the previous year's ROAA or ROAE, no incentive
compensation will be paid.
2. Incentive Opportunities. ROAA and ROAE goals will be weighted equally
-----------------------
for purposes of awarding incentives as a factor of base salary. To
provide continuous encouragement and incentive reflective of
performance, interpolation between percentage levels will be made.
2
<PAGE>
<TABLE>
<CAPTION>
Participation
Category Threshold Target Maximum
<S> <C> <C> <C>
Group I 17.5% 25.0% 40.0%
Group II 10.0% 20.0% 30.0%
Group III 7.5% 15.0% 20.0%
Group IV 5.0% 10.0% 15.0%
</TABLE>
D. Eligibility. Participation in each group is based on position held within
the Bank's organizational structure as follows:
Group I Chief Executive Officer
Group II Chief Lending Officer
Chief Operating Officer
Group III Chief Financial Officer
Director of Retail Banking
Director of Human Resources
Director of Marketing
Director of Operations
Group IV Branch Administrator
Director of Lending Operations
Manager of Residential Lending
Manager of Central Operations
Manager of Consumer Lending
Director of Corporate Services
Manager of Data Processing
1. Termination of Employment. Annual incentives will be forfeited by
-------------------------
termination of employment before the payment date, even if termination
occurs after the end of the qualifying calendar year but prior to the
actual payment date. No distinction is made based on the cause of
termination, whether voluntary or involuntary. However, no forfeiture
will occur if termination is due to death, disability or normal
retirement (age 62 or older at time of departure).
2. Newly hired employees. Any participant who is hired during the
---------------------
calendar year will have the annual portion of the incentive pro-rated
from date of hire. Pro-ration will be based upon full calendar months
worked during the year.
3
<PAGE>
3. Probationary employees. Any employee who is on disciplinary probation
----------------------
will not earn incentive while on probation. Employees who are on any
form of disciplinary probation or suspension are eligible for
incentive on the first day of the first full month after the probation
is lifted.
4. Extended leave. Any participant who is on an extended leave of
--------------
absence (more than 90 days) will not earn incentive for the entire
period of the absence. Pro-rated incentive will be calculated on the
number of full calendar months worked during the plan year.
E. Incentive Calculation. Incentives will be calculated as whole dollar
amounts as a percentage of base annual salary. Changes in base salary
through the plan year will result in pro-rated incentive amounts.
F. Vacation/Sick Time Calculations. Incentive pay for the month during which
an employee takes vacation or sick time will not be pro-rated.
G. Benefit Calculations. For the purpose of calculating maximum contributions
to the Bank's 401(k) and ESOP Plans, incentive pay from this plan will be
included in gross wage figures.
H. Taxes. All federal, state and local taxes will be withheld from the
incentive payment as required by law.
I. Job Changes During the Year. Incentive payment for any plan year in which
an employee changes from a job in one bonus group to another, or enters a
group for the first time upon promotion or hire, will be pro-rated for the
year.
J. Guarantees and Right of Assignment. The receipt of a payment under this
plan shall not give any employee any right to continued employment with
CFB; CFB remains an "employment at will" employer and reserves the right to
terminate any employee at any time, with or without cause.
4
<PAGE>
The receipt of an incentive payment in any measurement period shall not
give an employee the right to receive incentive payments in any subsequent
measurement period. No right or interest of any participant in an incentive
plan shall be assignable or transferable.
K. ROAA and ROAE Adjustments. The Compensation Committee of the Board of
Directors reserves the right to adjust ROAA and ROAE percentages for
extraordinary and unusual income or expense items. Examples (not all
inclusive) are: IRS refunds, expense for post-retirement benefits, et
cetera.
L. Changes in the Plan. Significant changes in job function, equipment, work
input, procedures, et cetera, may require adjustment to the plan. The
intent of any such adjustments is not to avoid payment of earned incentive;
rather, it is to ensure continuation of equivalent and appropriate
opportunity to earn incentive. Any changes in the plan will require
approval by the PA, CEO and the Compensation Committee of the Board of
Directors. Participants affected by such changes will be notified at least
thirty (30) days prior to the effective date of the change. The Board of
Directors and/or its Compensation Committee may elect to make no incentive
payments to the extent that the Bank would not be profitable or well-
capitalized due to such payments.
5
<PAGE>
[PHOTO]
A community of success.
A new century of growth.
CFSB [LOGO]
BANCORP
1998 Annual Report
<PAGE>
[PHOTO]
Community First
Executive Officers
(standing) Sally Peters, Robert Becker, Rick Laber, (seated) John Abbott, Wayne
Weaver, Jack Nimphie, Jane Judge McMillian.
"Never doubt that a
small group of thoughtful,
committed people can
change the world.
Indeed, it is the only
thing that ever has."
Margaret Mead
<PAGE>
Fulfilling Our Mission
CFSB Bancorp, Inc., through Community First Bank,
is a financial services organization of dedicated people
serving the needs of our customers. We provide competitive
products and services with a continuous emphasis on quality.
We will achieve superior returns for our stockholders
by placing the interests of our customers and
our communities first.
TABLE OF CONTENTS
Five Year Summary of Selected
Consolidated Financial Data..................................................8
Statement of Management's Responsibility.......................................9
Management's Discussion and Analysis of
Financial Condition and Results of Operations...............................10
Independent Auditors' Report..................................................23
Consolidated Statements of Financial Condition................................24
Consolidated Statements of Operations.........................................25
Consolidated Statements of Stockholders'
Equity and Comprehensive Income.............................................26
Consolidated Statements of Cash Flows.........................................27
Notes to Consolidated Financial Statements....................................29
Stockholder Information.......................................................55
<PAGE>
Business of the Corporation
CFSB Bancorp, Inc., with consolidated assets of $880 million, is the
parent company of Community First Bank, a state-chartered savings bank
headquartered in Lansing, Michigan. CFSB Bancorp, Inc. was organized as a
Delaware Corporation in November 1989.
The Bank was originally chartered in 1890 as Capitol Investment Building
and Loan Association.
The reorganization of the Bank into the holding company form of ownership
and the commencement of operations by the Corporation occurred in June 1990.
Since the reorganization, the Corporation's activities have principally
been limited to holding the stock of the Bank. The Bank originates and invests
in single family mortgage loans. The Bank also offers retail banking services to
the mid-Michigan marketplace.
In addition, the Bank offers a variety of complementary services such as
commercial business loans, consumer loans and home equity loans. The Bank's full
line of retail deposit services includes checking and savings accounts, and
certificates of deposit.
The Bank's deposits are insured by the Federal Deposit Insurance
Corporation up to the applicable limits.
PERFORMANCE HIGHLIGHTS
Net Income
(in thousands)
[GRAPHIC]
1994 1995 1996* 1997 1998
$5,589 $6,803 $7,661 $10,673 $11,844
PERFORMANCE HIGHLIGHTS
Return on Average Assets
[GRAPHIC]
1994 1995 1996* 1997 1998
.80% .92% .97% 1.26% 1.38%
PERFORMANCE HIGHLIGHTS
Return on Average Equity
[GRAPHIC]
1994 1995 1996* 1997 1998
10.18% 11.47% 11.89% 16.39% 17.59%
STOCK MARKET HIGHLIGHTS
Year End Closing Stock Price
[GRAPHIC]
1994 1995 1996 1997 1998
$7.74 $10.77 $10.74 $23.86 $24.38
*1996 excludes FDIC special assessment
<PAGE>
A Message
to our Stockholders
[LETTERHEAD OF CFSB BANCORP]
Dear Stockholders,
I would like to thank our Board of Directors for their continued support
and the teamwork, dedication and energy of our officers and employees. They all
helped to make 1998 a record year for you, our stockholders. I especially want
to thank our retiring director, Cecil Mackey, a former president of Michigan
State University and current professor of economics at MSU, for his 20 years of
excellent service to both CFSB Bancorp, Inc. and Community First Bank.
Your investment in CFSB Bancorp, Inc. had a compounded annual return of 36
percent since June 1990, the date of our initial public offering. But that was
just one of many records we exceeded during the year.
For the twelve months ended December 31, 1998, net income increased 11
percent to $11.8 million compared to $10.7 million for 1997. Return on equity
also increased to 17.59 percent in 1998 from 16.39 percent in 1997.
The Corporation has paid cash dividends for 32 consecutive quarters.
Stockholders earned $1.38 per share compared to $1.22 for 1997. We continued to
outperform our peer banks and thrifts in increasing stockholder value. Last
year, Crain's Detroit Business recognized CFSB Bancorp as the highest ranking
bank in the "The Michigan Super 10," a special ranking of companies based on
one-year return, net income growth, revenue growth, and return on equity.
We added more than 13,600 new customers in 1998, giving us a commanding 30
percent share of all households in our area.
Our share of the deposit market grew to 11 percent, another impressive
figure. Together the number of our deposit and loan accounts have grown 15
percent over the last two years.
Improvements in operations and earnings were made. Now 91 percent of our
earning assets are in loans. We have increased training, software, marketing and
loan office locations to handle more loans, more efficiently. At the same time,
we have effectively lowered the cost of our funds through borrowing from the
Federal Home Loan Bank and taking advantage of the current low interest rates.
Community First also continued to expand its lead in home mortgage real
estate closings. We have been the number one lender in our area with six
consecutive years of growth.
We are very pleased with the growth the Corporation has experienced. Our
diversified business plan and our flourishing sales culture are bringing more
products, services, and convenient access to our customers every year.
In 1995 we introduced Really Free Checking to our market. This account is
heavily promoted and continues to be very well received, leading to a 90 percent
increase in personal checking accounts since 1994. In third quarter 1998, we
introduced First Sweep Business Checking, capitalizing on the growing small
business market. In addition, we continue to enhance two important Community
First Services: Community First Insurance and Investment Services providing
mutual funds, annuities, and financial planning; and Michigan Bankers Title of
Mid-Michigan, LLC, providing title insurance to our loan customers. Both grew in
1998 and helped increase fee income.
Our main geographic area of focus continues to be the greater Lansing
area, which continues to grow at a modest but steady pace, and as a result,
unemployment remains very low at just 3.1 percent. This strong employment base
has been led by three major employers: State of Michigan with 20,000 employees,
General Motors with 13,400 employees, and Michigan State University with 12,500
employees and 43,000 students.
2
<PAGE>
In 1998, we also expanded our residential mortgage lending into Jackson
and Livingston counties. Livingston County, just west of Metro Detroit, is the
fastest growing county in Michigan. Residential growth is projected to double
and jobs to increase 83 percent by 2020.
As we offered more to our customers, their transactions with us continued
to grow. Traditional face-to-face transactions grew to 2.4 million and automated
transactions increased to nearly 4 million.
We gave our customers more convenient access with new ATMs, enhanced
on-line Web services, automated telephone banking services and an expanded
customer service center. In total, automated transactions were up 26 percent.
All of these transaction increases have helped steadily grow our fee
income. It has nearly doubled over the last three years. In 1998 fee income
represented 15 percent of our total net interest and noninterest income.
Regarding our compliance with the Year 2000, the Corporation's core data
processing software, which is provided by an outside vendor, has been certified
as Year 2000 compliant and is currently being tested. Year 2000 testing on all
internal systems is anticipated to be complete by March 31, 1999.
As you may know, on February 24, 1999, we announced that our Corporation
entered into a definitive agreement with Old Kent Financial Corporation
providing for the merger of CFSB Bancorp, Inc. with Old Kent. This agreement
calls for an exchange of .6222 shares of Old Kent Financial Corporation stock
for each share of CFSB Bancorp, Inc. stock
You may question why after such a successful year and so much hard work by
our team would we decide to merge this time.
The answer to your question is the basic promise of our Mission statement:
"We will achieve superior returns for our stockholders by placing the interests
of our customers and our communities first."
The year, 1998, was not only outstanding for CFSB, it was also a record
year for Old Kent Financial Corp. Their stockholders (and soon to include you)
earned $1.84 per share on net income of $198.8 million. Old Kent has a 40-year
history of consecutive annual increases in per share earnings and dividends.
Only five other companies listed on the New York Stock Exchange can match that
record.
Our customers will have even more access, more convenience, and more
financial services to help manage their money.
Customers will be able to utilize over 230 Old Kent branches and more than
400 ATMs throughout Michigan, Indiana and Illinois. They will have more services
and financial products for both individual and business needs. And they will
have the strength and dependability of a 146-year-old financial institution with
$17 billion in assets.
Our community will have the support of one of the strongest financial
institutions in the nation. A financial partner who is one of the leading
lenders of Small Business Association loans in Michigan.
So based on these benefits to our stockholders, our customers, and our
community, our Board of Directors has decided that now is the optimal time to
enter into a merger with Old Kent. And while the name on the door will change,
the spirit of Community First and the dedication of our employees will remain
strong. I salute you. I am proud to have worked with you in building Community
First into the largest, independent, local bank in mid-Michigan.
Join me as we enter a new century, as we become part of one of the
strongest and most respected financial services organizations in the nation.
Thank you.
Sincerely yours,
/s/ Robert H. Becker
Robert H. Becker
President and Chief Executive Officer
[PHOTO]
3
<PAGE>
[PHOTO] We make it easy for customers [PHOTO]
to connect on-line or
on-the-phone.
Approaching the next century
As we enter a new era, we conclude with one of our most successful years ever.
By anticipating and meeting customer needs we grew our market share, expanded
our reach in growing markets, and enhanced our relationship with current
customers. In 1998 we gave our customers more convenience, access, services, and
new products. Our customers gave Community First another very profitable year.
We served more customers in more areas through more delivery channels than ever
before. And our customers responded enthusiastically, driving up our loan
originations and deposits and completing more than 3.5 million financial
transactions.
Loan Leadership
Our loan programs, competitive products, and improved loan processing
efficiencies helped us exceed our loan goals in 1998. We originated a record
number of residential mortgage, home equity, lines of credit, small business,
and personal loans in 1998.
Mortgages continue to be the strength of our loan program and the largest
contributor to our loan income. Community First Bank is again mid-Michigan's #1
home mortgage lender.
We have helped more families enjoy the satisfaction of home ownership than any
other financial institution in the area. We have accomplished it by building
very strong relationships with more than 300 realtors and 200 approved builders,
and by always understanding that mid-Michigan is a community of people and
homes.
More than 2,169 families bought a house with a Community First mortgage during
1998, an increase of 78 percent over 1997. Many were first time buyers who took
advantage of our Buyer's Edge mortgage pre-approval program. This has been a key
part of our strategy to build solid financial relationships with more customers
right from the start and then provide them with more financial products as their
needs expand. We start by automatically qualifying all mortgage customers for a
Homeowners' Checking account.
To strengthen our mortgage program we joined with other banks in 1997 to form a
title insurance company, Michigan Bankers Title of Mid-Michigan, LLC. This
enabled us to give more comprehensive service and added convenience to our
mortgage loan customers. The timing was terrific as the 1998 boom in refinancing
pushed the company to large profits and growth.
We also made it easier to apply for a loan by adding on-line loan applications
and a special loan calculator to our expanded Website at www.communityfirst.com.
It's one more way we are using our Website as a marketing tool.
Loan production received another boost from our Loan By Phone program. It's a
fully automated loan qualification program. Customers used it to apply for a
loan conveniently by phone, 24 hours a day, 7 days a week.
To capitalize on the profitable loan business in fast growing Livingston County
and Jackson County we put new Loan Production Offices in these communities.
These special
Building, buying or renovating, we help make happy homeowners.
4
<PAGE>
home loan centers helped us capture more of these important markets.
These loan programs have helped us increase the percentage of loans as a part of
our earning assets to more than 91 percent.
Deposit Building
One of our most popular and profitable products has been Really Free Checking.
Each year this product has brought us thousands of new customers. 1998 was no
exception. We have more than 50,000 checking customers who have also become a
great source of customers for savings, investment services, home mortgages,
personal loans, and other Community First products and services. Really Free
Checking has helped push our total deposits to $587 million.
Another proven deposit builder has been our Power Rate Money Market account. The
hyperactive stock market helped drive more customers to our more steady Power
Rate. We, in turn, were then able to introduce them to additional Community
First products.
[PHOTO]
Business knows the value of time and money. They save both with us.
[PHOTO]
Business Banking Opportunities
Small business is another important growth area for bank income. Especially in
Michigan, where we have more successful business entrepreneurs than almost any
other state.
New Community First commercial business products brought added convenience and
access to our business customers as we expanded our market in 1998. Our First
Sweep Business Checking proved to be a popular new commercial sweep account.
Also our new ACH Origination Software for payroll, cash management, and accounts
receivables helped bring new ease of doing business to small businesses.
Growing Transactions Automatically
In 1998 we enhanced our automated transactions to make it easier for customers
to bank with us. We added more ATMs. We expanded our Customer Service Center for
more capacity, added convenience, and personal service. Customers called in for
one-on-one banking over the phone in record numbers. Calls increased 52 percent
over 1997.
Customers also connected automatically, day and night, seven days a week through
our First Line Telephone Banking. First Line phone transactions increased 24
percent over last year.
[GRAPHIC]
CUSTOMER SERVICE CENTER
[GRAPHIC]
FIRSTLINE TELEPHONE BANKING SERVICE
[GRAPHIC]
DRIVE-UP TRANSACTIONS
5
<PAGE>
On-the-go or in-the-branch, customers keep in touch.
[PHOTO]
[PHOTO]
[PHOTO]
We also saw a tremendous increase in MoneyCard transactions. These cards are
producing substantial fee income with more than 200,000 transactions per
quarter. Our combination ATM and debit card lets customers access their checking
accounts at more than 12 million merchants around the world. Customers made
almost a million MoneyCard debit transactions in 1998, up 48 percent.
Complementing our MoneyCard service is our expanding ATM network. Thirty
machines are processing more than 300,000 transactions each quarter. Many of
these transactions are by non-customers, bringing in additional fee income with
each transaction.
www.communityfirst.com, our Website continues to bring in new customers as more
people go on-line to bank. It provides rate, branch office, and business hours
information, applications, and loan calculators, as well as linking customers to
all of our products and services. Many area businesses including real estate
companies and a residential listing site are also linked to our site.
Serving More Customers
Surprisingly, our convenient automated services did not diminish traditional
face-to-face service in our branches. Our customers still like service delivered
in person. Branch transactions increased 4.3 percent. We also expanded drive
through lanes in our Okemos and Mason branch offices to build stronger customer
relationships in these important areas. Altogether, customer transactions
increased 51 percent from 1997. Many of these transactions helped generate fee
income.
[PHOTO]
Our Website links customers to all of our products and services.
Enhanced Service
Insurance and investments are important growth areas for banks. So in 1997 we
formed our own agency to capitalize on this opportunity. The customer demand was
strong and in 1998 we expanded the agency with new offices and staffing. We
brought in a top-ranked investment professional to lead our expanded investment
team. This enabled us to provide better service to our customers while
generating additional fee income.
The Right Product At the Right Time
Part of our successful growth this year is due to having the right information
to make good decisions. We have introduced a new Profitability Measurement
Program. Combining this state of the art software system with an in-depth Furash
Research Study on market potential we were able to match our most profitable
products and services in the most appropriate markets. The result was a very
powerful, efficient, and effective marketing and sales focus. It is a strong
competitive advantage.
[PHOTO]
6
<PAGE>
Community Ties
We always have had a long history of service and commitment to the communities
we serve. Our contributions of both volunteer time and financial investments
have increased each year, growing more than 20 percent in the last year.
[PHOTO]
Our community is a lot bigger than the bank.
We have focused much of our efforts on helping lower income families obtain
housing. We are members of the Lansing Neighborhood Housing Corporation that
provides financing for non-profit housing developers. We have increased our
support of CRA activities. And our employees have volunteered countless hours to
help the Capital Area United Way, American Cancer Society, Children's Miracle
Network, and dozens of other giving organizations throughout mid-Michigan.
David Huson,
Central Operations
[PHOTO]
Two employees who deserve special recognition are David Huson and Dennis Smith,
winners of our Volunteer of the Year Award for 1998.
We would not have become the leading independent, local bank in mid-Michigan
without taking the lead role in supporting and enhancing our communities. We
also would not have accomplished such a successful year without the amazing
performance of Community First employees, like Ron Salander, winner of the
President's Excellence Award for 1998.
[PHOTO]
Dennis Smith,
Accounting
Concluding a Chapter, Beginning a New Book
Our customers, our community commitment, our profitable products and services,
our successful marketing program and the dedication of our employees have made
us the leading financial institution in the growing mid-Michigan market. Our
success has made us a very attractive financial partner. And with our merger
into Old Kent we have succeeded in bringing more value to our stockholders, our
customers and our community. We are proud of our accomplishments, our programs
and our people. We look forward to the challenges ahead as we enter a new
century and a new banking relationship.
7
<PAGE>
FIVE YEAR SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
At and for the Years Ended December 31, 1998 1997 1996 1995 1994
==========================================================================================================
<S> <C> <C> <C> <C> <C>
Summary of Financial Condition: (Dollars in Thousands, Except Per Share Data)
Total assets $880,347 $852,888 $829,800 $761,418 $727,243
Interest-earning deposits 10,246 13,301 15,270 22,654 10,524
Investment securities, net 22,019 26,080 31,093 55,109 88,712
Mortgage-backed securities, net 16,007 21,598 27,221 35,156 66,151
Loans receivable, net 786,411 754,806 717,715 610,284 518,591
Deposits 586,707 562,412 553,574 527,816 501,690
FHLB advances and securities
sold under agreement to repurchase 213,607 212,693 202,639 160,649 160,351
Stockholders' equity 69,277 67,535 62,470 62,743 55,607
==========================================================================================================
Summary of Operations:
Interest income $62,562 $62,501 $57,402 $53,621 $47,080
Interest expense 36,601 37,131 34,498 33,188 26,978
- ----------------------------------------------------------------------------------------------------------
Net interest income before provision for
loan losses 25,961 25,370 22,904 20,433 20,102
Provision for loan losses 390 360 240 240 240
- ----------------------------------------------------------------------------------------------------------
Net interest income after provision for
loan losses 25,571 25,010 22,664 20,193 19,862
Noninterest income 8,309 6,401 4,242 3,966 2,349
Noninterest expense 16,224 15,762 15,669 14,427 14,473
FDIC special assessment -- -- 3,355 -- --
- ----------------------------------------------------------------------------------------------------------
Income before federal income tax expense 17,656 15,649 7,882 9,732 7,738
Federal income tax expense 5,812 4,976 2,435 2,929 2,149
- ----------------------------------------------------------------------------------------------------------
Net income $11,844 $10,673 $5,447 $6,803 $5,589
==========================================================================================================
Per Share Data: (1)
Basic earnings $1.44 $1.26 $0.62 $0.76 $0.63
Diluted earnings 1.38 1.22 0.60 0.75 0.61
Stockholders' equity (book value) 8.49 8.07 7.31 7.05 6.28
==========================================================================================================
Ratios and Other Data:
Interest rate spread 2.76% 2.70% 2.63% 2.52% 2.69%
Net yield on average earning assets 3.10 3.06 2.98 2.85 2.98
Return on average assets 1.38 1.26 0.69 0.92 0.80
Return on average stockholders' equity 17.59 16.39 8.55 11.47 10.18
Average earning assets to average
interest-bearing liabilities 107.67 108.18 107.78 107.23 107.41
Efficiency ratio 50.10 51.42 58.13 60.73 64.51
Noninterest expense to average assets 1.89 1.87 1.98 1.95 2.08
Stockholders' equity to total assets 7.87 7.92 7.53 8.24 7.65
Nonaccruing loans and real estate
owned to total assets 0.19 0.12 0.24 0.08 0.44
Dividend payout ratio 36.90 31.71 41.28 28.38 30.14
Number of full-service offices 17 17 18 18 18
==========================================================================================================
</TABLE>
(1) The financial information for per share amounts has been restated to
reflect the ten percent stock dividend declared May 19, 1998 as well as
previous stock dividends paid in 1997, 1996, and 1995 and a stock split
distributed in 1997.
8
<PAGE>
STATEMENT OF MANAGEMENT'S RESPONSIBILITY
The management of CFSB Bancorp, Inc. (the Corporation), and its wholly-owned
subsidiary Community First Bank, is responsible for the preparation of the
consolidated financial statements and other related financial information
included in the annual report. The consolidated financial statements have been
prepared in accordance with generally accepted accounting principles and include
amounts based on management's estimates and judgments where applicable. The
financial statements of the Bank, as filed with the Federal Deposit Insurance
Corporation (FDIC), have been prepared in accordance with the FDIC instructions
for Call Reports.
The Corporation maintains a system of internal controls to provide reasonable
assurance that assets are safeguarded and that transactions are executed in
accordance with management's authorization and are recorded properly to permit
the preparation of financial statements in accordance with generally accepted
accounting principles. Management continually monitors the internal control
structure for compliance with established policies and procedures. As an
integral part of the internal control system, the Corporation maintains a staff
of internal auditors who monitor compliance with internal controls and
coordinate audit coverage with the independent public accountants.
The Audit Committee of the board of directors, composed entirely of outside
directors, oversees the Corporation's financial reporting process and has
responsibility for recommending the independent public accountants who are
appointed by the board of directors to audit the Corporation's annual financial
statements.
The financial statements in this annual report have been audited by KMPG LLP.
The Audit Committee of the board of directors meets regularly with management,
internal auditors, independent public accountants and regulatory examiners to
review matters relating to financial reporting and internal controls. The
internal auditors, independent public accountants and regulatory examiners have
direct access to the Audit Committee.
The Corporation assesses its internal control structure over financial reporting
in relation to the criteria described in the "Internal Control--Integrated
Framework" issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this assessment, management of the Corporation believes
that as of December 31, 1998, in all material respects, the Corporation
maintained an effective internal control structure over financial reporting.
/s/ Robert H. Becker
Robert H. Becker
President & Chief Executive Officer
/s/ John W. Abbott
John W. Abbott
Executive Vice President, Chief Operating Officer & Secretary
/s/ Rick L. Laber
Rick L. Laber
Vice President, Chief Financial Officer & Treasurer
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following sections are designed to provide a more thorough discussion of the
Corporation's financial condition and results of operations, as well as to
provide additional information on the Corporation's asset/liability management
strategies, sources of liquidity and capital resources. Management's discussion
and analysis should be read in conjunction with the consolidated financial
statements and supplemental data contained elsewhere in this report.
General
CFSB Bancorp, Inc. (Corporation) is the holding company for Community First Bank
(Bank). Substantially all of the Corporation's assets are currently held in, and
operations conducted through its sole subsidiary, Community First Bank. The Bank
is a community-oriented financial institution offering a variety of financial
services to meet the needs of the communities it serves. The Bank's primary
market area is the greater Lansing, Michigan area, which is comprised of the
tri-county area of Clinton, Eaton, and Ingham counties, the western townships of
Shiawassee County and Ionia County. The Bank's business consists primarily of
attracting deposits from the general public and using such deposits, together
with Federal Home Loan Bank (FHLB) advances, to originate loans for the purchase
and construction of residential properties. To a lesser extent, the Bank also
makes income-producing property loans, commercial business loans, home equity
loans and various types of consumer loans. The Bank's revenues are derived
principally from interest income on mortgage and other loans, mortgage-backed
securities, investment securities, and to a lesser extent, from fees and
commissions. The operations of the Bank, and the financial services industry
generally, are significantly influenced by general economic conditions and
related monetary and fiscal policies of financial institution regulatory
agencies. Deposit flows and cost of funds are impacted by interest rates on
competing investments and market rates of interest. Lending activities are
affected by the demand for financing of real estate and other types of loans,
which in turn is affected by the interest rates at which such financing is
offered.
Financial Condition
The Corporation's total assets increased to $880.3 million at December 31, 1998
from $852.9 million at December 31, 1997. Most of the growth occurred in loans,
which was funded by an increase in deposits, as well as repayments on
mortgage-backed securities and maturities of investments.
Net loans receivable increased to $786.4 million at December 31, 1998 from
$754.8 million at December 31, 1997. This net growth of $31.6 million occurred
primarily through growth in mortgages of $32.8 million, consumer loans of $3.7
million and commercial loans of $2.6 million, partially offset by a decrease in
income-producing property loans of $7.5 million. The Corporation originated
$327.2 million of loans in 1998, compared to $206.0 million in 1997. Single
family mortgage loan originations in 1998 were $246.7 million, compared to
$142.3 million for 1997. During 1998 and 1997, the Corporation sold primarily
fixed-rate loans aggregating $131.8 million and $46.8 million, respectively. The
Corporation purchased loans consisting of one-to-four family residential, fixed-
and adjustable-rate loans from unaffiliated financial institutions. These
purchases, totaling $71.2 million and $27.8 million in 1998 and 1997,
respectively, are used to supplement and complement the Corporation's own
mortgage loan production.
Deposits increased $24.3 million to $586.7 million at December 31, 1998
from $562.4 million at December 31, 1997. This growth occurred through an
increase in savings accounts of $6.8 million and an increase in checking
accounts of $21.1 million, partially offset by a decrease in certificates of
deposit of $3.6 million.
FHLB advances and securities sold under agreement to repurchase are
comprised primarily of FHLB advances. Advances decreased $858,000 to $211.8
million at December 31, 1998 from $212.7 million at December 31, 1997. The net
decrease was composed of a decline in adjustable-rate advances of $8.5 million,
partially offset by an increase in fixed-rate advances of $7.6 million. The use
of fixed-rate advances increased as management continues to take steps to reduce
interest rate risk.
Total stockholders' equity was $69.3 million at December 31, 1998, an $1.8
million increase, compared to the 1997 year-end total of $67.5 million. The
increase was primarily the result of net income for 1998, offset in part by
dividend declarations and treasury stock purchases.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Results of Operations for the Year Ended December 31, 1998,
Compared to the Year Ended December 31, 1997
Net income for the year ended December 31, 1998 was $11.8 million, or $1.38 per
diluted share, compared to $10.7 million, or $1.22 per diluted share for 1997, a
net increase of $1.1 million. Earnings per share for 1998 increased 13 percent
over 1997. Principally accounting for the increase in earnings between years was
growth in both net interest income and fee income and an increase in gains on
sales of the Corporation's 30-year fixed-rate mortgage loan production, which
increased net income for 1998 over 1997 by $629,000.
Net income for 1998 represents a return on average assets of 1.38 percent,
an increase from 1.26 percent for 1997, and a return on average stockholders'
equity of 17.59 percent compared to 16.39 percent for 1997. The Corporation's
efficiency ratio, or recurring operating expenses over recurring operating
revenues, was 50.1 percent for the year ended December 31, 1998, an improvement
from 51.4 percent for the year ended December 31, 1997.
Net Interest Income
The most significant component of the Corporation's earnings is net interest
income, which is the difference between interest earned on loans,
mortgage-backed securities, investment securities and other earning assets, and
interest paid on deposits and FHLB advances and other borrowings. This amount,
when divided by average earning assets, is referred to as the net yield on
average earning assets. Net interest income and net yield on average earning
assets are directly impacted by changes in volume and composition of earning
assets and interest-bearing liabilities, market rates of interest, the level of
nonperforming assets, demand for loans and other market forces.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Analysis of Net Interest Income
The following table sets forth, for the periods indicated, information
regarding: (i) the total dollar amount of interest income from average earning
assets and the resultant average yields; (ii) the total dollar amount of
interest expense on average interest-bearing liabilities and the resultant
average cost; (iii) net interest income; (iv) interest rate spread; and (v) net
yield on average earning assets. Average balances are based on daily average
balances.
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Interest Interest
Average Earned/ Yield/ Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
(Dollars in Thousands)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earning Assets:
Loans receivable(1) $764,624 $58,166 7.61% $747,060 $57,570 7.71% $674,437 $51,612 7.65%
Mortgage-backed securities 18,489 1,415 7.66 24,144 1,769 7.32 30,714 2,342 7.62
Investment securities 16,872 1,007 5.97 28,452 1,689 5.94 38,848 2,189 5.63
Interest-earning deposits
with FHLB and other
depository institutions 25,439 1,026 4.03 15,836 523 3.30 14,598 465 3.18
Other 12,063 948 7.86 12,433 950 7.64 10,680 794 7.44
- ------------------------------------------------------------------------------------------------------------------------------------
Total earning assets 837,487 62,562 7.47 827,925 62,501 7.55 769,277 57,402 7.46
====================================================================================================================================
Interest-bearing Liabilities:
Savings, checking and money
market accounts(2) 254,009 6,052 2.38 235,475 5,930 2.52 217,316 5,435 2.50
Certificates of deposit(2) 325,400 18,716 5.75 322,998 18,547 5.74 319,491 18,403 5.76
FHLB advances
and securities sold
under agreement
to repurchase 198,429 11,833 5.96 206,826 12,654 6.12 176,943 10,660 6.02
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 777,838 36,601 4.71 765,299 37,131 4.85 713,750 34,498 4.83
====================================================================================================================================
Excess earning assets $ 59,649 $ 62,626 $ 55,527
====================================================================================================================================
Net interest income $25,961 $25,370 $22,904
====================================================================================================================================
Interest rate spread(3) 2.76% 2.70% 2.63%
====================================================================================================================================
Net yield on average
earning assets(4) 3.10% 3.06% 2.98%
====================================================================================================================================
Average earning assets to average
interest-bearing liabilities 107.67% 108.18% 107.78%
====================================================================================================================================
</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 in 1996.
(3) Represents the weighted average yield on earning assets for the year less
the weighted average cost of interest-bearing liabilities for the year.
(4) Net interest income divided by average outstanding balances of earning
assets.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
The following table presents information concerning yields on the
Corporation's earning assets and costs of the Corporation's interest-bearing
liabilities, the interest rate spread and the net yield on earning assets at the
dates and for the periods indicated. Yields and costs for the periods were
computed using daily average balances.
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year End of Year For the Year End of Year For the Year End of Year
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Weighted Average Yield:
Loans receivable (1) 7.61% 7.39% 7.71% 7.71% 7.65% 7.60%
Mortgage-backed securities 7.66 7.82 7.32 8.00 7.62 7.82
Investment securities 5.97 5.31 5.94 6.02 5.63 5.89
Interest-earning deposits with
FHLB and other depository
institutions 4.03 2.80 3.30 3.31 3.18 4.93
Other 7.86 7.83 7.64 7.90 7.44 7.55
- ------------------------------------------------------------------------------------------------------------------------------------
Total earning assets 7.47 7.27 7.55 7.57 7.46 7.47
====================================================================================================================================
Weighted Average Cost:
Savings, checking and money
market accounts (2) 2.38 2.32 2.52 2.60 2.50 2.65
Certificates of deposit (2) 5.75 5.60 5.74 5.83 5.76 5.73
FHLB advances and other borrowings 5.96 5.73 6.12 6.09 6.02 5.97
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 4.71 4.55 4.85 4.91 4.83 4.86
====================================================================================================================================
Interest rate spread (3) 2.76% 2.72% 2.70% 2.66% 2.63% 2.61%
====================================================================================================================================
Net yield on earning assets (4) 3.10% 3.02% 3.06% 3.02% 2.98% 2.95%
====================================================================================================================================
</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 $26.0 million
during 1998, a $591,000 increase from $25.4 million during 1997. Net interest
income in 1998 was positively affected by growth in loans receivable and earning
assets and a decline in cost of funds. The Corporation's net yield on average
earning assets was 3.10 percent for 1998, an improvement from 3.06 percent for
1997. A shift in the composition of average earning assets from lower yielding,
more liquid assets toward higher earning, longer term assets also contributed to
an improved net interest margin. Average loans receivable were $764.6 million in
1998, representing growth of $17.5 million over average loans receivable of
$747.1 million in 1997. The increased level of loans outstanding resulted from
originations of adjustable- and fixed-rate, medium-term mortgage loans and
purchases of adjustable- and fixed-rate, medium-term mortgage loans, all of
which are held in the Corporation's portfolio. The Corporation's net interest
margin of 3.10 percent for the year ended December 31, 1998 exceeded the net
interest margin of 3.02 percent at December 31, 1998.
The future trend of the Corporation's net interest margin and net interest
income may be impacted by the level of mortgage loan originations, purchases,
repayments, refinancings, sales and a resulting change in the composition of the
Corporation's earning assets. The relatively flat yield curve during late 1997
and 1998 resulted in a shift toward more customers exhibiting a preference for
fixed-rate mortgage loans, many of which were originated for sale in the
secondary market. In late 1997, customers began converting adjustable-rate
mortgage loans to 30-year fixed-rate loans, which the Bank sells in the
secondary market. This activity contributed to a decline in loan yields at
December 31, 1998, compared to December 31, 1997. This also contributed to the
decline in yield on earning assets from 7.55 percent for 1997 to 7.47 percent
for 1998.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
The decline in yield in earning assets was more than offset by a decline
in cost of funds during 1998, causing an increase in net interest margin from
3.06 percent for 1997 to 3.10 percent for 1998. Loans held for sale increased
slightly to $6.6 million at December 31, 1998, compared to $6.2 million at
December 31, 1997. A continued high level of refinancings and conversions of
adjustable-rate mortgage loans to 30-year fixed-rate loans could have a negative
impact on future net interest income. Because the Corporation is liability
sensitive, pressure may be felt on the Corporation's net interest margin if
short-term market interest rates rise or if long-term mortgage rates fall.
Additional factors affecting the Corporation's net interest income will continue
to be the volatility of interest rates, slope of the yield curve, asset size,
maturity/repricing activity and competition.
Rate/Volume Analysis of Net Interest Income
The following table presents the dollar amount of changes in interest income and
interest expense for major components of earning assets and interest-bearing
liabilities, distinguishing between changes related to outstanding balances and
changes due to interest rates. For each category of earning assets and
interest-bearing liabilities, information is provided on changes attributable
to: (i) changes in rate (i.e., changes in rate multiplied by prior volume); and
(ii) changes in volume (i.e., changes in volume multiplied by prior rate). For
purposes of this table, changes attributable to both rate and volume which
cannot be segregated have been allocated proportionately to the change due to
volume and the change due to rate.
<TABLE>
<CAPTION>
Years Ended December 31, 1998 vs 1997 1997 vs 1996
- -----------------------------------------------------------------------------------------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
Volume Rate Total Volume Rate Total
(Dollars in Thousands) (Dollars in Thousands)
=================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans receivable $ 1,347 $(751) $ 596 $ 5,554 $ 404 $ 5,958
Mortgage-backed securities (432) 79 (353) (484) (89) (573)
Investment securities (691) 9 (682) (614) 114 (500)
Interest-earning deposits with FHLB
and other depository institutions 368 134 502 40 18 58
Other (29) 26 (3) 134 22 156
- -----------------------------------------------------------------------------------------------------------------
Total interest income 563 (503) 60 4,630 469 5,099
=================================================================================================================
Interest Expense:
Savings, NOW and money
market accounts 457 (336) 121 452 43 495
Certificates of deposit 137 32 169 207 (63) 144
FHLB advances and securities sold
under agreement to repurchase (499) (322) (821) 1,815 179 1,994
- -----------------------------------------------------------------------------------------------------------------
Total interest expense 95 (626) (531) 2,474 159 2,633
=================================================================================================================
Net interest income $ 468 $ 123 $ 591 $ 2,156 $ 310 $ 2,466
=================================================================================================================
</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 $390,000 and
$360,000 during 1998 and 1997, respectively.
The Corporation maintains the allowance for loan losses at a level
determined to be adequate by management based on a review of the loan portfolio.
While management uses available information to determine the allowance for
losses on loans, future additions to the allowance may be necessary based on
changes in economic conditions and borrower circumstances. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Corporation's allowance for losses on loans. Such
agencies may require the Corporation to record additions to the allowance based
on their judgments about information available to them at the time of their
examination.
For more information on the Corporation's allowance for loan losses and
activity therein, reference is made to "Asset Quality."
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Noninterest Income
Noninterest income, a significant component of the Corporation's earnings, was
$8.3 million for the year ended December 31, 1998, an increase of $1.9 million,
compared to $6.4 million for the year ended December 31, 1997. The increase in
noninterest income resulted primarily from an increase in net gains on sales of
loans of $967,000 compared to 1997. The increase in gains on sales of loans was
primarily due to the high level of refinancings and conversions of
adjustable-rate mortgage loans to 30-year fixed-rate loans, which are sold in
the secondary market. An increase in interest rates could have a negative impact
on gains on sales of loans in future periods. Another significant component of
the increase in noninterest income was an increase in service charges and other
fees of $745,000. The increase in service charges and fees results from higher
fees assessed on a higher level of accounts and transaction account activity.
During 1998, noninterest income included a nonrecurring gain on the sale of a
bank building of $273,000, compared to nonrecurring net gains on the sales of
three branches totaling $506,000 in 1997. Income from debit cards, which were
introduced in April 1996, increased $176,000 in 1998 to $467,000 for the year
ended December 31, 1998.
Noninterest Expense
Noninterest expense in 1998 was $16.2 million, compared to $15.8 million in
1997. Compensation and fringe benefits expense rose $567,000 between periods as
a result of merit-based salary adjustments, an increased provision for the
management incentive program, an increase in the number of employees as open
employment positions were filled in 1998 and the use of temporary help in 1998.
Decreased office occupancy and equipment expense resulted from equipment
becoming fully depreciated in the second quarter of 1997. Depreciation expense
is expected to increase in 1999 due in part to equipment purchases made in late
1998 in connection with the Year 2000 project. See "Year 2000." Various other
costs were higher in 1998 due to a larger customer base and higher transaction
volumes.
Federal Income Tax Expense
Federal income tax expense was $5.8 million for the year ended December 31,
1998, compared to $5.0 million for 1997. The Corporation's federal income tax
expense is, for the most part, recorded at the federal statutory rate less a pro
rata portion of the anticipated low-income housing tax credits expected to be
available based upon the Corporation's limited partnership investments.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997,
COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
Net income for the year ended December 31, 1997 was $10.7 million, or $1.22 per
diluted share, compared to $5.4 million, or $0.60 per diluted share for 1996, a
net increase of $5.3 million. Earnings for 1996 were significantly impacted by a
nonrecurring, pre-tax charge of $3.4 million resulting from federal legislation
to recapitalize the Federal Deposit Insurance Corporation's (FDIC) Savings
Association Insurance Fund (SAIF). As a result of this charge, 1996 after-tax
earnings were reduced $2.2 million, or $0.25 per diluted share.
Pre-tax core earnings for 1997 increased 32 percent over 1996 pre-tax core
earnings. Principally accounting for the increase in pre-tax core earnings
between years was significant growth in the Corporation's net interest margin
and improved fee income.
Net income for 1997 represents a return on average assets of 1.26 percent,
an increase from 0.69 percent for 1996, and a return on average stockholders'
equity of 16.39 percent compared to 8.55 percent for 1996. The Corporation's
efficiency ratio, or recurring operating expenses over recurring operating
revenues, was 51.4 percent for the year ended December 31, 1997, an improvement
from 58.1 percent for the year ended December 31, 1996.
Net Interest Income
Net interest income for 1997 was $25.4 million, compared to $22.9 million for
1996. The interest rate spread increased to 2.70 percent in 1997 from 2.63
percent in 1996, and net yield on average earning assets was 3.06 percent,
compared to 2.98 percent for 1996. Net interest income for 1997 increased due to
1) a $58.6 million increase in average earning assets, partially offset by a
$51.5 million increase in average interest bearing liabilities and 2) a 9 basis
point increase in yield on funds, partially offset by a 2 basis point increase
in cost of funds. The $2.5 million increase in net interest income is summarized
as follows: net volume increases contributed $2.2 million and net rate increases
contributed $0.3 million to the net interest income increase over 1996.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Provision for Loan Losses
The provision for loan losses was $360,000 and $240,000 during 1997 and 1996,
respectively. The Corporation maintains the allowance for loan losses at a level
determined to be adequate by management based on a review of the loan portfolio.
Factors considered in this review include the historical loss experience,
recovery levels of loans previously charged off, the financial condition of
borrowers, the perceived risk exposure among loan types, delinquency rates and
present and projected economic conditions, as well as other relevant factors.
While the allowance for loan losses increased to $4.7 million at December
31, 1997, compared to $4.6 million at December 31, 1996, the allowance for loan
losses as a percentage of total loans as of December 31, 1997 declined slightly
to 0.61 percent, compared to 0.62 percent at December 31, 1996. Nonperforming
assets as a percentage of total assets decreased from 0.24 percent as of
December 31, 1996 to 0.12 percent as of December 31, 1997.
Noninterest Income
Noninterest income, a significant component of the Corporation's earnings, was
$6.4 million for the year ended December 31, 1997, an increase of $2.2 million,
compared to $4.2 million for the year ended December 31, 1996. The increase in
noninterest income resulted primarily from an increase in service charges and
other fees of $847,000. The increase in service charges and fees results from
higher fees assessed on a higher level of accounts and transaction account
activity. Net gains on sales of loans and securities increased $421,000 compared
to 1996. During 1997, noninterest income included nonrecurring net gains on the
sales of three branches totaling $506,000. Debit cards were introduced in April
1996 and income from debit cards increased $199,000 in 1997.
Noninterest Expense
Earnings for 1996 were significantly impacted by a nonrecurring, pre-tax charge
of $3.4 million to recapitalize the FDIC's SAIF. Noninterest expense in 1997 was
$15.8 million, compared to $15.7 million in 1996, excluding the FDIC special
assessment of $3.4 million. Compensation and fringe benefits expense rose
$416,000 between periods as a result of merit-based salary adjustments, an
increased provision for the management incentive program, employee bonuses paid
in 1997, and unallocated ESOP dividends used to reduce 1996 ESOP expense.
Furniture and equipment depreciation decreased $288,000 compared to 1996
primarily as a result of certain computer equipment becoming fully depreciated
in 1997. FDIC insurance, $796,000 lower in 1997, reflects the lower premium of
6.3 cents per $100 of domestic deposits versus 23 cents per $100 of domestic
deposits in 1996. Various other costs were higher in 1997 due to a larger
customer base and higher transaction volumes.
Federal Income Tax Expense
Federal income tax expense was $5.0 million for the year ended December 31,
1997, compared to $2.4 million for 1996. The Corporation's federal income tax
expense is, for the most part, recorded at the federal statutory rate less a pro
rata portion of the anticipated low-income housing tax credits expected to be
available based upon the Corporation's limited partnership investments.
Asset Quality
The following table presents the Corporation's nonperforming assets. Management
normally considers loans to be nonperforming when payments are 90 days or more
past due, when credit terms are renegotiated below market levels, or when an
analysis of an individual loan indicates repossession of the collateral may be
necessary to satisfy the loan.
16
<PAGE>
<TABLE>
<CAPTION>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
December 31, 1998 1997
(Dollars in Thousands)
================================================================================
<S> <C> <C>
Nonaccruing Loans:
One-to-four family residential mortgages $ 256 $ 697
FHA-partially insured and VA-partially guaranteed 132 109
Consumer installment 223 93
- --------------------------------------------------------------------------------
Total $ 611 $ 899
================================================================================
Percentage of total assets 0.07% 0.10%
================================================================================
Real Estate Owned:(1)
One-to-four family residential $ 686 $ 11
Construction and development 379 141
- --------------------------------------------------------------------------------
Total $1,065 $ 152
================================================================================
Percentage of total assets 0.12% 0.02%
================================================================================
Total nonaccruing loans and real estate owned $1,676 $1,051
================================================================================
Percentage of total assets 0.19% 0.12%
================================================================================
</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, 1995 through December 31, 1998. The ratio of
net loan charge-offs to average loans outstanding during the years ended
December 31, 1998 and 1997, was 0.02 percent and 0.03 percent, respectively.
<TABLE>
<CAPTION>
Real
Loans Estate Total
================================================================================
<S> <C> <C> <C>
Balance at December 31, 1995 $ 4,363,139 $ 223,577 $ 4,586,716
Provision for losses 240,000 60,000 300,000
Charges against the allowance (76,528) (187,214) (263,742)
Recoveries 36,983 115,796 152,779
- --------------------------------------------------------------------------------
Balance at December 31, 1996 4,563,594 212,159 4,775,753
Provision for losses 360,000 45,000 405,000
Charges against the allowance (247,432) (247,080) (494,512)
Recoveries 54,245 142,548 196,793
- --------------------------------------------------------------------------------
Balance at December 31, 1997 4,730,407 152,627 4,883,034
Provision for losses 390,000 -- 390,000
Charges against the allowance (167,493) (67,444) (234,937)
Recoveries 51,234 -- 51,234
- --------------------------------------------------------------------------------
Balance at December 31, 1998 $ 5,004,148 $ 85,183 $ 5,089,331
================================================================================
</TABLE>
Nonperforming assets increased from $1.1 million to $1.7 million from
December 31, 1997 to December 31, 1998, and as a percentage of total assets
increased from 0.12 percent at December 31, 1997 to 0.19 percent at December 31,
1998. Correspondingly, the $5.0 million allowance for loan losses at December
31, 1998 grew from $4.7 million at December 31, 1997, resulting in a slight
increase in the allowance for loan losses as a percentage of total loans as of
December 31, 1998 to 0.62 percent compared to 0.61 percent at December 31, 1997.
Management believes the current provisions and related allowances for loan
and real estate owned losses are adequate to meet current and potential credit
risks in the current loan and real estate owned portfolios, although there can
be no assurances the related allowances may not have to be increased in the
future.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Market Risk
Derivative financial instruments include futures, forwards, interest rate swaps,
option contracts and other financial instruments with similar characteristics.
The Corporation currently does not enter into futures, forwards, swaps or
options. However, the Corporation is party to financial instruments with
off-balance sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to
extend credit and standby letters of credit. These instruments involve to
varying degrees elements of credit and interest rate risk in excess of the
amount recognized in the consolidated balance sheets. Commitments to extend
credit are agreements to lend to a customer as long as there is no violation of
any condition established in the contract. Commitments generally have fixed
expiration dates and may require collateral from the borrower if deemed
necessary by the Corporation. Standby letters of credit are conditional
commitments issued by the Corporation to guarantee the performance of a customer
to a third party up to a stipulated amount and with specified terms and
conditions.
Commitments to extend credit and standby letters of credit are not
recorded as an asset or liability by the Corporation until the instrument is
exercised.
The Bank's exposure to interest rate risk is reviewed on a regular basis
by the Asset/Liability Committee (see "Asset/Liability Management"). Interest
rate risk is the potential for economic losses due to future interest rate
changes. These economic losses can be reflected as a loss of future net interest
income and/or a loss of current fair market values. The objective is to measure
the effect on net interest income and to adjust the balance sheet to minimize
the inherent risk, while at the same time maximize income. Management realizes
certain risks are inherent and the goal is to identify and minimize the risks.
Tools used by management include the standard GAP analysis and interest rate
shock modeling. The Bank has no market risk sensitive instruments held for
trading purposes. The condensed GAP analysis summarizing the Bank's interest
rate sensitivity is presented under "Asset/Liability Management."
Asset/Liability Management
The operating results of the Corporation are dependent, to a large extent, upon
its net interest income, which is the difference between its interest income
from interest-earning assets, such as loans, mortgage-backed securities and
investment securities and interest expense on interest-bearing liabilities, such
as deposits and FHLB advances.
The Corporation's current asset/liability management objective is to
provide an acceptable balance between interest rate risk, credit risk and
maintenance of yield. The principal operating strategy of the Corporation has
been to manage the repricing of its interest-sensitive assets and liabilities
and manage the sensitivity of the Corporation's earnings to changes in interest
rates. The Corporation generally implemented this strategy by: (i) originating
and retaining adjustable-rate mortgages; (ii) originating construction and
consumer loans which typically have shorter terms to maturity or repricing than
long-term, fixed-rate residential mortgages; (iii) maintaining liquidity levels
adequate to allow flexibility in reacting to the interest rate environment; and
(iv) selling upon origination certain long-term, fixed-rate, residential
mortgages in the secondary mortgage market.
The following table sets forth the interest rate sensitivity of the
Corporation's interest-earning assets and interest-bearing liabilities at
December 31, 1998. One indicator used to measure interest rate risk is the
one-year gap which represents the difference between interest-earning assets
which mature or reprice within one year and interest-bearing liabilities which
mature or reprice within one year. The Corporation's one-year gap was a negative
9.6 percent at December 31, 1998, compared to a negative 10.4 percent at
December 31, 1997; the Corporation's one-to-three-year cumulative gap was a
negative 5.5 percent at December 31, 1998, compared to a negative 1.7 percent at
December 31, 1997; and the Corporation's three-to-five-year cumulative gap was a
negative 5.7 percent at December 31, 1998, compared to a negative 1.5 percent at
December 31, 1997. Fixed-rate loans and mortgage-backed securities are shown on
the basis of contractual amortization adjusted for prepayments at rates
estimated by available industry sources. Adjustable-rate loans and investment
and mortgage-backed securities are determined to reprice at the earlier of
maturity, call date or the next contractual repricing date. The allocation of
savings, checking and money market account balances between the various
maturity/repricing periods is based on anticipated withdrawals and/or repricing
practices. The assumptions used may not be indicative of the actual prepayments
and withdrawals which may be experienced by the Corporation. FHLB advances that
are putable by the FHLB are assumed to mature/reprice at the first put date,
except that putable FHLB advances which mature/reprice in less than one year and
are unlikely to be put based on current interest rates are assumed to
mature/reprice in one year.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
The data presented in the table represents a static measure of assets and
liabilities maturing over various time periods. The table does not necessarily
indicate the impact of general interest rate movements on the Corporation's net
yield, because the repricing of certain categories of assets and liabilities is
subject to competitive and other pressures beyond the Corporation's control. As
a result, certain assets and liabilities indicated as maturing or otherwise
repricing within a stated period may, in fact, mature or reprice at different
times or at different volumes.
MATURITY/RATE SENSITIVITY
At December 31, 1998
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
0-6 7-12 1-3 3-5 Over 5
Months Months Years Years Years Total
(Dollars in Thousands)
===============================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Assets:
Loans receivable $128,421 $103,322 $211,285 $159,262 $184,121 $786,411
Mortgage-backed securities 7,520 5,432 1,893 1,162 -- 16,007
Investment securities 9,849 -- 12,170 -- -- 22,019
Other 21,697 -- -- -- -- 21,697
- -------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets 167,487 108,754 225,348 160,424 184,121 846,134
Noninterest earning assets 34,213
- -------------------------------------------------------------------------------------------------------------------------------
Total assets $880,347
===============================================================================================================================
Liabilities and Stockholders' Equity:
Regular savings 6,779 5,982 10,209 8,135 35,358 $ 66,463
Checking 18,102 14,408 29,765 8,022 17,662 87,959
Money market 41,659 5,082 2,887 25,863 -- 75,491
Certificates of deposit 139,036 100,967 60,610 19,155 969 320,737
Advances from Federal Home Loan Bank
and securities sold under agreement
to repurchase 9,631 15,689 86,982 100,861 444 213,607
- -------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities 215,207 142,128 190,453 162,036 54,433 764,257
Stockholders' equity and
noninterest bearing liabilities 116,090
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $880,347
===============================================================================================================================
Rate Sensitivity GAP and Ratios:
GAP for period (interest-earning assets
less interest-bearing liabilities) $(47,720) $(33,374) $ 34,895 $ (1,612) $129,688 $ 81,877
- -------------------------------------------------------------------------------------------------------------------------------
Cumulative gap $(47,720) $(81,094) $(46,199) $(47,811) $ 81,877
===============================================================================================================================
GAP as a percentage of
interest-earning assets (5.64)% (3.94)% 4.12% (0.19)% 15.33% 9.68%
- -------------------------------------------------------------------------------------------------------------------------------
Cumulative gap as a percentage of
interest-earning assets (5.64)% (9.58)% (5.46)% (5.65)% 9.68% --
===============================================================================================================================
Cumulative gap at December 31, 1997 (3.39)% (10.38)% (1.72)% (1.47)% 7.70% --
===============================================================================================================================
<CAPTION>
Average Estimated
Total Interest Rate Fair Value
===============================================================================================================================
<S> <C> <C> <C>
Assets:
Loans $786,411 7.39% $811,300
Securities 38,026 6.29 38,000
Other 21,697 6.11 21,700
Liabilities:
Deposits 550,650 4.11 552,800
FHLB advances and securities sold under
agreement to repurchase 213,607 5.73 215,300
===============================================================================================================================
</TABLE>
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Liquidity
The Bank has no regulatory mandated minimum liquidity requirements. Management's
intention is to maintain average short-term liquid assets each quarter of 3.0
percent of net withdrawable deposit accounts, plus borrowings payable in one
year or less. The Bank's short-term liquidity ratio was 4.40 percent and 7.32
percent at December 31, 1998 and December 31, 1997, respectively. Although the
liquidity ratio fluctuates, the ratio has been consistently maintained above
minimum targeted levels.
The Bank's principal sources of funds are deposits, principal and interest
payments on loans, sale of loans, maturities of securities, securities available
for sale and FHLB advances. All of the securities held in portfolio are
available for sale, thereby increasing the Bank's flexibility with respect to
such securities. While scheduled loan repayments and maturing investments are
relatively predictable, deposit flows and early loan repayments are more
influenced by interest rates, general economic conditions and competition.
Capital Resources
The Bank is subject to capital asset requirements in accordance with Bank
regulations. Community First Bank's regulatory capital ratios are well in excess
of minimum capital requirements specified by federal banking regulations. The
Bank's tangible, core and risk-based capital ratios were 7.6 percent, 7.6
percent and 14.1 percent, respectively, at December 31, 1998.
The Corporation's cash dividend policy is continually reviewed by
management and the Board of Directors. The Corporation currently intends to
continue its policy of paying quarterly dividends; however, such payments will
depend upon a number of factors, including capital requirements, regulatory
limitations, the Corporation's financial condition and results of operation and
the Bank's ability to pay dividends to the Corporation. Presently, the
Corporation has no significant source of income other than dividends from the
Bank. Consequently, the Corporation depends upon dividends from the Bank to
accumulate earnings for payment of cash dividends to its stockholders.
The Corporation's Board of Directors declared a 10 percent stock dividend
on May 19, 1998. The additional shares, as a result of the dividend, were
distributed on June 12, 1998 to stockholders of record as of May 29, 1998.
Although the stock dividend represents a component of the Corporation's
established dividend practices and the Corporation intends to issue similar
dividends in the future, such declarations will depend on several factors
similar to cash dividends.
During April 1998, the Corporation's Board of Directors approved an
extension of the April 1997 stock repurchase program pursuant to which the
Corporation may repurchase up to 5 percent or 426,525 shares of CFSB Bancorp,
Inc. common stock. Through December 31, 1998, the Corporation repurchased
399,722 shares of CFSB Bancorp, Inc. common stock on the open market for $8.6
million, or at an average purchase price of $21.53 per share. The program was
extended to April 1999 to allow the Corporation an opportunity to repurchase the
remaining 26,803 shares under the 1997 program.
Year 2000
The Year 2000 issue refers to potential problems with computer systems or any
equipment with computer chips that store the year portion of the date as just
two digits. Systems using this two-digit approach may not be able to determine
whether 00 represents the year 2000 or 1900. The problem, if not corrected, may
make those systems fail or allow them to generate incorrect calculations causing
a disruption of normal operations.
In 1998, a comprehensive project plan to address the Year 2000 issue, as
it relates to the Corporation, was developed, approved by the Board of Directors
and implemented. The scope of the plan includes five phases: Awareness,
Assessment, Renovation, Validation and Implementation, as defined by federal
banking regulatory agencies. A project team that consists of key members of the
technology staff, representatives of functional business units, and senior
management was developed. Additionally, the Director of Operations, a member of
senior management, serves as the Year 2000 project manager and regularly reports
to the Board of Directors.
An assessment of the impact of the Year 2000 issue on the Corporation's
computer systems has been completed. The scope of the project also includes
other operational and environmental systems since they may be impacted if
embedded computer chips control the functionality of those systems. From this
assessment, the Corporation identified and prioritized those systems deemed to
be mission critical or those that have significant impact on normal operations.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
The Corporation is progressing with the Renovation, Validation and
Implementation phases of the project plan. The Corporation relies on third party
vendors and service providers for its data processing capabilities and to
maintain its computer systems. Formal communications with these providers and
other external counterparties were initiated in 1998 to assess the Year 2000
readiness of their products and services. Their progress in meeting their
targeted schedules is being monitored for any indication that they may not be
able to address the problem on a timely basis. Thus far, responses indicate that
most of the significant providers currently have compliant versions available or
are well into the renovation and testing phases, with completion scheduled for
sometime in early 1999. Specifically, the Corporation's core data processing
software is provided by an outside vendor, which has certified the software is
Year 2000 compliant. The Corporation is using the compliant software and has
installed it on a redundant computer for testing, which began in August 1998.
The Corporation anticipates completion of testing the software for integration
with other third party software in early 1999. Management also anticipates
completing testing its remaining internal systems for Year 2000 compliance by
March 31, 1999. Year 2000 testing is scheduled for completion on all systems by
June 30, 1999. The Corporation can give no guarantee that the systems of these
service providers and vendors on which the Corporation's systems rely will be
timely renovated.
Additionally, the Corporation has implemented a plan to manage the
potential risk posed by the impact of the Year 2000 issue on its major
customers. Formal communications are in process, and the assessment is scheduled
to be completed by March 31, 1999.
The Corporation has completed the development of contingency plans for
systems that are determined to be mission critical. These plans include the
replacement of vendors or development of alternative systems or processes where
systems will not be completed by specified dates. The Corporation formed a task
force and is in the process of updating its business resumption plan, with
particular emphasis on addressing contingencies associated with systems that are
thought to be Year 2000 compliant, but prove not to be at a future date.
As of December 31, 1998, approximately $700,000 of costs have been
incurred in connection with ensuring the Corporation's systems and products are
Year 2000 compliant. Management anticipates total costs for Year 2000
implementation will approximate $750,000 to $900,000. These costs are primarily
for the replacement of depreciable assets.
The costs and the timetable in which the Corporation plans to complete the
Year 2000 readiness activities are based on management's best estimates, which
were derived using numerous assumptions of future events, including the
continued availability of certain resources, third party readiness plans, and
other factors. The Corporation can make no guarantee that these estimates will
be achieved, and actual results could differ from such plans.
Accounting Standards
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133).
SFAS 133 establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires recognition of all derivatives
as either assets or liabilities in the statement of financial condition and
measurement of those instruments at fair value. The accounting for gains and
losses on derivatives depends on the intended use of the derivative. This
Statement is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999, with earlier application encouraged. Retroactive application is
not permitted. Management has not completed its evaluation of the expected
impact of SFAS 133 on the financial condition or operations of the Corporation.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Forward-looking Statements
This report includes forward-looking statements that involve inherent risks and
uncertainties. A number of important factors could cause actual results to
differ materially from those in the forward-looking statements. Those factors
include the economic environment, competition, products and pricing in
geographic and business areas in which the Corporation operates, prevailing
interest rates, changes in government regulations and policies affecting
financial services companies and credit quality and credit risk management. CFSB
Bancorp, Inc. undertakes no obligation to release revisions to these
forward-looking statements or reflect events or circumstances after the date of
this report.
22
<PAGE>
INDEPENDENT AUDITORS' REPORT
[LOGO]
KPMG LLP
The Board of Directors and Stockholders
CFSB Bancorp, Inc.:
We have audited the consolidated statements of financial condition of CFSB
Bancorp, Inc., and subsidiary ("Corporation") as of December 31, 1998 and 1997,
and the related consolidated statements of operations, stockholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 1998. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CFSB Bancorp, Inc.,
and subsidiary as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Lansing, Michigan
January 19, 1999
Except as to Note 23, which is as of February 24, 1999
23
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
CFSB Bancorp, Inc., and Subsidiary
<TABLE>
<CAPTION>
December 31, 1998 1997
================================================================================
<S> <C> <C>
Assets:
Cash and amounts due from depository
institutions $ 11,694,940 $ 5,188,951
Interest-earning deposits with
Federal Home Loan Bank and
other depository institutions,
at cost, which approximate market 10,246,287 13,300,543
Investment securities available
for sale, at fair value 22,018,800 26,079,688
Mortgage-backed securities available
for sale, at fair value 16,006,538 21,597,690
Loans receivable, net 786,411,364 754,806,061
Accrued interest receivable, net 4,380,539 4,910,200
Real estate, net 979,838 --
Premises and equipment, net 10,345,702 10,457,180
Stock in Federal Home Loan Bank
of Indianapolis, at cost 11,450,700 11,423,100
Other assets 6,812,007 5,124,500
- --------------------------------------------------------------------------------
Total assets $880,346,715 $852,887,913
================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Deposits $586,707,413 $562,412,067
Advances from Federal Home Loan Bank
and securities sold under agreement
to repurchase 213,607,417 212,692,934
Advance payments by borrowers for
taxes and insurance 1,345,619 1,454,316
Accrued interest payable 2,760,854 3,043,923
Federal income taxes payable 850,629 556,315
Other liabilities 5,797,462 5,193,568
- --------------------------------------------------------------------------------
Total liabilities 811,069,394 785,353,123
- --------------------------------------------------------------------------------
Stockholders' Equity:
Serial preferred stock, $0.01 par value;
authorized 2,000,000 shares;
issued - none -- --
Common stock, $0.01 par value;
authorized 15,000,000 shares;
issued 8,173,517 shares in 1998,
and 7,655,466 shares in 1997 81,735 76,555
Additional paid-in capital 63,770,944 48,377,350
Retained income - substantially restricted 5,464,366 20,011,874
Accumulated other comprehensive income 269,897 312,597
Employee Stock Ownership Plan (74,387) (227,522)
Treasury stock, at cost 10,449 shares - 1998,
and 52,787 shares - 1997 (235,234) (1,016,064)
- --------------------------------------------------------------------------------
Total stockholders' equity 69,277,321 67,534,790
- --------------------------------------------------------------------------------
Commitments and contingent liabilities -- --
Total liabilities and stockholders' equity $880,346,715 $852,887,913
================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
24
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
CFSB Bancorp, Inc., and Subsidiary
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997 1996
======================================================================================================
<S> <C> <C> <C>
Interest Income:
Loans receivable $ 58,166,166 $ 57,570,229 $ 51,612,087
Mortgage-backed securities 1,415,333 1,768,498 2,341,727
Investment securities 1,006,813 1,688,983 2,188,967
Other 1,973,311 1,473,760 1,259,274
- ------------------------------------------------------------------------------------------------------
Total interest income 62,561,623 62,501,470 57,402,055
- ------------------------------------------------------------------------------------------------------
Interest Expense:
Deposits, net 24,767,702 24,477,571 23,837,494
Federal Home Loan Bank advances and securities
sold under agreement to repurchase 11,833,340 12,654,049 10,660,383
- ------------------------------------------------------------------------------------------------------
Total interest expense 36,601,042 37,131,620 34,497,877
- ------------------------------------------------------------------------------------------------------
Net interest income before provision
for loan losses 25,960,581 25,369,850 22,904,178
Provision for loan losses 390,000 360,000 240,000
- ------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 25,570,581 25,009,850 22,664,178
- ------------------------------------------------------------------------------------------------------
Noninterest Income:
Service charges and other fees 5,041,102 4,296,132 3,449,537
Loan servicing income 208,076 305,174 399,446
Losses on sales of investment securities
available for sale, net -- (31,372) (64,188)
Gains on sales of mortgage-backed securities
available for sale, net 2,362 2,051 --
Gains on sales of loans, net 1,609,982 642,876 256,343
Real estate operations, net 29,467 (50,121) (60,000)
Gains on sales of branches, net 272,793 505,698 --
Other, net 1,145,363 730,168 260,529
- ------------------------------------------------------------------------------------------------------
Total noninterest income 8,309,145 6,400,606 4,241,667
- ------------------------------------------------------------------------------------------------------
Noninterest Expense:
Compensation, payroll taxes, and fringe benefits 8,993,572 8,426,696 8,010,714
Office occupancy and equipment 2,194,540 2,384,424 2,609,958
Federal insurance premiums 346,042 354,007 1,150,117
FDIC special assessment -- -- 3,355,000
Marketing 701,081 808,823 792,083
Data processing 521,543 454,099 365,704
Other, net 3,466,916 3,333,879 2,739,977
- ------------------------------------------------------------------------------------------------------
Total noninterest expense 16,223,694 15,761,928 19,023,553
- ------------------------------------------------------------------------------------------------------
Income before federal income tax expense 17,656,032 15,648,528 7,882,292
Federal income tax expense 5,812,000 4,976,000 2,435,000
- ------------------------------------------------------------------------------------------------------
Net income $ 11,844,032 $ 10,672,528 $ 5,447,292
======================================================================================================
Earnings Per Share:
Basic $ 1.44 $ 1.26 $ 0.62
Diluted 1.38 1.22 0.60
======================================================================================================
Dividends per share 0.51 0.38 0.25
======================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
25
<PAGE>
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
CFSB Bancorp, Inc., and Subsidiary
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
====================================================================================================================================
Accumulated
Other Total
Common Additional Retained Commitment Treasury Comprehensive Stockholders'
Stock Paid-in Capital Income for ESOP Debt Stock Income Equity
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 67,777 $34,366,570 $ 29,852,980 $(691,294) $ (924,673) $ 71,661 $62,743,021
Net income for the year 1996 -- -- 5,447,292 -- -- -- 5,447,292
Change in net unrealized gain on
securities, net -- -- -- -- -- 142,933 142,933
-----------
Total comprehensive income 5,590,225
10% common stock dividend 4,967 6,969,800 (8,980,475) -- 1,995,912 -- (9,796)
Treasury stock purchased -- -- -- -- (4,089,237) -- (4,089,237)
Stock options exercised -- -- (283,171) -- 397,845 -- 114,674
Repayment of ESOP debt -- -- -- 231,886 -- -- 231,886
Cash dividends on common stock -
$0.25 per share -- -- (2,173,026) -- -- -- (2,173,026)
Tax benefit of ESOP dividends -- 28,730 -- -- -- -- 28,730
Tax benefit associated with exercise
of stock options -- 33,550 -- -- -- -- 33,550
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 72,744 41,398,650 23,863,600 (459,408) (2,620,153) 214,594 62,470,027
Net income for the year 1997 -- -- 10,672,528 -- -- -- 10,672,528
Change in net unrealized gain on
securities, net -- -- -- -- -- 98,003 98,003
-----------
Total comprehensive income 10,770,531
10% common stock dividend 3,811 6,985,791 (11,063,418) -- 4,062,759 -- (11,057)
Cash value of fractional shares
on stock split -- (7,091) -- -- -- -- (7,091)
Treasury stock purchased -- -- -- -- (2,777,983) -- (2,777,983)
Stock options exercised -- -- (214,148) -- 319,313 -- 105,165
Repayment of ESOP debt -- -- -- 231,886 -- -- 231,886
Cash dividends on common
stock - $0.38 per share -- -- (3,246,688) -- -- -- (3,246,688)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 76,555 48,377,350 20,011,874 (227,522) (1,016,064) 312,597 67,534,790
Net income for the year 1998 -- -- 11,844,032 -- -- -- 11,844,032
Change in net unrealized gain on
securities, net -- -- -- -- -- (42,700) (42,700)
-----------
Total comprehensive income 11,801,332
10% common stock dividend 5,180 15,300,221 (21,530,994) -- 6,210,476 -- (15,117)
Treasury stock purchased -- -- -- -- (6,317,707) -- (6,317,707)
Stock options exercised -- -- (702,861) -- 888,061 -- 185,200
Repayment of ESOP debt -- -- -- 153,135 -- -- 153,135
Cash dividends on common
stock - $0.51 per share -- -- (4,157,685) -- -- -- (4,157,685)
Tax benefit associated with
exercise of stock options -- 93,373 -- -- -- -- 93,373
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $ 81,735 $63,770,944 $ 5,464,366 $ (74,387) $ (235,234) $269,897 $69,277,321
====================================================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
26
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
CFSB Bancorp, Inc., and Subsidiary
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997 1996
=========================================================================================================================
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income $ 11,844,032 $ 10,672,528 $ 5,447,292
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,063,859 1,347,691 1,605,669
Provision for loan losses 390,000 360,000 240,000
Provision for real estate losses -- 45,000 60,000
Net amortization of premiums and accretion
of discounts (81,690) 165,158 370,832
Loans originated for sale (64,993,732) (20,424,389) (25,856,898)
Proceeds from sales of loans originated for sale 65,726,441 18,650,496 24,219,028
Net gains on sales of loans and securities (1,612,344) (613,555) (192,155)
Net gains on sales of real estate owned (40,470) -- --
Net (gains) losses on sales and disposals of
premises and equipment (279,569) (491,675) 83,101
Increase (decrease) in deferred loan fees (698,936) (353,731) 198,518
Decrease (increase) in accrued interest receivable 529,661 (560,960) 533,993
Increase in deferred federal income tax benefit (345,688) -- (65,000)
Increase (decrease) in accrued interest payable (283,069) (1,189,876) 759,736
Increase (decrease) in federal income taxes payable 387,687 (183,927) 273,902
Increase (decrease) in other liabilities 609,819 291,539 (192,161)
Decrease (increase) in other assets (1,156,893) (66,566) 1,660,411
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 11,059,108 7,647,733 9,146,268
- -------------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Purchases of investment securities available for sale (19,774,075) (24,018,281) (20,060,266)
Proceeds from sales of investment securities
available for sale -- 20,037,695 23,135,173
Principal repayments and maturities of investment
securities available for sale 24,000,000 9,000,000 20,420,000
Loan originations (net of undisbursed loans in process) (262,256,062) (185,621,409) (200,744,785)
Loans purchased (71,153,756) (27,847,054) (31,733,987)
Proceeds from sales of loans 66,746,891 28,439,980 7,853,490
Principal repayments on loans 234,894,592 149,524,869 118,078,242
Purchases of mortgage-backed securities available for sale (510,969) -- --
Principal repayments and maturities on mortgage-
backed securities available for sale 5,955,908 5,571,279 2,271,581
Principal repayments and maturities on mortgage-
backed securities held to maturity -- -- 5,967,777
Proceeds from sales, redemptions, and settlements
of real estate owned, net 247,475 723,716 497,637
Purchases of premises and equipment (1,372,088) (1,706,796) (1,456,346)
Proceeds from sales and disposals of premises
and equipment 699,276 1,378,799 5,524
Purchases of Federal Home Loan Bank stock (27,600) (791,100) (2,095,200)
- -------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (22,550,408) (25,308,302) (77,861,160)
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
CFSB Bancorp, Inc., and Subsidiary
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997 1996
===================================================================================================================
<S> <C> <C> <C>
Cash Flows From Financing Activities:
Net increase in deposits $ 24,295,346 $ 8,838,066 $ 25,757,823
Stock options exercised 185,200 105,165 114,674
Purchases of treasury stock (6,317,707) (2,777,983) (4,089,237)
Net increase (decrease) in advance payments
by borrowers for taxes and insurance (108,697) 97,809 75,464
Federal Home Loan Bank advance repayments (111,985,061) (110,885,770) (98,262,720)
Federal Home Loan Bank advances 111,127,509 120,939,381 140,252,667
Securities sold under agreement to repurchase 1,772,035 -- --
Dividends paid on common stock (4,025,592) (2,916,568) (2,107,991)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 14,943,033 13,400,100 61,740,680
- -------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 3,451,733 (4,260,469) (6,974,212)
Cash and cash equivalents at beginning of period 18,489,494 22,749,963 29,724,175
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 21,941,227 $ 18,489,494 $ 22,749,963
===================================================================================================================
Supplemental Disclosures of Cash Flow Information:
Cash paid for:
Interest expense $ 36,884,111 $ 38,321,496 $ 33,738,141
Federal income taxes 5,770,000 5,170,000 2,450,000
Transfers of loans to real estate owned 1,186,843 672,078 342,408
Transfers of loans to repossessed property and
accounts receivable 162,398 150,611 69,673
Loans charged off 167,493 247,432 76,528
Loans to facilitate the sale of real estate owned -- -- 279,700
Transfers of mortgage-backed securities to
available-for-sale classification -- -- 28,553,035
===================================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CFSB Bancorp, Inc., and Subsidiary
December 31, 1998
(1) SIGNIFICANT ACCOUNTING POLICIES
Business
CFSB Bancorp, Inc. is a unitary savings and loan holding company whose principal
business is conducted through its subsidiary Community First Bank. Community
First Bank (the Bank) is a community-oriented financial institution offering a
variety of financial services to meet the needs of the communities it serves.
The Bank's primary market area is the greater Lansing, Michigan area, which is
comprised of the tri-county area of Clinton, Eaton and Ingham counties, and the
western townships of Shiawassee County and Ionia County.
Principles of Consolidation
CFSB Bancorp, Inc. (the Corporation), is the holding company for Community First
Bank, a state chartered stock savings bank. Substantially all of the
Corporation's assets are currently held in, and operations conducted through its
sole subsidiary, Community First Bank.
The consolidated financial statements include the accounts and
transactions of CFSB Bancorp, Inc. and its wholly owned subsidiary, Community
First Bank; and the Bank's wholly owned subsidiaries Community First Mortgage
Corporation and Capitol Consolidated Financial Corporation (Capitol
Consolidated); and Capitol Consolidated's wholly owned subsidiary, Allegan
Insurance Agency, doing business as Community First Insurance and Investment
Services. Intercompany transactions and account balances are eliminated.
Basis of Financial Statement Presentation
The consolidated financial statements are prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities as of the date of the balance sheet and the reported amounts of
income and expenses for the period. Actual results could differ from those
estimates.
Investment and Mortgage-Backed Securities
Investment and mortgage-backed securities available for sale represent those
securities not classified as held-to-maturity. Unrealized holding gains and
losses, net of tax, on available-for-sale securities are excluded from earnings
and are reported as a separate component of other comprehensive income until
realized. Gains and losses on the sale of securities are determined using the
specific-identification method and are recognized on a trade-date basis.
Premiums and discounts are recognized in interest income using the
effective-interest method over the period to maturity.
Loans Receivable
Loans receivable, which the Corporation has the intent and ability to hold for
the foreseeable future or until maturity or payoff, are reported at their
outstanding unpaid principal balances, net of any undistributed portion of loans
in process, net deferred origination fees, and the allowance for loan losses.
Loan Origination Fees
Loan origination fees, net of certain loan origination costs, are deferred and
recognized over the lives of the related loans as an adjustment to the yield.
When loans are sold, any remaining unamortized deferred fees are recognized as
an adjustment of gain (loss) on sale of loans.
Loan origination fees charged on adjustable-rate mortgages are generally
deemed to be adjustments to the first adjustment period yield of the mortgage,
to the extent the interest rate during the first adjustment period on the
mortgage is less than the index rate plus the contractual spread.
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CFSB Bancorp, Inc., and Subsidiary
(1) SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Nonaccrual Assets
Nonaccrual assets are comprised of loans where the accrual of interest has been
discontinued, loans on which the terms have been renegotiated to less than
market rates as a result of a serious weakening of the borrower's financial
condition, and real estate which has been acquired primarily through foreclosure
and is awaiting disposition.
Loans are generally placed on a nonaccrual basis when principal or
interest is past due 90 days or more or when, in the opinion of management, full
collection of principal and interest is unlikely. At the time a loan is placed
on nonaccrual status, interest previously accrued but not collected is charged
against current income. Income on such loans is then recognized only to the
extent that cash is received and where future collections of principal are
probable. A nonaccrual loan may be restored to accrual status when interest and
principal payments are current and the loan appears otherwise collectible.
Allowance for Losses on Loans and Real Estate
Provisions for losses on loans and real estate are charged to operations based
upon management's evaluation of potential losses in the portfolio. In addition
to providing reserves on specific assets where a decline in value has been
identified, general provisions for losses are established based upon the overall
portfolio composition and general market conditions. In establishing both
specific and general valuation allowances, management reviews individual loans,
recent loss experience, current economic conditions, the overall balance and
composition of the portfolio and such other factors which, in management's
judgment, deserve recognition in estimating possible losses.
Management believes the allowance for losses on loans and real estate is
adequate. While management uses available information to recognize losses on
loans and real estate, future additions to the allowance may be necessary based
on changes in economic conditions and borrower circumstances.
Impaired loans have been identified in accordance with provisions of SFAS
No. 114. The Corporation considers a loan to be impaired when it is probable
that it will be unable to collect all or part of amounts due according to the
contractual terms of the loan agreement. Impaired loans are measured based on
the present value of expected cash flows discounted at the loan's effective
interest rate or, as a practical expedient, at a loan's observable market price
or the fair value of the collateral if the loan is collateral dependent.
Real Estate
Real estate acquired through foreclosure is carried at the lower of estimated
fair value less costs to sell or cost. Such determination is made on an
individual-asset basis. At the time of acquisition, any excess of carrying
amount over estimated fair value is recorded as a reduction in the allowance for
loan losses. Subsequent declines in fair value less estimated costs to sell are
recognized as increases in the valuation allowance. If the estimated fair value
of the asset minus the estimated costs to sell the asset is more than its
carrying amount, the valuation allowance is reduced, but not below zero.
Increases or decreases in the valuation allowance are charged or credited to
income. Generally, expenditures relating to the development and improvement of
real estate acquired through foreclosure are capitalized.
Loans Held for Sale
Additional funds for lending are periodically provided by selling mortgage
loans. Mortgage loans intended for sale in the secondary market are carried at
the lower-of-cost or estimated market value in the aggregate. These loans are
classified as held for sale and are included in loans receivable in the
consolidated statements of financial condition. Net unrealized losses are
recorded by charges to income.
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CFSB Bancorp, Inc., and Subsidiary
(1) SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Loan Servicing
The Corporation services for investors mortgage loans that are not included in
the consolidated statements of financial condition. Fees earned for servicing
loans owned by investors are reported as income when the related mortgage loan
payments are collected. Loan servicing costs are charged to expense as incurred.
The total cost of mortgage loans originated with the intent to sell is
allocated between the loan servicing right and the mortgage loan without
servicing, based on their relative fair value at the date of origination. The
capitalized cost of loan servicing rights is amortized in proportion to, and
over the period of, estimated net future servicing revenue.
Mortgage servicing rights are periodically evaluated for impairment.
Impairment represents the excess of cost of an individual mortgage servicing
rights stratum over its fair value, and is recognized through a valuation
allowance. Estimates of fair value include assumptions about prepayment, default
and interest rates and other factors which are subject to change over time.
Changes in these underlying assumptions could cause the fair value of mortgage
servicing rights, and the related valuation allowance, to change significantly
in the future.
Federal Income Taxes
The Corporation and its subsidiary file a consolidated federal income tax
return. The provision for federal income taxes is based upon income for
financial statement purposes, rather than amounts reported on the Corporation's
income tax return.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized as income or
expense in the period that includes the enactment date.
Premises and Equipment
Office property and equipment are carried at cost, less accumulated depreciation
and amortization. Depreciation and amortization of office properties and
equipment are charged to operations on a straight-line basis over the estimated
useful lives of the related assets.
Derivative Financial Instruments
Interest rate exchange agreements, designated as hedges against future
fluctuations in the interest rates of specifically identified assets or
liabilities, are not marked to market. Net interest income (expense) resulting
from the differential between exchanging floating and fixed-rate interest
payments is recorded as an addition to or reduction of the interest income
(expense) on the associated asset or liability. Gains and losses on terminated
interest rate exchange agreements are amortized over the remaining terms of the
agreements.
Interest on Deposits
Penalty income on early withdrawal of certificates of deposit is recognized as a
reduction of interest expense on deposits.
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CFSB Bancorp, Inc., and Subsidiary
(1) SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Comprehensive Income
The Corporation adopted FASB Statement No. 130, Reporting Comprehensive Income
(SFAS 130), effective January 1, 1998. SFAS 130 establishes standards for
reporting and displaying comprehensive income and its components, including but
not limited to unrealized gains or losses on securities available for sale, in
the financial statements. Prior period amounts have been reclassified in the
financial statements.
Amounts reclassified from net income to comprehensive income for the years
ended December 31 are as follows:
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997 1996
====================================================================================================================================
Tax Tax Tax
Expense Reclassification Expense Reclassification Expense Reclassification
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Change in unrealized holding gains
arising during period, net of tax $ 22,529 $(42,700) $(59,197) $114,911 $(20,599) $ 39,987
Add: reclassification adjustment for
realized gain included in net
income, net of tax -- -- 8,710 (16,908) (53,032) 102,946
- ------------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income for the year $ (42,700) $ 98,003 $142,933
====================================================================================================================================
</TABLE>
Statement of Cash Flows
For the purpose of presentation in the consolidated statement of cash flows,
cash and cash equivalents include cash and amounts due from depository
institutions and interest-earning deposits with the Federal Home Loan Bank and
other depository institutions.
Stock-Based Compensation
FASB SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123),
encourages but does not require companies to record compensation cost for
stock-based employee compensation plans at fair value. The Bank has chosen to
continue to measure compensation cost for those plans using the intrinsic value
based method of accounting prescribed by Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (Opinion 25). Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
quoted market price of the Corporation's stock at the date of the grant over the
amount an employee must pay to acquire the stock.
Pension and Other Postretirement Plans
On January 1, 1998, the Corporation adopted Statement of Financial Accounting
Standards (SFAS) No. 132, Employers' Disclosures about Pension and Other
Postretirement Benefits. SFAS No. 132 revises employers' disclosures about
pension and other postretirement benefit plans. SFAS No. 132 does not change the
method of accounting for such plans.
Stock Dividend and Split
The Corporation's Board of Directors declared a 10 percent stock dividend on May
19, 1998. The additional shares as a result of the dividend were distributed on
June 12, 1998 to stockholders of record as of May 29, 1998. Common shares
outstanding, per common share amounts and price per common share have been
restated for all periods presented to give retroactive effect to the stock
dividend.
Reclassifications
Certain prior years' financial statement amounts have been reclassified to
conform to the current year financial statement presentation.
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CFSB Bancorp, Inc., and Subsidiary
(2) RESTRICTIONS ON CASH AND AMOUNTS DUE FROM DEPOSITORY INSTITUTIONS
The Bank is required to maintain certain daily reserve balances in accordance
with Federal Reserve Board requirements. The reserve balances maintained in
accordance with such requirements were $2,862,000 and $1,754,000 at December 31,
1998 and 1997, respectively.
(3) INVESTMENT SECURITIES
Investment securities available for sale consist of the following:
<TABLE>
<CAPTION>
December 31, 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
Amortized Cost Fair Value Amortized Cost Fair Value
==========================================================================================================================
<S> <C> <C> <C> <C>
United States government and agency obligations:
Maturing within one year $ -- $ -- $24,000,000 $24,053,125
Federal agency obligations:
Maturing within one year 9,855,892 9,849,000 -- --
Maturing from one to five years 12,000,000 12,169,800 2,000,000 2,026,563
- --------------------------------------------------------------------------------------------------------------------------
21,855,892 22,018,800 2,000,000 2,026,563
- --------------------------------------------------------------------------------------------------------------------------
$21,855,892 $22,018,800 $26,000,000 $26,079,688
==========================================================================================================================
Weighted average interest rate 5.31% 6.02%
==========================================================================================================================
</TABLE>
Unrealized gains and losses on investment securities available for sale
are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1998 1997
- ----------------------------------------------------------------------------------------------------------------
Gross Gross Gross Gross
Unrealized Gains Unrealized Losses Unrealized Gains Unrealized Losses
================================================================================================================
<S> <C> <C> <C> <C>
United States government and
agency obligations $ -- $ -- $ 54,688 $ 1,563
Federal agency obligations 169,800 6,892 26,563 --
- ----------------------------------------------------------------------------------------------------------------
$169,800 $ 6,892 $ 81,251 $ 1,563
================================================================================================================
</TABLE>
Proceeds from sales of investment securities available for sale during the
years ended December 31, 1998, 1997, and 1996 were $0, $20,037,695 and
$23,135,173, respectively. Gross gains of $0, $19,659 and $43,207, and gross
losses of $0, $51,031 and $107,395, were realized on those sales during 1998,
1997, and 1996, respectively.
Expected maturities may differ from the contractual maturities above
because certain borrowers have the right to call or prepay obligations with or
without call or prepayment penalties. During the years ended December 31, 1997
and 1996, call provisions were exercised on $5,000,000 and $4,295,000,
respectively, of investment securities available for sale. No gains or losses
were recognized during the respective periods. There were no call provisions
exercised on investment securities available for sale during 1998.
Accrued interest receivable related to investment securities approximated
$63,000 and $627,000 at December 31, 1998 and 1997, respectively.
At December 31, 1998, the Bank had no commitments to purchase or sell
investment securities.
Investment securities carried at fair value of $2,272,000 and $502,000 at
December 31, 1998 and 1997, respectively, were pledged to secure public deposits
and repurchase agreements.
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CFSB Bancorp, Inc., and Subsidiary
(4) MORTGAGE-BACKED SECURITIES
Mortgage-backed securities available for sale consist of the following:
<TABLE>
<CAPTION>
December 31, 1998 1997
- ----------------------------------------------------------------------------------------------------------------
Amortized Cost Fair Value Amortized Cost Fair Value
================================================================================================================
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage Corporation
participation certificates $11,536,077 $11,791,572 $15,711,732 $16,137,553
Fannie Mae guaranteed mortgage
pass-through certificates 2,446,839 2,436,840 2,308,037 2,275,221
Government National Mortgage Association
modified pass-through certificates 18,927 18,927 45,208 46,338
Conventional pass-through certificates 1,759,199 1,759,199 3,138,769 3,138,578
- ----------------------------------------------------------------------------------------------------------------
$15,761,042 $16,006,538 $21,203,746 $21,597,690
================================================================================================================
Weighted average interest rate 7.82% 8.00%
================================================================================================================
</TABLE>
Unrealized gains and losses on mortgage-backed securities available for sale are
summarized as follows:
<TABLE>
<CAPTION>
December 31, 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
Gross Gross Gross Gross
Unrealized Gains Unrealized Losses Unrealized Gains Unrealized Losses
============================================================================================================================
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage Corporation
participation certificates $258,874 $ 3,379 $494,651 $ 68,830
Fannie Mae guaranteed mortgage
pass-through certificates 1,697 11,696 409 33,225
Government National Mortgage Association
modified pass-through certificates -- -- 1,130 --
Conventional pass-through certificates -- -- -- 191
- ----------------------------------------------------------------------------------------------------------------------------
$260,571 $ 15,075 $496,190 $102,246
============================================================================================================================
</TABLE>
There were no sales of mortgage-backed securities during the years ended
December 31, 1998, 1997 and 1996.
During the years ended December 31, 1998 and 1997, call provisions were
exercised on $345,952 and $380,544 of mortgage-backed securities available for
sale. Gross gains of $2,362 and $2,051 were recognized during the respective
periods. There were no call provisions exercised on mortgage-backed securities
available for sale during 1996.
Accrued interest receivable on mortgage-backed securities was
approximately $181,000 and $250,000 at December 31, 1998 and 1997, respectively.
The cost of mortgage-backed securities at December 31, 1998 and 1997
included net unamortized premiums of $10,842 and $0, respectively.
Variable-rate mortgage-backed securities approximated $7,358,000 and
$9,681,000, with weighted average rates of 7.09 percent and 7.29 percent, at
December 31, 1998 and 1997, respectively.
At December 31, 1998, the Bank had no commitments to buy or sell
mortgage-backed securities.
Mortgage-backed securities carried at fair value of $837,000 and
$1,144,000 at December 31, 1998 and 1997, respectively, were pledged to secure
public deposits and other liabilities.
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CFSB Bancorp, Inc., and Subsidiary
(5) LOANS RECEIVABLE
Loans receivable consist of the following:
December 31, 1998 1997
================================================================================
First mortgage:
One-to-four family residential $609,446,769 $585,266,880
Income-producing property 38,318,190 44,580,004
FHA-insured and VA-partially guaranteed 10,875,736 7,607,118
Construction and development:
One-to-four family residential 37,927,357 34,821,124
Income-producing property 30,965,138 32,648,987
- --------------------------------------------------------------------------------
727,533,190 704,924,113
Second mortgage 641,716 549,105
Other loans:
Land contract 118,855 149,095
Auto 10,625,602 10,218,761
Commercial 8,218,152 5,087,147
Educational 1,164,404 1,347,731
Marine 1,314,084 1,349,584
Home equity 42,195,001 42,281,117
Mobile home 800,700 1,099,038
Other 12,104,063 8,037,676
- --------------------------------------------------------------------------------
76,540,861 69,570,149
- --------------------------------------------------------------------------------
804,715,767 775,043,367
Less:
Undistributed portion of loans in process (12,811,625) (14,408,253)
Deferred origination fees (488,630) (1,098,646)
Allowance for losses on loans (5,004,148) (4,730,407)
- --------------------------------------------------------------------------------
$786,411,364 $754,806,061
================================================================================
Weighted average interest rate 7.39% 7.71%
================================================================================
Accrued interest receivable on loans, net of the allowance for
uncollectible interest, approximated $4,099,000 and $3,986,000 at December 31,
1998 and 1997, respectively.
The Corporation had approximately $611,000 and $883,000 of nonaccruing
loans as of December 31, 1998 and 1997, respectively. Interest received and
included as income on these loans for the years ended December 31, 1998, 1997
and 1996, was $27,000, $46,000 and $118,000, respectively. The Corporation would
have recorded $25,000, $32,000 and $46,000 of additional interest income on
these nonaccrual loans for the years ended December 31, 1998, 1997 and 1996,
respectively, if these loans had been current in accordance with their original
terms and had been outstanding throughout the periods or since origination.
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CFSB Bancorp, Inc., and Subsidiary
(5) LOANS RECEIVABLE - CONTINUED
There were no impaired loans as defined by SFAS 114 at December 31, 1998
and 1997. Impaired loans at December 31, 1996 totaled $554,000, and included one
income-producing property loan and three commercial business loans. The
Corporation's nonaccrual loans include residential mortgage and consumer
installment loans, for which SFAS 114 does not apply. The Corporation's
respective average investment in impaired loans was $265,000, $112,000 and
$559,000 during 1998, 1997 and 1996, respectively. Interest income recognized on
impaired loans during 1998, 1997 and 1996 totaled $25,000, $1,000 and $27,000,
respectively. Impaired loans had specific allocations of the allowance for loan
losses in accordance with SFAS 114 approximating $0, $0 and $150,000 at December
31, 1998, 1997 and 1996, respectively.
The Corporation had no troubled debt restructured loans at December 31,
1998 and 1997.
Included in one-to-four family residential, first-mortgage loans were
approximately $318,900,000 and $407,000,000 of adjustable-rate mortgages at
December 31, 1998 and 1997, respectively.
Included in income-producing property loans were approximately $34,700,000
and $44,500,000 of adjustable-rate mortgages at December 31, 1998 and 1997,
respectively.
The Corporation serviced loans for others of approximately $241,700,000,
$180,200,000 and $156,600,000 at December 31, 1998, 1997 and 1996, respectively.
The balance of loans serviced for others at December 31, 1998 and 1997
with capitalized originated mortgage servicing rights approximated $174,900,000
and $73,300,000, respectively. At December 31, 1998 and 1997, capitalized
originated mortgage servicing rights had a book value of $1,047,000 and $402,000
and fair value of approximately $1,700,000 and $700,000, respectively. No
valuation allowances for capitalized originated mortgage servicing rights were
considered necessary as of December 31, 1998 or 1997.
The Corporation had commitments to originate the following mortgage loans
at December 31, 1998:
Amount Weighted Average Rate
================================================================================
Residential fixed-rate $64,431,000 6.94%
Residential adjustable-rate 15,582,000 6.91
Income-producing property, fixed-rate 1,650,000 7.44
Income-producing property, adjustable-rate 2,400,000 8.25
- --------------------------------------------------------------------------------
$84,063,000 6.98%
================================================================================
The Corporation had commitments to sell one-to-four family residential,
fixed-rate mortgage loans of $13,886,000 at December 31, 1998. As of December
31, 1998, the Corporation had no commitments to buy mortgage loans. As of
year-end 1998, $6,583,000 of one-to-four family residential, fixed-rate mortgage
loans were held for sale. Loans held for sale, after consideration of the
aforementioned commitments, were valued at the lower-of-cost or market, as
determined on an aggregate basis.
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CFSB Bancorp, Inc., and Subsidiary
(6) CONCENTRATION OF CREDIT RISK
The Corporation considers its primary market area for lending and savings
activities to be the greater Lansing area in mid-Michigan. The Corporation's
one-to-four family residential real estate loans totaled $658,250,000 and
$627,700,000 at December 31, 1998 and 1997, respectively, and included
$497,800,000 and $498,500,000 of originated loans, respectively. Substantially
all of the originated loans were on properties located in Michigan. Of the
purchased loans which were serviced by other institutions at December 31, 1998,
$40,000,000 $104,200,000, and $16,200,000 represented loans on properties
located in Michigan, Texas and other states, respectively. Substantially all of
the Corporation's income-producing property and consumer loans are based in
Michigan. Although the Corporation has a diversified loan portfolio, a
substantial portion of its debtors' ability to honor their contractual
obligations is reliant upon the economic stability of the area. The greater
Lansing area is a diversified market with a strong service sector and, to a
lesser extent, trade and manufacturing sectors. The three major employers in the
area are the State of Michigan, General Motors and Michigan State University.
The Corporation is not dependent upon any single industry or business for its
banking opportunities.
Collateral securing the Corporation's income-producing loan portfolio
consists of the following property types:
December 31, 1998 1997
================================================================================
Apartments $24,075,353 $35,466,164
Office buildings 15,388,054 16,068,170
Restaurants and motels 3,513,726 3,808,960
Retail centers 4,545,032 5,448,099
Residential land development 11,791,400 6,683,685
Residential and condominiums 5,941,689 5,309,418
Other 4,028,074 4,444,494
- --------------------------------------------------------------------------------
$69,283,328 $77,228,990
================================================================================
(7) REAL ESTATE
Real estate held by the Corporation is summarized as follows:
December 31, 1998 1997
================================================================================
Real estate in judgment, subject to redemption $ 753,347 $ 11,455
Real estate acquired through foreclosure 311,674 141,172
- --------------------------------------------------------------------------------
1,065,021 152,627
Less: Allowance for losses (85,183) (152,627)
- --------------------------------------------------------------------------------
$ 979,838 $ --
================================================================================
The following is a summary of the results of real estate operations for
the years indicated:
Years Ended December 31, 1998 1997 1996
================================================================================
Income from sales of real estate acquired
through foreclosure, net $ 72,044 $ -- $ --
Provision for losses on real estate -- (45,000) (60,000)
Real estate expenses (42,577) (5,121) --
- --------------------------------------------------------------------------------
$ 29,467 $(50,121) $(60,000)
================================================================================
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CFSB Bancorp, Inc., and Subsidiary
(8) ALLOWANCE FOR LOSSES ON LOANS AND REAL ESTATE
The following is a summary of the allowance for losses on loans and real estate:
<TABLE>
<CAPTION>
Loans Real Estate Total
==========================================================================================
<S> <C> <C> <C>
Balance at December 31, 1995 $ 4,363,139 $ 223,577 $ 4,586,716
Provision for losses 240,000 60,000 300,000
Losses charged against the allowance (76,528) (187,214) (263,742)
Recoveries of losses 36,983 115,796 152,779
- ------------------------------------------------------------------------------------------
Balance at December 31, 1996 4,563,594 212,159 4,775,753
Provision for losses 360,000 45,000 405,000
Losses charged against the allowance (247,432) (247,080) (494,512)
Recoveries of losses 54,245 142,548 196,793
- ------------------------------------------------------------------------------------------
Balance at December 31, 1997 4,730,407 152,627 4,883,034
Provision for losses 390,000 -- 390,000
Losses charged against the allowance (167,493) (67,444) (234,937)
Recoveries of losses 51,234 -- 51,234
- ------------------------------------------------------------------------------------------
Balance at December 31, 1998 $ 5,004,148 $ 85,183 $ 5,089,331
==========================================================================================
</TABLE>
(9) PREMISES AND EQUIPMENT
Premises and equipment are carried at cost less accumulated depreciation and are
summarized by major classification as follows:
December 31, 1998 1997
================================================================================
Land $ 2,845,423 $ 2,873,424
Office buildings and improvements 11,251,836 12,009,627
Furniture, fixtures, and equipment 9,640,835 9,155,258
- --------------------------------------------------------------------------------
23,738,094 24,038,309
Less: Accumulated depreciation (13,392,392) (13,581,129)
- --------------------------------------------------------------------------------
$ 10,345,702 $ 10,457,180
================================================================================
(10) INVESTMENT IN FEDERAL HOME LOAN BANK STOCK
The Bank is required to maintain an investment in the stock of the Federal Home
Loan Bank of Indianapolis (FHLB) in an amount equal to at least 1.0 percent of
the unpaid principal balances of the Bank's residential mortgage loans, 0.3
percent of its total assets, or 5.0 percent of its outstanding advances from the
FHLB, whichever is greater. Purchases and sales of stock are made directly with
the FHLB at par value.
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CFSB Bancorp, Inc., and Subsidiary
(11) DEPOSITS
Deposits represented by various types of programs are presented below:
<TABLE>
<CAPTION>
December 31, 1998 1997
- -----------------------------------------------------------------------------------------------------
Weighted Weighted
Average Rate Amount Average Rate Amount
=====================================================================================================
<S> <C> <C> <C> <C>
Regular savings 2.00% $ 66,462,778 2.16% $ 63,069,112
Money market savings 4.94 25,369,404 5.80 21,943,735
Consumer checking 1.66 113,385,403 1.77 93,339,386
Commercial checking -- 10,631,394 -- 9,616,043
Money market checking 3.42 50,121,679 3.81 50,099,329
- -----------------------------------------------------------------------------------------------------
2.32 265,970,658 2.60 238,067,605
Certificates of deposit 5.60 320,736,755 5.83 324,344,462
- -----------------------------------------------------------------------------------------------------
Total deposits 4.11% $586,707,413 4.47% $562,412,067
=====================================================================================================
</TABLE>
Accrued interest payable on deposits approximated $2,189,000 and
$2,434,000 at December 31, 1998 and 1997, respectively.
Contractual maturities of certificates of deposit are as follows:
<TABLE>
<CAPTION>
December 31, 1998 1997
- -----------------------------------------------------------------------------------------------------
Weighted Weighted
Average Rate Amount Average Rate Amount
=====================================================================================================
<S> <C> <C> <C> <C>
Maturing in
1998 5.76% $227,836,887
1999 5.56% $232,974,637 5.97 60,441,070
2000 5.61 50,548,862 6.15 19,800,311
2001 5.59 14,755,760 5.68 7,403,257
2002 5.99 8,553,018 6.01 8,023,975
2003 5.81 12,714,004 6.42 191,633
2004 and thereafter 6.04 1,190,474 5.81 647,329
- -----------------------------------------------------------------------------------------------------
5.60% $320,736,755 5.83% $324,344,462
=====================================================================================================
</TABLE>
Included in total certificates of deposit as of December 31, 1998 and 1997
are approximately $37,900,00 and $34,000,000, respectively, in certificates of
deposit of $100,000 or more in amount, with weighted average interest rates of
5.75 percent and 6.00 percent, respectively. Contractual maturities of
certificates of deposit of $100,000 or more in amount outstanding at December
31, 1998 are $6,900,000 within 3 months or less; $9,500,000 within 3 months to 6
months; $12,300,000 within 6 months to 12 months; and $9,200,000 for over 12
months.
At December 31, 1998, the Corporation had no brokered deposits.
By regulation, certain penalties are assessed depositors exercising early
certificate withdrawal privileges. These penalties are accounted for as offsets
to interest expense on deposits in the year they are incurred. Listed below are
interest expense and penalties for the years indicated.
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997 1996
==============================================================================================
<S> <C> <C> <C>
Interest on deposits (net of penalties):
Savings $ 1,354,826 $ 1,407,554 $ 1,592,132
Checking 4,696,926 4,522,875 3,842,849
Certificates of deposit 18,715,950 18,547,142 18,402,513
- ----------------------------------------------------------------------------------------------
$24,767,702 $24,477,571 $23,837,494
==============================================================================================
Penalties $ 88,000 $ 121,000 $ 102,000
==============================================================================================
</TABLE>
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CFSB Bancorp, Inc., and Subsidiary
(11) DEPOSITS - CONTINUED
The Corporation's interest rate exchange agreements were terminated in
November 1994. The remainder of the deferred loss was amortized in 1996. The
cost of the Corporation's interest rate exchange agreements was $106,927 during
the year ended December 31, 1996, and is included above as interest expense on
deposits. There were no costs associated with interest rate exchange agreements
in 1998 and 1997.
(12) ADVANCES FROM FEDERAL HOME LOAN BANK AND SECURITIES SOLD UNDER AGREEMENT TO
REPURCHASE
FHLB advances at December 31, 1998 and 1997 are secured by the Corporation's
investment in the stock of the Federal Home Loan Bank of Indianapolis, and
substantially all of its first mortgage loans are under a blanket collateral
agreement. Maturities and weighted average interest rates are as follows:
<TABLE>
<CAPTION>
December 31, 1998 1997
- -----------------------------------------------------------------------------------------------------
Weighted Weighted
Average Rate Amount Average Rate Amount
=====================================================================================================
<S> <C> <C> <C> <C>
Fixed-rate advances maturing in
1998 6.01% $ 61,357,552
1999 5.86% $ 22,165,257 6.07 71,165,257
2000 5.82 42,086,995 5.85 27,086,995
2001 5.73 44,295,559 6.59 11,295,559
2002 6.06 54,567,059 6.46 29,567,059
2003 5.31 46,132,512 6.13 1,132,512
2004 and thereafter 6.75 88,000 6.75 88,000
- -----------------------------------------------------------------------------------------------------
Total fixed-rate advances 5.76 209,335,382 6.11 201,692,934
Adjustable-rate advances maturing in
1998 5.70 11,000,000
1999 5.13 2,500,000
- -----------------------------------------------------------------------------------------------------
Total adjustable-rate advances 5.13 2,500,000 5.70 11,000,000
- -----------------------------------------------------------------------------------------------------
5.75% $211,835,382 6.09% $212,692,934
=====================================================================================================
</TABLE>
At December 31, 1998 and 1997, the portfolio of FHLB advances included
borrowings of $108,000,000 and $30,000,000, respectively, which are putable
advances. Commencing with the put date of the borrowing, the FHLB may, at its
option, convert such fixed-rate advances to an adjustable interest rate. If the
FHLB exercises its option, the Corporation may, at its option and without
prepayment penalty, repay such advances. These advances are classified as
fixed-rate advances and are assumed to mature in the year putable, unless the
current rate environment indicates it is unlikely the FHLB will put the advance,
then the put date is assumed to occur one year later.
At December 31, 1998 and 1997, the portfolio of FHLB advances included
borrowings of $1,000,000 and $1,650,000, respectively, which contractually the
Corporation may, at its option and without prepayment penalty, repay such
advances on the first anniversary date of each borrowing or semiannually
thereafter until maturity.
The Corporation had a $5,000,000 available but unused line of credit from
the FHLB at December 31, 1998 and 1997.
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CFSB Bancorp, Inc., and Subsidiary
(12) ADVANCES FROM FEDERAL HOME LOAN BANK AND SECURITIES SOLD UNDER AGREEMENT TO
REPURCHASE - CONTINUED
The Corporation's short term borrowings included securities sold under
agreement to repurchase, which generally mature within thirty days. Information
relating to securities sold under agreement to repurchase is summarized as
follows:
1998 1997 1996
================================================================================
At December 31: (Dollars in Thousands)
Balance $1,772 -- --
Weighted average interest rate paid 3.89% -- --
During the year:
Maximum outstanding at any month-end $1,859 -- --
Daily average 456 -- --
Weighted average interest rate paid 4.10% -- --
================================================================================
(13) FEDERAL INCOME TAXES
Federal income tax expense consists of:
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997 1996
========================================================================================================
<S> <C> <C> <C>
Current tax expense $ 6,162,000 $ 4,976,000 $ 2,500,000
Deferred benefit (350,000) -- (65,000)
- --------------------------------------------------------------------------------------------------------
Income tax expense in the statements of operations 5,812,000 4,976,000 2,435,000
Income tax expense (benefit) charged (credited)
directly to stockholders' equity:
Gains on securities available for sale (18,000) 50,000 74,000
ESOP dividends -- -- (29,000)
Exercise of stock options (93,000) -- (34,000)
- --------------------------------------------------------------------------------------------------------
$ 5,701,000 $ 5,026,000 $ 2,446,000
========================================================================================================
</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 assets and deferred tax liabilities are
summarized as follows:
December 31, 1998 1997
================================================================================
Deferred tax assets:
Allowance for losses on loans and real estate $ 1,781,000 $ 1,709,000
Postretirement benefits 555,000 552,000
Compensation and benefits 291,000 289,000
Premises and equipment 485,000 371,000
Other 235,000 273,000
- --------------------------------------------------------------------------------
Total gross deferred tax assets 3,347,000 3,194,000
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Excess of tax bad debt reserves over
base-year reserves (1,077,000) (1,255,000)
Unrealized gains on available-for-sale securities (143,000) (161,000)
Federal Home Loan Bank stock dividends (294,000) (285,000)
Deferred loan origination fees (656,000) (648,000)
Servicing rights (366,000) (141,000)
Other (176,000) (437,000)
- --------------------------------------------------------------------------------
Total gross deferred tax liabilities (2,712,000) (2,927,000)
- --------------------------------------------------------------------------------
Net deferred tax asset $ 635,000 $ 267,000
================================================================================
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CFSB Bancorp, Inc., and Subsidiary
(13) FEDERAL INCOME TAXES - CONTINUED
The deferred tax asset is subject to certain asset realization tests.
Management believes no valuation allowance is required at December 31, 1998 and
1997 due to the combination of potential recovery of tax previously paid and the
reversal of certain deductible temporary differences.
Federal income tax expense differs from the amounts computed using the
statutory federal income tax rate. The reasons for the differences are
summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997 1996
================================================================================
<S> <C> <C> <C>
Computed "expected" tax expense $ 6,180,000 $ 5,477,000 $ 2,680,000
Reduction resulting from:
Low-income housing tax credits (349,000) (360,000) (228,000)
Other, net (19,000) (141,000) (17,000)
- --------------------------------------------------------------------------------
$ 5,812,000 $ 4,976,000 $ 2,435,000
================================================================================
</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. The excess
of the Bank's December 31, 1995 tax bad debt reserves over its reserves as of
December 31, 1987 is being taken into taxable income on a ratable basis over a
six-year period beginning in 1998, and a deferred tax liability has been
recognized related to this amount. No deferred tax liability has been recognized
for the Bank's December 31, 1987 tax bad debt reserves of $8,500,000 since these
reserves would only be taken into taxable income under circumstances the
Corporation is not likely to encounter. Therefore, this temporary difference is
not expected to reverse in the foreseeable future.
(14) STOCK OPTION PLANS
In October 1990, the Corporation adopted the 1990 Stock Option Plan (1990 Plan)
for the benefit of directors, selected officers and other key employees. The
number of shares of common stock reserved for issuance under the 1990 Plan was
equal to 10 percent of the total number of common shares issued pursuant to the
Bank's conversion to capital stock form. The 1990 Plan provides for the granting
of options for up to 691,446 shares of the Corporation's common stock at the
fair market value at the time the options are granted. The 1990 Plan will remain
in effect until June 28, 2000. Each stock option granted under the 1990 Plan
must be exercised within ten years of the date the option was granted.
In April 1994, the Corporation adopted the 1994 Stock Option and Incentive
Plan (1994 Plan) to provide select employees and directors the opportunity to
acquire shares. The number of shares of common stock reserved for issuance under
the 1994 Plan was equal to 10 percent of the then-outstanding shares. The 1994
Plan provides for the granting of options for up to 900,642 shares of the
Corporation's common stock at the fair market value at the time the options are
granted. The 1994 Plan will remain in effect until April 19, 2004. Each stock
option granted under the 1994 Plan must be exercised within ten years of the
date the option was granted. The 1994 Plan provides that the Stock Option
Committee (Committee), appointed by the Corporation's Board of Directors, at its
discretion, may award restricted shares of the Corporation's common stock to
employees. Shares of the Corporation's common stock issued pursuant to the 1994
Plan are restricted for a period of no less than six months and no greater than
five years. The Committee determines the restrictions applicable to the award of
restricted stock, including, but not limited to, requirements of continuous
service for a specified term or the attainment of specific corporate,
divisional, or individual performance standards or goals. As of December 31,
1998, no restricted stock has been awarded.
42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CFSB Bancorp, Inc., and Subsidiary
(14) STOCK OPTION PLANS - CONTINUED
Both plans also provide for the granting of options with tandem stock
appreciation rights. Stock appreciation rights entitle the grantee to receive
cash equal to the excess of the market value of the shares at the date the right
is exercised over the exercised price. Upon exercise of a stock appreciation
right, the related option, or portion thereof, is canceled. An expense is
accrued for the amount by which the market value of the stock exceeds the option
price for each stock appreciation right outstanding. As of December 31, 1998, no
stock appreciation rights have been granted.
Financial Accounting Standard No. 123, which became effective for 1996,
requires pro forma disclosures for companies that do not adopt its fair value
accounting method for stock-based employee compensation. Accordingly, the
following pro forma information presents net income and earnings per share had
the Standard's fair value method been used to measure compensation cost for
stock option plans. There were no compensation costs recognized for stock
options during 1998, 1997 and 1996.
1998 1997 1996
================================================================================
Net income as reported $11,844,032 $10,672,528 $5,447,292
Pro forma net income 11,741,793 10,569,927 5,349,009
Basic earnings per share as reported 1.44 1.26 0.62
Pro forma basic earnings per share 1.43 1.25 0.61
Diluted earnings per share as reported 1.38 1.22 0.60
Pro forma diluted earnings per share 1.37 1.21 0.59
================================================================================
In future years, the pro forma effect of not applying this standard is
expected to increase as additional options are granted.
Options exercisable at December 31 are as follows:
1998 1997 1996
================================================================================
Number of options 318,595 349,528 364,231
Weighted average exercise price $ 2.48 $ 2.51 $ 2.41
================================================================================
For options granted during the years indicated, the weighted average fair
values at grant date are as follows:
1998 1997 1996
================================================================================
Options granted at market price:
Exercise Price $25.38 $13.05 $10.54
Fair value 3.62 2.39 3.08
================================================================================
The fair value of options granted during 1998, 1997 and 1996 is estimated
using the following weighted average information:
1998 1997 1996
================================================================================
Risk-free interest rate 4.72% 5.78% 5.42%
Expected life 7 years 7 years 10 years
Expected volatility of stock price 21.19% 18.97% 17.01%
Expected dividends 2.00% 2.00% 2.00%
================================================================================
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CFSB Bancorp, Inc., and Subsidiary
(14) STOCK OPTION PLANS - CONTINUED
At December 31, 1998, options outstanding were as follows:
<TABLE>
================================================================================
<S> <C>
Number of options 497,891
Range of exercise price $2.10 - $25.57
Weighted average exercise price $5.43
Weighted average remaining option life 3.68 years
For options now exercisable:
Number 318,595
Weighted average exercise price $2.48
================================================================================
</TABLE>
The following table summarizes outstanding grants and stock option
transactions for the three years ended December 31, 1998:
<TABLE>
<CAPTION>
Number of Shares Average Exercise Price
================================================================================
<S> <C> <C>
Options outstanding at December 31, 1995 628,574 $ 5.07
Options exercised (50,929) 2.24
Options forfeited (721) 8.02
Options granted 19,591 10.54
- --------------------------------------------------------------------------------
Options outstanding at December 31, 1996 596,515 5.48
Options exercised (25,574) 4.11
Options forfeited (24,185) 10.37
Options granted 13,087 13.05
- --------------------------------------------------------------------------------
Options outstanding at December 31, 1997 559,843 5.52
Options exercised (39,868) 4.63
Options forfeited (24,351) 10.64
Options granted 2,267 25.38
- --------------------------------------------------------------------------------
Options outstanding at December 31, 1998 497,891 $ 5.43
================================================================================
</TABLE>
At December 31, 1998, 712,685 shares were available for future grants.
(15) EMPLOYEE STOCK OWNERSHIP PLAN
In conjunction with the plan of conversion, the Corporation's Board of Directors
approved a noncontributory Employee Stock Ownership Plan (ESOP) for
substantially all employees. The ESOP acquired 364,398 and 119,147 shares of
common stock in June 1990 and December 1991, respectively, for $1,260,000 and
$595,088, respectively, financed by loans payable to a nonaffiliated bank. The
loan agreements are secured by pledges of the Corporation's common stock owned
by the ESOP and purchased with the proceeds from these loans. The Corporation
does not guarantee the debt.
On April 25, 1994, the ESOP borrowed from the Corporation funds totaling
$1,097,095, which were used to repay debt outstanding to the nonaffiliated bank.
The repayment schedules for the new loans are the same as those contained in the
original loan agreements; however, the new agreements provide for the payment of
no interest on the unpaid principal balances. As of December 31, 1998, the
outstanding loan balances are reflected as a reduction in stockholders' equity.
44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CFSB Bancorp, Inc., and Subsidiary
(15) EMPLOYEE STOCK OWNERSHIP PLAN - CONTINUED
The Corporation's contribution to the ESOP was approximately $153,000,
$232,000 and $147,000 for the years ended December 31, 1998, 1997 and 1996,
respectively. These amounts were charged to expense in the accompanying
consolidated statements of operations. Dividends on shares not allocated to
participants and held by the ESOP are utilized to service the ESOP debt and are
tax-deductible by the Corporation to the extent they are utilized to repay the
outstanding principal of the debt. Contributions from dividends on shares held
by the ESOP approximated $85,000 for the year ended December 31, 1996. There
were no contributions in 1998 and 1997.
(16) PENSION PLAN AND OTHER RETIREMENT BENEFITS
Employees' Deferred Savings Plan and Deferred Savings Plan
The Bank's Employees' Deferred Savings Plan and Deferred Savings Plan (401(k)
plans) cover substantially all of its employees who have attained the age of 21,
have completed at least one year of service, and are a full-time or part-time
employee who has worked at least 1,000 hours during such plan year. Eligible
employees may contribute up to 18 percent of their annual compensation, subject
to certain maximums established by the Internal Revenue Service. The Corporation
will match up to 50 percent of the first 4 percent of the employees'
compensation deferred each year. In 1994, in addition to providing matching
funds under the 401(k) plans, the Bank established a discretionary
profit-sharing plan whereby eligible employees, regardless of their level of
participation in the 401(k) plans, received a contribution to their 401(k)
account in an amount equal to 2 percent of their compensation. The Corporation's
cost of these plans for the years ending December 31, 1998, 1997 and 1996, was
approximately $184,000, $141,000 and $176,000, respectively.
Financial Institutions Retirement Fund
The former Union Federal Savings (Union), which was merged into the Bank in
December 1991, was a participant in the multiple employer Financial Institutions
Retirement Fund (FIRF or the Fund), and substantially all of its officers and
employees were covered by the plan. FIRF provides benefits based on basic
compensation and years of service for employees age 21 and over after one year
of service. Union's contributions were determined by FIRF and generally
represented the normal cost of the Fund.
Union's participation in the FIRF was withdrawn effective February 29,
1992; therefore, no subsequent contributions have been required. Employee
participants were given the election to either choose continued participation
with the FIRF or to transfer the accrued benefit into the Bank's 401(k) plans.
Transfer of excess plan assets to the Bank's 401(k) plans occurred during 1993
and 1994 and are periodically allocated to remaining eligible participants as an
employer contribution. Remaining excess plan assets were allocated to eligible
participants in 1998.
Postretirement Benefits
The Bank's Employees' Retirement Health Care and Life Insurance Plan
(Postretirement Plan) is a contributory defined benefit postretirement health
care plan which covers substantially all employees of the Bank and their covered
dependents. Eligibility for benefits from the Postretirement Plan is age 60 with
at least 25 years of service with the Bank and active employment at retirement.
Retirees' contributions to the Postretirement Plan vary based upon the retiree's
age and election of coverage.
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CFSB Bancorp, Inc., and Subsidiary
(16) PENSION PLAN AND OTHER RETIREMENT BENEFITS - CONTINUED
Components of net periodic postretirement benefit cost for the years
indicated are as follows:
Years Ended December 31, 1998 1997 1996
================================================================================
Service cost $26,077 $22,645 $21,209
Interest cost 51,142 53,107 47,523
- --------------------------------------------------------------------------------
Net periodic postretirement benefit cost $77,219 $75,752 $68,732
================================================================================
The weighted average discount rate used in determining the net periodic
postretirement benefit cost for 1998, 1997 and 1996 was 7.00 percent, 7.50
percent and 7.25 percent, respectively. Additionally, in determining the net
periodic postretirement benefit cost, in 1998 there was a health care inflation
assumption of 9.80 percent, grading down uniformly to 5.00 percent in 2005 and
all years thereafter. A health care inflation assumption of 10.41 percent,
grading down uniformly to 5.50 percent in 2005 and all years thereafter, was
used in 1997. The dental inflation assumption was 5.00 percent in 1998 and 1997.
The following sets forth the plans' benefit obligations, fair value of
plan assets, and funded status:
December 31, 1998 1997
================================================================================
Change in benefit obligation:
Benefit obligation at beginning of year $ 759,312 $ 739,368
Service cost 26,077 22,645
Interest cost 51,142 53,107
Actuarial (gain)/loss 5,039 (3,867)
Benefits paid (50,793) (51,941)
- --------------------------------------------------------------------------------
Benefit obligation at end of year 790,777 759,312
Plan assets at fair value -- --
- --------------------------------------------------------------------------------
Unfunded status 790,777 759,312
Unrecognized net gains/(losses) from
experience different from that assumed (20,647) (15,609)
- --------------------------------------------------------------------------------
Accrued postretirement benefit cost $ 770,130 $ 743,703
================================================================================
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation at December 31, 1998 and 1997, was 6.75
percent and 7.00 percent, respectively.
For measurement purposes at December 31, 1998, the health care
inflation rate is assumed to decline uniformly from 9.06 percent per year
presently to 5.00 percent per year in 2005 and all years thereafter. The dental
inflation assumption is 5.00 percent per year in all future years.
At December 31, 1997, for measurement purposes, the health care
inflation rate is assumed to decline uniformly from 9.80 percent per year to
5.00 percent per year in 2005 and all years thereafter. The dental inflation
assumption is 5.00 percent per year in all future years.
Assumed health care cost trend rates have an effect on the amounts
reported for the health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:
1-Percentage- 1-Percentage-
Point Increase Point Decrease
================================================================================
Effect on total of service and
interest cost components $ 231 $ (234)
Effect on postretirement benefit
obligation 2,731 (2,744)
================================================================================
46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CFSB Bancorp, Inc., and Subsidiary
(17) REGULATORY MATTERS
The Bank is subject to regulatory capital requirements administered by federal
regulatory agencies. Capital adequacy guidelines and prompt corrective action
regulations involve quantitative measures of assets, liabilities and certain
off-balance-sheet items calculated under regulatory accounting practices.
Capital amounts and classifications are also subject to qualitative judgments by
regulators about components, risk weightings and other factors, and the
regulators can lower classifications in certain cases. Failure to meet various
capital requirements can initiate regulatory action that could have a direct
material effect on the consolidated financial statements.
The prompt corrective action regulations provide five classifications,
including well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized, although these
terms are not used to represent overall financial condition. If adequately
capitalized, regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required.
At year-end, actual capital levels (in millions) and minimum required
levels were:
<TABLE>
<CAPTION>
Minimum Required
Minimum Required To Be Well Capitalized
for Capital Under Prompt-
Actual Adequacy Purposes Corrective-Action Regulations
- -------------------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
==============================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
1998
Total capital (to risk-weighted assets) $ 71.8 14.1% $ 40.9 8.0% $ 51.1 10.0%
Tier 1 (core) capital
(to risk-weighted assets) 66.8 13.1 20.4 4.0 30.6 6.0
Tier 1 (core) capital
(to adjusted total assets) 66.8 7.6 26.4 3.0 43.9 5.0
Tangible capital
(to adjusted total assets) 66.8 7.6 13.2 1.5 N/A N/A
- -------------------------------------------------------------------------------------------------------------------------------
1997
Total capital (to risk-weighted assets) $ 69.7 13.8% $ 40.5 8.0% $ 50.6 10.0%
Tier 1 (core) capital
(to risk-weighted assets) 65.0 12.8 20.2 4.0 30.4 6.0
Tier 1 (core) capital
(to adjusted total assets) 65.0 7.6 25.5 3.0 42.6 5.0
Tangible capital
(to adjusted total assets) 65.0 7.6 12.8 1.5 N/A N/A
==============================================================================================================================
</TABLE>
The Bank, at December 31, 1998 and 1997, was categorized as well
capitalized.
47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CFSB Bancorp, Inc., and Subsidiary
(17) REGULATORY MATTERS - CONTINUED
The following is a reconciliation of the Corporation's consolidated
stockholders' equity for financial reporting purposes to the Bank's consolidated
tangible, core and risk-based capital available to meet its regulatory
requirements:
December 31, 1998 1997
================================================================================
Corporation's stockholders' equity
as reported in the accompanying
consolidated financial statements $ 69,277,321 $ 67,534,790
Plus (less):
Capitalization of parent company (2,234,277) (2,266,491)
Unrealized gains on available-for-sale
securities, net of tax (269,897) (312,597)
- --------------------------------------------------------------------------------
Tangible and core capital 66,773,147 64,955,702
Plus supplementary capital:
General loss reserves 5,004,148 4,730,407
- --------------------------------------------------------------------------------
Risk-based capital $ 71,777,295 $ 69,686,109
================================================================================
The Bank may not declare or pay cash dividends on, or purchase, any of its
shares of common stock if the effect thereof would cause stockholders' equity to
be reduced below applicable regulatory capital maintenance requirements, or if
such declaration and payment would otherwise violate regulatory requirements.
(18) EARNINGS PER SHARE
In February 1997 the FASB issued SFAS No. 128, Earnings Per Share (SFAS 128).
SFAS 128 specifies the computation, presentation and disclosure requirements for
earnings per share. It replaces primary earnings per share and fully diluted
earnings per share with basic earnings per share and diluted earnings per share.
Effective December 31, 1997, the Corporation adopted SFAS 128. Diluted earnings
per share of common stock are based on the weighted average number of common
shares and common share equivalents outstanding during the year. The effect of
common stock equivalent shares applicable to employees' and directors' stock
options has been included in the calculation of diluted earnings per share for
1998, 1997 and 1996 because their impact was dilutive. The weighted average
number of common and common equivalent shares used in the calculation of diluted
earnings per share for 1997 and 1996 was restated to give retroactive effect to
the 10 percent stock dividend declared May 19, 1998.
There are no reconciling items when calculating basic earnings per share.
A reconciliation of diluted earnings per share for the years ended December 31,
follows:
Years Ended December 31, 1998 1997 1996
================================================================================
Net earnings applicable to common stock $11,844,032 $10,672,528 $5,447,292
================================================================================
Average number of shares outstanding 8,202,087 8,440,388 8,815,161
Effect of dilutive securities -
stock options 385,588 334,633 258,113
- --------------------------------------------------------------------------------
8,587,675 8,775,021 9,073,274
================================================================================
Diluted earnings per share $ 1.38 $ 1.22 $ 0.60
================================================================================
48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CFSB Bancorp, Inc., and Subsidiary
(19) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In the normal course of business, to meet the financing needs of its customers
and to reduce its own exposure to fluctuations in interest rates, the
Corporation is a party to financial instruments with off-balance-sheet risk.
These financial instruments include commitments to extend credit and letters of
credit. Those instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the accompanying
consolidated statements of financial condition. The contract or notional amounts
of those instruments reflect the extent of involvement the Corporation has in
particular classes of financial instruments.
The Corporation's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to extend credit
and letters of credit is represented by the contractual amount of that
instrument. The Corporation uses the same credit policies in making commitments
as it does for on-balance-sheet instruments.
Financial instruments whose contract amounts represent credit risk at
December 31, 1998 and 1997, are as follows:
1998 1997
================================================================================
Commitments to extend credit $147,927,000 $ 82,305,000
Letters of credit 228,000 440,000
================================================================================
Notional values of off-balance-sheet financial instruments significantly
exceeded the amount of credit risk associated with these instruments.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Because many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Corporation applies the same
credit standards used in the lending process when extending these commitments
and evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Corporation upon
extension of credit, is based on management's credit evaluation of the
counterparty. Collateral held varies, but may include residential real estate
and income-producing commercial properties.
Letters of credit written are conditional commitments issued by the
Corporation to guarantee the performance of a customer to a third party. Most
guarantees extend for one year and expire in decreasing amounts through October
7, 1999. The extent of collateral held on those commitments at December 31, 1998
is equal to or in excess of the committed amount.
49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CFSB Bancorp, Inc., and Subsidiary
(20) CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
The statements of financial condition at December 31, 1998 and 1997, and the
statements of operations and cash flows for the years ended December 31, 1998,
1997 and 1996 of CFSB Bancorp, Inc., follow:
Statements of Financial Condition
<TABLE>
<CAPTION>
December 31, 1998 1997
================================================================================
<S> <C> <C>
Assets:
Cash on deposit at subsidiary bank $ 1,304,727 $ 77,505
Investment in subsidiary bank 67,043,044 65,268,299
Dividends receivable from subsidiary bank 734,336 1,767,318
Other assets 1,758,104 1,884,227
- --------------------------------------------------------------------------------
Total assets $ 70,840,211 $ 68,997,349
================================================================================
Liabilities:
Dividends payable to stockholders $ 1,060,107 $ 912,897
Other liabilities 502,783 549,662
- --------------------------------------------------------------------------------
Total liabilities 1,562,890 1,462,559
- --------------------------------------------------------------------------------
Stockholders' Equity:
Common stock 81,735 76,555
Additional paid-in capital 63,770,944 48,377,350
Retained income 5,464,366 20,011,874
Accumulated other comprehensive income of
subsidiary bank, net of tax 269,897 312,597
Employee Stock Ownership Plan (74,387) (227,522)
Treasury stock (235,234) (1,016,064)
- --------------------------------------------------------------------------------
Total stockholders' equity 69,277,321 67,534,790
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 70,840,211 $ 68,997,349
================================================================================
</TABLE>
<TABLE>
<CAPTION>
Statements of Operations
Years Ended December 31, 1998 1997 1996
=================================================================================================================
<S> <C> <C> <C>
Income:
Dividends from subsidiary bank $ 11,932,981 $ 5,141,733 $ 6,342,950
Loss on equity investment (159,516) (92,754) (108,153)
- -----------------------------------------------------------------------------------------------------------------
Total operating income 11,773,465 5,048,979 6,234,797
Expenses:
Compensation, payroll taxes and fringe benefits 322,189 401,105 312,954
Other operating expenses 298,334 297,325 208,621
- -----------------------------------------------------------------------------------------------------------------
Total operating expenses 620,523 698,430 521,575
- -----------------------------------------------------------------------------------------------------------------
Income before equity in undistributed net
income of subsidiary bank 11,152,942 4,350,549 5,713,222
Equity in undistributed net income of subsidiary bank 691,090 6,321,979 (265,930)
- -----------------------------------------------------------------------------------------------------------------
Net income $ 11,844,032 $ 10,672,528 $ 5,447,292
=================================================================================================================
</TABLE>
50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CFSB Bancorp, Inc., and Subsidiary
(20) CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY - CONTINUED
<TABLE>
<CAPTION>
Statements of Cash Flows
Years Ended December 31, 1998 1997 1996
============================================================================================
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income $ 11,844,032 $ 10,672,528 $ 5,447,292
Adjustments to reconcile net income:
Loss (equity) in undistributed net income
of subsidiary bank (691,089) (6,321,979) 265,930
Decrease (increase) in other assets 126,123 (59,175) 129,969
Increase in other liabilities 106,255 253,424 217,059
- --------------------------------------------------------------------------------------------
Net cash provided by operating activities 11,385,321 4,544,798 6,060,250
- --------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Proceeds from stock options exercised 185,200 105,165 114,674
Purchases of treasury stock (6,317,707) (2,777,983) (4,089,237)
Dividends paid on common stock (4,025,592) (2,916,568) (2,107,991)
- --------------------------------------------------------------------------------------------
Net cash used by financing activities (10,158,099) (5,589,386) (6,082,554)
- --------------------------------------------------------------------------------------------
Net increase (decrease) in cash 1,227,222 (1,044,588) (22,304)
Cash at beginning of period 77,505 1,122,093 1,144,397
- --------------------------------------------------------------------------------------------
Cash at end of period $ 1,304,727 $ 77,505 $ 1,122,093
============================================================================================
</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 flows. In that regard, the derived fair-value estimates
cannot be substantiated by comparison to independent markets and, in many cases,
could not be realized in immediate settlement of the instrument.
Fair-value methods and assumptions for the Corporation's financial
instruments are as follows:
Cash and Cash Equivalents - The carrying amounts reported in the
consolidated statements of financial condition for cash and interest-earning
deposits with the Federal Home Loan Bank and other depository institutions
reasonably approximate those assets' fair values.
Investment and Mortgage-Backed Securities - Fair values for investment and
mortgage-backed securities are based on quoted market prices.
Loans Receivable - For adjustable-rate loans that reprice frequently and
with no significant change in credit risk, fair values are generally based on
carrying values. The fair values for fixed-rate one-to-four family residential
mortgage loans, income-producing property loans and consumer loans are estimated
using discounted cash flow analyses, using interest rates currently being
offered for loans with similar terms and similar credit quality. The carrying
amount of accrued interest receivable approximates its fair value.
Deposit Liabilities - The fair value of deposits with no stated maturity,
such as savings, checking and money market accounts, is equal to the amount
payable on demand as of December 31, 1998 and 1997. The fair value of
certificates of deposit is based on the discounted value of contractual cash
flows. The discount rate is estimated using the rates currently offered by the
Corporation for deposits of similar remaining maturities. The fair value of
accrued interest payable approximates its carrying value.
51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CFSB Bancorp, Inc., and Subsidiary
(21) FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
Deposit Liabilities, continued - The fair-value estimates of deposit
liabilities do not include the benefit that results from the low-cost funding
provided by the deposit liabilities compared to the cost of borrowing funds in
the market.
Federal Home Loan Bank Advances and Securities Sold Under Agreement to
Repurchase - The fair value of the Corporation's borrowings are estimated using
discounted cash flow analyses, based on the Corporation's current incremental
borrowing rates for similar types of borrowing arrangements.
Off-Balance-Sheet Instruments - The fair value of commitments to extend
credit is estimated using the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
present creditworthiness of the counterparties. For fixed-rate loan commitments,
fair value also considers the difference between current levels of interest
rates and the committed rates.
The estimated fair value of the Corporation's financial instruments at
December 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
Carrying Value Estimated Fair Value Carrying Value Estimated Fair Value
=================================================================================================================================
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term interest-earning deposits $ 21,941,227 $ 21,900,000 $ 18,489,494 $ 18,500,000
Investment securities 22,018,800 22,000,000 26,079,688 26,100,000
Mortgage-backed securities 16,006,538 16,000,000 21,597,690 21,600,000
Loans receivable, net 786,411,364 811,300,000 754,806,061 765,900,000
Accrued interest receivable 4,380,539 4,400,000 4,910,200 4,900,000
- ---------------------------------------------------------------------------------------------------------------------------------
Financial liabilities:
Savings, checking and money market accounts 265,970,658 266,000,000 238,067,605 238,100,000
Certificates of deposit 320,736,755 322,900,000 324,344,462 325,400,000
Advances from Federal Home Loan Bank and
securities sold under agreement to repurchase 213,607,417 215,300,000 212,692,934 214,200,000
Accrued interest payable 2,760,854 2,800,000 3,043,923 3,000,000
- ---------------------------------------------------------------------------------------------------------------------------------
Off-balance-sheet items:
Commitments to extend credit -- -- -- --
=================================================================================================================================
</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.
52
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
CFSB Bancorp, Inc., and Subsidiary
(22) QUARTERLY FINANCIAL INFORMATION (unaudited)
The following is a summary of quarterly financial information for the years
ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
March 31 June 30 September 30 December 31
(Dollars in Thousands, Except Per Share Data)
====================================================================================================================================
<S> <C> <C> <C> <C>
1998
Interest income $ 15,548 $ 15,552 $ 15,686 $ 15,776
Net interest income 6,406 6,543 6,505 6,507
Provision for loan losses 98 97 97 98
Income before federal income tax expense 4,189 4,817 4,323 4,327
Net income 2,830 3,209 2,870 2,935
Earnings per share(1):
Basic .34 .39 .35 .36
Diluted .33 .37 .34 .34
Stock price range(1) $22.27 - 29.09 $24.77 - 28.75 $20.25 - 29.00 $20.00 - 25.00
====================================================================================================================================
1997
Interest income $ 15,171 $ 15,459 $ 15,879 $ 15,992
Net interest income 6,215 6,344 6,466 6,345
Provision for loan losses 90 90 90 90
Income before federal income tax expense 3,373 4,056 4,138 4,082
Net income 2,307 2,796 2,801 2,769
Earnings per share(1):
Basic .27 .33 .34 .33
Diluted .26 .32 .32 .32
Stock price range(1) $10.47 - 12.26 $11.71 - 15.00 $14.09 - 18.79 $17.42 - 23.86
====================================================================================================================================
</TABLE>
(1) Per share data was restated to give retroactive effect to the 3-for-2
stock split declared November 18, 1997 and the 10% stock dividends
declared May 19, 1998 and May 20, 1997.
(23) SUBSEQUENT EVENT
On February 24, 1999, the Corporation entered into an Agreement and Plan of
Merger (the Merger Agreement) with Old Kent Financial Corporation (Old Kent),
pursuant to which the Corporation is expected to merge with and into Old Kent
(the Merger). As a result of the Merger, each outstanding share of the
Corporation's common stock, par value $0.01 per share (the Corporation Common
Stock), will be converted into the right to receive 0.6222 shares of common
stock of Old Kent, par value $1 per share (Old Kent Common Stock). The Merger is
conditioned upon, among other things, approval by holders of a majority of the
Corporation Common Stock and the receipt of certain regulatory and governmental
approvals. It is intended that the Merger will be treated as a
pooling-of-interests for accounting and financial reporting purposes.
Concurrently with their execution and delivery of the Merger Agreement,
Old Kent and the Corporation entered into a stock option agreement (the Stock
Option Agreement) pursuant to which the Corporation granted Old Kent the right,
upon the terms and subject to the conditions set forth in the Stock Option
Agreement, to purchase up to 1,645,364 shares (or 19.99%) of the Corporation
Common Stock at a price of $21.00 per share, subject to certain adjustments.
53
<PAGE>
QUARTERLY STOCK PRICE AND DIVIDEND INFORMATION
CFSB Bancorp, Inc., and Subsidiary
Quarterly stock prices and dividends declared are shown in the table below:
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends Dividends
High Low Close Declared High Low Close Declared
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Quarter
First $29.09 $22.27 $26.82 $ 0.12 $12.26 $10.47 $11.71 $ 0.08
Second 28.75 24.77 28.75 0.13 15.00 11.71 14.09 0.09
Third 29.00 20.25 22.75 0.13 18.79 14.09 17.50 0.10
Fourth 25.00 20.00 24.38 0.13 23.86 17.42 23.86 0.11
- ------------------------------------------------------------------------------------------------------------------------------------
Year $29.09 $20.00 $24.38 $ 0.51 $23.86 $10.47 $23.86 $ 0.38
====================================================================================================================================
</TABLE>
On May 19, 1998 a 10 percent stock dividend payable on June 12, 1998 to
stockholders of record on May 29, 1998 was declared. On November 18, 1997, the
Corporation's board of directors declared a 3-for-2 stock split payable on
December 18, 1997 to stockholders of record on December 1, 1997. On May 20, 1997
a 10 percent stock dividend payable on June 16, 1997 to stockholders of record
on May 30, 1997 was declared. As a result, per share amounts have been restated
for all periods to reflect the stock split and the stock dividends.
CFSB Bancorp, Inc.'s common stock trades on The Nasdaq Stock Market SM
under the symbol CFSB.
As of December 31, 1998, there were 8,163,068 shares of common stock
issued and outstanding.
As of February 26, 1999, there were approximately 1,261 stockholders of
record which does not include stockholders holding their stock in street name or
nominee's name.
54
<PAGE>
STOCKHOLDER INFORMATION
- --------------------------------------------------------------------------------
Corporate Headquarters
CFSB Bancorp, Inc.
112 East Allegan Street
Lansing, MI 48933
(517) 374-3550
Fax (517) 374-3557
Wholly Owned Subsidiary
Community First Bank
112 East Allegan Street
Lansing, Michigan 48933
(517) 371-2911
Stock Transfer Agent & Registrar
Registrar and Transfer Company
Investor Relations
10 Commerce Drive
Cranford, New Jersey 07016
(800) 368-5948
Dividend Reinvestment Plan
CFSB Bancorp, Inc. offers a Dividend Reinvestment and Stock Purchase Plan to
stockholders. The plan provides participating stockholders with a convenient way
to purchase additional shares of CFSB Bancorp common stock by reinvesting the
cash dividends paid on their shares. Participants may also purchase additional
shares by making an optional cash payment of $50 to $3,000. There are no fees or
commissions charged on shares purchased through the Plan. If you are interested
in learning more about the Dividend Reinvestment and Stock Purchase Plan, please
contact the Marketing Department at (517) 374-3569.
Annual Meeting
The annual meeting of stockholders for the year ended December 31, 1998 will be
held at the Sheraton Lansing Hotel, 925 South Creyts Road, Lansing, Michigan, on
Tuesday, April 20, 1999, at 11:00 a.m.
Form 10-K
The Corporation's 1998 Annual Report on Form 10-K as filed with the Securities
and Exchange Commission will be provided without charge to stockholders upon
request. Send requests to the Marketing Department at CFSB Bancorp Inc., 112
East Allegan Street, Lansing, Michigan 48933, or call (517) 374-3569.
55
<PAGE>
OFFICERS
- --------------------------------------------------------------------------------
CFSB Bancorp, Inc.,
James L. Reutter, Chairman
Robert H. Becker, President & Chief Executive Officer
John W. Abbott, Executive Vice President,
Chief Operating Officer & Secretary
Rick L. Laber, Vice President, Chief Financial Officer & Treasurer
COMMUNITY FIRST BANK
- --------------------------------------------------------------------------------
Executive Officers
Robert H. Becker, President & Chief Executive Officer
John W. Abbott, Executive Vice President,
Chief Operating Officer & Secretary
Jack G. Nimphie, Senior Vice President & Director of Operations
C. Wayne Weaver, Senior Vice President & Director of Retail Banking
JaneMarie Judge McMillian, Vice President &
Director of Human Resources
Rick L. Laber, Vice President, Chief Financial Officer & Treasurer
Sally A. Peters, Vice President & Director of Marketing
OTHER OFFICERS
- --------------------------------------------------------------------------------
Vice Presidents
Richard J. Benson, Manager of Data Processing
S. Mark Guastella, Branch Administrator
David A. Huson, Manager of Central Operations
James S. Leenstra, Commercial Real Estate Loan Officer
Carole A. Rush-Witt, Manager of Residential Lending
Douglas W. Sutton, Manager of Consumer Lending
Rodney W. Weaver, Manager of Residential Lending Operations
Assistant Vice Presidents
Brenda G. Bartowiak, Williamston Branch Manager
Rhonda A. Curtis, Ionia Branch Manager
Julie M. Farrar, Manager of Construction Lending
Kevin J. Fedewa, St. Johns Area Branch Manager
Michael C. Fildey, Operations Service Manager
Dan O. Kares, Commercial Loan Officer
Paul L. Kelsey, East Lansing Area Branch Manager
R. Anthony Payne, West Saginaw Area Branch Manager
Joseph F. Szombati, Grand Ledge Area Branch Manager
Glenn R. Varlesi, South Cedar Area Branch Manager
Michelle L. Warfle, Mason Branch Manager
Robert D. Warnke, Metro Area Branch Manager &
Manager of Retirement Accounts
Gail M. Williams, Charlotte Branch Manager
Crystal D. Yaw, DeWitt Branch Manager
Managers
Stanley J. Gorecki, Controller
William E. Johnson, Data Processing Operations Manager
Ronald M. Pioch, Manager of Internal Control and Compliance
Kathy S. Richards, Application Software Support Manager
Lori A. Smith, Consumer Loan Officer
Theodore M. Terzian, Community First Insurance and
Investment Services Manager
BOARD OF DIRECTORS
[PHOTO]
James L. Reutter,
Chairman of the Board,
CFSB Bancorp, Inc.
Chairman, Lansing Ice and
Fuel Company
Lansing, Michigan
[PHOTO]
Robert H. Becker
President and Chief Executive Officer,
CFSB Bancorp, Inc.
Lansing, Michigan
[PHOTO]
David H. Brogan
Agent, Ohio National Life
Insurance Company
Lansing, Michigan
[PHOTO]
William C. Hollister
President, Basic Insight
East Lansing, Michigan
[PHOTO]
Cecil Mackey
Professor of Economics,
Michigan State University
East Lansing, Michigan
[PHOTO]
J. Paul Thompson, Jr.
President,
Computer Graphics, Inc.
DeWitt, Michigan
[PHOTO]
Henry W. Wolcott, IV
Shareholder,
Public Accounting Firm of
Kutas, Hawes & Wolcott, P.C.
Lansing, Michigan
56
<PAGE>
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.
Community First also owns 100% of the common stock of Community First
Mortgage Corporation, a Michigan Corporation, which was formed on January 2,
1998.
<PAGE>
EXHIBIT 23
[LETTERHEAD OF KPMG LLP]
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 19,
1999, except as to note 23, which is as of February 24, 1999, relating to the
consolidated statements of financial condition of CFSB Bancorp, Inc. and
subsidiary as of December 31, 1998 and 1997, 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, 1998, which report appears in
the December 31, 1998, Annual Report on Form 10-K of CFSB Bancorp, Inc.
/s/ KPMG LLP
March 18, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 11,694,940
<INT-BEARING-DEPOSITS> 10,246,287
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 38,025,338
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 786,411,364
<ALLOWANCE> 5,004,148
<TOTAL-ASSETS> 880,346,715
<DEPOSITS> 586,707,413
<SHORT-TERM> 26,437,292
<LIABILITIES-OTHER> 10,754,564
<LONG-TERM> 187,170,125
0
0
<COMMON> 63,852,679
<OTHER-SE> 5,424,642
<TOTAL-LIABILITIES-AND-EQUITY> 880,346,715
<INTEREST-LOAN> 58,166,166
<INTEREST-INVEST> 2,422,146
<INTEREST-OTHER> 1,973,311
<INTEREST-TOTAL> 62,561,623
<INTEREST-DEPOSIT> 24,767,702
<INTEREST-EXPENSE> 36,601,042
<INTEREST-INCOME-NET> 25,960,581
<LOAN-LOSSES> 390,000
<SECURITIES-GAINS> 2,362
<EXPENSE-OTHER> 16,223,694
<INCOME-PRETAX> 17,656,032
<INCOME-PRE-EXTRAORDINARY> 11,844,032
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,844,032
<EPS-PRIMARY> 1.44
<EPS-DILUTED> 1.38
<YIELD-ACTUAL> 3.10
<LOANS-NON> 611,080
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 18,443
<ALLOWANCE-OPEN> 4,730,407
<CHARGE-OFFS> 167,493
<RECOVERIES> 51,234
<ALLOWANCE-CLOSE> 5,004,148
<ALLOWANCE-DOMESTIC> 2,389,949
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,614,199
</TABLE>
