<PAGE>
FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------------------
(Mark one)
(X) Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the quarterly period ended June 30, 1996, 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: 0-20742
CB BANCORP, INC
Delaware 35-1866127
- ----------------------------------- -------------
(State or other jurisdiction (I.R.S. Employee
of incorporation or organization) Identification
Number)
126 E Fourth Street
- -------------------
Michigan City, Indiana 46360
- ---------------------- -----
(Address of principal (Zip code)
executive office)
Registrant's telephone number, including area code:(219) 873-2800
--------------
Check whether the issuer (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.
(1) Yes X . No .
------- -------
(2) Yes X . No .
------- -------
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
for the issuer's classes of common stock as of the latest practicable date.
Common Stock 1,175,226 Shares
------------ -------------------
(Class) (Outstanding)
<PAGE>
CB BANCORP, INC.
FORM 10-QSB
INDEX
PART I. FINANCIAL INFORMATION PAGE
- ------------------------------ ----
Item 1. Financial Statements
Consolidated Balance Sheets, 1
June 30, 1996 and March 31, 1996
Consolidated Statements of Income, 2
Three Months Ended June 30,
1996 and 1995
Consolidated Statements of Changes in Share- 3
holders' Equity, Three Months Ended
June 30, 1996 and 1995
Consolidated Statements of Cash Flows, 4-5
Three Months Ended June 30, 1996
and 1995
Notes to Financial Statements 6-11
Item 2. Management's Discussion and Analysis of Financial 12-20
Condition and Results of Operations.
PART II. OTHER INFORMATION
- ------- -----------------
Item 1 Legal Proceedings 21
Item 2-5 N/A 21
Item 6 Exhibits and Reports on Form 8-K 21
Signature Page 22
<PAGE>
CB BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, March 31,
1996 1996
--------- ----------
ASSETS: (In thousands)
<S> <C> <C>
Cash and due from financial institutions $ 4,813 $ 4,755
Interest-earning deposits in financial institutions-Short Term 129 1,308
-------- --------
Cash and cash equivalents 4,942 6,063
Securities available-for-sale (reported at fair value (Note 2) 622 621
Securities held-to-maturity (fair value: June 30, 1996 - 5,996 5,675
$5,933; March 31, 1996-$5,644) (Note 2)
Other Securities-Federal Home Loan Bank Stock (Note 2) 2,702 2,702
Mortgage-backed and related securities held-to-maturity (fair value:
June 30, 1996-$9,763; March 31, 1995-$10,282) (Note 3) 9,736 10,192
Loans
Loans purchased under agreements to resell (Note 5) 72,866 80,031
Loans receivable 90,877 92,616
Less: Allowance for possible loan losses (1,573) (1,346)
-------- --------
162,170 171,301
Mortgage loans held for sale 1,051 513
Accrued interest receivable 1,188 1,183
Premises and equipment, net 2,462 2,387
Investment in limited partnership (Note 8) 1,673 1,679
Other assets 3,116 3,069
-------- --------
Total assets $195,658 $205,385
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities
Deposits $128,127 $137,047
Borrowed funds 44,074 45,124
Advance payment by borrowers for taxes and insurance 1,307 1,214
Obligation relative to limited partnership (Note 8) 1,468 1,450
Accrued expenses and other liabilities 1,363 1,718
-------- --------
Total liabilities 176,339 186,553
Commitments and contingencies (Note 7)
Shareholders' equity
Serial preferred stock, no par value, 500,000
shares authorized; none outstanding
Common Stock: $.01 Par Value, 1,500,000 shares
authorized, 1,284,238 Shares Issued 13 13
Additional Paid-in capital 5,805 5,813
Retained earnings, substantially restricted 15,031 14,324
Less Treasury Stock: (Shares at cost: June 30, 1996-109,012; (1,316) (1,082)
March 31, 1996-96,012)
Net unrealized net appreciation on securities available-for-sale 27 26
Less common stock acquired by employee stock ownership plan (225) (241)
Less common stock acquired by recognition and retention plan (16) (21)
-------- --------
Total shareholders' equity 19,319 18,832
-------- --------
Total liabilities and shareholders' equity $195,658 $205,385
See accompanying notes to consolidated financial statements ======== ========
</TABLE>
1
<PAGE>
CB BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
June 30,
1996 1995
----------------- -----------------
Interest income: (In thousands-except per share data)
<S> <C> <C>
Loans receivable $1,871 $1,812
Loans purchased under agreements to resell 1,783 762
Securities available-for-sale 7 7
Securities held-to-maturity 128 129
Mortgage-backed securities held-to-maturity 167 185
Other interest-earning deposits 6 20
------ ------
Total interest income 3,962 2,915
------ ------
Interest expense:
Deposits 1,321 1,089
Borrowed funds 629 286
------ ------
Total interest expense 1,950 1,375
------ ------
Net interest income 2,012 1,540
Less provision for loan losses 111 70
------ ------
Net interest income after provision for loan losses 1,901 1,470
------ ------
Noninterest income:
Gain (loss) on sale on interest-earning assets 44 0
Commission income 26 26
Service charges and fees 126 126
Fees related to loans purchased under agreements to resell 146 46
Late charges 7 6
Other 32 32
------ ------
Total noninterest income 381 236
------ ------
Noninterest expense:
Compensation and employee benefits 475 369
Occupancy and equipment 146 128
SAIF deposit insurance premium 69 64
Data processing fees 62 59
Telephone, postage and supplies 64 47
Advertising and promotion 36 21
Professional fees 62 37
Employee expense and payroll taxes 77 37
Other 171 128
------ ------
Total noninterest expense 1,162 890
------ ------
Income before taxes 1,120 816
Income tax expense 413 312
------ ------
Net income $ 707 $ 504
====== ======
Earnings per share (Note 6) $0.56 $0.39
Earnings per share assuming full dilution (Note 6) $0.56 $0.39
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE>
CB BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized Common Stock Total
Losses on Acquired by Share-
Retained Securities Common Paid in Treasury ----------- holders
Three Months Ended June 30, 1995 Earnings A.F.S Stock Capital Stock ESOP RRP Equity
- -----------------------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at April 1, 1995 $11,865 $2 $13 $5,822 $(671) $(305) $(48) $16,678
Net income 504 504
Issuance of treasury stock (16) 32 16
Purchase of treasury stock (84) (84)
Contribution to fund ESOP 16 16
Amortization of RRP contribution 8 8
Net change in unrealized net depreciation
of securities available-for-sale 7 7
---------------------------------------------------------------------------------------
Balance at June 30, 1995 $12,369 $9 $13 $5,806 $(723) $(289) $(40) $17,145
=======================================================================================
<CAPTION>
Unrealized Common Stock Total
Losses on Acquired by Share-
Retained Securities Common Paid in Treasury ----------- holders
Three Months Ended June 30, 1996 Earnings A.F.S Stock Capital Stock ESOP RRP Equity
- -----------------------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at April 1, 1996 $14,324 $26 $13 $5,813 $(1,082) $(241) $(21) $18,832
Net income 707 707
Issuance of treasury stock (8) 14 6
Purchase of treasury stock (248) (248)
Contribution to fund ESOP 16 16
Amortization of RRP contribution 5 5
Net change in unrealized net depreciation
of securities available-for-sale 1 1
---------------------------------------------------------------------------------------
Balance at June 30, 1996 $15,031 $27 $13 $5,805 $(1,316) $(225) $(16) $19,319
=======================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
CB BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
June 30,
---------------------
1996 1995
---------- ---------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 707 $ 504
Adjustments to reconcile net income to net cash from
operating activities
Depreciation and amortization 36 82
Provision for loan losses 111 70
(Gain) loss on sale of:
Interest earning assets (44) 0
Loans purchased under agreements to resell (249,718) (132,830)
Sale of loans purchased under agreements to resell 256,883 104,981
Mortgage loans originated for sale (2,754) 0
Proceeds from sales of mortgage loans held for sale 2,260 0
Amortization of RRP contribution 5 8
Change in accrued interest receivable (5) (137)
Change in other assets (47) 138
Change in accrued interest payable and other
liabilities (355) (16)
-------- --------
Net cash from operating activities 7,079 (27,200)
CASH FLOWS FROM INVESTING ACTIVITIES
Principal collected on mortgage-backed securities
held-to-maturity 595 530
Purchase of:
Securities and mortgage backed securities
held-to-maturity (1,137) (1,773)
Proceeds from:
Maturities of securities held-to-maturity 675 2,263
Purchase of loans 0 (500)
Net change in loans 1,871 (1,820)
Net change in interest-earning deposits in other
financial institutions 0 199
Investment in limited partnership 6 (11)
Property and equipment purchases (125) (24)
-------- --------
Net cash from investing activities 1,885 (1,136)
</TABLE>
4
<PAGE>
CB BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
------------------
1996 1995
------ ------
(In thousands)
CASH FLOWS FROM FINANCING ACTIVITIES
<S> <C> <C>
Net change in deposits (8,920) 8,262
Net increase (decrease) in advances from borrowers for
taxes and insurance 93 (223)
New borrowings 441,268 452,696
Repayments of borrowed funds (442,300) (431,609)
Contribution to fund ESOP 16 16
Issuance of treasury stock 6 16
Purchase of treasury stock (248) (84)
-------- --------
Net cash from financing activities (10,085) 29,074
-------- --------
Net change in cash and cash equivalents (1,121) 738
Cash and cash equivalents at beginning of period 6,063 3,543
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,942 $ 4,281
======== ========
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest $ 1,965 $ 1,295
Income taxes 60 143
Noncash investing activities
Real estate acquired in settlement of loans $ 0 $ 64
</TABLE>
See accompanying notes to financial statements
5
<PAGE>
CB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements were prepared
in accordance with instructions for Form 10-QSB and, therefore, do not include
all disclosures required by generally accepted accounting principles for
complete presentation of financial statements. In the opinion of management, the
consolidated financial statements contain all adjustments (consisting only of
normal recurring accruals) necessary to present fairly the consolidated balance
sheets of CB Bancorp, Inc., ("the Company"), and its wholly owned subsidiary,
Community Bank, A Federal Savings Bank ("the Bank"), as of June 30, 1996 and
March 31, 1996 and the consolidated statements of income, changes in
shareholders' equity and cash flows for the three months ended June 30, 1996 and
1995. All significant intercompany transactions and balances are eliminated in
consolidation. The income reported for the three months ended June 30, 1996 is
not necessarily indicative of the results that may be expected for the full
fiscal year. For other accounting policies refer to the financial statements
incorporated by reference in the Annual Report or Form 10-KSB for the fiscal
year ended March 31, 1996.
Note 2 - Securities
The amortized cost and fair values of securities at June 30, 1996 are as
follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains losses Value
---------- ---------- ---------- ----------
Available-for-Sale (In thousands)
------------------
<S> <C> <C> <C> <C>
Marketable Equity securities $ 578 46 (2) 622
========== ========== ========== ==========
Held-to-Maturity
----------------
U.S. Government and U.S. Government
agency securities $ 4,000 $ - $ (58) $ 3,942
Corporate notes 1,996 2 (7) 1,991
---------- ---------- ---------- ----------
Total $ 5,996 $ 2 $ (65) $ 5,933
========== ========== ========== ==========
Other Securities
----- ----------
Stock in Federal Home Loan Bank $ 2,702 $ - $ - $ 2,702
========== ========== ========== ==========
</TABLE>
6
<PAGE>
CB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Note 2 - Securities (continued)
The amortized cost and fair values of securities at March 31, 1996 are as
follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains losses Value
------------ ------------ ------------ ------------
Available-for-Sale (In thousands)
------------------
<S> <C> <C> <C> <C>
Marketable Equity securities 578 44 (1) 621
============ ============ ============ ============
Held-to-Maturity
----------------
U.S. Government and U.S. Government
agency securities $ 3,000 $ - $ (30) $ 2,970
Corporate notes 2,675 5 (6) 2,674
------------ ------------ ------------ ------------
Total $ 5,675 $ 5 $ (36) $ 5,644
============ ============ ============ ============
Other Securities
----------------
Stock in Federal Home Loan Bank $ 2,702 $ - $ - $ 2,702
========== ============ ============ ============
</TABLE>
The amortized cost and fair value of debt securities at June 30, 1996, by
contractual maturity, are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
June 30, 1996
----------------------
Amortized Fair
Cost Value
--------- ---------
(In thousands)
<S> <C> <C>
Due in one year or less................ $2,330 $2,324
Due after one year through five years.. 3,666 3,609
--------- ---------
$5,996 $5,933
========= =========
</TABLE>
7
<PAGE>
CB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Note 2 - Securities (continued)
There were no sales of securities available-for-sale during the three months
ended June 30, 1996.
At June 30, 1996, there were no holdings of securities of any one issuer, other
than the U.S. government and its agencies and corporations, in amounts greater
than 10% of shareholders' equity.
Note 3 - Mortgage-Backed and Related Securities
The carrying value and fair value of mortgage-backed and related securities
held-to-maturity as presented on the balance sheets are summarized as follows:
<TABLE>
<CAPTION>
June 30, 1996
--------------------------------------------------------------------------------
Principal Unamortized Unearned Carrying Fair
Balance Premiums Discounts Value Value
--------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
GNMA certificates $ 3,494 $ 8 $ (8) $ 3,494 $ 3,525
FHLMC certificates 4,637 2 (5) 4,634 4,623
FNMA certificates 961 - (11) 950 953
Collateralized mortgage
obligations 661 1 (3) 658 662
--------------------------------------------------------------------------------
Total $ 9,753 $ 11 $ (27) $ 9,736 $ 9,763
================================================================================
March 31, 1996
--------------------------------------------------------------------------------
Principal Unamortized Unearned Carrying Fair
Balance Premiums Discounts Value Value
--------------------------------------------------------------------------------
(In Thousands)
GNMA certificates $ 3,600 $ 9 $ (10) $ 3,599 $ 3,646
FHLMC certificates 4,892 3 (6) 4,889 4,914
FNMA certificates 880 - (8) 872 886
Collateralized mortgage
obligations 834 1 (3) 832 836
--------------------------------------------------------------------------------
Total $10,206 $ 13 $ (27) $10,192 $ 10,282
================================================================================
</TABLE>
8
<PAGE>
CB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Note 3 - Mortgage-Backed and Related Securities (continued)
Gross unrealized gains and losses on mortgage-backed and related securities
held-to-maturity are as follows:
<TABLE>
<CAPTION>
June 30, 1996 March 31, 1996
--------------------------- ---------------------------
Gross Gross Gross Gross
Unrealized Unrealized Unrealized Unrealized
Gains losses Gains losses
----------- ----------- ----------- -----------
(In thousands)
<S> <C> <C> <C> <C>
GNMA certificates $ 36 $ (5) $ 53 $ (7)
FHLMC certificates 53 (63) 72 (47)
FNMA certificates 5 (2) 14 -
Collateralized mortgage obligations 4 (1) 4 -
----------- ----------- ----------- -----------
Total $ 98 $ (71) $ 143 $ (54)
=========== =========== =========== ===========
</TABLE>
The Company did not sell any mortgage-backed and related securities held-to-
maturity during the three months ended June 30, 1996 and during the three months
ended June 30, 1995.
Note 4 - Concentrations of Credit Risk
The Company grants real estate and consumer loans including education, home
improvement and other consumer loans primarily in LaPorte and Porter counties of
Indiana. Substantially all loans are secured by consumer assets and real estate.
Loans purchased under agreements to resell are residential mortgage loans
secured by one to four family residences located throughout the continental
United States.
Note 5 - Loans Purchased Under Agreements to Resell
The Company purchases residential mortgage loans from various mortgage
companies prior to sale of these loans by the mortgage companies in the
secondary market. The Company purchases such loans from mortgage companies at
par, net of certain fees, and later sells them back to the mortgage companies at
the same amount and without recourse provisions. The Company records interest
income on the loans during the funding period and the Company records fee income
(recorded as noninterest income) received from the mortgage company for each
loan when resold. Purchase money and refinance mortgage loans are generally held
no more than 90 days by the Company and typically are resold within 30 days.
Construction loan mortgages purchased, are held for the duration of the
construction period which is typically six months or longer. With regard to the
interim construction loans in the pipeline, the Company recognizes that there
may be credit risk due to possible change in the borrower's financial condition
9
<PAGE>
CB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
during the interim construction period. The Company had approximately $28.7
million of interim construction loans in the pipeline at June 30, 1996 as
compared to $29.4 million at March 31, 1996.
NOTE 6 - Earnings Per Common Share
Earnings per common and common equivalent share were computed by dividing net
income by the weighted-average number of shares of common stock and common stock
equivalents outstanding. Employee and Director stock options are considered
common stock equivalents. The weighted-average number of shares outstanding for
the calculation of earnings per common and common stock equivalent share for the
three months ended June 30, 1996 and 1995 was 1,251,397 and 1,278,132,
respectively. The weighted-average number of shares outstanding for the
calculation of fully-diluted earnings per common and common stock equivalent
share for the three months ended June 30, 1996 and 1995 was 1,252,413 and
1,278,132, respectively.
Note 7 - Commitments and Contingencies
The Company is a 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 make loans, standby letters
of credit and unused lines of credit. The Company's exposure to credit loss in
the event of nonperformance by the other party to the financial instrument for
commitments to make loans, standby letters of credit and unused lines of credit
is represented by the contractual amount of those instruments. The Company
follows the same credit policy to make such commitments as it follows for those
loans recorded in the financial statements. At June 30, 1996, and March 31,
1996, the Company had commitments to make loans totaling $125,000 and $137,000
respectively and standby letters of credit and unused lines of credit totaling
$6.8 million and $5.4 million, respectively. Outstanding commitments to make
loans at June 30, 1996 consisted of two single family mortgage loans with
maturities of fifteen years or less. Since commitments to make loans and to fund
lines and letters of credit may expire without being used, the amounts do not
necessarily represent future cash commitments.
Note 8 - Affordable Housing Tax Credit Project
The Company, through the Bank's subsidiary, Community Financial Services,
Incorporated, has a 99% limited partner interest in Pedcor Investments-1994-XX,
L.P. which was formed for the construction, ownership, and management of an 80
unit apartment project located in Michigan City, Indiana. Financing consists of
a $2,550,000 first mortgage loan funded with tax exempt bonds.
10
<PAGE>
CB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Note 8 - Affordable Housing Tax Credit Project (continued)
The Bank is the lead lender in the debt financing arrangement and has guaranteed
through letters of credit $1,550,000 of the debt financing, which represents the
Bank's share of the mortgage loan. The remaining portion of the debt financing
is guaranteed by participating lenders through letters of credit in amounts
proportional to their loan amounts. The Bank and other lending institutions have
as their security a first mortgage lien and assignment of rents and leases on
the apartment complex. As of June 30, 1996, Community Financial has invested
$1,673,000 in the limited partnership. Community Financial contributed $223,000
in cash to the partnership while the remaining $1,468,000 was funded by short-
term tax-exempt notes backed by a letter of credit issued by the Bank. Terms of
the partnership agreement allocate 99% of the eligible tax credits to the
limited partner. For the year ended March 31, 1996, the limited partner received
$70,000 in tax credits, which were the first tax credits received from the
limited partner.
Note 9 - Allowance for Loan Losses
The allowance for loan losses is increased by charges to income and decreased
by charge-offs (net of recoveries). Estimating the risk of loss and the amount
of loss on any loan is necessarily subjective. Accordingly, the allowance is
maintained by management at a level considered adequate to cover losses that are
currently anticipated. Management's periodic evaluation of the adequacy of the
allowance is based on the Company's past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the
borrowers ability to repay, the estimated value of any underlying collateral,
and current economic conditions. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the Company's
allowance for losses on loans and foreclosed real estate. Such agencies may
require the Company to recognize additions to the allowances based on their
judgments of information available to them at the time of their examination.
Activity in the allowance for loan losses was as follows for the three months
ended June 30 (In Thousands).
<TABLE>
<CAPTION>
1996 1995
------- ------
<S> <C> <C>
Balance at March 31 $1,347 $ 672
Provision for loan losses 111 70
Charged-off loans (2) -
Recoveries 117 -
------ ------
Balance at June 30 $1,573 $ 742
====== ======
</TABLE>
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF PLAN OF OPERATION
GENERAL
The Company's results of operations are dependent primarily on the Bank. The
Bank's primary source of earnings is its net interest income which is the
difference between the interest income earned on its loan, mortgage-backed
securities and investment portfolios less its cost of funds, consisting of the
interest paid on its deposits and borrowings. Operating results are also
affected by the types of lending engaged in, fixed-rate versus adjustable or
short-term, each of which has a different rate and fee structure. The Company's
operating expenses principally consist of employee compensation and benefits,
occupancy and equipment expenses, federal deposit insurance premiums and other
general and administrative expenses. The Company's results of operation are
also significantly affected by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities.
MORTGAGE LOAN REVERSE REPURCHASE PROGRAM
In fiscal 1991, the Company instituted the Mortgage Loan Reverse Repurchase
Program (the "Program"). There are currently seventy-eight active participants
in the Program. The Mortgage Loan Reverse Repurchase Program is carried out
pursuant to agreements with each participant which provide for the purchase at
par (less certain fees paid to the participant by the borrower) of whole
mortgage loans by the Company, at its option, and the subsequent resale of such
loans to the Participant (for transfer to an end investor). Purchase money and
refinance mortgage loans are generally held no more than 90 days by the Company
and typically are resold within 30 days. Construction loan mortgages acquired
via the Program, are held for the duration of the construction loan period,
typically for six months or longer. At June 30, 1996, construction loan
balances totaled $28.7 million and accounted for 39.4% of the Company's total
outstanding investment in the Program. The Company records interest income on
the loans based on a rate of interest tied to the prime rate (as established
from time to time by a major Chicago-based financial institution) during the
funding period, and not the rates on individual loans, plus a fee (recorded as
noninterest income) collected from the Participant for each loan when that loan
is resold. It is the Company's policy to purchase under the Program only those
loans that comply with accepted secondary market underwriting standards. The
Company's Mortgage Loan Reverse Repurchase Program has been and is a key
contributor to the Company's efforts to maintain a strong net interest margin.
Management is aware that a decline in Program activity would negatively impact
the Company's profitability.
FINANCIAL CONDITION
Total assets decreased $9.7 million or 4.7%, to $195.7 million at June 30,
1996 from $205.4 million at March 31, 1996. The decrease is primarily
attributable to a $7.2 million or 9.0% de-
12
<PAGE>
crease in loans purchased under agreements to resell under the Program. Since
its inception, the Program has caused the level of the Company's assets and
liabilities and capital ratios to significantly fluctuate between periods.
Management attributes this decrease to higher mortgage interest rates which have
resulted in a decrease in home mortgage originations. Over this same time
period, the loans receivable portfolio decreased $1.7 million or 1.9% primarily
attributable to management's decision to sell the majority of the Company's
single family fixed rate loan production originated during the quarter; mortgage
loans held for sale increased $538,000 or 104.9%; cash and cash equivalents
decreased $1.1 million or 18.5%; FHLB Stock and securities increased $322,000 or
3.6% and mortgage-backed and related securities decreased $456,000 or 4.5%.
Total borrowed funds decreased $1.1 million or 2.3%, to $44.1 million at June
30, 1996 from $45.1 million at March 31, 1996. This decrease is attributable to
the decreased funding needs of the Program. Borrowed funds outstanding at June
30, 1996 consist of $37.1 million in advances outstanding with the Federal Home
Loan Bank of Indianapolis, of which $35.1 million have maturities of one year or
less, and federal funds purchased of $7.0 million.
Deposits decreased $8.9 million or 6.5%, to $128.1 million at June 30, 1996,
from $137.0 million at March 31, 1996. The decrease in deposits is also
primarily attributable to the decreased funding needs of the Program.
The primary objective of the Company's $9.3 million securities portfolio is to
contribute to profitability by providing a stable cash flow of dependable
earnings. The investment portfolio consists of U.S. Treasury and Agency
securities, short-term investment grade corporate notes and Federal Home Loan
Bank Stock. The Company also has investments in both variable and fixed rate
U.S. Government Agency mortgage-backed securities and collateralized mortgage
obligations. The Company's portfolio of securities contains no securities
classified by the Federal Banking Regulators as "High Risk Derivative
Securities".
RISK ELEMENTS
NON-PERFORMING ASSETS: Non-performing assets totaled $2.9 million at June 30,
1996, a decrease of $48,000 from March 31, 1996. Loan loss reserves at June 30,
1996 totaled $1.6 million or 53.3% of total nonperforming assets and increased
$227,000 from March 31, 1996.
At June 30, 1996, impaired assets included $1.6 million in principal due the
Company on four pools of small business equipment leases that the Company
acquired through contractual relationships entered into with Bennett Funding
Group, Inc. and its affiliate Aloha Capital Corporation (f.k.a. Bennett Leasing
Corporation). Bennett Funding Group, Inc. sought Chapter 11 Bankruptcy
protection on March 29, 1996. Several weeks later, Aloha Capital Corporation
was placed into involuntary bankruptcy at the request of the court appointed
Bankruptcy Trustee for
13
<PAGE>
Bennett Funding Group, Inc., who is now also the Bankruptcy Trustee for Aloha
Capital Corporation. Per the terms of the contractual arrangements Bennett
Funding Group, Inc. acts as the servicing agent for the Company on the pool of
leases purchased from that entity, wherein, at June 30, 1996, $396,000 of
principal remained to be remitted to the Company over the course of the
remaining scheduled lease payments due from individual lessees. Similiarly, at
June 30, 1996, $1.2 million of principal remained to be remitted to the Company
on three pools of leases purchased from and serviced by Aloha Capital
Corporation. Payment due the Company on the four pools of leases were current
at the time the respective servicing companies were placed in bankruptcy. The
Bankruptcy Trustee is monitoring the lease payment billing and collection
activities of the servicing companies and is segregating the payments received
from the individual lessees but has not yet allowed the resumption of the
payment stream due the Company. Management can make no assurances as to the
outcome of this matter.
Also included in impaired loans are two single family construction loans
totaling $501,000. The loans, which were purchased through the Program, are
currently in foreclosure. The Company has a signed offer to purchase one of the
properties for an amount over its carrying value and continues to seek an offer
on the other property.
Schedule of Non-performing Assets
<TABLE>
<CAPTION>
June 30, March 31, June 30,
1996 1996 1995
--------- --------- ---------
(In Thousands)
<S> <C> <C> <C>
Accruing mortgage loans
delinquent more than 90 days $ - $ - $ -
Accruing consumer and other
loans delinquent more than
90 days 7 4 10
Non-accruing mortgage loans
delinquent more than 90 days 494 523 340
Non-accruing consumer and
other loans delinquent more
than 90 days - - -
---------------------------------------
Total loans delinquent more
than 90 days 501 527 350
Restructured loans 302 306 336
Impaired Loans 2,146 2,164 -
---------------------------------------
Total non-performing loans 2,949 2,997 686
Total real estate owned,
net of related reserves - - 64
---------------------------------------
Total non-performing assets $ 2,949 $ 2,997 $ 750
=======================================
Total non-performing assets
to total loans 1.80% 1.74% 0.85%
Total non-performing assets
to total assets 1.51 1.46 0.43
Total loan loss allowances
to non-performing assets 53.34 44.94 98.93
</TABLE>
14
<PAGE>
INTEREST RATE SENSITIVITY
The Company's primary strategy for controlling interest rate risk exposure, is
to maintain a high level of the Company's asset portfolios in interest rate
sensitive assets. Management has accomplished this objective through its
investment in the Loan Reverse Repurchase Program. Under the Program, the
Company purchases single family mortgage loans from select mortgage banking
firms on a short-term basis under agreements to resell and earn an adjustable
prime based return during the holding period. The Program has complemented the
Company's portfolio of adjustable rate loans held for investment which account
for approximately 40% of the loans receivable portfolio. In addition, the
Company has sought to lengthen the maturity of its interest-bearing liabilities
by emphasizing longer term certificates of deposit. The Company also has the
ability to obtain long-term advances from the Federal Home Loan Bank of
Indianapolis if such borrowings appear favorable under a particular interest
rate environment.
Management regularly measures the Bank's interest rate risk by monitoring the
Company's interest rate risk ("IRR") measures produced by the Office of Thrift
Supervision from the Bank's quarterly thrift financial reports. In 1990, the
regulators adopted the interest-rate sensitivity approach as one measure of
interest-rate risk. This approach measures the projected changes in net
portfolio value ("NPV") that would result if interest rates were to increase by
100, 200, 300 and 400 basis points, or if interest rates were to decline by 100,
200, 300 and 400 basis points. Net portfolio value is defined by the market
value of assets less the market value of liabilities. According to the
"Interest Rate Risk Report," prepared by the Office of Thrift Supervision as of
March 31, 1996 (most recent available), after an adverse rate shock of +200
basis points, the Bank's NPV of $22.8 million was projected to decline $1.4
million or 6.3%, to $21.4 million. According to the OTS report, only 40% of
Thrifts nationwide would have experienced a decline of 7.9% or less. Presented
below, as of March 31, 1996, is an analysis of the Bank's interest rate risk as
measured by changes in NPV for instantaneous and substantial parallel shifts of
100 basis points in market interest rates.
Interest Rate Sensitivity of Net Portfolio Value (NPV)
Net Portfolio Value
-------------------
<TABLE>
<CAPTION>
Change
in rates $ Amount $ Change % CHANGE
---------- -------- -------- ---------
<S> <C> <C> <C>
+400 bp 19,335 -3,498 -15%
+300 bp 20,396 -2,437 -11%
+200 bp 21,394 -1,439 - 6%
+100 bp 22,269 - 564 - 2%
0 bp 22,833
-100 bp 22,868 35 0%
-200 bp 22,382 - 451 - 2%
-300 bp 22,090 - 743 - 3%
-400 bp 22,294 - 593 - 2%
</TABLE>
15
<PAGE>
COMPARISON OF OPERATING RESULTS
Three Months Ended June 30, 1996, Compared to Three Months Ended June 30, 1995
- -----------------------------------------------------------------------------
GENERAL: The Company reported net income of $707,000 for the three month period
ended June 30, 1996 which represents a 40.3% increase over the comparable three-
month period in 1995 in which the Company reported net income of $504,000. The
increase in net income is primarily attributable to a greater leveraging of the
Company's balance sheet through increased activity in the Company's Mortgage
Loan Reverse Repurchase Program.
INTEREST INCOME: Interest income increased $1.1 million or 37.9%, from $2.9
million at June 30, 1995, to $4.0 million at June 30, 1996. The increase in
interest income is primarily attributable to an increase in the Company's
outstandings in the Mortgage Loan Reverse Repurchase Program. The Company's
average outstanding investment in the Program increased $45.2. million or 58.4%,
from $32.2 million for the three months ended June 30, 1995 to $77.4 million for
the three months ended June 30, 1996. Over this same time period, interest
income on loans purchased under agreements to resell increased $1.0 million or
134.0%. The increase in outstandings in the Program is primarily attributable to
an increase in the number of mortgage companies participating in the Program. To
a lesser extent the Company benefited from an increase in interest income on the
loans receivable portfolio which increased $59,000 or 3.3% over the same period
last year.
INTEREST EXPENSE: Interest expense increased $575,000 or 41.8%, from $1.4
million for the three months June 30, 1995, to $2.0 million for the three months
June 30, 1996. The increase is primarily attributable to a $343,000 or 119.9%
increase in interest on borrowings and a $232,000 or 21.3% increase in interest
on deposits resulting from the increased funding needs of the Program.
NET INTEREST INCOME: Net interest income before the provision for loan losses
increased by $472,000 or 30.6% from $1.5 million for the three months ended June
30, 1995, to $2.0 million for the three months ended June 30, 1996. This
increase in net interest income over the prior year's quarter is primarily
attributable to management's efforts to profitably grow the Company's level of
interest-earning assets as described above.
PROVISION FOR LOAN LOSSES: The provision for loan losses increased $41,000 or
58.6%, from $70,000 for the three months ended June 30, 1995, to $111,000 for
the three months ended June 30, 1996. The increase in the provision reflects
the Company's increased activity in construction lending, commercial lending and
consumer lending. The Company will continue to monitor its allowance for loan
losses and make future loan loss provisions in consideration of the amount and
types of loans in its portfolio and as economic conditions dictate.
16
<PAGE>
NONINTEREST INCOME: Noninterest income increased $145,000 or 61.4% to $381,000
for the three months ended June 30, 1996, from $236,000 for the three months
ended June 30, 1995. This increase was primarily attributable to a $100,000 or
217.4% increase in fees related to the repurchase program, and to $44,000 in
gains realized from the sale of single family mortgage loans.
NONINTEREST EXPENSE: Noninterest expense increased $272,000 or 30.6% to $1.2
million for the three months ended June 30, 1996, from $890,000 for the same
time period in the prior year. The increase in noninterest expenses is
primarily attributable to increased personnel and occupancy expenses associated
with the Company's newly established Mortgage Banking Division. In addition,
the Company experienced higher period over period legal costs.
INCOME TAX EXPENSE: Income tax expense increased $101,000 or 32.4%, from
$312,000 for the three months ended June 30, 1995, to $413,000 for the three
months ended June 30, 1996. This increase is primarily attributable to an
increase in earnings.
LIQUIDITY AND CAPITAL RESOURCES
The Bank is required under applicable federal regulations to maintain a
liquidity ratio at certain specified levels which are subject to change.
Currently, a minimum of 5% of the combined total of deposits and short term
borrowings must be maintained in the form of liquid assets. At June 30, 1996
liquidity as measured for regulatory purposes was 7.0% as compared to a ratio of
7.7% at March 31, 1996.
Management structures the liquid asset portfolio and borrowing capacity of the
Company to meet the cash flow needs of operating, investing and financing
activities. The Companies net liquid assets are cash and cash equivalents,
which include investments in highly liquid investments. At June 30, 1996 cash
and cash equivalents totaled $4.9 million. In addition, the Company maintains a
$5.0 million line of credit with the FHLB of Indianapolis to meet short term
liquidity needs.
Cash flows from operating activities consisted primarily of net income and
activity under the Program. Cash flows provided by/(for) operating activities
were $7.1 million and $(27.2) million for the three months ended June 30, 1996
and 1995, respectively. The Company's primary investing activities have been the
purchase and monitoring of securities and mortgage-backed securities and the
purchase, origination and repayment of loans. Net Cash flows provided for
investing activities were $1.9 million and ($1.1) million for the three months
ended June 30, 1996 and 1995, respectively. Cash flow from financing activities
consisted of deposit activity, new borrowings and the repayment of borrowings.
Net cash flow provided by/(for) financing activities were ($10.1) million and
$29.1 million for the three months ended June 30, 1996 and 1995.
17
<PAGE>
Shareholders' equity at June 30, 1996 was $19.3 million, an increase of $487,000
or 2.6% over March 31, 1996, which represents net income for the three months
ended June 30, 1996, adjustments for the Company's ESOP and management
recognition and retention plans, the purchase and issuance of treasury stock and
change in unrealized net appreciation on securities available-for-sale.
The Bank is subject to three capital standards pursuant to regulations of the
Office of Thrift Supervision: a 1.5% tangible capital standard, a 3% leverage
(core and capital) ratio and an 8% risk based capital standard. Under these
capital requirements, at June 30, 1996, the Bank had:
- - tangible capital of $17.3 million or 8.8% of total assets thereby exceeding
the 1.5% requirement ($2.9 million) by $14.4 million.
- - core capital (tangible capital plus certain intangible assets) of $17.3
million or 8.8% of total assets thereby exceeding the 3.0% requirement ($5.9
million) by $11.4 million.
- - risk-based capital (core capital plus allowance for loan losses) of $18.7
million or 17.3% of risk-based assets thereby exceeding the 8.0% requirement
($8.7 million) by $10.0 million.
IMPACT OF NEW ACCOUNTING STANDARDS
Several new accounting standards have been issued by the Financial Accounting
Standards Board that will apply in 1996. Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the impairment of long-lived assets
and for assets to be disposed of", requires a review of long term assets for
impairment of recorded value and resulting write-downs if value is impaired.
SFAS No. 122, "Accounting for mortgage servicing rights", requires the
recognition of an asset when servicing rights are retained on in-house
originated loans that are sold. Statement of Financial Accounting Standards No.
123, "Accounting for stock-based compensation", encourages, but does not
require, entities to use a "fair value based method" to account for stock-based
compensation plans. If the fair value accounting encouraged is not adopted,
entities must disclose the pro forma effect on net income and on earnings per
share had the accounting been adopted. These statements are not expected to have
a material effect on the Company's financial position or results of operations.
LEGISLATIVE MATTERS
Legislation is pending in Congress to mitigate the effect of the Bank
insurance Fund ("BIF") Savings Association Insurance Fund ("SAIF") premium
disparity. Under the legislation a special assessment would be imposed on the
amount of deposits held by SAIF-member institutions as of a specified date,
currently March 31, 1995, including the Bank, to recapitalize the SAIF. The
amount of the special assessment would be left to the discretion of the FDIC but
is generally estimated at between 79 to 85 basis points of insured deposits.
The legislation would also require that the BIF and SAIF be merged, provided
that subsequent
18
<PAGE>
legislation is enacted requiring federal savings associations to become
national banks or state chartered banks or thrifts, and that the Financing
Insurance Company ("FICO") payments be spread across all BIF and SAIF members.
The payment of the special assessment would have the effect of immediately
reducing the capital of SAIF-member institutions, net of any tax effect;
however, it would not effect the Bank's compliance with its regulatory capital
requirements. Management cannot predict whether legislation imposing such an
assessment will be enacted, or, if enacted, the specific terms of such
legislation including the amount of any special assessment and when and whether
ongoing SAIF premiums will be reduced to a level equal to that of BIF premiums.
Management can also not predict whether or when the BIF and SAIF will merge. A
significant increase in SAIF insurance premiums or a significant special
assessment to recapitalize the SAIF would likely have an adverse effect on the
operating expenses of the Company. The assessment of an 79 to 85 basis point
fee to recapitalize the SAIF would result in a $611,000 to $657,000 payment on
an after-tax basis.
Legislation regarding bad debt recapture has been passed by Congress and sent to
the President for signature. The legislation requires recapture of reserves
accumulated after 1987. The recapture tax on post 1987 reserves must be paid
over a six year period starting in 1996. The payment of the tax can be deferred
in each of 1996 and 1997 if an institution originates at least the same
principal amount of mortgage loans that it originated in the six years prior to
1996. Management has not assessed the impact of this legislation on the
operations of the Company.
No assurances can be given as to whether legislation as discussed above will
be enacted or, if enacted, what the terms of the legislation will be.
19
<PAGE>
AVERAGE BALANCE SHEETS FOR THE THREE MONTHS ENDED JUNE 30, 1996 AND 1995.
The following table sets forth certain information relating to the
consolidated statements of financial condition and reflects the yield on average
assets and the average cost of liabilities for the periods indicated. The yields
and costs include amortization of fees, discounts, and premiums which are
considered adjustments to yield.
<TABLE>
<CAPTION>
Average Balance Sheets
Yield Analysis
Three Months Ended June 30, Three Months Ended June 30,
---------------------------------- ----------------------------------
1996 1995
---------------------------------- ----------------------------------
Average Average
Average Yield/ Average Yield/
Balance(a) Interest Cost Balance(a) Interest Cost
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans, net $168,241 $3,654 8.71% $ 119,168 $2,575 8.64%
Mortgage-backed securities 9,967 167 6.72% 11,179 185 6.62%
Interest earning deposits and
federal funds sold 480 6 5.01% 1,161 20 6.89%
Securities 8,803 135 6.15% 8,339 135 6.48%
-------- -------- -------- -------- -------- --------
Total interest-earning assets 187,491 3,962 8.48% 139,847 2,915 8.34%
Noninterest-earning assets (b) 12,010 -------- -------- 10,332 -------- --------
-------- --------
Total assets $199,501 $ 150,179
======== =========
Interest-bearing liabilities:
Deposits $122,422 $1,321 4.33% $ 105,272 $1,089 4.14%
Borrowed Funds 45,045 629 5.60% 18,067 286 6.33%
-------- -------- -------- --------- -------- --------
Total interest-bearing liabilities
167,467 1,950 4.67% 123,339 1,375 4.46%
Noninterest-bearing
liabilities (c) 13,093 -------- --------- 9,890 -------- --------
-------- ---------
Total liabilities 180,560 133,229
Stockholders' equity 18,941 16,950
-------- ---------
Total liabilities and
equity $199,501 $ 150,179
======== =========
Net interest income/ Net rate spread $2,012 3.81% $1,540 3.88%
======== ======== ======== ========
Net interest-earning assets/ net
interest rate margin $ 20,024 4.30% $ 16,508 4.40%
========= ======== ========= ========
Ratio of average interest-earning
assets to average interest-bearing
liabilities 1.12 X 1.13 X
</TABLE>
(a) Average balances, which are stated in thousands, are derived from average
daily balances.
(b) Includes average investment in life insurance policies of $2,236,000 and
$2,163,000 for the three months ended June 30, 1996 and June 30, 1995,
respectively. The Company realized non-interest income of $25,000 and
$29,000 on it's outstanding investment in these policies over the same
respective time periods.
(c) Includes non-interest bearing deposit accounts.
20
<PAGE>
PART II OTHER INFORMATION
- ------- -----------------
Item 1. Legal Proceedings.
The Company is not involved in any legal proceedings of a material
nature at this time other than those occurring in the ordinary course of
business which in the aggregate involves amounts which are believed by
management to be immaterial to the financial condition of the Company.
Item 2. Changes in Securities.
None
Item 3. Defaults upon Senior Securities.
None
Item 4. Submission of Matters to a vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a). Exhibits
3.1 Certificate of Incorporation of CB Bancorp,
Inc.*
3.2 Bylaws of CB Bancorp, Inc.*
27 Financial Data Schedule (filed herewith)
*Incorporated by reference to Registration State-
ment of Form S-1, as amended, filed on September
11, 1992, registration Number 33-51882.
(b) Reports on Form 8-K
None
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CB Bancorp, Inc.
Dated: By:/s/ Joseph F. Heffernan
-------------- ----------------------------
Joseph F. Heffernan
President and Chief Executive
Officer
Dated: By:/s/ George L. Koehm
-------------- ----------------------------
George L. Koehm
Vice President and Chief Fina-
ncial Officer
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FORM 10-Q AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> JUN-30-1996
<CASH> 4,942,000
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 622,000
<INVESTMENTS-CARRYING> 18,434,000
<INVESTMENTS-MARKET> 18,398,000
<LOANS> 164,794,000
<ALLOWANCE> 1,573,000
<TOTAL-ASSETS> 195,658,000
<DEPOSITS> 128,127,000
<SHORT-TERM> 43,381,000
<LIABILITIES-OTHER> 1,363,000
<LONG-TERM> 3,468,000
0
0
<COMMON> 5,818,000
<OTHER-SE> 13,501,000
<TOTAL-LIABILITIES-AND-EQUITY> 195,658,000
<INTEREST-LOAN> 3,654,000
<INTEREST-INVEST> 302,000
<INTEREST-OTHER> 6,000
<INTEREST-TOTAL> 3,962,000
<INTEREST-DEPOSIT> 1,321,000
<INTEREST-EXPENSE> 1,950,000
<INTEREST-INCOME-NET> 2,012,000
<LOAN-LOSSES> 111,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,162,000
<INCOME-PRETAX> 1,120,000
<INCOME-PRE-EXTRAORDINARY> 1,120,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 707,000
<EPS-PRIMARY> 0.56
<EPS-DILUTED> 0.56
<YIELD-ACTUAL> 4.30
<LOANS-NON> 494,000
<LOANS-PAST> 7,000
<LOANS-TROUBLED> 302,000
<LOANS-PROBLEM> 2,146,000
<ALLOWANCE-OPEN> 1,347,000
<CHARGE-OFFS> 2,000
<RECOVERIES> 117,000
<ALLOWANCE-CLOSE> 1,573,000
<ALLOWANCE-DOMESTIC> 1,273,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 300,000
</TABLE>
