UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
(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, 2003
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 0-50143
CCSB Financial Corp.
(Exact name of registrant as specified in its charter)
Delaware | 32-0034299 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1178 West 152 Highway, Liberty, Missouri | 64068 | |
(Address of principal executive office) | (Zip Code) |
Registrant’s telephone number, including area code(816) 781-4500
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 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.* YesX . No .
Indicate the number of shares outstanding of the issuer’s classes of common stock, as of the latest practicable date.
Class | Outstanding August 5, 2003 | |
Common Stock, par value $.01 per share | 978,650 |
* The issuer became subject to the filing requirements of Section 13 or 15(d) when its Form SB-2 was declared effective on November 13, 2002.
FORM 10-QSB
FOR THE QUARTER ENDED JUNE 30, 2003
| PAGE NO. | ||
PART 1 — Financial Information | ||
Item 1 — Consolidated Financial Statements (Unaudited) | ||
| 3 | ||
| 4 | ||
| 5 | ||
| 6 | ||
| 8 | ||
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations | 9 | |
| 14 | ||
| 15 | ||
| 15 | ||
Exhibit 31.1 — Certification of Chief Executive Officer pursuant to Section 302 | ||
Exhibit 31.2 — Certification of Chief Financial Officer pursuant to Section 302 | ||
Exhibit 32 — Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
Reports on Form 8-K — Earnings Release Filed May 2, 2003 | ||
| 15 | ||
2
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, 2003 | September 30, 2002 | ||||||
Assets | |||||||
Cash and due from banks | $ | 674,071 | $ | 591,525 | |||
Interest-bearing deposits in banks | 7,630,182 | 10,454,147 | |||||
Total cash and cash equivalents | 8,304,253 | 11,045,672 | |||||
Certificates of deposit | — | 192,350 | |||||
Securities available for sale, at market value (amortized cost of $6,313,491 and $6,568,681, respectively) | 6,360,381 | 6,651,098 | |||||
Securities held to maturity, at amortized cost (market value of $0 and $15,012, respectively) | — | 15,479 | |||||
Stock in Federal Home Loan Bank of Des Moines | 963,300 | 963,300 | |||||
Mortgage-backed securities available for sale, at market value (amortized cost of $11,781,585 and $3,674,943, respectively) | 11,862,419 | 3,703,955 | |||||
Loans receivable, net of allowance for loan losses of $240,089 and $206,035, respectively | 52,405,271 | 49,902,828 | |||||
Loans held for sale | 290,500 | 471,500 | |||||
Premises and equipment, net | 4,214,507 | 4,307,718 | |||||
Accrued interest receivable: | |||||||
Securities | 64,501 | 70,582 | |||||
Mortgage-backed securities | 43,003 | 15,554 | |||||
Loans receivable | 209,516 | 236,911 | |||||
Other assets | 251,223 | 346,545 | |||||
Total assets | $ | 84,968,874 | $ | 77,923,492 | |||
Liabilities and Stockholders' Equity | |||||||
Deposits | $ | 63,932,358 | $ | 64,463,097 | |||
Accrued interest on deposits | 357 | 35,017 | |||||
Advances from Federal Home Loan Bank | 5,172,838 | 5,876,719 | |||||
Advances from borrowers for taxes and insurance | 440,635 | 688,062 | |||||
Other liabilities | 190,952 | 158,828 | |||||
Income taxes | 134,598 | 148,947 | |||||
Total liabilities | 69,871,738 | 71,370,670 | |||||
Commitments and contingencies | |||||||
Common Stock: | |||||||
$0.01 par value; 2,500,000 shares authorized; 978,650 shares issued | 9,787 | — | |||||
Additional Paid-In Capital | 9,144,864 | — | |||||
Unearned ESOP Shares | (749,417 | ) | — | ||||
Retained earnings—substantially restricted | 6,607,604 | 6,479,279 | |||||
Accumulated other comprehensive earnings, net | 84,298 | 73,543 | |||||
Total stockholders' equity | 15,097,136 | 6,552,822 | |||||
Total liabilities and stockholders' equity | $ | 84,968,874 | $ | 77,923,492 | |||
See accompanying notes to consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||
Interest income: | ||||||||||||||||
Loans receivable | $ | 832,645 | $ | 951,938 | $ | 2,526,886 | $ | 3,105,225 | ||||||||
Mortgage-backed securities | 89,980 | 24,594 | 208,072 | 74,461 | ||||||||||||
Securities | 59,791 | 91,591 | 209,168 | 290,343 | ||||||||||||
Other interest-earning assets | 17,161 | 38,387 | 88,282 | 110,455 | ||||||||||||
Total interest income | 999,577 | 1,106,510 | 3,032,408 | 3,580,484 | ||||||||||||
Interest expense: | ||||||||||||||||
Deposits | 273,084 | 440,537 | 934,122 | 1,476,887 | ||||||||||||
Borrowings | 73,470 | 108,034 | 215,449 | 401,246 | ||||||||||||
Total interest expense | 346,554 | 548,571 | 1,149,571 | 1,878,133 | ||||||||||||
Net interest income | 653,023 | 557,939 | 1,882,837 | 1,702,351 | ||||||||||||
Provision for loan losses | 8,100 | 2,000 | 42,100 | 3,374 | ||||||||||||
Net interest income after provision for loan losses | 644,923 | 555,939 | 1,840,737 | 1,698,977 | ||||||||||||
Noninterest income: | ||||||||||||||||
Service charges on deposit accounts | 45,271 | 30,473 | 133,524 | 95,744 | ||||||||||||
Loan service charges | 24,220 | 17,759 | 71,468 | 49,892 | ||||||||||||
Amortization of mortgage servicing rights | (34,371 | ) | (13,270 | ) | (87,185 | ) | (34,779 | ) | ||||||||
Gain on sale of loans | 72,733 | 3,654 | 174,506 | 78,713 | ||||||||||||
Other | 6,126 | 3,370 | 13,593 | 11,238 | ||||||||||||
Total noninterest income | 113,979 | 41,986 | 305,906 | 200,808 | ||||||||||||
Noninterest expense: | ||||||||||||||||
Compensation and benefits | 381,118 | 329,509 | 1,100,417 | 980,934 | ||||||||||||
Occupancy expense | 62,773 | 63,062 | 191,556 | 179,290 | ||||||||||||
Equipment and data processing expense | 92,124 | 85,909 | 279,340 | 266,737 | ||||||||||||
SAIF deposit insurance premium | 3,436 | 2,790 | 8,874 | 8,201 | ||||||||||||
Supervisory and professional | 28,508 | 15,100 | 78,699 | 43,439 | ||||||||||||
Advertising | 16,616 | 14,969 | 43,279 | 54,595 | ||||||||||||
Loss on sale of foreclosed real estate | — | — | — | 4,026 | ||||||||||||
Correspondent banking charges | 6,475 | 13,089 | 43,381 | 41,539 | ||||||||||||
Other | 66,660 | 70,437 | 202,158 | 197,772 | ||||||||||||
Total noninterest expense | 657,710 | 594,865 | 1,947,704 | 1,776,533 | ||||||||||||
Earnings before income taxes | 101,192 | 3,060 | 198,939 | 123,252 | ||||||||||||
Income taxes | 35,992 | 989 | 70,614 | 41,753 | ||||||||||||
Net earnings | $ | 65,200 | $ | 2,071 | $ | 128,325 | $ | 81,499 | ||||||||
Basic and diluted earnings per share – See Note 2 | $ | 0.07 | N/A | $ | 0.12 | N/A | ||||||||||
See accompanying notes to consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(Unaudited)
| Three Months Ended | Nine Months Ended | ||||||||||
| June 30, | June 30, | ||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||
Net earnings | $ | 65,200 | 2,071 | $ | 128,325 | 81,499 | |||||
Other comprehensive earnings: | |||||||||||
Unrealized gain (loss) on securities and MBS available for sale, net | 70,131 | 38,977 | 10,755 | (20,074 | ) | ||||||
Comprehensive earnings | $ | 135,331 | 41,048 | $ | 139,080 | 61,425 | |||||
See accompanying notes to consolidated financial statements.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine Months Ended | ||||||||
| June 30, | ||||||||
| 2003 | 2002 | |||||||
Cash flows from operating activities: | ||||||||
Net earnings | $ | 128,325 | $ | 81,499 | ||||
Adjustments to reconcile net earnings to net | ||||||||
Depreciation and amortization: | ||||||||
Deferred loans fees, net | (29,034 | ) | (42,734 | ) | ||||
Premises and equipment | 184,440 | 175,747 | ||||||
Premiums and discounts, net | 29,356 | 4,329 | ||||||
ESOP expense | 42,253 | — | ||||||
(Increase) decrease in accrued interest receivable | 6,027 | 98,531 | ||||||
Increase (decrease) in accrued interest on deposits | (34,660 | ) | (32,143 | ) | ||||
Provision for loan losses | 42,100 | 3,374 | ||||||
Loans originated for sale | (14,472,671 | ) | (7,870,350 | ) | ||||
Proceeds from sale of loans, net | 14,828,177 | 7,944,213 | ||||||
Loss on foreclosed real estate, net | — | 4,026 | ||||||
Gain on sale of loans | (174,506 | ) | (73,863 | ) | ||||
Change in other assets and other liabilities, net | 107,990 | (85,870 | ) | |||||
Net cash provided by operating activities | 657,797 | 206,759 | ||||||
Cash flows from investing activities: | ||||||||
Net change in loans receivable | (2,515,508 | ) | 6,262,090 | |||||
Securities held to maturity: | ||||||||
Proceeds from maturity or call | 15,000 | — | ||||||
Securities available for sale: | ||||||||
Purchases | (4,500,000 | ) | (5,091,937 | ) | ||||
Proceeds from maturity or call | 4,750,000 | 4,248,537 | ||||||
Principal collections | 6,628 | 36,624 | ||||||
Certificates of Deposit—Other Insured Institutions: | ||||||||
Purchases | — | (192,350 | ) | |||||
Proceeds from maturity | 192,350 | 450,000 | ||||||
Mortgage-backed securities available for sale: | ||||||||
Principal payments | 1,932,448 | 615,823 | ||||||
Purchase | (10,069,404 | ) | (494,616 | ) | ||||
Additions to foreclosed real estate and other repossessed assets, net | (435 | ) | 128,947 | |||||
Purchase of premises and equipment | (91,229 | ) | (140,217 | ) | ||||
Net cash provided by (used for) investing activities | $ | (10,280,150 | ) | $ | 5,822,901 | |||
(Continued)
6
CCSB FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
(Continued)
| Nine Months Ended | ||||||||
| June 30, | ||||||||
| 2003 | 2002 | |||||||
Cash flows from financing activities: | ||||||||
Net increase (decrease) in deposits | $ | (530,739 | ) | $ | 5,591,902 | |||
Proceeds from advances from the FHLB | 1,500,000 | — | ||||||
Repayments of advances from the FHLB | (2,203,881 | ) | (5,038,756 | ) | ||||
Proceeds from issuance of common stock | 8,362,981 | — | ||||||
Increase (decrease) in advances from borrowers for taxes and insurance | (247,427 | ) | (257,161 | ) | ||||
Net cash provided by (used for) financing activities | 6,880,934 | 295,985 | ||||||
Net increase (decrease) in cash and cash equivalents | (2,741,419 | ) | 6,325,645 | |||||
Cash and cash equivalents at beginning of period | 11,045,672 | 3,405,873 | ||||||
Cash and cash equivalents at end of period | $ | 8,304,253 | $ | 9,731,518 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid (received) during the period for: | ||||||||
Interest on deposits and advances from FHLB | $ | 1,184,231 | 1,910,276 | |||||
Federal and state income taxes | $ | 90,503 | 14,480 | |||||
Real estate ond other assets acquired in settlement of loans | $ | 6,763 | — | |||||
See accompanying notes to consolidated financial statements.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Basis of Presentation
The information contained in the accompanying consolidated financial statements is unaudited and was prepared in accordance with instructions for Form 10-QSB and, therefore, do not include information or footnotes for a complete presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. However, in the opinion of management, the financial statements contain all adjustments (none of which were other than normal recurring entries) necessary for a fair statement of the results of operations for the interim periods. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the entire fiscal year. These financial statements should be read in conjunction with the financial statements of the Bank for the year ended September 30, 2002, contained in the Company’s Form 10-KSB for the period ended September 30, 2002.
In September 2002, CCSB Financial Corp. (the “Company”) was incorporated to facilitate the conversion of Clay County Savings and Loan Association from a mutual savings association to a stock savings bank (“the Conversion’). As part of the Conversion, Clay County Savings and Loan Association changed its name to Clay County Savings Bank (the “Bank”). In connection with the Conversion the Company offered its common stock to the depositors and borrowers of the Bank as of specified dates and to an employee stock ownership plan. The Conversion was consummated on January 8, 2003, at which time the Company became the holding company for the Bank and issued shares of its stock to the general public.
The Company filed a Form SB-2 with the Securities and Exchange Commission (“SEC”) on September 19, 2002, which as amended, was declared effective by the SEC on November 13, 2002. The Bank filed a Form AC with the Office of Thrift Supervision (the “OTS”) on September 19, 2002, which as amended, along with related offering and proxy materials, was conditionally approved by the OTS on November 12, 2002, and November 13, 2002. The Company also filed an Application H-(e)1-S with the OTS on September 19, 2002, which was conditionally approved by the OTS on November 12, 2002. The members of the Bank approved the Plan of Conversion at a special meeting held on December 20, 2002, and the subscription offering closed on December 19, 2002.
On January 8, 2003, the Company became the holding company for the Bank upon the consummation of the Conversion. The Conversion was accomplished through the sale and issuance by the Company of 978,650 shares of common stock at $10 per share. Net proceeds from the sale of common stock were $9,145,901, inclusive of $782,920 related to shares held by the Bank’s employee stock ownership plan. Costs associated with the Conversion were deducted from the proceeds from the sale of the common stock and totaled $640,599.
The Bank operates as a federally-chartered stock savings bank, originally chartered by the State of Missouri in 1922. The Bank became a federally-chartered stock savings bank on January 8, 2003. The Bank’s deposit accounts are insured up to a maximum of $100,000 by the Savings Association Insurance Fund (SAIF), which is administered by the Federal Deposit Insurance Corporation (FDIC).
Note 2 — Earnings Per Share
For the three months and nine months ended June 30, 2003, earnings (basic and diluted) per share were $0.07 and $0.12, respectively. Basic and diluted earnings per share are based upon the weighted-average shares outstanding during the period of January 8, 2003, to June 30, 2003. Earnings for the quarter ended December 31, 2002, are not included in the calculation of earnings per share for the nine-month period ended June 30, 2003. ESOP shares that have been committed to be released are considered outstanding. The weighted-average shares outstanding for basic and diluted per share for the three and nine months ended June 30, 2003, were 902,871 and 902,033, respectively. There are no stock options outstanding. Earnings per share for the three and nine months ended June 30, 2002, are not meaningful since there was no common stock outstanding during those periods.
8
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements
Certain statements in this report that relate to the Company’s plans, objectives or future performance may be deemed to be forward-looking statements within the meaning of Private Securities Litigation Act of 1995. Such statements are based on management’s current expectations. Actual strategies and results in future periods may differ materially from those currently expected because of various risks and uncertainties. Additional discussion of factors affecting the Company’s business and prospects is contained in periodic filings with the SEC.
General
The Company’s results of operations depend primarily on its wholly-owned subsidiary bank, which is the Company’s primary investment. The Bank’s results of operations depend primarily on its net interest income. Net interest income is the difference between the interest income earned on interest-earning assets, consisting primarily of loans, mortgage-backed securities, investment securities and other interest-earning deposits, and the interest paid on interest-bearing liabilities, consisting primarily of deposit accounts and Federal Home Loan Bank (FHLB) advances. The Bank’s results of operations are also affected by provisions for loan losses, noninterest income and noninterest expense. Noninterest income consists primarily of fees and service charges and gains on the sale of assets. Noninterest expense consists primarily of salaries and employee benefits, occupancy, equipment, data processing and deposit insurance premiums, advertising, and other operating expenses. The Bank’s results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.
Changes in Financial Condition
Total assets increased $7.1 million, or 9.0%, to $85.0 million at June 30, 2003, from $77.9 million at September 30, 2002. The increase is primarily attributed to the infusion of cash from the stock offering as part of the Conversion, which was primarily used to fund loans and adjustable-rate mortgage-backed securities (MBSs). However, total assets did increase $2.2 million during the recent quarter due to an influx of deposits in the latter part of the quarter.
Loans increased $2.5 million, or 5.0%, from $49.9 million at September 30, 2002, to $52.4 million at June 30, 2003. The change was due to an increase in shorter-term commercial real estate loans, construction and development loans, and consumer loans. Multi-family and nonresidential real estate loans increased from $5.3 million at September 30, 2002, to $7.0 million at June 30, 2003. Construction and development loans (net of loans-in-process) increased from $2.2 million at September 30, 2002, to $6.0 million at June 30, 2003. Consumer loans increased from $3.0 million at September 30, 2002, to $3.8 million at June 30, 2003. The Bank continued its strategy to sell long-term, fixed-rate single-family real estate loans in the secondary market; although, for approximately two months during this period, the Bank did retain fixed-rate loans with maturities of 15 years or less. Single-family real estate loans decreased from $39.2 million at September 30, 2002, to $35.3 million at June 30, 2003. Conversely, the portfolio of single-family real estate loans serviced for others increased from $17.5 at September 30, 2002, to $24.2 million at June 30, 2003. Additional cash flow from the conversion was used to purchase mortgage-backed securities, fund deposit outflow and repay maturing FHLB advances. MBS increased from $3.7 million at September 30, 2002, to $11.9 million at June 30, 2003. The investment in MBS has been in MBS collateralized by loans with repricing periods of five years or less.
Deposits decreased from $64.5 million at September 30, 2002, to $63.9 million at June 30, 2003. Although deposits decreased $531,000, the aggregate amount of transactional checking and savings accounts increased $2.3 million, or 8.0%, during the same period. This is the result of the Bank focusing its funding strategy on transactional accounts as opposed to higher-costing and traditionally more interest-rate sensitive certificates of deposit. Accordingly, the percentage of deposits consisting of transactional checking and savings accounts increased from 44.9% at September 30, 2002, to 48.9% at June 30, 2003. FHLB advances decreased from $5.9 million at September 30, 2002, to $5.2 million at June 30, 2003.
Stockholder’s equity increased $8.5 million, from $6.6 million at September 30, 2002, to $15.1 million at June 30, 2003, primarily as a result of the issuance of 978,650 shares of common stock in the initial public offering. Stockholder’s equity
9
CCSB FINANCIAL CORP.
increased $157,000 in the most recent quarter as the result of net earnings, ESOP accrual and an increase in accumulated other comprehensive earnings. At June 30, 2003, the book value per share was $15.43.
Results of Operations — Comparison of the Three and Nine-Month Periods Ended June 30, 2003 and 2002
Net earnings for the three and nine months ended June 30, 2003, were $65,000 and $128,000, respectively, compared to $2,000 and $81,000, respectively, for the same periods in 2002. Both net interest income and noninterest income improved during the periods, while noninterest expense and provision for loan losses were higher.
Net Interest Income. Net interest income prior to the provision for loan losses increased $95,000, or 17.0%, for the three months ended June 30, 2003, and $180,000, or 10.6%, for the nine months ended June 30, 2003. The increase in net interest income can be attributed to an increase in interest-earning assets while interest-bearing liabilities declined during the periods as the result of the purchase of common stock by depositors. At June 30, 2003, interest-earning assets totaled $79.5 million compared to $72.4 million at September 30, 2002. In contrast, interest-bearing liabilities totaled $69.1 million at June 30, 2003, compared to $70.3 million at September 30, 2002. There was also a gradual shift from interest-bearing deposits in banks to higher yielding MBS and loans. Nevertheless, the historic decline in interest rates impacted both interest income and interest expense and continues to impact the net interest margin. While the improved ratio of interest-earning assets to interest-bearing liabilities has resulted in improved net interest income when compared to periods prior to the Conversion, it has been and may continue to be difficult to improve upon net interest income in periods after the Conversion as the result of the compression of the spread between the yield on earning assets and cost of interest-bearing liabilities.
Interest Income. Interest income decreased from $1.1 million and $3.6 million for the three and nine months ended June 30, 2002, respectively, to $1.0 million and $3.0 million for the three and nine months ended June 30, 2003, respectively. Despite the increase in interest-earning assets as the result of the Conversion, interest income has been impacted by the historically low interest rates. Interest income on loans receivable, securities and other interest-earning assets declined. Interest income on MBS increased due to the increase in the aggregate balance during the periods.
Interest income from loans receivable decreased $119,000, or 12.5%, for the three-month period and $578,000, or 18.6%, for the nine-month period compared to the prior periods as higher-rate loans either paid off, refinanced or were modified to lower interest rates and adjustable-rate loans repriced to lower interest rates than in the prior period. Interest income from securities decreased $32,000, or 34.7%, and $81,000, or 28.0%, for the three and nine months ended June 30, 2003, respectively, compared to the same periods in the prior year as securities either matured or were called and new securities were purchased at lower interest rates. Interest income from other interest-earning assets, principally interest-bearing deposits, decreased from $38,000 for the three months ended June 30, 2002, to $17,000 for the three months ended June 30, 2003, and from $110,000 for the nine months ended June 30, 2002, to $88,000 for the nine months ended June 30, 2003. This was the result of lower interest rates and a decrease in the overall average balance. The increase in interest income on MBS was due to the increased investment in MBS, as previously noted. Interest income on MBS increased from $25,000 and $74,000 for the three and nine months ended June 30, 2002, respectively, to $90,000 and $208,000 for the three and nine months ended June 30, 2003, respectively.
Interest expense. The impact of the historically low interest rates had even a greater impact on interest expense. The infusion of cash and the Bank’s increased liquidity position also allowed for the pay-off of higher-rate FHLB advances. Interest expense decreased from $549,000 and $1.9 million for the three and nine months ended June 30, 2002, respectively, to $347,000 and $1.1 million for the three and nine months ended June 30, 2003. Interest expense on deposits decreased $167,000, or 38.0%, for the three-month period and $543,000, or 36.8%, for the nine-month period as deposits repriced to lower rates than in the prior period. The Bank’s funding strategy focusing on lower interest-bearing transactional accounts as opposed to higher interest-bearing certificates of deposit has also had a favorable impact. Due to the pay-off of higher-rate FHLB advances, interest expense on borrowings decreased $35,000, or 32.0%, for the three-month period and $186,000, or 46.3%, for the nine-month period.
Provision for Loan Losses. Based on the continued growth of commercial real estate and nonmortgage loans, construction and development loans, and consumer loans, provision for loan losses of $8,000 and $42,000 were recorded for the three and nine months ended June 30, 2003, respectively, compared to $2,000 and $3,000 for the three and nine months ended June 30, 2002, respectively. The provision increased the allowance for loan losses to the amount considered adequate by management based on current economic conditions, loan portfolio composition, historical loss experience, and a review of selected individual loans.
10
CCSB FINANCIAL CORP.
Noninterest Income. Noninterest income increased from $42,000 and $201,000 for the three and nine months ended June 30, 2002, respectively, to $114,000 and $306,000 for the three months and nine months ended June 30, 2003, respectively. The improvement was primarily due to increases in service charges and fees and gain on the sale of loans, partially offset by higher amortization of mortgage servicing rights.
Gain on sale of loans increased $69,000 for the three-month period and $96,000 for the nine-month period. For the three months ended June 30, 2003, gain on sale of loans totaled $73,000 and for the nine months ended June 30, 2003, gain on sale of loans totaled $175,000. Such gains are indicative of the low interest rate environment, which has resulted in the growth in refinancing activity in recent periods and in particular fixed-rate loans. The Bank’s strategy not to retain fixed-rate loans has resulted in the growth of secondary market activities. If refinancing activity were to slow, such gains cannot be expected. The growth in loans serviced for others and the amount of refinancing activity has also resulted in the increased amortization of mortgage servicing rights (MSRs). The amortization of MSRs increased $21,000 and $52,000 for the three- and nine-month periods, respectively, offsetting increases in loan service fee income. Loan service charges increased $6,000 and $22,000 for the three-and nine-month periods, respectively. At June 30, 2003, the fair value of MSRs was $169,000. MSRs are amortized in proportion to, and over the period of, estimated net servicing income. The amortization of MSRs will continue to have an impact on noninterest income if the amount of loans serviced for others continues to increase or if interest rates remain at historically low levels resulting in more loan payoffs. Service charges on deposit accounts increased to $45,000 and $134,000 for the three and nine months ended June 30, 2003, respectively, from $30,000 and $96,000 for the three and nine months ended June 30, 2002, respectively. The increase in service charges for deposit accounts from the prior periods was due to fee income generated from the implementation of overdraft privileges and the increase in transactional deposit accounts.
Noninterest expense. Noninterest expense increased from $595,000 and $1.8 million for the three and nine months ended June 30, 2002, respectively, to $658,000 and $1.9 million for the three and nine months ended June 30, 2003, respectively. The increases were due primarily to higher compensation and benefits expense, which increased from $330,000 and $981,000 for the three and nine months ended June 30, 2002, respectively, to $381,000 and $1.1 million for the three and nine months ended June 30, 2003, respectively. The increase is due to expense of the Employee Stock Ownership Plan (ESOP) approved as part of the Conversion, an increase in staff, higher health insurance premium costs, and higher salaries and compensation for directors, officers and employees. In addition, for the three-month period, increases were noted in equipment and data processing expense, deposit insurance premiums, supervisory and professional expense and advertising, partially offset by decreases in occupancy expense, correspondent banking charges and other noninterest expense. The increase in supervisory and professional expense was particularly related to being a publicly-traded company. For the nine-month periods, increases are noted in all subcategories with the exception of advertising expenses and the prior period had a loss on the sale of foreclosed assets.
Income Taxes. Income taxes increased from the prior periods due to higher earnings before income taxes.
Qualitative Disclosures of Market Risk
The Company, through its wholly-owned subsidiary savings bank, has an exposure to interest rate risk. The Bank’s principal financial objective is to achieve long-term profitability while reducing its exposure to fluctuating interest rates. The Bank has employed various strategies intended to minimize the adverse effect of interest rate risk on future operations by providing a better match between the interest rate sensitivity of its assets and liabilities. In particular, the Bank’s strategies are intended to stabilize net interest income for the long-term by protecting its interest rate spread against increases in interest rates. Such strategies include the origination for portfolio of one-year, adjustable-rate mortgage loans (AMLs) secured by one-to-four family residential real estate and the origination of other types of adjustable-rate and short-term loans with greater interest rate sensitivities than long-term, fixed-rate residential mortgage loans.
Quantitative Disclosures of Market Risk
The Company does not purchase derivative financial instruments or other financial instruments for trading purposes.
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CCSB FINANCIAL CORP.
Further, the Company is not subject to any foreign currency exchange rate risk, commodity price risk or equity price risk. The Company, through its wholly-owned subsidiary savings bank, is subject to interest rate risk.
The OTS, the Company’s and Bank’s primary regulator, provides a net market value methodology to measure the interest rate risk exposure of thrift institutions. This exposure is a measure of the potential decline in the net portfolio value (NPV) of the institution based upon the effect of assumed incremental 100 basis point increases or decreases in interest rates. NPV is the present value of the expected net cash flows from the institution’s financial instruments (assets, liabilities and off-balance sheet contracts). Loans, deposits, advances and investments are valued taking into consideration similar maturities, related discount rates and applicable prepayment assumptions.
Liquidity and Capital Resources
The Company’s principal sources of funds are cash receipts from customer deposits, loan repayments by borrowers, proceeds from maturing securities, FHLB advances, and net earnings. The Bank has an agreement with the FHLB of Des Moines to provide cash advances, should the Bank need additional funds for loan originations or other purposes.
Commitments to originate loans are legally binding agreements to lend to the Bank’s customers. Letters of credit are conditional commitments issued by the Bank to guarantee the performance of the borrower to a third party. At June 30, 2003, commitments, which generally expire in 180 days or less, to originate adjustable and fixed-rate mortgage loans for portfolio (including related loans in process) were approximately $2,374,000 and $445,000, respectively. Interest rates on fixed-rate loans ranged from 5.75% to 6.25%. Also at June 30, 2003, commitments to originate consumer loans totaled $619,000, of which $42,000 were fixed-rate loans ranging from 5.75% to 7.50%. Commitments on behalf of borrowers for unused lines of credit on home equity loans, lines of credit secured by other real estate and commercial non-real estate loans were approximately $3,616,000 (including $49,000 that is fixed-rate) expiring in seven years or less. Commitments on behalf of borrowers for outstanding letters of credit amounted to $257,000 at June 30, 2003.
Minimum Regulatory Capital
The Bank is required to maintain certain minimum capital requirements under OTS regulations. Failure by a savings institution to meet minimum capital requirements can result in certain mandatory and possible discretionary actions by regulators, which, if undertaken, could have a direct material effect on the Bank’s financial statements. Under the capital adequacy guidelines and regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to judgments by the regulators about components, risk-weightings and other factors.
The Bank’s actual and required capital amounts and ratios at June 30, 2003, are as follows:
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| Actual | Minimum Required | ||||||||||||||||||
| for Capital Adequacy | to be "Well Capitalized" | ||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||
| (Dollars in Thousands) | |||||||||||||||||||
Stockholder's equity of the bank | $ | 10,542 | |||||||||||||||||
Unrealized gain on securities AFS, net | (84 | ) | |||||||||||||||||
Tangible capital | $ | 10,458 | 12.4 | % | $ | 1,269 | 1.5 | % | |||||||||||
Includable unrealized gain on equity securities available for sale, net | — | ||||||||||||||||||
General valuation allowance | 240 | ||||||||||||||||||
Total capital to risk-weighted assets | $ | 10,698 | 24.4 | % | $ | 3,512 | 8.0 | % | $ | 4,391 | 10.0 | % | |||||||
Tier 1 capital to risk-weighted assets | $ | 10,458 | 23.8 | % | $ | 1,756 | 4.0 | % | $ | 2,634 | 6.0 | % | |||||||
Tier 1 capital to total assets | $ | 10,458 | 12.4 | % | $ | 3,384 | 4.0 | % | $ | 4,230 | 5.0 | % | |||||||
Asset Quality
At June 30, 2003, there was one single-family loan in the amount of $33,000 that was over 90 days past due and on nonaccrual status. There were no other nonperforming or nonaccrual loans, and no loans or assets adversely classified. The Bank held one repossessed asset with a book value under $1,000 and no property classified as real estate owned. At June 30, 2003, there were five single-family mortgage loans totaling $291,000, including the above-mentioned single-family loan, and two consumer loans totaling $8,000 designated as special mention. There were no other loans, which were not currently classified as nonaccrual, 90 days past due or restructured but where known information about possible credit problems of borrowers caused management to have serious concerns as to the ability of the borrowers to comply with present loan repayment terms and would result in disclosure as nonaccrual, 90 days past due or restructured.
Allowance for Loan Losses
At June 30, 2003, the allowance for loan losses was $240,000. Management believes that all known losses in the loan portfolio that are both probable and reasonable to estimate have been recorded as of June 30, 2003. The following is a summary of activity in the allowance for loan losses:
| Nine Months Ended | ||||||||
| June 30, | June 30, | |||||||
| 2003 | 2002 | |||||||
| (Unaudited) | (Unaudited) | |||||||
Balance, beginning of period | $ | 206,035 | $ | 190,313 | ||||
Loan charge-offs | (11,089 | ) | (2,552 | ) | ||||
Loan recoveries | 3,043 | 1,900 | ||||||
Provision charged to expense | 42,100 | 3,374 | ||||||
Balance, end of period | $ | 240,089 | $ | 193,035 | ||||
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CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information required to be included in the Company’s periodic SEC reports. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
In addition, there has been no change in the Company’s internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II — Other Information
Item 1 — Legal Proceeding
There are no material legal proceedings to which the Company and Bank is a party or of which any of their property is subject. From time to time, the Bank is a party to various legal proceedings incident to its business.
Item 2 — Changes in Securities
None.
Item 3 — Defaults upon Senior Securities
Not applicable.
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) | Exhibit 31.1 – Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| (b) | Exhibit 31.2 – Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| (c) | Exhibit 32 – Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| (d) | Reports on Form |
| (e) | 8-K: Form 8-K on the release of earnings filed May 2, 2003. |
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.
CCSB FINANCIAL CORP. (Registrant) | ||||||||
| DATE: August 5, 2003 | /s/ John R. Davis | |||||||
John R. Davis, Chairman, President, and Chief Executive Officer (Principal Executive Officer) | ||||||||
| DATE: August 5, 2003 | /s/ Mario Usera | |||||||
Mario Usera, Executive Vice President, and Chief Financial Officer (Principal Financial Officer) | ||||||||
| DATE: August 5, 2003 | /s/ Deborah A. Jones | |||||||
Deborah A. Jones, Senior Vice President, Secretary, and Treasurer (Principal Accounting Officer) | ||||||||
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