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 December 31, 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 the number of shares outstanding of the issuer’s classes of common stock, as of the latest practicable date.
Class | Outstanding February 3, 2004 | |
| Common Stock, par value $.01 per share | 978,650 |
Transitional Small Business Disclosure Format. Yes ¨ No x
CCSB FINANCIAL CORP.
FORM 10-QSB
FOR THE QUARTER ENDED DECEMBER 31, 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 | |
Item 3 -Controls and Procedures | 14 | |
PART II –Other Information | 15 | |
| 15 | ||
Item 6 –Exhibits and Reports on Form 8-K | 15 | |
Exhibit 31.1 – Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
Exhibit 31.2 – Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
Exhibit 32 – Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
Reports on Form 8-K – Earnings Release Filed November 19, 2003, for the fiscal year ended September 30, 2003. | ||
| 16 | ||
2
CCSB FINANCIAL CORP.
(Unaudited)
December 31, 2003 | September 30, 2003 | |||||||
Assets | ||||||||
Cash and due from banks | $ | 2,972,754 | $ | 3,461,690 | ||||
Interest-bearing deposits in banks | 664,013 | 3,843,931 | ||||||
Total cash and cash equivalents | 3,636,767 | 7,305,621 | ||||||
Securities available for sale, at market value (amortized cost of $4,162,395 and $5,782,541, respectively) | 4,153,735 | 5,797,865 | ||||||
Stock in Federal Home Loan Bank of Des Moines | 320,600 | 345,400 | ||||||
Mortgage-backed securities available for sale, at market value (amortized cost of $14,179,723 and $15,245,853, respectively) | 14,068,134 | 15,196,822 | ||||||
Loans receivable, net of allowance for loan losses of $257,685 and $249,300, respectively | 55,614,139 | 51,996,061 | ||||||
Loans held for sale | — | — | ||||||
Premises and equipment, net | 4,159,429 | 4,206,829 | ||||||
Foreclosed real estate and other repossessed assets, net | 5,000 | — | ||||||
Accrued interest receivable: | ||||||||
Securities | 32,110 | 39,682 | ||||||
Mortgage-backed securities | 47,821 | 54,767 | ||||||
Loans receivable | 209,253 | 215,263 | ||||||
Other assets | 343,035 | 313,023 | ||||||
Total assets | $ | 82,590,023 | $ | 85,471,333 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Deposits | $ | 62,641,405 | $ | 64,224,723 | ||||
Accrued interest on deposits | 20 | 247 | ||||||
Fed funds purchased | 695,000 | — | ||||||
Advances from Federal Home Loan Bank | 3,939,750 | 5,140,757 | ||||||
Advances from borrowers for taxes and insurance | 47,816 | 572,577 | ||||||
Other liabilities | 189,008 | 421,899 | ||||||
Income taxes | 52,126 | 69,416 | ||||||
Total liabilities | 67,565,125 | 70,429,619 | ||||||
Commitments and contingencies | ||||||||
Common Stock: | ||||||||
$0.01 par value; 2,500,000 shares authorized; 978,650 shares issued | 9,787 | 9,787 | ||||||
Additional Paid-In Capital | 9,158,857 | 9,150,476 | ||||||
Unearned ESOP Shares | (715,913 | ) | (732,665 | ) | ||||
Retained earnings - substantially restricted | 6,651,532 | 6,636,363 | ||||||
Accumulated other comprehensive earnings, net | (79,365 | ) | (22,247 | ) | ||||
Total stockholders’ equity | 15,024,898 | 15,041,714 | ||||||
Total liabilities and stockholders’ equity | $ | 82,590,023 | $ | 85,471,333 | ||||
See accompanying notes to consolidated financial statements.
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CCSB FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Three Months Ended December 31, | ||||||||
| 2003 | 2002 | |||||||
Interest income: | ||||||||
Loans receivable | $ | 786,556 | $ | 851,697 | ||||
Mortgage-backed securities | 103,202 | 38,194 | ||||||
Securities | 40,063 | 77,802 | ||||||
Other interest-earning assets | 6,252 | 40,432 | ||||||
Total interest income | 936,073 | 1,008,125 | ||||||
Interest expense: | ||||||||
Deposits | 216,936 | 357,288 | ||||||
Borrowings | 40,182 | 79,134 | ||||||
Total interest expense | 257,118 | 436,422 | ||||||
Net interest income | 678,955 | 571,703 | ||||||
Provision for loan losses | 10,000 | 25,700 | ||||||
Net interest income after provision for loan losses | 668,955 | 546,003 | ||||||
Noninterest income: | ||||||||
Service charges on deposit accounts | 45,794 | 44,414 | ||||||
Loan service charges | 29,068 | 24,494 | ||||||
Amortization of mortgage servicing rights | (27,585 | ) | (29,468 | ) | ||||
Gain on sale of loans | 3,989 | 79,697 | ||||||
Other | 3,423 | 5,436 | ||||||
Total noninterest income | 54,689 | 124,573 | ||||||
Noninterest expense: | ||||||||
Compensation and benefits | 403,443 | 348,256 | ||||||
Occupancy expense | 61,420 | 66,601 | ||||||
Equipment and data processing expense | 94,751 | 99,139 | ||||||
SAIF deposit insurance premium | 2,537 | 2,721 | ||||||
Supervisory and professional | 26,858 | 20,830 | ||||||
Advertising | 14,592 | 13,592 | ||||||
Correspondent banking charges | 11,133 | 16,253 | ||||||
Other | 81,608 | 71,218 | ||||||
Total noninterest expense | 696,342 | 638,610 | ||||||
Earnings before income taxes | 27,302 | 31,966 | ||||||
Income taxes | 12,133 | 10,870 | ||||||
Net earnings | $ | 15,169 | $ | 21,096 | ||||
Basic and diluted earnings per share - See Note 2 | $ | 0.02 | N/A | |||||
See accompanying notes to consolidated financial statements.
4
CCSB FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(Unaudited)
| Three Months Ended December 31, | |||||||
| 2003 | 2002 | ||||||
Net earnings | $ | 15,169 | 21,096 | ||||
Other comprehensive earnings: | |||||||
Unrealized gain (loss) on securities and MBS available for sale, net | (57,118 | ) | (17,147 | ) | |||
Comprehensive earnings | $ | (41,949 | ) | 3,949 | |||
See accompanying notes to consolidated financial statements.
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CCSB FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended December 31, | ||||||||
| 2003 | 2002 | |||||||
Cash flows from operating activities: | ||||||||
Net earnings | $ | 15,169 | $ | 21,096 | ||||
Adjustments to reconcile net earnings to net cash provided by (used for) operating activities: | ||||||||
Depreciation and amortization: | ||||||||
Deferred loans fees, net | (8,573 | ) | (9,265 | ) | ||||
Premises and equipment | 60,549 | 69,477 | ||||||
Premiums and discounts, net | 37,091 | (5,340 | ) | |||||
ESOP expense | 25,133 | — | ||||||
(Increase) decrease in accrued interest receivable | 20,528 | 7,436 | ||||||
Increase (decrease) in accrued interest on deposits | (227 | ) | 21,080 | |||||
Provision for loan losses | 10,000 | 25,700 | ||||||
Loans originated for sale | (301,700 | ) | (6,540,205 | ) | ||||
Proceeds from sale of loans, net | 305,689 | 7,091,402 | ||||||
Gain on sale of loans | (3,989 | ) | (79,697 | ) | ||||
Change in other assets and other liabilities, net | (217,061 | ) | (193,588 | ) | ||||
Net cash provided by operating activities | (57,391 | ) | 408,096 | |||||
Cash flows from investing activities: | ||||||||
Net change in loans receivable | (3,619,505 | ) | (261,216 | ) | ||||
(Purchases) redemption of FHLB Stock | 24,800 | — | ||||||
Securities available for sale: | ||||||||
Purchases | — | (1,000,000 | ) | |||||
Proceeds from maturity or call | 1,598,810 | 2,015,479 | ||||||
Principal collections | 21,212 | 1,647 | ||||||
Mortgage-backed securities available for sale: | ||||||||
Principal payments | 995,455 | 356,094 | ||||||
Purchases | — | (2,949,131 | ) | |||||
Additions to foreclosed real estate and other repossessed assets, net | (5,000 | ) | — | |||||
Purchase of premises and equipment | (13,149 | ) | (52,905 | ) | ||||
Net cash provided by (used for) investing activities | $ | (997,377 | ) | $ | (1,890,032 | ) | ||
(Continued)
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CCSB FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
| (Continued) | Three Months Ended December 31, | |||||||
| 2003 | 2002 | |||||||
Cash flows from financing activities: | ||||||||
Net increase (decrease) in deposits | $ | (1,583,318 | ) | $ | 20,839,093 | |||
Proceeds from advances from the FHLB | 2,500,000 | — | ||||||
Repayments of advances from the FHLB | (3,701,007 | ) | (2,152,636 | ) | ||||
Proceeds from fed funds purchased | 695,000 | — | ||||||
Increase (decrease) in advances from borrowers for taxes and insurance | (524,761 | ) | (623,662 | ) | ||||
Net cash provided by (used for) financing activities | (2,614,086 | ) | 18,062,795 | |||||
Net increase (decrease) in cash and cash equivalents | (3,668,854 | ) | 16,580,859 | |||||
Cash and cash equivalents at beginning of period | 7,305,621 | 11,045,672 | ||||||
Cash and cash equivalents at end of period | $ | 3,636,767 | $ | 27,626,531 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid (received) during the period for: | ||||||||
Interest on deposits and advances from FHLB | $ | 256,891 | 457,502 | |||||
Federal and state income taxes | $ | — | 39,000 | |||||
Real estate and other assets acquired in settlement of loans | $ | 5,000 | 3,000 | |||||
See accompanying notes to consolidated financial statements.
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CCSB FINANCIAL CORP.
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 Company for the year ended September 30, 2003, contained in the Company’s Form 10-KSB for the period ended September 30, 2003.
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 ended December 31, 2003, earnings (basic and diluted) per share were $0.02 based upon the weighted-average shares outstanding during the period. Earnings per share data for the quarter ended December 31, 2002, are not considered meaningful as the Conversion had not yet been completed as of December 31, 2002. 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 months ended December 31, 2003, were 906,221. There are no stock options outstanding as of December 31, 2003.
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CCSB FINANCIAL CORP.
Note 3 – Benefit Plans
On January 15, 2004, the Company’s stockholders voted to approve both a Recognition and Retention Plan (“RRP”) and a Stock Option Plan. The RRP authorizes the award of up to 39,146 shares of common stock, subject to restrictions, to be issued to directors, officers and employees of the Company and its subsidiary bank. The Stock Option Plan provides for awards in the form of stock options, reload options, dividend equivalent rights and/or limited stock appreciation rights to officers and employees of the Company and/or its subsidiary bank. The approved Stock Option Plan authorizes the granting of options to purchase up to 97,865 shares of common stock. The plans were established as a method of providing directors, officers and employees a proprietary interest in the Company and designed to encourage such persons to remain with the Company and/or subsidiary bank. The plans are administered by the Compensation Committee of the Board of Directors of the Company, which is composed of all directors except Directors Davis and Usera. The Company accounts for the cost of share purchases under the plans as a reduction of stockholders’ equity. The awards generally vest at the rate of 20% per year over a five-year period. Compensation expense for the RRP is to be recognized based on the Company’s stock price on the date the shares are awarded to employees over the five-year vesting period. As of December 31, 2003, no expense has been recognized as no awards under the RRP had yet been granted. The Company will account for its RRP and Stock Option Plan under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and related Interpretations. As of December 31, 2003, no stock-based employee compensation cost is reflected in net earnings, as no RRP awards have yet been granted.
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, Federal Home Loan Bank (FHLB) advances and fed funds purchased. 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 decreased $2.9 million, or 3.4%, to $82.6 million at December 31, 2003, from $85.5 million at September 30, 2003. The decrease is primarily attributed to the runoff of excess liquidity to fund deposit outflow, the repayment of FHLB advances, and the payment of taxes from advances from borrowers for taxes and insurance (escrow accounts) on mortgage loans. As a result, total cash and cash equivalents decreased $3.7 million from $7.3 million at September 30, 2003, to $3.6 million at December 31, 2003. Most of the decrease in cash and cash equivalents was in interest-bearing deposits in banks, which decreased $3.2 million during the period from $3.8 million at September 30, 2003, to $660,000 at December 31, 2003.
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CCSB FINANCIAL CORP.
There was also a shift from investments to loans during the period. In addition to the decrease in interest-bearing deposits in banks, securities available for sale decreased $1.6 million, or 28.4%, from $5.8 million at September 30, 2003, to $4.2 million at December 31, 2003, and mortgage-backed securities (MBS) decreased $1.1 million, or 7.4%, from $15.2 million at September 30, 2003, to $14.1 million at December 31, 2003. Loans receivable increased $3.6 million, or 7.0%, from $52.0 million at September 30, 2003, to $55.6 million at December 31, 2003. During the three months ended December 31, 2003, payoffs on loans slowed significantly from prior periods. Single-family real estate loans increased $713,000, or 2.2%, from $32.9 million at September 30, 2003, to $33.6 million at December 31, 2003. The Bank continued its strategy to sell long-term, fixed-rate single-family real estate loans in the secondary market, but the secondary market activity has slowed due to the decline in refinances. Loans originated for sale for the three months ended December 31, 2003, totaled $302,000 compared to $6.5 million for the three months ended December 31, 2002. Increases in shorter-term nonresidential real estate loans, construction and development loans, commercial nonmortgage loans and consumer loans occurred, while multi-family loans declined. Nonresidential real estate loans increased slightly from $5.0 million at September 30, 2003, to $5.1 million at December 31, 2003. An increase in the amount disbursed on construction and development loans resulted in an increase in construction and development loans (net of loans-in-process) from $7.7 million at September 30, 2003, to $9.1 million at December 31, 2003. Commercial nonmortgage loans increased from $742,000 at September 30, 2003, to $1.8 million at December 31, 2003, due primarily to two new nonmortgage loans totaling $873,000. Consumer loans (including loans secured by deposits) increased from $4.6 million at September 30, 2003, to $5.2 million at December 31, 2003, primarily due to an increase in home equity loans. Multi-family loans decreased from $1.4 million at September 30, 2003, to $1.1 million at December 31, 2003.
Deposits decreased $1.6 million, or 2.5%, from $64.2 million at September 30, 2003, to $62.6 million at December 31, 2003, primarily due to a $1.1 million decrease in money market deposit accounts resulting from disintermediation and higher interest rates being offered by other financial institutions in the market area. Certificates of deposit also decreased $412,000. FHLB advances decreased from $5.1 million at September 30, 2003, to $3.9 million at December 31, 2003, as $3.7 million of higher-costing FHLB advances matured during the three months ended December 31, 2003, while $2.5 million in new FHLB advances were acquired. As a result, the weighted average rate on FHLB advances declined from 5.60% at September 30, 2003, to 3.15% at December 31, 2003. An additional $695,000 was outstanding in fed funds purchased at December 31, 2003.
Stockholders’ equity decreased $17,000 in the three months ended December 31, 2003, as the net unrealized loss on securities and MBS available for sale offset net earnings. Stockholders’ equity totaled $15.0 million, or $15.35 per share, at December 31, 2003.
Results of Operations – Comparison of the Three-Month Periods Ended December 31, 2003 and 2002
Net earnings for the three months ended December 31, 2003, were $15,000 compared to $21,000 for the same period in 2002. Higher net interest income was offset by a decrease in noninterest income and an increase in noninterest expense. Noninterest income was impacted by lower gain on the sale of loans, while the increase in noninterest expense can be attributed primarily to higher compensation and benefits.
Net Interest Income. Net interest income before the provision for loan losses increased $107,000, or 18.8%, to $679,000 for the three months ended December 31, 2003, from $572,000 for the three months ended December 31, 2002. The increase in net interest income can partially be attributed to the improved ratio of interest-earning assets to interest-bearing liabilities resulting from the infusion of capital. At December 31, 2003, interest-earning assets totaled 111% of interest-bearing liabilities compared to 102% at December 31, 2002. In addition, interest income benefited from a shift in the mix of assets and the historically low interest rates had a greater impact on the cost of funds than on interest income.
Interest Income. Interest income decreased $72,000, or 7.1%, from $1.0 million for the three months ended December 31, 2002, to $936,000 for the three months ended December 31, 2003. Interest income on loans receivable, securities and other interest-earning assets declined due to the impact of lower interest rates, but the impact on interest income was partially offset by the increase in the average balances of net loans receivable and MBS.
Interest income from loans receivable decreased $65,000, or 7.6%, for the three-month period compared to the prior period 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. The impact of lower interest rates was partially offset by an increase in the average balance of net loans receivable, which increased $3.8 million from $50.0 million for the three months ended December 31, 2002, to $53.8 million for the three months ended December 31, 2003. Interest income
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CCSB FINANCIAL CORP.
from securities decreased $38,000, or 48.5%, for the three months ended December 31, 2003, compared to the same period in the prior year as securities either matured or were called and new securities were purchased at lower interest rates. The average balance in securities, including FHLB stock, also decreased $1.8 million from $7.1 million for the three months ended December 31, 2002, to $5.3 million for the three months ended December 31, 2003. Interest income from other interest-earning assets, principally interest-bearing deposits, decreased from $40,000 for the three months ended December 31, 2002, to $6,000 for the three months ended December 31, 2003. This was the result of lower interest rates and a decrease in the average balance. The increase in interest income on MBS was due to the increased investment in MBS. Interest income on MBS increased from $38,000 for the three months ended December 31, 2002, to $103,000 for the three months ended December 31, 2003, as the average balance nearly tripled from $5.0 million for the three months ended December 31, 2002, to $14.6 million for the three months ended December 31, 2003.
Interest expense. The impact of the historically low interest rates had a greater impact on interest expense due to the pay-off of higher-rate FHLB advances and the repricing of interest-bearing deposits to lower interest rates. Interest expense decreased $179,000, or 41.1%, from $436,000 for the three months ended December 31, 2002, to $257,000 for the three months ended December 31, 2003. Interest expense on deposits decreased $140,000, or 39.3%, for the three-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 $39,000, or 49.2%, for the three-month period.
Provision for Loan Losses. Provisions for loan losses are charged to operations in order to increase the allowance for loan losses to a level necessary to absorb management’s best estimate of probable loan losses in the loan portfolio as of the balance sheet date. Management considers, among other factors, historical loss experience, type and amount of loans in the portfolio, adverse circumstances that may affect the borrower’s ability to repay the loan, the estimated value of underlying collateral, and current economic conditions. This evaluation is ongoing and inherently subjective, as it requires estimates that are susceptible to significant revision as new information becomes available or circumstances change. Various regulatory agencies periodically review the allowance for loan losses and may require the Bank to record additional provisions based on their judgment of information available to them at the time of examination.
The Bank recorded a provision for loan losses of $10,000 for the three months ended December 31, 2003, compared to $26,000 for the three months ended December 31, 2002. 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.
Noninterest Income. Noninterest income decreased $70,000, or 56.1%, from $125,000 for the three months ended December 31, 2002, to $55,000 for the three months ended December 31, 2003, as the result of the decrease in gain on the sale of loans. The decrease in the gain on the sale of loans was only slightly offset by higher service charges on deposit accounts, higher loan service charges and lower amortization of mortgage servicing rights.
Gain on sale of loans decreased $76,000 for the three-month period as secondary market activities, as previously noted, have been reduced as the result of the slowdown in refinances. For the three months ended December 31, 2003, gain on sale of loans totaled $4,000 compared to $80,000 for the three months ended December 31, 2002.
Noninterest expense. Noninterest expense increased $58,000, or 9.0%, from $639,000 for the three months ended December 31, 2002, to $696,000 for the three months ended December 31, 2003. The increase was primarily due to higher compensation and benefits expense, which increased $55,000, or 15.8%, from $348,000 for the three months ended December 31, 2002, to $403,000 for the three months ended December 31, 2003. Approximately $25,000 of the increase is due to expense of the Employee Stock Ownership Plan (ESOP) approved as part of the Conversion, $6,000 is due to higher health insurance premium costs, and $22,000 is due to lower loan origination costs deferred pursuant to generally accepted accounting principles. In addition, for the three-month period, increases were noted in supervisory and professional expense, which related to expenses of being a publicly-traded company that were not applicable in the prior period, advertising and other noninterest expense. The increases were partially offset by lower occupancy expense, equipment and data processing expense, deposit insurance premiums, and correspondent banking charges.
Income Taxes. Income taxes increased from the prior period despite lower earnings before income taxes because of the taxable impact of ESOP expense that was not present in the prior period.
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CCSB FINANCIAL CORP.
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. 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, fed funds purchased 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 December 31, 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 $644,000 and $3,181,000, respectively. Interest rates on fixed-rate loans ranged from 4.75% to 7.75%. In addition, at December 31, 2003, commitments to originate consumer and commercial non-real estate loans totaled $212,000, of which $17,000 were fixed-rate loans ranging from 5.75% to 7.75%. 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 $4,355,000 (including $56,000 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 December 31, 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.
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CCSB FINANCIAL CORP.
The Bank’s actual and required capital amounts and ratios at December 31, 2003, are as follows:
| Actual | Minimum for Capital Adequacy | Required to be “Well Capitalized” | ||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||
Stockholders’ equity of the Bank | $ | 10,489 | ||||||||||||||||
Unrealized loss on securities AFS, net | 79 | |||||||||||||||||
Tangible capital | $ | 10,568 | 12.9 | % | $ | 1,229 | 1.5 | % | ||||||||||
Includable unrealized gain on equity securities available for sale, net | — | |||||||||||||||||
General valuation allowance | 258 | |||||||||||||||||
Total capital to risk-weighted assets | $ | 10,826 | 23.6 | % | $ | 3,669 | 8.0 | % | $ | 4,587 | 10.0 | % | ||||||
Tier 1 capital to risk-weighted assets | $ | 10,568 | 23.0 | % | $ | 1,835 | 4.0 | % | $ | 2,752 | 6.0 | % | ||||||
Tier 1 capital to total assets | $ | 10,568 | 12.9 | % | $ | 3,277 | 4.0 | % | $ | 4,096 | 5.0 | % | ||||||
Asset Quality
At December 31, 2003, nonperforming loans or assets consisted of one single-family loan in the amount of $31,000 that was over 90 days past due and on nonaccrual status and one repossessed automobile totaling $5,000. Only the repossessed asset was adversely classified, due to loan-to-value ratio of the single-family loan. There were no properties classified as real estate owned. At December 31, 2003, there were four single-family mortgage loans, including the loan on nonaccrual status, totaling $209,000 and one consumer loan totaling $3,000 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 December 31, 2003, the allowance for loan losses was $258,000. Management believes that all known losses in the loan portfolio that are both probable and reasonable to estimate have been recorded as of December 31, 2003. The following is a summary of activity in the allowance for loan losses:
| Three Months Ended | ||||||||
| December 31, 2003 | December 31, 2002 | |||||||
| (Unaudited) | (Unaudited) | |||||||
Balance, beginning of period | $ | 249,300 | $ | 206,035 | ||||
Loan charge-offs | (2,815 | ) | (1,875 | ) | ||||
Loan recoveries | 1,200 | 1,144 | ||||||
Provision charged to expense | 10,000 | 25,700 | ||||||
Balance, end of period | $ | 257,685 | $ | 231,004 | ||||
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CCSB FINANCIAL CORP.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. There has been no change in the Company’s internal control over financial reporting during the Company’s first quarter of fiscal year 2004 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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CCSB FINANCIAL CORP.
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 and Use of Proceeds
None.
Item 3 - Defaults upon Senior Securities
Not applicable.
Item 4 - Submission of Matters to a Vote of Security Holders
The annual meeting of stockholders of the registrant was held on January 15, 2004. At the meeting the stockholders elected Robert A. Whipple and George A. McKinley to three-year terms as directors of the Company and approved the Company’s 2004 Stock Option Plan and 2004 Recognition and Retention Plan. Also at the meeting, Michael Trokey & Company, P.C., was ratified as the Company’s independent auditors. The results of the voting for each matter considered was as follows:
a) The election of directors to serve for a term of three years of until a successor has been elected and qualified.
| For | Withheld | Broker Non-Vote | ||||
Robert A. Whipple | 821,546 | 30,011 | 0 | |||
George A. McKinley | 825,008 | 26,549 | 0 |
b) The approval of the CCSB Financial Corp. 2004 Stock Option Plan.
| For | Withheld | Abstain | Broker Non-Vote | |||||
| 493,950 | 76,142 | 5,491 | 275,974 |
c) The approval of the CCSB Financial Corp. 2004 Recognition and Retention Plan.
| For | Withheld | Abstain | Broker Non-Vote | |||||
| 437,651 | 128,365 | 9,567 | 275,974 |
d) The appointment of Michael Trokey & Company, P.C., as auditors of the Company for the fiscal year ending September 30, 2004.
| For | Withheld | Abstain | Broker Non-Vote | |||||
| 829,086 | 15,180 | 7,291 | 0 |
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 8-K: Form 8-K filed on November 19, 2003, on the release of earnings for the fiscal year ended September 30, 2003. |
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CCSB FINANCIAL CORP.
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: February 3, 2004 | /s/ John R. Davis | |
| John R. Davis, Chairman, President, and | ||
| Chief Executive Officer (Principal Executive Officer) | ||
DATE: February 3, 2004 | /s/ Mario Usera | |
| Mario Usera, Executive Vice President, and | ||
| Chief Financial Officer (Principal Financial Officer) | ||
DATE: February 3, 2004 | /s/ Deborah A. Jones | |
| Deborah A. Jones, Senior Vice President, | ||
| Secretary, and Treasurer (Principal Accounting Officer) | ||
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