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, 2004
| ¨ | 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 Kansas, Liberty, Missouri 64068
(Address of principal executive office)
(816) 781-4500
(Issuer’s telephone number)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report.)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x. No ¨.
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:
Class | Outstanding February 2, 2005 | |
| Common Stock, par value $.01 per share | 966,745 |
Transitional Small Business Disclosure Format. Yes ¨ No x
FORM 10-QSB
INDEX
| PAGE NO. | ||||
| PART I – Financial Information | ||||
| Consolidated Balance Sheets | 3 | |||
| Consolidated Statements of Income | 4 | |||
| Consolidated Statements of Comprehensive Income | 5 | |||
| Consolidated Statements of Cash Flows | 6-7 | |||
| Notes to Consolidated Financial Statements | 8-9 | |||
Item 2 –Management’s Discussion and Analysis or Plan of Operation | 10-14 | |||
Item 3 –Controls and Procedures | 15 | |||
| PART II – Other Information | 16 | |||
Item 6 –Exhibits | 16 | |||
| Signature Page | 17 | |||
| Certifications | 18-20 | |||
CCSB FINANCIAL CORP.
PART I – FINANCIAL INFORMATION
December 31, 2004 and September 30, 2004
December 31, (Unaudited) | September 30, 2004 | |||||||
ASSETS: | ||||||||
Cash and due from banks | $ | 2,655,798 | $ | 2,950,102 | ||||
Interest-bearing deposits in banks | 125,778 | 79,566 | ||||||
Federal funds sold | — | 582,000 | ||||||
Total cash and cash equivalents | 2,781,576 | 3,611,668 | ||||||
Available-for-sale securities | 17,077,706 | 18,076,040 | ||||||
Federal Home Loan Bank stock | 762,400 | 492,100 | ||||||
Loans, net of allowance for loan losses of $315,000 and $300,000 at December 31, 2004, and September 30, 2004, respectively | 64,149,099 | 59,512,972 | ||||||
Loans held for sale | — | 107,000 | ||||||
Premises and equipment, net | 4,789,494 | 4,092,410 | ||||||
Accrued interest receivable | 311,381 | 274,079 | ||||||
Bank owned life insurance - cash surrender value | 2,555,527 | 2,528,698 | ||||||
Other assets | 293,877 | 334,482 | ||||||
TOTAL ASSETS | $ | 92,721,060 | $ | 89,029,449 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY: | ||||||||
Deposits: | ||||||||
Demand | $ | 3,773,757 | $ | 4,337,369 | ||||
Savings, NOW and money market | 29,171,811 | 28,422,812 | ||||||
Time deposits | 30,673,455 | 32,574,367 | ||||||
Total deposits | 63,619,023 | 65,334,548 | ||||||
Federal funds purchased | 1,375,000 | — | ||||||
Federal Home Loan Bank advances | 12,936,519 | 8,205,633 | ||||||
Advances from borrowers for taxes and insurance | 88,975 | 634,223 | ||||||
Interest payable and other liabilities | 196,937 | 477,426 | ||||||
TOTAL LIABILITIES | 78,216,454 | 74,651,830 | ||||||
Commitments and contingencies: | ||||||||
Preferred stock, $0.01 par value; 500,000 shares authorized; none issued | — | — | ||||||
Common stock, $0.01 par value; 2,500,000 shares authorized; 978,650 shares issued | 9,787 | 9,787 | ||||||
Additional paid-in capital | 9,194,812 | 9,190,436 | ||||||
Treasury stock, at cost, of 11,905 shares and 11,880 shares at December 31, 2004 and September 30, 2004, respectively | (167,425 | ) | (167,033 | ) | ||||
Unearned ESOP shares | (651,552 | ) | (667,805 | ) | ||||
Unearned RRP shares | (467,219 | ) | (502,583 | ) | ||||
Retained earnings - substantially restricted | 6,660,409 | 6,622,865 | ||||||
Accumulated other comprehensive loss | (74,206 | ) | (108,048 | ) | ||||
TOTAL STOCKHOLDERS’ EQUITY | 14,504,606 | 14,377,619 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 92,721,060 | $ | 89,029,449 | ||||
See notes to consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF INCOME
For Three Months Ended December 31, 2004 and 2003 (Unaudited)
Three Months Ended December 31, | ||||||||
| 2004 | 2003 | |||||||
INTEREST AND DIVIDEND INCOME: | ||||||||
Loans | $ | 886,295 | $ | 786,556 | ||||
Investment and mortgage-backed securities | 130,924 | 140,816 | ||||||
FHLB stock | 3,704 | 2,449 | ||||||
Other interest-earning assets | 4,494 | 6,252 | ||||||
TOTAL INTEREST AND DIVIDEND INCOME | 1,025,417 | 936,073 | ||||||
INTEREST EXPENSE: | ||||||||
Deposits | 238,529 | 216,936 | ||||||
Other borrowings | 66,692 | 40,182 | ||||||
TOTAL INTEREST EXPENSE | 305,221 | 257,118 | ||||||
NET INTEREST INCOME | 720,196 | 678,955 | ||||||
Provision for loan losses | 15,000 | 10,000 | ||||||
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES | 705,196 | 668,955 | ||||||
NONINTEREST INCOME: | ||||||||
Charges and other fees on loans | 25,835 | 29,068 | ||||||
Charges and other fees on deposit accounts | 49,125 | 45,794 | ||||||
Amortization of mortgage servicing rights | (19,560 | ) | (27,585 | ) | ||||
Net gain on the sale of loans | 7,741 | 3,989 | ||||||
Increase in cash surrender value of bank owned life insurance | 26,829 | — | ||||||
Other | 4,167 | 3,423 | ||||||
TOTAL NONINTEREST INCOME | 94,137 | 54,689 | ||||||
NONINTEREST EXPENSE: | ||||||||
Compensation and benefits | 443,182 | 403,443 | ||||||
Occupancy and equipment, net | 118,197 | 115,826 | ||||||
Data processing | 43,794 | 40,345 | ||||||
Audit, legal and other professional services | 30,972 | 26,858 | ||||||
Advertising | 14,620 | 14,592 | ||||||
Correspondent banking charges | 11,721 | 11,133 | ||||||
Other | 92,735 | 84,145 | ||||||
TOTAL NONINTEREST EXPENSE | 755,221 | 696,342 | ||||||
INCOME BEFORE INCOME TAXES | 44,112 | 27,302 | ||||||
PROVISION FOR INCOME TAXES | 6,568 | 12,133 | ||||||
NET INCOME | $ | 37,544 | $ | 15,169 | ||||
BASIC AND DILUTED EARNINGS PER SHARE | $ | 0.04 | $ | 0.02 | ||||
See notes to consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For Three Months Ended December 31, 2004 and 2003 (Unaudited)
Three Months Ended December 31, | ||||||
| 2004 | 2003 | |||||
Net income | $ | 37,544 | 15,169 | |||
Other comprehensive income (loss): | ||||||
Unrealized gain (loss) on securities available for sale, net | 33,842 | (57,118 | ) | |||
Comprehensive income (loss) | $ | 71,386 | (41,949 | ) | ||
See notes to consolidated financial statements.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
For Three Months Ended December 31, 2004 and 2003 (Unaudited)
Three Months Ended December 31, | ||||||||
| 2004 | 2003 | |||||||
CASH FLOW FROM OPERATING ACTIVITIES: | ||||||||
Net income | $ | 37,544 | $ | 15,169 | ||||
Items not requiring (providing) cash: | ||||||||
Depreciation and amortization | 58,384 | 60,549 | ||||||
Provision for loan losses | 15,000 | 10,000 | ||||||
Amortization of premiums and discounts on securities | 17,633 | 37,091 | ||||||
Amortization of mortgage-servicing rights | 19,560 | 27,585 | ||||||
Compensation related to incentive plans | 31,942 | — | ||||||
Compensation related to ESOP | 23,659 | 25,133 | ||||||
Deferred income taxes | (12,052 | ) | — | |||||
Deferred loan fees, net | (10,582 | ) | (8,573 | ) | ||||
Originations of mortgage loans held for sale | (385,500 | ) | (301,700 | ) | ||||
Proceeds from the sale of mortgage loans | 500,241 | 305,689 | ||||||
Net gain on loans sold | (7,741 | ) | (3,989 | ) | ||||
Changes in: | ||||||||
Interest receivable | (37,302 | ) | 20,528 | |||||
Cash surrender value of life insurance | (26,829 | ) | — | |||||
Other assets | (5,474 | ) | 5,535 | |||||
Accrued income taxes | 21,139 | (17,290 | ) | |||||
Interest payable and other liabilities | (280,489 | ) | (233,118 | ) | ||||
NET CASH USED FOR OPERATING ACTIVITIES | (40,867 | ) | (57,391 | ) | ||||
CASH FLOW FROM INVESTING ACTIVITIES: | ||||||||
Proceeds from sales, maturity or call of available-for-sale securities | — | 1,598,810 | ||||||
Repayment of principal on mortgage-backed securities | 1,002,283 | 995,455 | ||||||
Principal collections on available-for-sale securities | 29,692 | 21,212 | ||||||
(Purchase) redemption of FHLB stock, net | (270,300 | ) | 24,800 | |||||
Net change in loans | (4,640,545 | ) | (3,619,505 | ) | ||||
Proceeds from sale of foreclosed assets | — | (5,000 | ) | |||||
Purchase of premises and equipment | (755,468 | ) | (13,149 | ) | ||||
NET CASH USED FOR INVESTING ACTIVITIES | (4,634,338 | ) | (997,377 | ) | ||||
(Continued)
6
CCSB FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For Three Months Ended December 31, 2004 and 2003 (Unaudited)
(Continued)
Three Months Ended December 31, | ||||||||
| 2004 | 2003 | |||||||
CASH FLOW FROM FINANCING ACTIVITIES: | ||||||||
Net decrease in deposits | $ | (1,715,525 | ) | $ | (1,583,318 | ) | ||
Proceeds from Federal Home Loan Bank overnight funds | 5,500,000 | 1,000,000 | ||||||
Repayments of Federal Home Loan Bank overnight funds | (5,500,000 | ) | (1,000,000 | ) | ||||
Proceeds from Federal Home Loan Bank fixed-maturity advances | 5,250,000 | 2,500,000 | ||||||
Repayments of Federal Home Loan Bank fixed-maturity advances | (519,114 | ) | (3,701,007 | ) | ||||
Proceeds from federal funds purchased | 6,312,000 | 2,775,000 | ||||||
Repayments of federal funds purchased | (4,937,000 | ) | (2,080,000 | ) | ||||
Net decrease in advances from borrowers for taxes and insurance | (545,248 | ) | (524,761 | ) | ||||
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES | 3,845,113 | (2,614,086 | ) | |||||
DECREASE IN CASH AND CASH EQUIVALENTS | (830,092 | ) | (3,668,854 | ) | ||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 3,611,668 | 7,305,621 | ||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 2,781,576 | $ | 3,636,767 | ||||
Supplemental cash flow information: | ||||||||
Interest paid | $ | 302,901 | $ | 256,891 | ||||
Income tax paid (net of refunds) | $ | 504 | $ | — | ||||
Real estate and other assets acquired in settlement of loans | $ | — | $ | 5,000 | ||||
See notes to consolidated financial statements.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1 – Basis of Presentation
The accompanying consolidated financial statements include the accounts of CCSB Financial Corp. (Company) and its wholly owned subsidiary, Clay County Savings Bank (Bank). All significant intercompany accounts and transactions have been eliminated in consolidation. The accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Rule 10-01 of Securities and Exchange Commission (SEC) Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all material adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. The consolidated balance sheet of the Company, as of September 30, 2004, has been derived from the audited consolidated balance sheet for the Company as of that date. Certain reclassifications have been made to the 2003 financial statements to conform to the 2004 financial statement presentation. These reclassifications had no effect on net income. Operating results for the three-month period ended December 31, 2004, 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 consolidated financial statements of the Company for the year ended September 30, 2004, contained in the Company’s Form 10-KSB for the year ended September 30, 2004.
Note 2 – Earnings Per Share
Basic and diluted earnings per share are based upon the weighted-average shares outstanding. The option to purchase shares are not included in the computation of diluted earnings per share for the three months ended December 31, 2004, since the exercise price was greater than the average market price of the common stock. ESOP shares that have been committed to be released are considered outstanding. Following is a summary of basic and diluted earnings (loss) per common share for the three months ended December 31, 2004, and 2003:
Three Months Ended December 31, | ||||||
| 2004 | 2003 | |||||
Net income | $ | 37,544 | 15,169 | |||
Weighted-average shares - Basic EPS | 899,975 | 906,221 | ||||
Stock options - treasury stock method | — | N/A | ||||
Weighted-average shares - Diluted EPS | 899,975 | 906,221 | ||||
Basic and diluted earnings per common share | $ | 0.04 | $ | 0.02 | ||
Note 3 – Stock Option Plans
At December 31, 2004, the Bank has a stock-based employee compensation plan, which is described more fully in Note 4. The Bank accounts for this plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under this plan had an exercise price equal to the market value of the underlying common stock on the grant date. The following table illustrates the effect on net income and earnings per share if the Bank had applied the fair value provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.
| Three Months Ended December 31, | |||||||
| 2004 | 2003 | ||||||
Net income, as reported | $ | 37,544 | 15,169 | ||||
Add: Stock-based employee compensation expense included in reported income, net of related tax effects | — | — | |||||
Less: Total stock-based employee compensation expense determined under fair value based method for stock options, net of related tax effects | (23,222 | ) | N/A | ||||
Pro forma net income | $ | 14,322 | �� | $ | 15,169 | ||
Earnings per share: | |||||||
Basic and diluted - as reported | $ | 0.04 | 0.02 | ||||
Basic and diluted - pro forma | $ | 0.02 | 0.02 | ||||
8
Note 4 – Benefit Plans
Employee Stock Ownership Plan (ESOP)
As part of the conversion to stock in 2003, the Company established an ESOP covering substantially all employees of the Company. The ESOP acquired 78,292 shares of Company common stock at $10 per share in the conversion with funds provided by a loan from the Company. Accordingly, $782,920 of common stock acquired by the ESOP was shown as a reduction of stockholders’ equity. The Company accounts for the ESOP in accordance with American Institute of Certified Public Accountants (AICPA) Statement of Position 93-6. The cost of shares issued to the ESOP but not yet allocated to participants is presented in the consolidated balance sheet as a reduction of stockholders’ equity. Compensation expense is recorded based on the market price of the shares as they are committed to be released for allocation to participant accounts. The difference between the market price and the cost of shares committed to be released is recorded as an adjustment to additional paid-in capital. Dividends on allocated ESOP shares are recorded as a reduction of retained earnings; dividends on unallocated ESOP shares are reflected as a reduction of debt. Shares are considered outstanding for earnings per share calculations when they are committed to be released; unallocated shares are not considered outstanding. ESOP compensation expense for the three-month periods ended December 31, 2004 and 2003 was $24,000 and $25,000 respectively.
Recognition and Retention Plan (RRP)
The Company adopted with stockholders’ approval the RRP on January 15, 2004. The RRP provides for the granting of shares of common stock to the eligible directors, officers and employees. The RRP was approved for 39,146 shares of common stock of the Company. As of December 31, 2004, the RRP has granted 38,095 shares to existing directors, officers and employees with 1,051 shares available for future grants. The awards vest at the rate of 20% per year over a five-year period, with the first 20% vesting on December 1, 2004, with the exception of awards of less than 100 shares. Awards of less than 100 shares became 100% vested on December 1, 2004.
The vesting of the granted shares can be accelerated based on certain plan provisions. Directors, officers, and employees granted shares retain voting rights and, if dividends are paid, dividends during the vesting period. The RRP will continue in effect for 10 years unless otherwise terminated. The Company’s stock price was $15.95 on the RRP approval date. Treasury stock has been used for the award of RRP shares. RRP expense for the three months ended December 31, 2004, was $35,000. No RRP expense was recognized for the three months ended December 31, 2003, as the plan was not in effect.
Stock Option Plan
On January 15, 2004, the Company’s stockholders also voted to approve a Stock Option Plan, providing for the 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 the Bank. The Stock Option Plan authorizes the granting of options to purchase up to 97,865 shares of common stock. On January 21, 2004, the Company awarded options to purchase 92,500 shares under the Stock Option Plan to directors, officers and employees. The awards vest at the rate of 20% per year over a five-year period beginning December 1, 2004, and the maximum term is 10 years. All such options were granted with an exercise price of $15.95 per share, the fair market value of the Company’s stock on the date of the grant. As of December 31, 2004, options to purchase 18,500 shares were available to be exercised and no options have expired.
9
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATIONS
Forward Looking Statements
Certain statements in this annual 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. These statements are based on the beliefs of management as well as the assumptions made using information currently available to management. Since these statements reflect the views of management concerning future events, these statements involve risks, uncertainties and assumptions. These risks and uncertainties include, among others:
| • | the impact of changes in market interest rates and general economic conditions, |
| • | changes in government regulations, |
| • | changes in accounting principles, and |
| • | the quality or composition of the loan and investment portfolio. |
Therefore, actual future results may differ significantly from results in the forward-looking statements due to a number of factors, which include, but are not limited to, factors discussed in the documents filed by the Company with the Securities and Exchange Commission (SEC) from time to time. 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 the 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 provision 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.
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).
Critical Accounting Policies
Generally accepted accounting principles are complex and require management to apply significant judgments to various accounting, reporting and disclosure matters. Management of the Company must use assumptions and estimates to apply these principles where actual measurement is not possible or practical. For a complete discussion of the Company’s significant accounting policies, see “Notes to the Consolidated Financial Statements” in the Company’s 2004 Annual Report. Certain policies are considered critical because they are highly dependent upon subjective or complex judgments, assumptions and estimates. Changes in such estimates may have a significant impact on the financial statements. Management has reviewed the application of these policies with the Audit Committee of the Company’s Board of Directors. For a discussion of applying critical accounting policies, see “Critical Accounting Policies” beginning on page 23 in the Company’s 2004 Annual Report.
In addition to the above, in December 2004, the Financial Accounting Standards Board (FASB) issued its Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (Statement 123R), which addresses the accounting for employee stock options. Statement 123R requires that the cost of all employee stock options, as well as other equity-based compensation arrangements, be reflected in the financial statements based on the estimated fair value of the awards. Statement 123R is effective, for public entities that file as small business issuers, as of the beginning of the first interim or annual reporting period that begins after December 15, 2005. The impact of this statement can not be fully determined at this time.
Changes in Financial Condition
Total assets increased $3.7 million, or 4.2%, to $92.7 million at December 31, 2004, from $89.0 million at September 30, 2004. This is attributed to the continued growth of the loan portfolio. Net loans increased $4.6 million, or 7.8%, during the first three months of the fiscal year ending September 30, 2005, primarily as the result of the growth in construction and land loans, consumer and commercial nonmortgage loans. Premises and equipment also increased $700,000, or 17.0%, due to the acquisition of land planned for a future branch site in December 2004. The growth in loans and premises and equipment was partially funded by a decrease in securities available-for-sale and federal funds sold. Securities available-for-sale decreased $1.0 million, or 5.5%, due primarily to the repayment of principal on mortgage-backed securities (MBS) and federal funds sold decreased $582,000 to $0 at December 31, 2004.
10
FHLB advances and federal funds purchased were utilized to supplement additional cash flow needs resulting from the loan growth due to the lack of deposit growth. Deposits decreased $1.7 million from $65.3 million at September 30, 2004, to $63.6 million at December 31, 2004. However, the decrease in deposits is in large part due to the timing of the maturity of a public unit fund deposit. The $1.5 million in public unit funds matured on December 30, 2004, and were subsequently re-deposited but not until the following week, which was after December 31, 2004 quarter end. The decrease in deposits, as well as advances from borrowers for taxes and insurance, was also impacted by the seasonal payment of real estate taxes at the end of the calendar year. Custodial funds held for escrow accounts for the FHLMC (reflected in the deposit balance) decreased $350,000 and advances from borrowers for taxes and insurance decreased $545,000 from September 30, 2004, to December 31, 2004. As a result, a total of $1,375,000 in federal funds purchased was outstanding at December 31, 2004. FHLB advances also increased $4.7 million, or 57.7%, from $8.2 million at September 30, 2004, to $12.9 million at December 31, 2004. The FHLB advances were also utilized to lengthen the maturities of liabilities as the weighted average term to maturity of FHLB advances was 46 months at December 31, 2004.
Stockholders’ equity increased $127,000 from $14.4 million at September 30, 2004, to $14.5 million at December 31, 2004, due to earnings, the amortization of the ESOP and RRP, and the decrease in the unrealized loss on securities available-for-sale. Stockholders’ equity was $15.00 per share, at December 31, 2004.
Results of Operations – Comparison of the Three-Month Period Ended December 31, 2004 and 2003
The Company had earnings of $38,000 for the three months ended December 31, 2004, compared to earnings of $15,000 for the three months ended December 31, 2003. The improvement is attributed to the increase in net interest income and noninterest income, which more than offset the increase in noninterest expense.
11
Net Interest Income. Net interest income increased $41,000, or 6.1%, for the three months ended December 31, 2004, compared to the three months ended December 31, 2003. The increase in net interest income can be attributed to the loan growth and an increase in noninterest-bearing transaction deposit accounts, which resulted in an improved net interest spread between interest-earning assets and interest-bearing liabilities. This offsets a decrease in the average net interest-earning assets from the three months ended December 31, 2003, to the three months ended December 31, 2004. The primary reason for the decrease in net interest-earning assets was the investment in bank owned life insurance, which is not reflected in interest-earning assets (See Noninterest Income), and the funding of the stock repurchase program and the acquisition of land for a future branch site. This is illustrated in the table below:
| Three Months Ended December 31, | ||||||||||||||||||||
| 2004 | 2003 | |||||||||||||||||||
| Average outstanding balance | Interest earned/ paid | Interest yield/ rate | Average outstanding balance | Interest earned/ paid | Interest yield/ rate | |||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||
INTEREST-EARNING ASSETS: | ||||||||||||||||||||
Interest-bearing deposits in banks | $ | 2,030 | $ | 3 | 0.59 | % | $ | 3,237 | $ | 4 | 0.49 | % | ||||||||
Fed funds sold | 291 | 1 | 1.37 | 1,611 | 2 | 0.50 | ||||||||||||||
Available-for-sale securities | 17,577 | 131 | 2.98 | 19,608 | 141 | 2.88 | ||||||||||||||
Federal Home Loan Bank stock | 627 | 4 | 2.55 | 492 | 2 | 1.63 | ||||||||||||||
Loans receivable (1) | 61,884 | 886 | 5.73 | 53,805 | 787 | 5.85 | ||||||||||||||
TOTAL INTEREST-EARNING ASSETS | $ | 82,409 | $ | 1,025 | 4.98 | % | $ | 78,753 | $ | 936 | 4.75 | % | ||||||||
INTEREST-BEARING LIABILITIES | ||||||||||||||||||||
Demand (2) | $ | 4,056 | $ | — | — | % | $ | 3,073 | $ | — | — | % | ||||||||
Savings, NOW and money market | 28,797 | 66 | 0.92 | 28,714 | 43 | 0.60 | ||||||||||||||
Time deposits | 31,624 | 172 | 2.18 | 31,646 | 174 | 2.20 | ||||||||||||||
Fed funds purchased | 687 | 2 | 1.16 | 348 | 1 | 1.15 | ||||||||||||||
Federal Home Loan Bank advances | 10,571 | 65 | 2.46 | 4,535 | 39 | 3.44 | ||||||||||||||
TOTAL INTEREST-BEARING LIABILITIES | $ | 75,735 | $ | 305 | 1.61 | % | $ | 68,316 | $ | 257 | 1.51 | % | ||||||||
Net interest income | $ | 720 | $ | 679 | ||||||||||||||||
Net interest spread | 3.37 | % | 3.24 | % | ||||||||||||||||
Net earning assets | $ | 6,674 | $ | 10,437 | ||||||||||||||||
Net yield on average interest-earning assets | 0.87 | % | 0.86 | % | ||||||||||||||||
Average interest-earning assets to average interest-bearing liabilities | 108.81 | % | 115.28 | % | ||||||||||||||||
| (1) | Includes loans held for sale and net of loans in process and deferred fees and credits. |
| (2) | Includes NOW deposits carrying a zero yield. |
Interest Income. Interest income increased $89,000, or 9.5%, to $1,025,000 for the three months ended December 31, 2004, from $936,000 for the three months ended December 31, 2003. The increase was due to the increase in interest-earning assets, but also can be attributed to the shift from lower-yielding investments to higher-yielding loans during the periods.
Interest income from loans receivable increased $99,000 for the three-month period as average loans receivable for the three months ended December 31, 2004, increased $8 million, or 15.0%, from December 31, 2003. As previously stated, the funding of loans has been partially funded from the decrease in securities. The average balance in available-for-sale securities decreased $2 million, or 10.4%, for the three months ended December 31, 2004, compared to the three months ended December 31, 2003. Interest income from securities decreased $10,000 between the same periods as a result.
Interest expense. Interest expense increased $48,000, or 18.7%, to $305,000 for the three months ended December 31, 2004, from $257,000 for the three months ended December 31, 2003. Interest expense was favorably impacted by the increase in noninterest-bearing deposits; however, recent increases in interest rates have resulted in a negative impact. Interest expense on savings, NOW and money market deposit accounts increased $23,000 for the three months ended December 31, 2004, compared to the three months ended December 31, 2003, primarily due to the recent increases in interest rates. The increase in FHLB advances and fed funds purchased resulted in a increase in the interest expense of borrowings of $27,000 for the three months ended December 31, 2004, compared to the three months ended December 31, 2003.
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.
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The Bank recorded a slightly higher provision for loan losses for the three months ended December 31, 2004, compared to the three months ended December 31, 2003. 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 increased $39,000, or 70.9%, from $55,000 for the three months ended December 31, 2003, to $94,000 for the three months ended December 31, 2004, primarily due to earnings on bank owned life insurance. In June and July 2004, the Bank purchased “key person” life insurance policies on three senior employees for a total cash surrender value of $2.5 million. Earnings, which are added to the cash surrender value, for the three months ended December 31, 2004, totaled $27,000. There was also an increase in the gain on the sale of loans, charges and other fees on deposit accounts, and other noninterest income. This was partially offset by a decrease in charges and other fees on loans. Also favorably impacting noninterest income, was a decrease in the amortization of mortgage servicing rights of $8,000 for the three months ended December 31, 2004, compared to the three ended December 31, 2003.
Noninterest expense. Noninterest expense increased $59,000, or 8.5%, to $755,000 for the three months ended December 31, 2004, from $696,000 for the three months ended December 31, 2003. The increase was primarily due to higher compensation and benefits expense resulting from the expense of the RRP (See Note 3 of the Consolidated Financial Statements). The RRP expense was $35,000 for the three months ended December 31, 2004, which contributed to compensation and benefits expense increasing from $403,000 for the three months ended December 31, 2003, to $443,000 for the three months ended December 31, 2004. Payroll taxes also increased $5,000 comparatively between the periods due to payroll taxes related to RRP shares vested during the three months ended December 31, 2004. All other expense categories were also higher for the three months ended December 31, 2004, compared to the three months ended December 31, 2003, with the exception of SAIF premiums.
Income Taxes. Despite an increase in earnings before income taxes from $27,000 for the three months ended December 31, 2003, to $44,000 for the three months ended December 31, 2004, the provision for income taxes was lower. The provision for income taxes was $7,000 for the three months ended December 31, 2004, compared to $12,000 for the three months ended December 31, 2003. The primary reason is the impact of the tax deferral of earnings on bank owned life insurance (See Noninterest Income).
Asset/Liability Management and 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 (ARM) loans 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. The Bank also sells fixed-rate loans in the secondary market. Management does not anticipate that financial objectives, strategies or instruments used to reduce its interest rate exposure will change significantly in the future.
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 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. Loans-in-process represents funds committed to Bank’s customers on loans already originated that have not yet been disbursed. Letters of credit are conditional commitments issued by the Bank to guarantee the performance of the borrower to a third party. At December 31, 2004, commitments, which generally expire in 180 days or less, to originate adjustable and fixed-rate mortgage loans for portfolio were approximately $232,000 and $2,000, respectively. The Bank had one outstanding commitment to originate a variable-rate, home equity line of credit in the amount of $40,000 at December 31, 2004. Related loans-in-process on construction and land development loans at December 31, 2004, totaled $4.7 million, of which $304,000 is tied to the prime rate of interest and $4,458,000 were on fixed-rate loans that ranged from 4.50% 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 $5.8 million expiring in seven years or less. Commitments on behalf of borrowers for outstanding letters of credit amounted to $24,000 at December 31, 2004.
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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 December 31, 2004, are as follows:
| Actual | Minimum for Capital | Required to be “Well | ||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||
Stockholders’ equity of the Bank | $ | 10,793 | ||||||||||||||||
Unrealized loss on securities AFS, net | 74 | |||||||||||||||||
Tangible capital | $ | 10,867 | 11.9 | % | $ | 1,373 | 1.5 | % | ||||||||||
Includable unrealized gain on equity securities available for sale, net | — | |||||||||||||||||
General valuation allowance | 315 | |||||||||||||||||
Total capital to risk-weighted assets | $ | 11,182 | 19.3 | % | $ | 4,626 | 8.0 | % | $ | 5,783 | 10.0 | % | ||||||
Tier 1 capital to risk-weighted assets | $ | 10,867 | 18.8 | % | $ | 2,313 | 4.0 | % | $ | 3,470 | 6.0 | % | ||||||
Tier 1 capital to total assets | $ | 10,867 | 11.9 | % | $ | 3,661 | 4.0 | % | $ | 4,576 | 5.0 | % | ||||||
Asset Quality
At December 31, 2004, there was only one loan for $30,000 that was considered to be nonperforming and on nonaccrual status. The loan is an unsecured commercial loan that was also classified as substandard. There was no property classified as real estate owned or considered a repossessed asset. At December 31, 2004, there were one single-family mortgage loan and two consumer loans secured by vehicles totaling $108,000 that were 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 which may result in disclosure as nonaccrual, 90 days past due or restructured.
Allowance for Loan Losses
At December 31, 2004, the allowance for loan losses was $315,000. Management believes that all known losses in the loan portfolio that are both probable and reasonable to estimate have been recorded as of each balance sheet date. The following is a summary of activity in the allowance for loan losses:
Three Months Ended December 31, | |||||||
| 2004 | 2003 | ||||||
| (Unaudited) | (Unaudited) | ||||||
Balance, beginning of period | $ | 300,000 | $ | 249,300 | |||
Loan charge-offs | — | (2,815 | ) | ||||
Loan recoveries | — | 1,200 | |||||
Provision charged to expense | 15,000 | 10,000 | |||||
Balance, end of period | $ | 315,000 | $ | 257,685 | |||
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ITEM 3 – CONTROLS AND PROCEDURES
Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the design and operation of disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) was carried out 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, the 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 2005 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 are 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 – UNREGISTERED SALES OF EQUITY 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
None.
ITEM 5 – OTHER INFORMATION
None.
| (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. |
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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.
| CCSB FINANCIAL CORP. | ||
| (Registrant) | ||
| DATE: February 2, 2005 | /s/ John R. Davis | |
| John R. Davis, Chairman, President, and | ||
| Chief Executive Officer (Principal Executive Officer) | ||
| DATE: February 2, 2005 | /s/ Mario Usera | |
| Mario Usera, Executive Vice President, and | ||
| Chief Financial Officer (Principal Financial Officer) | ||
| DATE: February 2, 2005 | /s/ Deborah A. Jones | |
| Deborah A. Jones, Senior Vice President, | ||
| Secretary, and Treasurer (Principal Accounting Officer) | ||
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