UNITED STATES
SECURITIES & EXCHANGE COMMISSION
WASHINGTON, DC 20552
-------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2000
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 000-29460
COMMUNITY SAVINGS BANKSHARES, INC.
-----------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 65-0870004
------------------------------- -------------------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
660 US Highway One
North Palm Beach, FL 33408
------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (561) 881-2212
Indicate by check whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of October 23, 2000, there were 8,542,363 shares of the Registrant's
common stock outstanding.
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
TABLE OF CONTENTS
Part I. Financial Information Page
- ----------------------------- ----
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
September 30, 2000 (Unaudited) and December 31, 1999 2
Consolidated Statements of Operations (Unaudited) for the
three and nine months ended September 30, 2000 and 1999 3
Consolidated Statements of Changes in Shareholders' Equity
for the nine months ended September 30, 2000 (Unaudited)
and for the year ended December 31, 1999 4
Consolidated Statements of Cash Flows (Unaudited) for the
nine months ended September 30, 2000 and 1999 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Part II. Other Information
- --------------------------
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Default Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signature Page 17
1
ITEM 1. FINANCIAL STATEMENTS
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AT SEPTEMBER 30, 2000 (UNAUDITED) AND DECEMBER 31, 1999
September 30, December 31,
2000 1999
----------- -----------
(Unaudited)
(In thousands)
ASSETS
Cash and cash equivalents:
Cash and amounts due from depository institutions $ 17,783 $ 22,057
Interest-bearing deposits 18,883 23,182
----------- -----------
Total cash and cash equivalents 36,666 45,239
Securities available for sale 145,427 144,840
Securities held to maturity 35,410 38,802
Loans receivable, net 676,218 608,369
Accrued interest receivable 3,855 3,788
Premises and equipment, net 25,302 24,939
Real estate held for investment 2,221 1,872
Investment in and advances to real estate venture 13,995 11,633
Real estate owned, net 422 494
Federal Home Loan Bank stock - at cost 8,063 7,009
Other assets 6,355 5,989
----------- -----------
Total assets $ 953,934 $ 892,974
=========== ===========
LIABILITIES
Deposits:
Demand deposits $ 42,038 $ 39,429
NOW and statement savings 74,559 76,073
Savings deposits 35,109 34,466
Money market deposits 88,587 100,299
Certificates of deposit 423,095 363,676
----------- -----------
Total deposits 663,388 613,943
Mortgage-backed bond, net 13,813 14,508
Advances from Federal Home Loan Bank 147,214 140,186
Advances by borrowers for taxes and insurance 8,640 1,403
Other liabilities 6,194 7,233
----------- -----------
Total liabilities 839,249 777,273
----------- -----------
SHAREHOLDERS' EQUITY
Preferred stock ($1 par value): 10,000,000 shares authorized,
no shares issued -- --
Common stock ($1 par value): 60,000,000 shares authorized;
8,902,991 and 9,319,873 shares outstanding at
September 30, 2000 and December 31, 1999, respectively 10,571 10,571
Additional paid-in capital 93,950 93,744
Retained income - substantially restricted 40,448 37,869
Common stock purchased by Employee Stock Ownership Plan (4,209) (4,722)
Common stock issued to or purchased by Recognition and
Retention Plans (2,049) (2,586)
Accumulated other comprehensive income (2,365) (3,358)
Treasury stock, at cost: 1,668,149 and 1,251,267 shares at
September 30, 2000 and December 31, 1999, respectively (21,661) (15,817)
----------- -----------
Total shareholders' equity 114,685 115,701
----------- -----------
Total liabilities and shareholders' equity $ 953,934 $ 892,974
=========== ===========
See notes to consolidated financial statements.
2
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
For the three months For the nine months
ended September 30, ended September 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(Unaudited)
(Dollars in thousands except per share data)
Interest income:
Loans $ 13,052 $ 11,331 $ 37,069 $ 32,858
Securities 3,130 3,066 9,421 8,148
Other interest and dividend income 658 345 1,914 2,222
------------ ------------ ------------ ------------
Total interest income 16,840 14,742 48,404 43,228
------------ ------------ ------------ ------------
Interest expense:
Deposits 7,143 5,426 19,510 16,323
Advances from Federal Home Loan Bank and other borrowings 2,763 1,885 7,682 5,230
------------ ------------ ------------ ------------
Total interest expense 9,906 7,311 27,192 21,553
------------ ------------ ------------ ------------
Net interest income 6,934 7,431 21,212 21,675
Provision for loan losses 75 193 300 710
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 6,859 7,238 20,912 20,965
------------ ------------ ------------ ------------
Other income:
Servicing income and other fees 49 104 206 294
NOW account and other customer fees 899 834 2,585 2,540
Net gain (loss) on real estate owned (13) 22 12 (34)
Loss on write down of securities available for sale -- -- (138) --
Equity in net income (loss) of real estate venture 145 (8) (55) 8
Net gain (loss) on termination of defined benefit plan (15) -- 907 --
Miscellaneous 94 93 279 209
------------ ------------ ------------ ------------
Total other income 1,159 1,045 3,796 3,017
------------ ------------ ------------ ------------
Operating expense:
Employee compensation and benefits 3,130 3,115 9,365 9,068
Occupancy and equipment 1,425 1,543 4,372 4,477
Advertising and promotion 168 132 547 624
Federal deposit insurance premium 32 83 94 256
Miscellaneous 814 1,053 2,563 2,804
------------ ------------ ------------ ------------
Total operating expense 5,569 5,926 16,941 17,229
------------ ------------ ------------ ------------
Income before provision for income taxes 2,449 2,357 7,767 6,753
Provision for income taxes 850 679 2,561 1,965
------------ ------------ ------------ ------------
Net income $ 1,599 $ 1,678 $ 5,206 $ 4,788
============ ============ ============ ============
Basic earnings per share $ 0.19 $ 0.17 $ 0.61 $ 0.48
============ ============ ============ ============
Diluted earnings per share $ 0.18 $ 0.16 $ 0.59 $ 0.47
============ ============ ============ ============
Weighted average common shares outstanding - basic 8,493,351 9,748,762 8,575,565 9,915,437
============ ============ ============ ============
Weighted average common shares outstanding - diluted 8,734,721 10,147,797 8,809,971 10,292,895
============ ============ ============ ============
See notes to consolidated financial statements.
3
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (UNAUDITED)
------------------------------------------------------------------------------------------
Retained Employee Recognition Accumulated
Additional Income- Stock and Other
Common Paid-In Substantially Ownership Retention Comprehensive Treasury
Stock Capital Restricted Plan Plans Income Stock Total
------------------------------------------------------------------------------------------
(In thousands)
BALANCE - DECEMBER 31, 1998 $ 10,549 $ 93,268 $ 35,545 $ (5,407) $ (237) $ (432) $ -- $ 133,286
Net income for the nine months
ended September 30, 1999 -- -- 4,788 -- -- -- -- 4,788
Other comprehensive income:
Unrealized decrease in market
value of securities available
for sale (net of income taxes) -- -- -- -- -- (1,773) -- (1,773)
---------
Comprehensive income 3,015
Stock options exercised 22 99 -- -- -- -- 44 165
Shares committed to be released -
Employee Stock Ownership Plan
and Recognition and Retention Plans -- 279 -- 513 335 -- -- 1,127
Purchase of common stock by 1999 and
1995 Recognition and Retention Plans -- 60 (95) -- (2,888) -- -- (2,923)
Cost of stock issuance -- (54) -- -- -- -- -- (54)
Purchase of treasury stock -- -- -- -- -- -- (4,387) (4,387)
Dividends declared -- -- (3,171) -- -- -- -- (3,171)
-----------------------------------------------------------------------------------------
BALANCE - SEPTEMBER 30, 1999 (UNAUDITED) $ 10,571 $ 93,652 $ 37,067 $ (4,894) $(2,790) $(2,205) $ (4,343) $ 127,058
=========================================================================================
BALANCE - DECEMBER 31, 1999 $ 10,571 $ 93,744 $ 37,869 $ (4,722) $(2,586) $(3,358) $ (15,817) $ 115,701
Net income for the nine months ended
September 30, 2000 -- -- 5,206 -- -- -- -- 5,206
Other comprehensive income:
Unrealized increase in market
value of securities available
for sale (net of income taxes) -- -- -- -- -- 993 -- 993
---------
Comprehensive income 6,199
Stock options exercised -- -- -- -- -- -- 754 754
Shares committed to be released -
Employee Stock Ownership Plan
and Recognition and Retention Plans -- 206 -- 513 537 -- -- 1,256
Stock benefit plan tax adjustment -- -- 159 -- -- -- -- 159
Purchase of treasury stock -- -- -- -- -- -- (6,598) (6,598)
Dividends declared -- -- (2,786) -- -- -- -- (2,786)
-----------------------------------------------------------------------------------------
BALANCE - SEPTEMBER 30, 2000 (UNAUDITED) $ 10,571 $ 93,950 $ 40,448 $ (4,209) $(2,049) $(2,365) $ (21,661) $ 114,685
=========================================================================================
See notes to consolidated financial statements.
4
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
For the nine months ended
September 30,
----------------------
2000 1999
--------- ---------
(Unaudited)
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,206 $ 4,788
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,654 1,365
ESOP and Recognition and Retention Plans
compensation expense 1,415 1,127
Accretion of discounts, amortization of premiums,
and other deferred yield items (1,316) (1,190)
Provision for loan losses 300 710
Increase in other assets (361) (819)
Increase in other liabilities 5,664 8,427
--------- ---------
Net cash from operating activities 12,562 14,408
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in loans (39,642) (58,060)
Principal payments, calls and maturities received
on securities and Federal Home Loan Bank stock 8,280 31,025
Purchases of:
Loans and participations (28,507) --
Securities available for sale and Federal
Home Loan Bank stock (3,686) (74,870)
Premises and equipment, net and real estate
held for investment, net (2,021) (1,666)
Net change in investment in real estate venture (2,362) --
--------- ---------
Net cash from investing activities (67,938) (103,571)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 49,445 (11,200)
Advances from Federal Home Loan Bank 70,000 45,000
Repayments, calls of advances from Federal Home
Loan Bank (62,972) (10,835)
Purchase of treasury stock (6,598) (4,387)
Purchase of common stock by Recognition and
Retention Plans -- (2,977)
Proceeds from exercise of stock options 754 165
Payments made on mortgage-backed bond (1,040) (1,039)
Dividends paid (2,786) (3,171)
--------- ---------
Net cash from financing activities 46,803 11,556
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (8,573) (77,607)
CASH AND CASH EQUIVALENTS, beginning of period 45,239 117,015
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 36,666 $ 39,408
========= =========
See notes to consolidated financial statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited consolidated interim financial statements for Community
Savings Bankshares, Inc. ("Bankshares") and its subsidiary Community
Savings, F. A. (the "Association"), reflect all adjustments (consisting
only of normal recurring accruals) which, in the opinion of management,
are necessary to present fairly Bankshares' consolidated financial
condition and the consolidated results of operations and cash flows for
the interim periods presented herein. The results for interim periods are
not necessarily indicative of trends or results to be expected for the
full fiscal year. All weighted interest rates are presented on an
annualized basis. The unaudited consolidated interim financial statements
and notes should be read in conjunction with the audited consolidated
financial statements and the notes thereto included in Bankshares' Annual
Report to Shareholders for the year ended December 31, 1999.
RECLASSIFICATIONS - Certain items in the 1999 financial statements and the
notes thereto have been reclassified to conform with the 2000
presentation.
2. LOANS RECEIVABLE
Loans receivable consists of the following:
September 30, December 31,
2000 1999
--------- ---------
(In thousands)
Real estate loans:
Residential 1-4 family $ 501,412 $ 420,845
Residential 1-4 family construction 113,878 105,282
Multi-family 6,883 11,135
Multi-family construction 28,692 17,251
Land 20,598 50,885
Commercial 36,249 32,627
Commercial construction 8,924 9,633
--------- ---------
Total real estate loans 716,636 647,658
--------- ---------
Non-real estate loans:
Consumer 14,263 12,685
Commercial business 5,459 7,408
--------- ---------
Total non-real estate loans 19,722 20,093
--------- ---------
Total loans receivable 736,358 667,751
Undisbursed loan proceeds (58,172) (56,948)
Unearned discounts and premiums and
net deferred loan fees and costs 1,874 1,489
Allowance for loan losses (3,842) (3,923)
--------- ---------
Total loans receivable, net $ 676,218 $ 608,369
========= =========
An analysis of the changes in the allowance for loan losses is as follows:
For the nine months
ended September 30,
------------------------
2000 1999
--------- ---------
(In thousands)
Balance, beginning of period $ 3,923 $ 3,160
Provision charged to income 300 710
Losses charged to allowance (381) (120)
Recoveries -- --
--------- ---------
Balance, end of period $ 3,842 $ 3,750
========= =========
6
The Association accounts for impaired loans in accordance with SFAS No. 114
"Accounting by Creditors for Impairment of a Loan" ("SFAS 114") as amended by
SFAS No. 118 "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures".
An analysis of the recorded investment in impaired loans is as follows:
At or for the nine months
Ended September 30,
------------------------
2000 1999
--------- ---------
(In thousands)
Impaired loan balance $ 3,675 $ --
Related allowance -- --
Average impaired loan balance 2,059 93
Interest income recognized 187 --
For a further discussion of delinquent loans, see "Asset Quality" in this Form
10-Q.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
In the following discussion, references to "Bankshares" relate to Community
Savings Bankshares, Inc. together with its wholly-owned subsidiary, the
Association.
COMMUNITY SAVINGS BANKSHARES, INC.
Bankshares is a Delaware-chartered stock holding company organized in August
1998. Bankshares' significant assets include cash and its investment in its
wholly-owned subsidiary, the Association. On December 15, 1998, Bankshares
completed its reorganization and stock offering in connection with the
conversion and reorganization of ComFed, M.H.C. ("ComFed") and its mid-tier
holding company. The holding company reorganization was accounted for at
historical cost in a manner similar to a pooling of interests. Therefore, all
financial information has been presented as if Bankshares had been in existence
for all periods presented in this report. The common stock of Bankshares trades
on The Nasdaq Stock Market under the symbol "CMSV".
COMMUNITY SAVINGS, F. A.
The Association, founded in 1955, is a federally chartered savings and loan
association headquartered in North Palm Beach, Florida. The Association's
deposits are federally insured by the Federal Deposit Insurance Corporation
("FDIC") through the Savings Association Insurance Fund ("SAIF"). The
Association has been a member of the Federal Home Loan Bank of Atlanta ("FHLB")
since 1955. The Association is regulated by the Office of Thrift Supervision
("OTS").
The Association is a community-oriented financial institution engaged primarily
in the business of attracting deposits from the general public and using such
funds, together with other borrowings, to invest in various residential and
commercial real estate loans, consumer and commercial business loans,
mortgage-backed securities ("MBS"), and investment securities. The Association's
plan is to operate as a well-capitalized, profitable and independent
institution. The Association currently exceeds all regulatory capital
requirements.
The Association's profitability is highly dependent on its net interest income.
The components that determine net interest income are the amount of
interest-earning assets and interest-bearing liabilities, non-interest-bearing
liabilities and capital, together with the yields earned or rates paid on such
interest rate-sensitive instruments. The Association manages interest rate risk
exposure by matching, in part, asset and liability maturities and rates. This is
accomplished while considering the credit risk of certain assets. The
Association maintains asset quality by utilizing comprehensive loan underwriting
standards and collection efforts as well as by primarily originating or
purchasing secured or guaranteed assets.
7
The Association has two wholly-owned subsidiaries. ComFed, Inc. ("ComFed"),
formed in 1971, conducts business as Community Insurance Agency, selling
mortgage life insurance and receiving income and incurring related expenses from
the sale of third party mutual funds and annuities. Palm River Development Co.,
Inc. ("Palm River"), incorporated in 1999, is involved in a real estate
development joint venture commenced in mid-1999 to construct and sell
single-family lots, condominiums, villa homes and carriage homes on 117 acres of
land located in Indian River County, Florida. Palm River's investment in and
advances to the real estate joint venture totaled $14.0 million at September 30,
2000. Bankshares recognized income of $145,000 during the quarter ended
September 30, 2000 as the result of a $138,000 adjustment to the estimated loss
recognized during the first two quarters of 2000, resulting in a net loss of
$55,000 for the nine months ended September 30, 2000. This net loss represents
the expected recognition of start-up costs during the preliminary stages of this
construction project. Management estimates that an additional loss will be
incurred in the fourth quarter of 2000 but that the aggregate losses incurred
during 2000 will be partially offset by gains recognized on projected developed
lot closings expected to commence as early as December 2000. Construction of the
models is expected to begin in the first quarter of 2001. The sales of all units
are projected to be completed during 2004.
Number
of units Reservations
Type of units planned on units (1)
================================================================================
Riverfront single-family lots 17 12
Condominiums 48 6
Villa single-family homes 113 1
Carriage duplex homes 22 3
--- ---
Total 200 22
=== ===
(1) Reservations require a deposit of 10% of the purchase price from the buyer
to reserve a particular lot or home. Reservations will be converted to contracts
at the time certain approvals are received from city and county authorities.
Management believes the success of the Association as a community-oriented
financial institution depends on building long-term relationships with its
customers while meeting their current financial needs. The business strategy for
2000 includes aggressively pursuing new loan opportunities in its primary market
area of Palm Beach, Martin, St. Lucie and Indian River counties, funding the
resulting increase in interest-earning assets primarily through deposit growth.
While management will still look for suitable locations for new branch offices,
they will also evaluate the effectiveness of the existing branch network. In
addition, management will continue to focus on improving the efficiency ratio,
through cost reduction and enhanced fee income strategies.
As previously announced, the Association's Board of Directors terminated the
Association's defined benefit plan and replaced it with a 401(k) defined
contribution plan. As a result, the Association recognized a one-time $907,000
unusual gain, net of expenses, during the nine months ended September 30, 2000.
The Association currently estimates it will incur a $383,000 final settlement
expense for the defined benefit plan in the fourth quarter of 2000 in connection
with the distribution of the plan's assets to the participants.
LIQUIDITY AND CAPITAL RESOURCES
The Association adjusts its liquidity levels in order to meet funding needs of
deposit outflows, payment of real estate taxes on mortgage loans, repayment of
borrowings and loan commitments. The Association also adjusts liquidity as
appropriate to meet its asset and liability management objectives. A major
portion of the Association's liquidity consists of cash and cash equivalents,
which are a product of its operating, investing, and financing activities.
The Association is required to maintain minimum levels of liquid assets as
defined by OTS regulations. This requirement, which varies from time to time
depending upon economic conditions and deposit flows, is based upon a percentage
of deposits and short-term borrowings. The required ratio currently is 4.0%. The
Association's liquidity ratio averaged 11.9% during the nine months ended
September 30, 2000 while liquidity ratios averaged 14.7% for the year ended
December 31, 1999.
8
The Association's primary sources of funds are deposits, amortization and
prepayment of loans and MBS, maturities of investment securities and other
short-term investments, FHLB advances, as well as earnings and funds provided
from operations. While scheduled principal repayments on loans and MBS, and
maturities of securities are a relatively predictable source of funds, deposit
flows and loan prepayments are greatly influenced by general interest rates,
economic conditions, and competition. The Association manages the pricing of its
deposits in order to maintain desired deposit balances. In addition, the
Association invests funds in excess of its immediate needs in short-term
interest-earning deposits and other assets, which provide liquidity to meet
lending requirements. Short-term interest-bearing deposits with the FHLB of
Atlanta totaled $17.6 million at September 30, 2000. Other assets qualifying for
liquidity outstanding at September 30, 2000 amounted to $46.4 million. For
additional information about cash flows from operating, financing, and investing
activities, see the unaudited consolidated statements of cash flows included in
the consolidated financial statements.
Liquidity management is both a daily and long-term function of business
management. If funds are required beyond the Association's ability to generate
them in the local market, borrowing agreements exist with the FHLB which provide
an additional source of funds. FHLB advances totaled $147.2 million at September
30, 2000.
At September 30, 2000, commitments to originate loans totaled $8.7 million. The
unfunded portion of consumer lines of credit totaled $8.3 million and available
commercial lines and letters of credit totaled $10.7 million. Certificates of
deposit scheduled to mature in less than one year totaled $285.0 million at
September 30, 2000. Based on prior experience, management believes that a
significant portion of such deposits will remain with the Association.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
GENERAL
Net income for the quarter ended September 30, 2000 was $1.6 million, or $0.18
diluted earnings per share, a $79,000 decrease from the $1.7 million, or $0.16
diluted earnings per share, earned during the quarter ended September 30, 1999.
The decrease in net income was primarily the result of a $497,000 decrease in
net interest income, partially offset by a $118,000 decrease in the provision
for loan losses. In addition, the Company recognized income of $145,000 related
to Palm River's investment in the real estate joint venture in Vero Beach as the
result of a $138,000 adjustment to the estimated loss recognized by the Company
during the first two quarters of 2000. The increase to $0.18 diluted earnings
per share for the quarter ended September 30, 2000 from $0.16 for the 1999
period was primarily due to a decrease in the number of shares outstanding which
resulted from Bankshares' stock repurchase programs.
NET INTEREST INCOME
Net interest income decreased to $6.9 million for the quarter ended September
30, 2000 from $7.4 million for the same period in 1999. In the rising interest
rate environment experienced during 2000, the Association's interest-bearing
liabilities repriced more rapidly than its interest-earning assets. As a result,
the average cost of interest-bearing liabilities increased by 73 basis points to
4.83% while the average yield on interest-earning assets increased only 29 basis
points to 7.66% resulting in a 44 basis point decrease in the net interest rate
spread to 2.83% for the quarter ended September 30, 2000 from 3.27% for the 1999
period. A 68 basis point increase in the average cost of deposits was
responsible in large part for the increase in the cost of interest-bearing
liabilities, as the Association used higher costing odd-term certificates of
deposit during the third quarter of 2000 to maintain existing customers as well
as to attract new deposits needed to fund growth in the loan portfolio,
resulting in not only an increased cost of deposits but also a shift in the
composition of the deposit portfolio. The dollar balance of total certificates
of deposit, which have a higher cost to the Association, increased by 16%, while
the dollar balance of lower costing core deposits (consisting of checking, NOW,
statement, passbook, and money market deposit accounts) decreased by 4%. The
Association continues to emphasize lower costing core deposit products to its
customers in connection with establishing a complete deposit relationship. The
weighted yield and weighted cost of the loan and deposit portfolios and the net
interest rate spread was 7.64%, 4.65%, and 2.99% at September 30, 2000,
respectively.
In addition, the average balance of interest-bearing liabilities increased 15%
to $819.7 million for the quarter ended September 30, 2000 from $713.6 million
for the same period in 1999, primarily due to the use of deposits (primarily
odd-term certificates of deposit with original maturities of less than two
years) and, to a lesser extent, borrowings to fund loan growth as well as stock
repurchases and Palm River's investment in the real estate joint venture, as
compared to a 10% increase to $879.3 million in the average balance of
interest-earning assets (primarily in single-family residential real estate
loans) for the quarter ended September 30, 2000 as compared to $800.2 million
for the 1999 period.
9
PROVISION FOR LOAN LOSSES
The Association maintains an allowance for loan losses based upon the periodic
evaluation of known and inherent risks in the loan portfolio, its past loan loss
experience, adverse situations that may affect borrowers' ability to repay
loans, the estimated value of the underlying loan collateral, the nature and
volume of its loan activities, and current as well as expected future economic
conditions. Loan loss provisions are based upon management's estimate of the
fair value of the collateral and actual loss experience, as well as guidelines
established by the OTS. The provision for loan losses was $75,000 for the
quarter ended September 30, 2000 as compared to $193,000 for the quarter ended
September 30, 1999. As loan growth was primarily in residential real estate
loans which have a lower risk of loss, management's assessment of the allowance
for loan losses resulted in a decreased provision in the 2000 period as compared
to the same period in 1999. Although management believes the loan loss allowance
was adequate at September 30, 2000, actual losses depend upon future events and,
as such, further additions to the allowance for loan losses may become
necessary.
OTHER INCOME
Other income consists of service charges, fee income, gains or losses on the
sale of assets, and other non-interest income. Other income increased $114,000
to $1.2 million for the quarter ended September 30, 2000, from $1.0 million for
the same period in 1999, primarily due to a $137,000 increase in Palm River's
equity in net income of the real estate joint venture. This increase occurred as
the result of a $138,000 adjustment to the estimated loss, based on projections,
recognized by Palm River during the first two quarters of 2000. Financial
reports received during the quarter ended September 30, 2000 indicated that the
loss was over estimated and the adjustment was recognized. For further
information on this project, see "Community Savings, F. A." in this Form 10-Q
and "Investments in and Advances to Real Estate Venture" in the Notes to
Consolidated Financial Statements in Bankshares' 1999 Annual Report.
OPERATING EXPENSE
Operating expense decreased $357,000 to $5.6 million for the three month period
ended September 30, 2000 from $5.9 million for the same period in 1999 primarily
due to a $239,000 decrease in miscellaneous operating expense. This decrease was
partially the result of a $59,000 decrease in the amortization of the
Association's investment in an affordable housing partnership during the quarter
ended September 30, 2000 as compared to the same period in 1999. In addition,
occupancy and equipment costs decreased $118,000 as a result of the
Association's cost savings efforts.
PROVISION FOR INCOME TAXES
The provision for income taxes was $850,000 for the three months ended September
30, 2000 as compared to $679,000 for the same period in 1999. Taxes were lower
in 1999 primarily due to the benefit from tax credits resulting from the
Association's investment in the affordable housing partnership noted above which
totaled $63,000 for the 2000 period as compared to $150,000 for the 1999 period.
RESULTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
GENERAL
Net income for the nine months ended September 30, 2000 was $5.2 million, or
$0.59 diluted earnings per share, a $418,000 increase from $4.8 million, or
$0.47 diluted earnings per share, for the nine months ended September 30, 1999.
A $907,000 unusual gain, net of expenses, was recognized as a result of the
termination of the Association's defined benefit plan, partially offset by a
$463,000 decrease in net interest income. The increase to $0.59 diluted earnings
per share for the nine months ended September 30, 2000 from $0.47 for the 1999
period was also due to a decrease in the number of shares outstanding which
resulted from Bankshares' stock repurchase programs.
10
NET INTEREST INCOME
Net interest income decreased to $21.2 million for the nine months ended
September 30, 2000 from $21.7 million for the same period in 1999 as a result of
a $92,000 increase in average interest-bearing liabilities to $796.7 million for
the nine months ended September 30, 2000 from $704.9 million for the same period
in the prior year, offset in part by a $59.8 million increase in
interest-earning assets to $854.1 million for the nine months ended September
30, 2000 from $794.3 million for the same period in 1999. In addition, the
average cost of interest-bearing liabilities increased 47 basis points to 4.55%
for the nine months ended September 30, 2000 from 4.08% for the 1999 period,
primarily as a result of increased costs for deposits which increased to 4.08%
for the nine months ended September 30, 2000 from 3.70% for the same period in
1999. This increase in cost reflected the Association's decision to offer
special rates for odd-term certificates of deposits on a more aggressive basis.
The certificate of deposit growth was used in conjunction with FHLB advances to
fund loan portfolio growth, to repurchase the Company's common stock in the open
market, and to fund Palm River's investment in the real estate joint venture.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $300,000 for the nine months ended September
30, 2000, as compared to $710,000 for the same period in 1999. As loan growth
was primarily in residential real estate loans which have a lower risk of loss,
management's assessment of the allowance for loan losses resulted in a decreased
provision in the 2000 period as compared to the same period in 1999. Although
management believes the general loan loss allowance is adequate at September 30,
2000, actual losses depend upon future events and, as such, further additions to
the allowance for loan losses may become necessary.
OTHER INCOME
Other income increased $779,000 to $3.8 million for the nine months ended
September 30, 2000 from $3.0 million for the same period in 1999, primarily due
to the $907,000 unusual gain, net of expenses, on the termination of the
Association's defined benefit plan. This gain was partially offset by a $138,000
loss on the write down of a security classified as available for sale during the
nine months ended September 30, 2000. In addition, a $55,000 net expense related
to Palm River's investment in the real estate joint venture was recognized
during the 2000 period as compared to an $8,000 gain for the nine months ended
September 30, 1999. The joint venture began operations in July 1999. For further
information on this project, see "Community Savings, F. A." in this Form 10-Q
and "Investments in and Advances to Real Estate Venture" in the Notes to
Consolidated Financial Statements in Bankshares' 1999 Annual Report.
OPERATING EXPENSE
Operating expense decreased $288,000 to $16.9 million for the nine month period
ended September 30, 2000 from $17.2 million for the same period in 1999.
Decreases in occupancy and equipment and advertising and promotion expense of
$105,000 and $77,000, respectively, reflected the Association's efforts to
implement its cost reduction program. In addition, FDIC premiums decreased
$162,000 due to lower deposit insurance rates. These decreases were partially
offset by a $297,000 increase in employee compensation and benefits during the
nine months ended September 30, 2000 as compared to the 1999 period. The
increase primarily reflected the acceleration of costs related to awards granted
pursuant to Bankshares' Recognition and Retention Plans as a result of the death
of a member of the Board of Directors.
PROVISION FOR INCOME TAXES
The provision for income taxes was $2.6 million for the nine months ended
September 30, 2000 as compared to $2.0 million for the same period in 1999
reflecting the increase in net income for the nine months ended September 30,
2000 as well as a $207,000 decrease in the tax benefit to $242,000 recognized
during the nine months ended September 30, 2000 from the affordable housing tax
credit partnership previously noted as compared to a $449,000 tax benefit for
the 1999 period.
11
FINANCIAL CONDITION
SEPTEMBER 30, 2000 COMPARED TO DECEMBER 31, 1999
The following table summarizes certain information relating to Bankshares'
financial condition at the dates indicated.
September 30, December 31, Increase
2000 1999 (Decrease)
---------- ---------- ----------
(Unaudited)
(In thousands)
Assets:
Total assets $ 953,934 $ 892,974 $ 60,960
Cash and cash equivalents 36,666 45,239 (8,573)
Securities portfolio:
Securities available for sale 145,427 144,840 587
Securities held to maturity 35,410 38,802 (3,392)
---------- ----------
Total securities portfolio 180,837 183,642 (2,805)
Loans receivable, net 676,218 608,369 67,849
Investments in and advances to real estate venture 13,995 11,633 2,362
Real estate owned, net 422 494 (72)
Liabilities and Shareholders' Equity:
Total liabilities 839,249 777,273 61,976
Deposits 663,388 613,943 49,445
Federal Home Loan Bank advances 147,214 140,186 7,028
Advances by borrowers for taxes and insurance 8,640 1,403 7,237
Shareholders' equity 114,685 115,701 (1,016)
Total assets increased $60.9 million to $953.9 million at September 30, 2000, as
compared to $893.0 million at December 31, 1999 primarily due to a $67.8 million
increase in net loans receivable to $676.2 million at September 30, 2000 from
$608.4 million at December 31, 1999. The loan growth was funded by increases in
deposits (primarily odd-term certificates of deposit with original maturities of
less than two years) and borrowings, as well as decreases in interest-earning
deposits and the securities portfolio (which includes securities available for
sale and held to maturity).
As a result of continued emphasis on expanded lending activities, loan
originations and purchases totaled $162.5 million and $21.0 million,
respectively, and included loans secured by residential one- to four-family
properties totaling $136.3 million, multi-family properties totaling $3.8
million, land totaling $7.8 million, commercial real estate properties totaling
$5.2 million, consumer loans totaling $3.2 million and commercial business loans
totaling $6.2 million. The originations and purchases of $183.5 million were
offset by repayments totaling $113.9 million. Repayments included the payoff of
a $21.0 million loan secured by land.
The securities portfolio net decrease of $2.8 million primarily reflects $2.6
million in purchases of new securities available for sale offset by a $138,000
write down of a security available for sale as well as scheduled principal
reductions and amortization of premiums and discounts and other adjustments
amounting to $5.3 million.
Total liabilities increased $61.9 million to $839.2 million at September 30,
2000, from $777.3 million at December 31, 1999. Total deposits increased by
$49.5 million to $663.4 million at September 30, 2000 from $613.9 million at
December 31, 1999. The increase in deposits reflected increases of $59.4
million, $2.6 million, and $643,000 in certificates of deposits, demand
accounts, and savings accounts, respectively. During the nine months ended
September 30, 2000, the Association aggressively pursued odd-term certificates
of deposits which were used in conjunction with FHLB advances to fund new loan
originations. These increases were partially offset by decreases of $11.7
million and $1.5 million in money market deposit accounts and NOW and other
statement accounts. The weighted average rate paid on deposits increased to
4.65% at September 30, 2000 as compared to 3.95% at December 31, 1999 due to the
rising interest rate environment existing during 2000, reflecting the market's
adjustment to increases in interest rates changed by the Board of Governors of
the Federal Reserve System, as well as the 16% increase in certificates of
12
deposit which have a higher cost to the Association than do lower costing core
accounts (which consist of NOW and statement accounts, passbooks, non-interest
checking and money market accounts). Management continues to emphasize the
opening of lower costing core deposit relationships whenever possible. FHLB
advances increased $7.0 million to $147.2 million at September 30, 2000 from
$140.2 million at December 31, 1999. The increases included new advances
obtained during the first nine months of 2000 totaling $70.0 million offset in
part by the calls and maturity of advances totaling $15.0 million and $5.0
million, respectively, as well as $43.0 million of normal amortization.
Total equity, which totaled $114.7 million at September 30, 2000, decreased $1.0
million from December 31, 1999, reflecting the purchase of treasury stock
totaling $6.6 million and the declaration of dividends totaling $2.8 million,
offset in part by net income for the nine months of $5.2 million, stock options
exercised totaling $754,000, an increase in the market value of the
Association's securities available for sale totaling $993,000 and the
amortization of compensation represented by stock benefit plans totaling $1.4
million. For further information, see the unaudited consolidated statements of
changes in shareholders' equity in the accompanying consolidated financial
statements.
The Association is required to report regulatory capital ratios unconsolidated
with Bankshares. The Association's actual capital amounts and ratios at
September 30, 2000 are as follows:
For To be Considered Well
Capital Capitalized for Prompt
Adequacy Corrective Action
Actual Purposes Provisions
----------------- ----------------- -----------------
Ratio Amount Ratio Amount Ratio Amount
----- ------ ----- ------ ----- ------
(Dollars in thousands)
As of September 30, 2000:
Total risk-based capital
(to risk-weighted assets) 16.4% $84,431 8.0% $41,232 10.0% $51,540
Core (Tier 1) capital
(to adjusted tangible assets) 8.6 80,656 4.0 37,366 5.0 46,707
Core (Tier 1) capital
(to risk-weighted assets) 15.7 80,656 4.0 20,616 6.0 30,924
As of September 30, 2000, adjusted tangible assets and risk-weighted assets were
$934.1 million and $515.4 million, respectively.
13
ASSET QUALITY
Loans 90 days past due are generally placed on non-accrual status. The
Association ceases to accrue interest on a loan once it is placed on non-accrual
status and interest accrued but unpaid at such time is charged against interest
income. Additionally, any loan where it appears evident prior to being past due
90 days that the collection of interest is in doubt is also placed on
non-accrual status. Real estate owned is carried at the lower of cost or fair
value, less cost to dispose. Management regularly reviews assets to determine
proper valuation. There were no restructured loans as defined by SFAS No. 15 at
September 30, 2000 or December 31, 1999.
The following table sets forth information regarding the delinquent loans and
foreclosed real estate at the dates indicated:
September 30, December 31,
2000 1999
-------- --------
(In thousands)
Non-performing loans, net of write-downs:
Residential real estate:
Loans 60 to 89 days delinquent $ 401 $ 426
Loans more than 89 days delinquent 3,673 1,015
Commercial and multi-family real estate:
Loans 60 to 89 days delinquent -- --
Loans more than 89 days delinquent -- 5
Consumer and commercial business:
Loans 60 to 89 days delinquent 6 --
Loans more than 89 days delinquent -- 12
Land:
Loans 60 to 89 days delinquent -- --
Loans more than 89 days delinquent 420 7
Real estate owned, net of related allowance 422 494
Other repossessed assets -- --
Loans to facilitate sale of real estate owned 230 234
-------- --------
Total $ 5,152 $ 2,193
======== ========
In the above table, residential real estate loans more than 89 days delinquent
included two loans to a local builder, one a $2.1 million acquisition and
development loan and the other a $1.2 million revolving construction line of
credit loan, extended for the purpose of developing Phase I of a project to
build 78 golf villas on an eight acre parcel of land located in Palm Beach
County. Due to slower sales than projected which resulted in reduced cash flows,
the borrower notified the Association in May 2000 of its inability to make
scheduled interest payments in the near future. In accordance with SFAS 114,
management reversed all accrued but unpaid interest and placed the loans on
non-accrual status effective June 2000. A fair value calculation was performed
which estimated the value of existing collateral and indicated a fair market
value in excess of the principal loan balances at September 30, 2000. The rate
of sale of completed units has accelerated subsequent to September 30, 2000. At
the present time, management does not anticipate incurring any loss of principal
on these loans. During August 2000, an additional $779,000 loan was made to the
builder to allow construction to begin on additional pre-sold units in the
project. At September 30, 2000, additional loans and lines of credit committed
to this builder for other projects aggregated $5.1 million, with $2.9 million
disbursed. All of such additional loans were performing in accordance with their
terms at September 30, 2000.
Real estate owned consists of the following:
September 30, December 31,
2000 1999
------- -------
(In thousands)
Real estate owned $ 424 $ 500
Less allowance for loss 2 6
------- -------
Total real estate owned $ 422 $ 494
======= =======
14
Changes in allowance for loss on real estate owned are as follows:
For the nine months
Ended September 30,
-------------------
2000 1999
----- -----
(In thousands)
Balance, beginning of period $ 6 $ 36
Provision charged to income 14 10
Losses charged to allowance (18) (12)
----- -----
Balance, end of period $ 2 $ 34
===== =====
FORWARD-LOOKING STATEMENTS
Certain information in this Form 10-Q may constitute forward-looking information
that involves risks and uncertainties that could cause actual results to differ
materially from those estimated. Persons are cautioned that such forward-looking
statements are not guarantees of future performance and are subject to various
factors which could cause actual results to differ materially from those
estimated. These factors include, but are not limited to, changes in general
economic and market conditions, legislative and regulatory changes, monetary and
fiscal policies of the federal government, demand for loan and deposit products
and the development of an interest rate environment that adversely affects the
interest rate spread or other income from Bankshares' investments and
operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of Bankshares' asset and liability management policies as well
as the potential impact of interest rate changes upon the market value of
Bankshares' portfolio equity, see "Management's Discussion and Analysis - Market
Risk Analysis" and -"Market Value of Portfolio Equity" in Bankshares' Annual
Report to Shareholders. There has been no material change in Bankshares' asset
and liability position or the market value of Bankshares' portfolio equity since
December 31, 1999.
15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are various claims and lawsuits in which Bankshares or the
Association are periodically involved incidental to its business. In
the opinion of management, no material loss is expected from any of
such pending claims or lawsuits.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
27 Financial Data Schedule.
(b) CURRENT REPORTS ON FORM 8-K.
None during the reporting period.
16
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.
COMMUNITY SAVINGS BANKSHARES, INC.
/s/ JAMES B. PITTARD, JR.
------------------------------------------
Date: October 31, 2000 James B. Pittard, Jr.
President and Chief Executive Officer
Date: October 31, 2000 /s/ LARRY J. BAKER
------------------------------------------
Larry J. Baker
Senior Vice President, Chief Financial
Officer and Treasurer
17