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 June 30, 2001
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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
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COMMUNITY SAVINGS BANKSHARES, INC.
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(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
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(Address of principal executive (ZIP code)
offices)
Registrant's telephone number, including area code (561) 881-2212
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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 July 27, 2001, there were 8,636,027 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
June 30, 2001 (Unaudited) and December 31, 2000 2
Consolidated Statements of Operations (Unaudited) for the
three and six months ended June 30, 2001 and 2000 3
Consolidated Statements of Changes in Shareholders' Equity
(Unaudited) for the six months ended June 30, 2001 and 2000 4
Consolidated Statements of Cash Flows (Unaudited) for the
six months ended June 30, 2001 and 2000 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 14
Part II. Other Information
- --------------------------
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Default Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signature Page 16
1
Item 1. Financial Statements
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AT JUNE 30, 2001 (UNAUDITED) AND DECEMBER 31, 2000
June 30, December 31,
2001 2000
--------- ---------
(Unaudited)
(In thousands)
ASSETS
Cash and cash equivalents:
Cash and amounts due from depository institutions $ 17,063 $ 17,844
Interest-bearing deposits 35,468 27,274
--------- ---------
Total cash and cash equivalents 52,531 45,118
Securities available for sale 111,106 131,418
Securities held to maturity 30,428 34,025
Loans receivable, net of allowance for loan losses of $4,285 at
June 30, 2001 (unaudited) and $3,875 at December 31, 2000 690,118 691,294
Accrued interest receivable 3,919 4,363
Premises and equipment, net 27,498 25,323
Real estate held for investment 2,139 2,193
Investment in and advances to real estate venture 15,985 14,612
Real estate owned, net 10 170
Federal Home Loan Bank stock - at cost 8,063 8,063
Other assets 6,550 6,126
--------- ---------
Total assets $ 948,347 $ 962,705
========= =========
LIABILITIES
Deposits:
Demand deposits $ 48,017 $ 44,662
NOW and statement savings 78,989 79,110
Savings deposits 37,845 34,506
Money market deposits 100,004 91,214
Certificates of deposit 404,945 431,577
--------- ---------
Total deposits 669,800 681,069
Mortgage-backed bond, net 13,113 13,582
Advances from Federal Home Loan Bank 135,179 146,714
Advances by borrowers for taxes and insurance 6,187 1,153
Other liabilities 8,128 7,724
--------- ---------
Total liabilities 832,407 850,242
--------- ---------
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; 8,636,027 and 8,542,363
shares outstanding at June 30, 2001 and December 31, 2000, respectively 10,571 10,571
Additional paid-in capital 94,296 94,043
Retained income - substantially restricted 40,493 39,832
Common stock purchased by Employee Stock Ownership Plan (3,695) (4,038)
Common stock issued to or purchased by Recognition and Retention Plans (1,426) (1,907)
Accumulated other comprehensive loss (291) (855)
Treasury stock, at cost: 1,935,113 and 2,028,777 shares at June 30, 2001 and
December 31, 2000, respectively (24,008) (25,183)
--------- ---------
Total shareholders' equity 115,940 112,463
--------- ---------
Total liabilities and shareholders' equity $ 948,347 $ 962,705
========= =========
See notes to consolidated financial statements.
2
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000
For the three months For the six months
ended June 30, ended June 30,
2001 2000 2001 2000
----------- ----------- ----------- -----------
(Unaudited)
(Dollars in thousands, except per share data)
Interest income:
Loans $ 13,587 $ 12,350 $ 27,222 $ 24,017
Securities 2,471 3,104 5,261 6,291
Other interest and dividend income 555 572 1,210 1,256
----------- ----------- ----------- -----------
Total interest income 16,613 16,026 33,693 31,564
----------- ----------- ----------- -----------
Interest expense:
Deposits 7,294 6,313 15,066 12,367
Advances from Federal Home Loan Bank and other borrowings 2,256 2,576 4,658 4,919
----------- ----------- ----------- -----------
Total interest expense 9,550 8,889 19,724 17,286
----------- ----------- ----------- -----------
Net interest income 7,063 7,137 13,969 14,278
Provision for loan losses 90 75 180 225
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 6,973 7,062 13,789 14,053
----------- ----------- ----------- -----------
Other income:
Servicing income and other fees 48 68 116 157
NOW account and other customer fees 894 874 1,780 1,686
Net gain on real estate owned 24 21 24 25
Loss on write down of securities available for sale -- (138) -- (138)
Equity in net income (loss) of real estate venture 34 (125) 221 (200)
Net gain on termination of defined benefit plan -- 922 -- 922
Miscellaneous 187 84 285 185
----------- ----------- ----------- -----------
Total other income 1,187 1,706 2,426 2,637
----------- ----------- ----------- -----------
Operating expense:
Employee compensation and benefits 3,360 3,099 6,844 6,235
Occupancy and equipment 1,419 1,476 2,839 2,947
Advertising and promotion 162 144 344 379
Federal deposit insurance premium 32 31 64 62
Miscellaneous 1,010 802 2,072 1,749
----------- ----------- ----------- -----------
Total operating expense 5,983 5,552 12,163 11,372
----------- ----------- ----------- -----------
Income before provision for income taxes 2,177 3,216 4,052 5,318
Provision for income taxes 622 1,216 1,263 1,711
----------- ----------- ----------- -----------
Net income $ 1,555 $ 2,000 $ 2,789 $ 3,607
=========== =========== =========== ===========
Basic earnings per share $ 0.19 $ 0.23 $ 0.35 $ 0.42
=========== =========== =========== ===========
Diluted earnings per share $ 0.19 $ 0.23 $ 0.34 $ 0.41
=========== =========== =========== ===========
Weighted average common shares outstanding - basic 8,110,051 8,610,356 8,058,184 8,618,986
=========== =========== =========== ===========
Weighted average common shares outstanding - diluted 8,385,686 8,850,132 8,318,416 8,865,108
=========== =========== =========== ===========
See notes to consolidated financial statements.
3
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
--------------------------------------------------------------------------------------------
Retained Employee Recognition Accumulated
Additional Income- Stock and Other
Common Paid-In Substantially Ownership Retention Comprehensive Treasury
Stock Capital Restricted Plan Plans Income(Loss) Stock Total
--------------------------------------------------------------------------------------------
(In thousands)
--------------------------------------------------------------------------------------------
Balance - December 31, 1999 $ 10,571 $ 93,744 $ 37,869 $ (4,722) $ (2,586) $ (3,358) $ (15,817) $ 115,701
Net income for the six months
ended June 30, 2000 -- -- 3,607 -- -- -- -- 3,607
Other comprehensive income:
Unrealized increase in market
value of securities available
for sale (net of income taxes) -- -- -- -- -- 58 -- 58
---------
Comprehensive income 3,665
Stock options exercised -- -- -- -- -- -- 675 675
Shares committed to be released -
Employee Stock Ownership Plan
and Recognition and Retention
Plans -- 123 -- 342 394 -- -- 859
Stock benefit plan tax adjustment -- -- 159 -- -- -- -- 159
Purchase of treasury stock -- -- -- -- -- -- (2,267) (2,267)
Dividends declared -- -- (1,882) -- -- -- -- (1,882)
--------------------------------------------------------------------------------------------
Balance - June 30, 2000 (unaudited) $ 10,571 $ 93,867 $ 39,753 $ (4,380) $ (2,192) $ (3,300) $ (17,409) $ 116,910
--------------------------------------------------------------------------------------------
Balance - December 31, 2000 $ 10,571 $ 94,043 $ 39,832 $ (4,038) $ (1,907) $ (855) $ (25,183) 112,463
Net income for the six months
ended June 30, 2001 -- -- 2,789 -- -- -- -- 2,789
Other comprehensive income:
Unrealized increase in market
value of securities available
for sale (net of income taxes) -- -- -- -- -- 564 -- 564
---------
Comprehensive income 3,353
Stock options exercised -- -- (355) -- -- -- 1,175 820
Shares committed to be released -
Employee Stock Ownership Plan
and Recognition and Retention
Plans -- 253 -- 343 481 -- -- 1,077
Dividends declared -- -- (1,773) -- -- -- -- (1,773)
--------------------------------------------------------------------------------------------
Balance June 30, 2001 (unaudited) $ 10,571 $ 94,296 $ 40,493 $ (3,695) $ (1,426) $ (291) $ (24,008) $ 115,940
============================================================================================
See notes to consolidated financial statements.
4
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
For the six months ended
June 30,
2001 2000
-------- --------
(Unaudited)
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,789 $ 3,607
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 1,119 1,106
ESOP and Recognition and Retention Plans compensation expense 1,077 1,018
Accretion of discounts, amortization of premiums, and other deferred yield items (1,017) (865)
Provision for loan losses 180 225
Decrease (increase) in other assets 180 (642)
Increase in other liabilities 5,109 3,203
-------- --------
Net cash from operating activities 9,437 7,652
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in loans 2,093 (22,345)
Principal payments, calls and maturities received on securities and FHLB stock 28,512 5,386
Purchases of:
Loans and participations (1,097) (28,507)
Securities available for sale and Federal Home Loan Bank stock (2,750) (1,686)
Premises and equipment, net and real estate held for investment, net (3,016) (1,232)
Net change in investment in real estate venture (1,373) (1,699)
-------- --------
Net cash from investing activities 22,369 (50,083)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits (11,269) 25,124
Advances from Federal Home Loan Bank -- 38,000
Repayments, calls of advances from Federal Home Loan Bank (11,535) (21,936)
Purchase of treasury stock -- (2,267)
Proceeds from exercise of stock options 820 675
Payments made on mortgage-backed bond (693) (693)
Dividends paid (1,716) (1,885)
-------- --------
Net cash from financing activities (24,393) 37,018
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 7,413 (5,413)
-------- --------
CASH AND CASH EQUIVALENTS, beginning of period 45,118 45,239
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 52,531 $ 39,826
======== ========
See notes to consolidated financial statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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
thereto 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, 2000.
Reclassifications - Certain items in the 2000 financial statements and the
notes thereto have been reclassified to conform with the 2001 presentation.
2. LOANS RECEIVABLE
Loans receivable consists of the following:
June 30, December 31,
2001 2000
--------- ---------
(In thousands)
Real estate loans:
Residential 1-4 family $ 524,115 $ 511,324
Residential 1-4 family construction 99,113 113,179
Multi-family 9,234 10,501
Multi-family construction 20,952 33,960
Land 20,320 20,216
Commercial 36,142 37,255
Non-residential construction 11,793 8,170
--------- ---------
Total real estate loans 721,669 734,605
--------- ---------
Non-real estate loans:
Consumer 14,657 14,029
Commercial business 7,004 5,454
--------- ---------
Total non-real estate loans 21,661 19,483
--------- ---------
Total loans receivable 743,330 754,088
Undisbursed loan proceeds (50,953) (60,874)
Unearned discounts and premiums and
net deferred loan fees and costs 2,026 1,955
Allowance for loan losses (4,285) (3,875)
--------- ---------
Total loans receivable, net $ 690,118 $ 691,294
========= =========
An analysis of the changes in the allowance for loan losses is as follows:
For the six months
ended June 30,
2001 2000
--------- ---------
(In thousands)
Balance, beginning of period $ 3,875 $ 3,923
Provision charged to income 180 225
Losses charged to allowance (14) (310)
Recoveries 244 --
--------- ---------
Balance, end of period $ 4,285 $ 3,838
========= =========
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 six months
ended June 30,
2001 2000
-------- --------
(In thousands)
Impaired loan balance $ 1,974 $ 4,280
Related allowance -- 244
Average impaired loan balance 2,460 1,521
Interest income recognized 38 168
For a further discussion of delinquent loans, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - 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. 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 and related 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 using comprehensive loan underwriting
standards and collection efforts as well as by primarily originating or
purchasing secured or guaranteed assets.
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 venture commenced in mid-1999 to construct and sell 17 riverfront
single-family lots, 48 condominiums, 112 villa single-family homes and 22
carriage duplex homes on 117 acres of land located on the Intracoastal Waterway
7
in Indian River County, Florida. Palm River's investment in and advances to the
real estate development venture totaled $16.0 million at June 30, 2001. During
the quarter ended June 30, 2001, Bankshares recognized $348,000 in interest
income related to the advances made to this project. However, offsetting this
income was a $314,000 net loss (exclusive of interest income) on the project for
the same quarter resulting in net income in the equity of the real estate
development venture of $34,000. The losses being incurred on the project
(excluding interest income) were anticipated and are typical during the early
stages for projects of this type. Management expects to begin recognizing net
income (excluding interest income) on the project in late 2001 or early 2002.
The sales of all lots and units are currently projected to be completed during
2005.
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. A business strategy
priority for 2001 is to lower the cost of deposits to improve the net interest
rate spread. During the first half of 2001, management discontinued offering
higher-costing odd-term certificates of deposit and did not aggressively match
competitors' rates for other certificates of deposit. The Association's efforts
are focused on obtaining new lower costing core deposit accounts (consisting of
demand, NOW, savings and money market accounts). This strategy resulted in a
$26.6 million decrease in certificates of deposit offset in part by a $15.3
million increase in core deposits. The shift in deposit products resulted in a
12 basis point improvement in the interest rate spread for the quarter ended
June 30, 2001 as compared to the quarter ended March 31, 2001. Management
expects to see a continued improvement in the interest rate spread over the next
six months as maturing certificates of deposit either reprice at lower rates or
are not renewed. Certificates of deposit totaling $96.7 million and $75.8
million, with weighted average rates of 5.81% and 5.66% will mature in the three
months ending September 30 and December 31, 2001, respectively. New deposits and
loan repayments will be supplemented with FHLB advances as needed to fund loan
originations.
In July 2001, the Association opened a new office building in Palm City. This
facility includes a full service branch to replace the leased Martin Downs
branch as well as a training and meeting room for the Association's northern
branches. In addition, second floor leased space will provide rental income. The
Association has also entered into a contract to purchase the land and building
where the Bluffs branch office is located. The closing is currently expected to
be completed in the second half of 2001.
For the remainder of 2001, management will continue to focus on additional cost
reduction and enhanced fee income strategies.
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. While
the OTS liquidity regulation has been discontinued for 2001, liquidity levels
will continue to be monitored by Association management on a regular schedule.
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 $33.9 million at June 30, 2001. Other liquid assets outstanding
at June 30, 2001 amounted to $30.1 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 $135.2 million at June 30,
2001.
8
At June 30, 2001, commitments to originate loans totaled $14.3 million. The
unfunded portion of consumer lines of credit totaled $8.9 million and available
commercial lines and letters of credit totaled $9.6 million and $1.4 million,
respectively. Certificates of deposit scheduled to mature in less than one year
totaled $349.9 million at June 30, 2001. 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 June 30, 2001 and 2000
General
Net income for the quarter ended June 30, 2001 was $1.6 million, or $0.19
diluted earnings per share, a $445,000 decrease from the $2.0 million, or $0.23
diluted earnings per share, earned during the quarter ended June 30, 2000. The
three month period in 2000 included a one-time $922,000 net pre-tax gain
($575,000 after tax), or $0.06 after-tax diluted earnings per share, as a result
of the termination of the Association's defined benefit plan.
Net Interest Income
Net interest income was $7.1 million for the quarters ended June 30, 2001 and
2000. During the second half of 2000, the Association used higher costing
odd-term certificates of deposit to maintain existing customers as well as to
attract new deposits needed to fund loan growth, which increased its cost of
deposits. As a result, the weighted average cost of interest-bearing deposits
increased by 35 basis points to 4.31% for the three months ended June 30, 2001
as compared to 3.96% for the same period in 2000. In addition, the average
balance of deposits increased by $39.7 million. This increase in interest
expense for deposits was partially offset by a 41 basis point decrease in the
weighted average cost of borrowed funds, as well as a $10.5 million decrease in
the average balance of borrowed funds. The net effect of these changes resulted
in a 16 basis point increase in the weighted average cost of interest-bearing
liabilities to 4.62% for the 2001 period. A $56.7 million increase in the
average balance of real estate loans for the three months ended June 30, 2001 as
compared to the same period in 2000, as well as a 9 basis point increase in the
weighted average yield on real estate loans to 7.75% contributed to the 2 basis
point increase in the weighted average yield on interest earning assets. As a
result of these changes, the interest rate spread decreased 14 basis points to
2.91 % for the three months ended June 30, 2001 as compared to 3.05% for the
2000 period.
The Association's priority for 2001 is to lower its deposit cost in order to
improve the net interest rate spread. During 2001, new odd-term certificates of
deposit were not offered and management is not aggressively matching
competitors' rates. While this has caused some outflow of deposit funds, the
Association has focused on enhancing its relationships with new and existing
depositors, including obtaining additional lower costing core deposit accounts.
As a result of its efforts to lower the cost of deposits in the first six months
of 2001, there was a 12 basis point improvement in the interest rate spread for
the quarter ended June 30, 2001 as compared to the quarter ended March 31, 2001.
Management expects to continue to see an improvement in the interest rate spread
over the next six months as maturing certificates of deposit either reprice at
lower rates or are not renewed.
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 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 $90,000 for the quarter ended June 30,
2001 as compared to $75,000 for the quarter ended June 30, 2000. In addition to
the provision for loan losses recorded during the quarter ended June 30, 2001,
the allowance for loan losses was increased by a $244,000 recovery on the
previous writedown of a loan. Although management believes the loan loss
allowance was adequate at June 30, 2001, further additions to the allowance for
loan losses may be necessary. For a further information regarding asset quality,
see " - Asset Quality" in this Form 10-Q.
Other Income
Other income consists of service charges, fee income, gains or losses on the
sale of assets, gain or loss on the real estate development venture and other
non-interest income. Other income decreased $519,000 to $1.2 million for the
9
quarter ended June 30, 2001, from $1.7 million for the same period in 2000.
Included in the second quarter of 2000 was the one-time $922,000 gain (noted
above) recognized as a result of the termination of the defined benefit plan. In
addition, miscellaneous income for the three months ended June 30, 2001,
includes a $100,000 gain on the acquisition by eminent domain by the State of
Florida of a strip of land at the Association's Port Salerno branch. Other
income also includes the results of the activity of Palm River which is involved
in a real estate development venture commenced in mid-1999 to develop and sell
single-family riverfront lots, and construct and sell condominiums, villa homes
and carriage homes on 117 acres of land on the inland waterway near Vero Beach
in Indian River County, Florida. The investment in and advances to the real
estate development venture totaled $16.0 million at June 30, 2001. Bankshares
recognized $348,000 in interest income related to advances made to the project
during the quarter ended June 30, 2001 as compared to $341,000 for the same
period in 2000 (all of which is reflected in equity in net income or loss from
real estate venture). However, offsetting this was a $314,000 net loss
(exclusive of such interest income) on the project for the second quarter of
2001 resulting in a net gain from the real estate venture of $34,000. This
compares to a $466,000 net loss (exclusive of interest income) resulting in a
net loss of $125,000 for the same quarter in 2000. Such losses, without regard
to interest income, were anticipated and are typical for projects of this type.
The losses incurred to date on this project reflect the expected recognition of
start-up costs during the early stages of this construction project. Net income
(exclusive of interest income) on the project is expected to begin to be
recognized when closings begin later this year or early next year. 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' Annual Report to Shareholders
for the year ended December 31, 2000 ("2000 Annual Report").
Operating Expense
Operating expense increased $431,000 to $6.0 million for the three month period
ended June 30, 2001 from $5.6 million for the same period in 2000. This increase
was primarily due to a $261,000 increase in compensation and benefits expense to
$3.4 million from $3.1 million for the same period in 2000. The increase
primarily reflected increased wages paid by the Association in order to attract
and retain employees in its competitive market place. In addition, miscellaneous
operating expense increased $208,000 for the three months ended June 30, 2001
partially as a result of a $94,000 increase in the amortization of the
Association's investment in an affordable housing partnership.
Provision for Income Taxes
The provision for income taxes was $622,000 for the three months ended June 30,
2001 as compared to $1.2 million for the 2000 period. Taxes were higher in the
2000 period due to the increase in net income for the three months ended June
30, 2000 as well as a $96,000 decrease in the benefit from tax credits resulting
from the Association's investment in an affordable housing partnership in that
same period.
Results of Operations
for the Six Months Ended June 30, 2001 and 2000
General
Net income for the six months ended June 30, 2001 was $2.8 million, or $0.34
diluted earnings per share, an $818,000 decrease from $3.6 million, or $0.41
diluted earnings per share, for the six months ended June 30, 2000. In addition
to the one-time $922,000 gain, net of expenses, recognized in the 2000 period on
the termination of the Association's defined benefit plan described above, for
the six months ended June 30, 2001, net interest income decreased $309,000 and
employee compensation and benefits and miscellaneous operating expense increased
$609,000 and $323,000, respectively. Partially offsetting these shifts was the
recognition of $221,000 equity in net income in the real estate venture as
compared to a $200,000 net loss in the same period in 2000.
Net Interest Income
Net interest income decreased to $14.0 million for the six months ended June 30,
2001 from $14.3 million for the same period in 2000 primarily as a result of a
50 basis point increase in the weighted average cost of interest-bearing
deposits to 4.43% for the six months ended June 30, 2001 as compared to 3.93%
for the same period in 2000. In addition, the average balance of deposits
increased by $50.9 million. This resulted in an increase in the weighted average
cost of interest-bearing liabilities to 4.74% for the 2001 period. These
increases were partially offset by a $75.0 million increase in the average
10
balance of the loan portfolio. As a result of these changes, the interest rate
spread decreased 26 basis points to 2.84% for the six months ended June 30,
2001.
As explained above, the Association's priority for 2001 has been to lower the
cost of deposits in order to improve the interest rate spread. Management
expects to continue to see an improvement in the interest rate spread over the
next six months as maturing certificates of deposit either reprice at lower
rates or are not renewed.
Provision for Loan Losses
The provision for loan losses was $180,000 for the six months ended June 30,
2001, as compared to $225,000 for the six months ended June 30, 2000. The
allowance for loan losses as a percentage of net loans receivable was 0.62% and
0.58% at June 30, 2001 and 2000, respectively. Management determined to increase
the allowance loan loss reserves to a greater extent in the 2000 period as
compared to the same time period in 2001, after evaluating the risks inherent in
the then current loan portfolio. In addition to the provision for loan losses
recorded during the six months ended June 30, 2001, the allowance for loan
losses was increased by a $244,000 recovery on the previous writedown of a loan.
For a further information regarding asset quality, see " - Asset Quality" in
this Form 10-Q.
Other Income
Other income decreased $211,000 to $2.4 million for the six months ended June
30, 2001 from $2.6 million for the same period in 2000, primarily due to the
one-time $922,000 gain, net of expenses, recorded as a result of the termination
of the Association's defined benefit plan. This gain was partially offset by a
$138,000 impairment loss during the second quarter of 2000 taken on a security
classified as available for sale. In addition, equity in the net income related
to the real estate venture in Vero Beach increased $421,000 to $221,000 from a
net loss of $200,000 for the 2000 period. 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' 2000 Annual Report.
Operating Expense
Operating expense increased $791,000 to $12.2 million for the six month period
ended June 30, 2001 from $11.4 million for the same period in 2000. Employee
compensation and benefits increased $609,000 during the six months ended June
30, 2001 as compared to the 2000 period primarily reflecting increased wages
paid by the Association in order to attract and retain employees in its
competitive market place. The Association also recognized $232,000 in the
acceleration of costs related to stock benefit plans as a result of the
retirement of a member of the Board of Directors and a senior officer of
Bankshares and the Association in January 2001. In addition, the $323,000
increase in miscellaneous operating expense included a $101,000 increase in the
amortization of the Association's investment in the tax credit partnership.
Provision for Income Taxes
The provision for income taxes was $1.3 million for the six months ended June
30, 2001 as compared to $1.7 million for the same period in 2000 reflecting the
decrease in net income for the six months ended June 30, 2001.
Financial Condition
June 30, 2001 compared to December 31, 2000
At June 30, 2001, Bankshares' assets totaled $948.3 million, a $14.4 million
decrease from December 31, 2000. Net loans receivable decreased $1.2 million
during the six months ended June 30, 2001. Loan repayments totaling $101.4
million were offset by new loan originations and purchases and a decrease in
loans in process and other adjustments of $91.5 million and $8.7 million,
respectively. The Association is offering a loan modification program to
maintain existing loan customers seeking to refinance higher rate fixed and
adjustable loans in the declining interest rate market experienced during 2001.
This program has resulted in the modification of the interest rates of $4.2
million in loans during the three months ended June 30, 2001.
Deposits aggregated $669.8 million at June 30, 2001, an $11.3 million decrease
from December 31, 2001. The Association, utilizing a strategy designed to lower
its cost of funds, focused on obtaining new core deposit accounts (consisting of
demand, NOW, savings and money market accounts), and discontinued offering its
11
higher costing odd-term certificates of deposit product. This strategy resulted
in a $26.6 million decrease in certificates of deposit offset in part by a $15.3
million increase in core deposits.
The declining interest rate market experienced during 2001 has also impacted the
Association's securities portfolio, which includes callable U.S. Government and
Agency securities and amortizing mortgage-backed and related securities. When
market interest rates decline, some securities may be called and prepayments of
mortgage-backed and related securities may accelerate. Calls of securities
classified as available for sale totaling $18.4 million as well as scheduled
principal reductions and amortization of premiums and discounts and other
adjustments amounting to $8.3 million resulted in a net decrease in the
securities portfolio of $23.9 million for the six months ended June 30, 2001.
Funds resulting from the calls and amortization were primarily used to fund new
loan originations. The decrease in the securities portfolio in the first half of
2001 was partially offset by purchases of Fannie Mae ("FNMA") and Freddie Mac
("FHLMC") stock aggregating $2.8 million. At June 30, 2001, the Association's
investment portfolio included additional callable securities and mortgage-backed
and related securities aggregating $16.0 million and $57.3 million,
respectively.
FHLB advances decreased $11.5 million to $135.2 million at June 30, 2001 from
$146.7 million at December 31, 2000. The decreases included the maturity and
payoff of $10.0 million in advances as well as $1.5 million of normal
amortization. The early payoff was made without penalty. New deposits and loan
repayments will be supplemented with FHLB advances as needed to fund loan
originations for the remainder of 2001.
Total equity, which totaled $115.9 million at June 30, 2001, increased $3.5
million from December 31, 2000, reflecting net income for the six months of $2.8
million, stock option exercises totaling $820,000, an increase in the market
value of the Association's securities available for sale totaling $564,000 (net
of tax) and the amortization of compensation represented by stock benefit plans
totaling $1.1 million, offset in part by the declaration of dividends totaling
$1.8 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 June 30,
2001 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 June 30, 2001:
Total risk-based capital
(to risk-weighted assets) 13.8% $75,361 8.0% $43,675 10.0% $54,593
Core (Tier 1) capital
(to adjusted tangible assets) 7.6 71,143 4.0 37,289 5.0 46,611
Core (Tier 1) capital
(to risk-weighted assets) 13.0 71,143 4.0 37,289 6.0 32,756
As of June 30, 2001, adjusted tangible assets and risk-weighted assets were
$932.2 million and $545.9 million, respectively.
12
Asset Quality
Loans 90 days past due are considered non-performing and 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 any interest accrued but unpaid at such time
is reversed from interest income. Additionally, any loan for which 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.
The following table sets forth information regarding non-performing and
delinquent loans, foreclosed real estate, and loans to facilitate the sale of
REO at the dates indicated:
June 30, December 31,
2001 2000
---- ----
(In thousands)
Non-performing and delinquent loans, net of write-downs:
Residential real estate:
Loans 60 to 89 days delinquent $ 337 $ 701
Loans more than 89 days delinquent 2,846 2,888
Commercial and multi-family real estate:
Loans 60 to 89 days delinquent -- --
Loans more than 89 days delinquent -- --
Consumer and commercial business:
Loans 60 to 89 days delinquent 64 17
Loans more than 89 days delinquent -- 8
Land:
Loans 60 to 89 days delinquent -- 3
Loans more than 89 days delinquent 6 420
Real estate owned, net of related allowance 10 170
Other repossessed assets -- --
Loans to facilitate sale of real estate owned 226 229
------ ------
Total $3,489 $4,436
====== ======
In the above table, residential real estate loans more than 89 days delinquent
included two loans to a local builder, aggregating $2.0 million, 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 during fiscal 2000 of its inability to make scheduled interest
payments. In accordance with SFAS No. 114, management reversed all accrued but
unpaid interest and placed the loans on non-accrual status at that time. A fair
value calculation was performed which estimated the fair market value of
existing collateral as being in excess of the principal loan balances at June
30, 2001. At the present time, management does not anticipate incurring any loss
of principal on these loans.
Land loans more than 89 days delinquent at December 31,2000 included a $399,000
loan (net of a $244,000 write-down). This land loan was secured by three
residential and one commercial lot. During the quarter ended June 30, 2001, the
Association negotiated a settlement involving the repayment of the total
principal balance of $643,000 as well as past due interest and late charges
aggregating $51,000 and legal and other fees aggregating $36,000. The $244,000
recovery was posted to the allowance for loan losses.
13
Real estate owned consists of the following:
June 30, December 31,
2001 2000
---- ----
(In thousands)
Real estate owned $ 12 $172
Less allowance for loss 2 2
---- ----
Total real estate owned $ 10 $170
==== ====
Changes in allowance for loss on real estate owned are as follows:
For the six months
ended June 30,
2001 2000
---- ----
(In thousands)
Balance, beginning of period $ 2 $ 6
Provision charged to income -- 14
Losses charged to allowance -- (6)
---- ----
Balance, end of period $ 2 $ 14
==== ====
Forward-Looking Statements
Statements included in this Form 10-Q which are not historical facts are
forward-looking statements, as that term is defined in the Private Securities
Litigation Reform Act of 1995. Amounts herein could vary as a result of market
and other factors. Such forward-looking statements are subject to risks and
uncertainties which could cause actual results to differ materially from those
currently anticipated due to a number of factors, which include, but are not
limited to, factors discussed in documents filed by Bankshares with the
Securities and Exchange Commission from time to time. Such forward-looking
statements may be identified by the use of such words as "believe," "expect,"
"anticipate," "should," "planned," "estimated," "potential" and "projected."
Examples of forward-looking statements include, but are not limited to,
estimates with respect to the financial condition, expected or anticipated
revenue, results of operations and business of Bankshares that are subject to
various factors which could cause actual results to differ materially from these
estimates. These factors include, but are not limited to, general economic
conditions; changes in interest rates; deposit flows; the levels of defaults,
losses and prepayments on loans held by Bankshares in portfolio or sold in the
secondary market; loan demand; real estate values; competition; changes in
accounting principles, policies, practices or guidelines; changes in legislation
or regulation; and other economic, competitive, governmental, regulatory, and
technological factors affecting Bankshares' operations, pricing, products and
services. The forward-looking statements are made as of the date of this Form
10-Q, and Bankshares' assumes no obligation to update the forward-looking
statements or to update the reasons why actual results could or did differ from
those projected in the forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For a discussion of Bankshares' asset and liability management policies, see
"Management's Discussion and Analysis - Market Risk Analysis" and -"Market Value
of Portfolio Equity" in Bankshares' 2000 Annual Report.
Management measures Bankshares' interest rate risk by computing estimated
changes in net interest income and the net portfolio value ("NPV") of its cash
flows from assets and liabilities in the event of a range of assumed changes in
market interest rates. Bankshares' exposure to interest rate risk is reviewed on
a quarterly basis by the Association's Board of Directors and by the
Asset/Liability Committee (the "ALCO") which is comprised of senior management
of the Association. The ALCO establishes policies to monitor and coordinate
Bankshares' sources, uses, and pricing of funds. Exposure to interest rate risk
is measured with the use of interest rate sensitivity analysis to determine the
change in NPV in the event of hypothetical changes in interest rates. If
estimated changes to NPV and net interest income are not within the limits
established by the Association's Board of Directors, then the Board may direct
management to adjust Bankshares' asset and liability mix to bring its interest
rate risk within Board approved limits.
NPV represents the market value of assets less the market value of liabilities.
This analysis assesses the risk of loss in market risk sensitive instruments in
the event of sudden and sustained 1% to 2% increases and decreases in market
interest rates. The Association's Board of Directors has adopted an interest
rate risk policy which establishes maximum decreases in NPV in the event of such
changes in market interest rates. The following table presents Bankshares' most
recent internal calculations of NPV at March 31, 2001.
14
- --------------------------------------------------------------------------------------------------------------------
NPV as % of
Estimated Net Market Value of Portfolio Equity PV of Average Assets
Change in Interest Rates in Basis Points ---------------------------------------------- --------------------
(Rate Shock) Amount $ Change % Change NPV Ratio Change
- ----------------------------------------- ---------------------------------------------- -------------------------
(Dollars in Thousands) (Basis Points)
200 $ 120,955 $ (23,680) (16.4)% 12.6% (246)
100 133,961 (10,674) (7.4) 13.9 (111)
Static 144,635 -- -- 15.1 --
(100) 143,387 1,248 0.9 14.9 13
(200) 133,851 10,784 7.5 13.9 112
As of December 31, 2000, Bankshares' NPV was $155.1 million or 16.0% of the
present value of average assets. Following a 200 basis point increase in
interest rates, Bankshares' "post shock" NPV was $145.4 million or 15.0% of the
present value of average assets. The change in the NPV ratio or Bankshares'
sensitivity measure was (6.30%).
Based upon management's knowledge as of the date hereof, Bankshares' does not
believe that there has been any material change in its' asset and liability
position or the market value of its' portfolio equity since March 31, 2001.
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
Harold I. Stevenson announced his retirement effective July 2, 2001.
Mr. Stevenson, a member of the Board of Directors of the Association
since 1987 and Bankshares since 1998, retired for personal reasons.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
--------
None.
(b) Current Reports on Form 8-K.
---------------------------
None during the reporting period.
15
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.
Date: July 31, 2001 /s/ JAMES B. PITTERD, JR.
--------------------------------------
James B. Pittard, Jr.
President and Chief Executive Officer
Date: July 31, 2001 /s/ DONNA L. SHEPPARD
--------------------------------------
Donna L. Sheppard
Vice President, Chief Accounting Officer
and Controller
16