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, 1997
------------------
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)
UNITED STATES 65-0780334
- ---------------------------------------- --------------------------------
(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 November 10, 1997, there were 5,094,920 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
Unaudited Consolidated Statements of Financial Condition as of
September 30, 1997 and December 31, 1996 (Unaudited) 2
Consolidated Statements of Operations for the three and the nine
months ended September 30, 1997 and 1996 (Unaudited) 3
Consolidated Statements of Changes in Shareholders' Equity for the
year ended December 31, 1996 and for the nine months ended
September 30, 1997 (Unaudited) 4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1997 and 1996 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
PART II. OTHER INFORMATION
- --------------------------
Item 1 Legal Proceedings 19
Item 2 Changes in Securities 19
Item 3 Default Upon Senior Securities 19
Item 4 Submission of Matters to a Vote of Security Holders 19
Item 5 Other Information 20
Item 6 Exhibits and Reports on Form 8-K 20
Signature Page 21
1
ITEM 1. FINANCIAL STATEMENTS.
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AT SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
September 30, December 31,
1997 1996
--------- ---------
(Unaudited)
(In Thousands)
ASSETS
Cash and cash equivalents:
Cash and amounts due from depository institutions $ 14,193 $ 13,547
Interest-bearing deposits 36,104 28,895
--------- ---------
Total cash and cash equivalents 50,297 42,442
Securities available for sale 139,379 123,152
Investments - held to maturity 21.409 22,139
Mortgage-backed and related securities - held to maturity 48,326 53,405
Loans receivable, net of allowance for loan losses 418,760 389,040
Accrued interest receivable 2,824 2,354
Office properties and equipment, net 20,259 16,368
Real estate owned, net 593 1,455
Federal Home Loan Bank stock - at cost 3,263 2,864
Other assets 4,110 1,990
--------- ---------
Total assets $ 709,220 $ 655,209
========= =========
LIABILITIES
Deposits $ 544,295 $ 513,709
Mortgage-backed bond - net 16,558 17,230
Advances from Federal Home Loan Bank 48,926 34,763
ESOP borrowings 1,621 1,915
Advances by borrowers for taxes and insurance 6,968 1,059
Other liabilities 7,969 8,378
Deferred income taxes 2,441 2,036
--------- ---------
Total liabilities 628,778 579,090
--------- ---------
SHAREHOLDERS' EQUITY
Preferred stock ($1 par value): 10,000,000 authorized shares, no shares issued -- --
Common stock ($1 par value): 20,000,000 authorized shares, 5,094,920 and
5,090,120 shares outstanding at September 30, 1997 and
December 31, 1996, respectively 5,095 5,090
Additional paid in capital 30,136 29,950
Retained income - substantially restricted 47,341 44,603
Common stock purchased by Employee Stock Ownership Plan (1,522) (1,848)
Common stock issued to Recognition and Retention Plan (468) (608)
Unrealized decrease in market value of assets available
for sale, net of income taxes (140) (1,068)
--------- ---------
Total shareholders' equity 80,442 76,119
--------- ---------
Total liabilities and shareholders' equity $ 709,220 $ 655,209
========= =========
See notes to consolidated financial statements.
2
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
For the three months For the nine months
ended September 30, ended September 30,
1997 1996 1997 1996
-------- -------- -------- --------
(Unaudited)
(In Thousands)
Interest income:
Real estate loans $ 8,065 $ 7,297 $ 23,544 $ 20,487
Consumer and commercial business loans 405 457 1,222 1,164
Investment securities and securities available for sale 3,135 2,623 8,414 7,359
Mortgage-backed and related securities 816 1,069 2,827 2,838
Interest-earning deposits 473 399 1,464 1,836
-------- -------- -------- --------
Total interest income 12,894 11,845 37,471 33,684
-------- -------- -------- --------
Interest expense:
Deposits 5,800 4,985 16,832 14,749
Advances from Federal Home Loan Bank
and other borrowings 1,236 967 3,464 2,761
-------- -------- -------- --------
Total interest expense 7,036 5,952 20,296 17,510
-------- -------- -------- --------
Net interest income 5,858 5,893 17,175 16,174
Provision for loan losses 138 28 221 68
-------- -------- -------- --------
Net interest income after provision for loan losses 5,720 5,865 16,954 16,106
-------- -------- -------- --------
Other income:
Servicing income and other fees 46 50 204 113
NOW account and other customer fees 876 817 2,483 2,360
Net gain (loss) on sale and early maturities
of securities available for sale (8) 6 (8) 144
Gain on sale of other assets 617 -- 617 --
Net loss on amounts due from depository institutions -- -- -- (200)
Net gain (loss) on sale of loans receivable 3 (7) 3 (225)
Loss incurred in real estate venture (75) (1) (75) (59)
Miscellaneous 63 62 160 131
-------- -------- -------- --------
Total other income 1,522 927 3,384 2,264
-------- -------- -------- --------
Operating expense:
Employee compensation and benefits 2,332 1,988 6,585 5,782
Occupancy and equipment 1,257 1,180 3,677 3,437
Net gain on real estate owned (26) (243) (29) (325)
Advertising and promotion 115 149 547 511
Federal deposit insurance premium 86 3,110 185 3,628
Miscellaneous 1,209 958 2,813 2,379
-------- -------- -------- --------
Total operating expense 4,973 7,142 13,778 15,412
-------- -------- -------- --------
Income (loss) before provision for (benefit from) income taxes 2,269 (350) 6,560 2,958
Provision for (benefit from) income taxes 720 (164) 2,276 94
-------- -------- -------- --------
Net income (loss) $ 1,549 $ (186) $ 4,284 $ 2,864
======== ======== ======== ========
Primary earnings (loss) per share $ 0.31 $ (0.04) $ 0.85 $ 0.58
======== ======== ======== ========
Fully diluted earnings (loss) per share $ 0.30 $ (0.04) $ 0.84 $ 0.58
======== ======== ======== ========
See notes to consolidated financial statements.
3
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
Unrealized
Increase
(Decrease) in
Retained Employee Recognition Market Value
Additional Income- Stock and of Assets
Common Paid In Substantially Ownership Retention Available for
Stock Capital Restricted Plan Plan Sale Total
================================================================================
(In Thousands)
Balance - September 30, 1996 $ 5,090 $ 29,881 $ 43,902 $ (1,965) $ (654) $ (1,198) $ 75,056
Net income for three months ended
December 31, 1996 -- -- 1,160 -- -- -- 1,160
Stock options exercised -- 4 -- -- -- -- 4
Unrealized increase in market
value of assets available for
sale (net of income taxes) -- -- -- -- -- 130 130
Amortization of deferred
compensation - Employee Stock
Ownership Plan and Recognition
and Retention Plan -- 65 -- 117 46 -- 228
Dividends declared -- -- (459) -- -- -- (459)
--------------------------------------------------------------------------------
Balance - December 31, 1996
(unaudited) 5,090 29,950 44,603 (1,848) (608) (1,068) 76,119
Net income for nine months ended
September 30, 1997 -- -- 4,284 -- -- -- 4,284
Stock options exercised 5 49 -- -- -- -- 54
Unrealized increase in market
value of assets available for
sale (net of income taxes) -- -- -- -- -- 928 928
Amortization of deferred
compensation - Employee Stock
Ownership Plan and Recognition
and Retention Plan -- 137 -- 326 140 -- 603
Dividends declared -- -- (1,546) -- -- -- (1,546)
--------------------------------------------------------------------------------
Balance-September 30, 1997
(unaudited) $ 5,095 $ 30,136 $ 47,341 $ (1,522) $ (468) $ (140) $ 80,442
================================================================================
See notes to consolidated financial statements.
4
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
For the nine months ended
September 30,
1997 1996
-------- --------
(Unaudited)
(In Thousands)
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Net income $ 4,284 $ 2,864
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 1,049 940
ESOP and Recognition and Retention Plan compensation expense 603 430
Accretion of discounts, amortization of premiums, and other deferred
yield items (1,149) (1,123)
Provision for losses on other assets -- 200
Provision for loan losses 221 68
Provision for gains and net gains on sales of real estate owned (123) (96)
Amortization of discount on mortgage-backed bond 369 372
Net (gain) loss on sale and early maturities of
securities available for sale 8 (254)
Net (gain)loss on sale of loans and other assets (630) 208
Increase in accrued interest receivable (470) (236)
Increase in other assets (2,120) (491)
(Increase) decrease in loans available for sale 70 319
Increase (decrease) in other liabilities (409) 2,576
-------- --------
Net cash provided by operating activities 1,703 5,777
-------- --------
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
Loan originations and principal payments on loans (25,750) (29,017)
Principal payments received on mortgage-backed and related securities 10,194 8,965
Principal payments on investments 1,438 2,075
Purchases of
Loans (4,463) (16,671)
Securities available for sale (41,309) (63,332)
Federal Home Loan Bank stock (399) --
Office property and equipment (4,933) (1,366)
Proceeds from sales of:
Federal Home Loan Bank stock -- 2,000
Office properties and equipment 129 425
Participation loan purchased -- 3,452
Real estate acquired in settlement of loans 1,263 728
Proceeds from calls or maturities of investments 21,734 13,213
Other investing 331 (394)
-------- --------
Net cash used for investing activities (41,765) (79,922)
-------- --------
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
Net increase (decrease) in:
NOW accounts, demand deposits, and savings accounts 2,494 (8,741)
Certificates of deposit 28,092 45,985
Advances from Federal Home Loan Bank 20,000 22,500
Repayment of advances from Federal Home Loan Bank (5,837) (3,263)
Advances by borrowers for taxes and insurance 5,909 5,401
ESOP loan (294) (345)
Proceeds from exercise of stock options 54 13
Payments made on mortgage-backed bond (1,041) (1,040)
Dividends paid (1,460) (1,227)
-------- --------
Net cash provided by financing activities 47,917 59,283
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 7,855 (14,862)
CASH AND CASH EQUIVALENTS, beginning of period 42,442 59,642
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 50,297 $ 44,780
======== ========
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
interim periods. The results for interim periods are not necessarily
indicative of trends or results to be expected for the full 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 the Association's Annual Report to
Shareholders for the year ended September 30, 1996. As the Association
represents Bankshares' sole investment, the interim periods presented
herein are comparable to prior year financial data.
2. REORGANIZATION TO A MUTUAL HOLDING COMPANY AND CONVERSION TO STOCK FORM OF
OWNERSHIP
On September 30, 1997, the Association completed its reorganization into
the two-tier form of mutual holding company ownership. Pursuant to the
reorganization, the Association is now the wholly owned subsidiary of the
newly-formed, federally chartered mid-tier stock holding company,
Bankshares. Bankshares is the majority owned subsidiary of ComFed, M.H.C.
("ComFed"), a federally chartered mutual holding company regulated by the
Office of Thrift Supervision ("OTS").
Under the reorganization, each share of the Association's common stock
held by the existing shareholders was converted into one share of common
stock of Bankshares. ComFed, which was the majority holder of shares of
the Association, now holds 2,620,144 shares of Bankshares, or 51.4% of the
5,094,920 shares of common stock issued and outstanding. The minority
shares are owned by members of the public including officers and directors
of Bankshares.
The reorganization was accounted for in a manner similar to a pooling of
interests and did not result in any significant accounting adjustments.
Bankshares conducts no business other than holding the common stock of the
Association. Consequently, its net income is derived from the Association.
3. CHANGE IN FISCAL YEAR END
During January 1997, the Board of Directors voted to change the
Association's fiscal year end from September 30th to December 31st,
effective December 31, 1996. Bankshares' fiscal year end is December 31st
as well.
4. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards No. 130 "Reporting
Comprehensive Income", which requires
6
that an enterprise report, by major components and as a single total, the
change in its net assets during the period from nonowner sources, and No.
131 "Disclosures about Segments of an Enterprise and Related Information",
which establishes annual and interim reporting standards for an
enterprise's operating segments and related disclosures about its
products, services, geographic areas, and major customers. Adoption of
these statements will not impact Bankshares' consolidated financial
position, results of operations or cash flows, and any effect will be
limited to the form and content of its disclosures. Both statements are
effective for fiscal years beginning after December 15, 1997, with earlier
application permitted.
5. LOANS RECEIVABLE
Loans receivable consist of the following:
September 30, December 31,
1997 1996
-------- --------
(In Thousands)
Real estate loans:
Residential 1-4 family $314,952 $293,296
Residential 1-4 family held for sale (at lower of cost or fair value) -- 70
Residential construction loans 44,093 33,158
Non-residential construction loans -- 2,200
Land loans 18,854 19,426
Multi-family loans 8,881 8,096
Commercial 44,827 37,815
-------- --------
Total real estate loans 431,607 394,061
-------- --------
Non-real estate loans:
Consumer loans 15,415 16,028
Commercial business 2,354 2,458
-------- --------
Total non-real estate loans 17,769 18,486
-------- --------
Total loans receivable 449,376 412,547
Less:
Undisbursed loan proceeds 27,933 20,765
Unearned discount and net deferred loan fees 51 200
Allowance for loan losses 2,632 2,542
-------- --------
Total loans receivable, net $418,760 $389,040
======== ========
The amount of loans on which Bankshares has ceased accruing interest
aggregated approximately $1,263,000 and $1,631,000 at September 30, 1997
and December 31, 1996, respectively. The amount of interest not accrued
related to these loans was approximately $93,000 and $65,000 at September
30, 1997 and December 31, 1996, respectively.
7
An analysis of the changes in the allowance for loan losses is as follows:
For the nine months
ended September 30,
1997 1996
------- -------
(In Thousands)
Balance, beginning of period $ 2,542 $ 3,492
Provision charged to income 221 68
Losses charged to allowance (131) (1,248)
Recoveries -- --
------- -------
Balance, end of period $ 2,632 $ 2,312
======= =======
Bankshares accounts for impaired loans in accordance with SFAS No. 114
"Accounting by Creditors for Impairment of a Loan" as amended by SFAS No.
118.
An analysis of the recorded investment in impaired loans owned by
Bankshares at June 30, 1997 and the related allowance for those loans is
as follows:
September 30, 1997
------------------------
Loan Related
Balances Allowances
-------- ----------
(In Thousands)
Impaired loan balances and related
allowances for loan losses $1,050 $ 252
====== ======
6. REAL ESTATE OWNED
Real estate owned consists of the following:
September 30, December 31,
1997 1996
----- -----
(In Thousands)
Real estate owned $ 642 $1,547
Less allowance for loss 49 92
------ ------
Total $ 593 $1,455
====== ======
Changes in allowance for loss on real estate owned are as follows:
For the nine months
ended September 30,
---------------------
1997 1996
----- -----
(In Thousands)
Balance, beginning of period $ 92 $ 149
Provision charged to income -- (32)
Losses charged to allowance (43) (25)
----- -----
Balance, end of period $ 49 $ 92
===== =====
8
7. DEPOSITS
The weighted-average interest rates on deposits at September 30, 1997 and
December 31, 1996 were 4.29% and 4.15%, respectively. Deposit accounts, by
type and range of rates at September 30, 1997 and December 31, 1996,
consist of the following:
September 30, December 31,
------------- ------------
1997 1996
-------- --------
(In Thousands)
ACCOUNT TYPE AND RATE
Non-interest-bearing NOW accounts $ 19,810 $ 18,627
NOW, Super NOW and funds transfer accounts 65,944 67,076
Passbook and statement accounts 29,669 30,821
Money market accounts 73,109 69,514
-------- --------
Total non-certificate accounts 188,532 186,038
-------- --------
Certificates:
3.00% or less 1,339 1,035
3.01% - 3.99% 11 598
4.00% - 4.99% 27,959 51,484
5.00% - 5.99% 284,013 232,313
6.00% - 6.99% 33,734 33,568
7.00% - 7.99% 8,707 8,673
-------- --------
Total certificates of deposit 355,763 327,671
-------- --------
Total $544,295 $513,709
======== ========
Individual deposits greater than $100,000 at September 30, 1997 and
December 31, 1996 aggregated approximately $83,499,000 and $72,504,000,
respectively. Deposits in excess of $100,000 are not insured.
8. CONTINGENCIES
Bankshares is continuing to investigate a previously reported possible
employee defalcation which may have been occurring for several years.
Bankshares maintains insurance to cover possible defalcation losses with a
claim deductible of $200,000. Bankshares established a liability for the
amount of the deductible during fiscal year 1996. Bankshares has notified
its insurance company of the potential claim and the insurance company has
acknowledged coverage. The insurance company is in the process of
completing its due diligence related to the claim. Management does not
believe that the claim will have any material adverse effect on its
financial position or results of its operations.
9
9. EARNINGS PER SHARE
The primary and fully diluted weighted-average number of shares includes
adjustments for the Association's ESOP, Recognition and Retention Plan
("RRP"), and stock options. For the quarter ended September 30, 1997, the
primary and fully diluted weighted-average number of shares was 5,066,404
and 5,088,291, respectively. For the quarter ended September 30, 1996, the
primary and fully diluted weighted-average number of shares was 5,036,778
and 5,076,896, respectively.
During March 1997, FASB issued SFAS No. 128, "Earnings per Share". The
statement, which is intended to simplify the current standard for
computing earnings per share and to make it compatible with international
standards, is effective for financial statements issued for periods ending
after December 15, 1997. At that time, Bankshares will be required to
change the method currently used to compute earnings per share and to
restate all prior periods. Under the new method for computing basic
earnings per share, the dilutive effect of stock options will be excluded.
For the quarter ended September 30, 1997, basic and diluted earnings per
share as computed under the provisions of SFAS No. 128, would be $0.31 per
share.
10
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 subsidiary, Community Savings, F. A.
COMMUNITY SAVINGS BANKSHARES, INC.
Bankshares is a federally chartered mid-tier stock holding company organized in
August 1997. The only significant asset of Bankshares is its investment in its
wholly-owned subsidiary, the Association. Bankshares is majority owned by
ComFed, M.H.C., a federally chartered mutual holding company. After the close of
business on September 30, 1997, Bankshares acquired all of the issued and
outstanding common stock of the Association in connection with the Association's
reorganization into the two-tier form of mutual holding company ownership. At
that time, each share of the Association's common stock was converted into one
share of Bankshares' common stock. ComFed owns 2,620,144 shares of Bankshares
common stock with the remaining 2,474,776 shares being owned by public
shareholders.
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. On October 24, 1994, the Association completed a reorganization into
a federally chartered mutual holding company, ComFed. As part of the
reorganization, the Association organized a new federally chartered stock
savings association and transferred substantially all of its assets and
liabilities to the stock savings association in exchange for a majority of the
common stock of the stock savings association.
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 consumer based real
estate loans and mortgage-backed securities ("MBS"). 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, together with the rates earned or paid
on such interest rate-sensitive instruments. The Association is sensitive to
managing interest rate risk exposure by better matching 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.
11
LIQUIDITY AND CAPITAL RESOURCES
Bankshares 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. Bankshares also adjusts liquidity as
appropriate to meet its asset and liability management objectives. A major
portion of Bankshares' liquidity consists of cash and cash equivalents, which
are a product of its operating, investing, and financing activities.
Bankshares 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 is currently 5.0%. Bankshares'
liquidity ratio averaged 13.9% during the nine months ended September 30, 1997
while liquidity ratios averaged 14.1% for the year ended December 31, 1996.
Bankshares' primary sources of funds are deposits, amortization and prepayment
of loans and MBS, maturities of investment securities and other short-term
investments, and earnings and funds provided from operations. While scheduled
principal repayments on loans and MBS are a relatively predictable source of
funds, deposit flows and loan prepayments are greatly influenced by general
interest rates, economic conditions, and competition. Bankshares manages the
pricing of its deposits to maintain a desired deposit balance. In addition,
Bankshares 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 amounted to $36.1 million at September 30, 1997. Other assets qualifying
for liquidity outstanding at September 30, 1997 amounted to $52.0 million. For
additional information about cash flows from Bankshares' operating, financing,
and investing activities, see the unaudited consolidated statements of cash
flows included in the financial statements.
Liquidity management is both a daily and long-term function of business
management. If Bankshares requires funds beyond its ability to generate them
internally, borrowing agreements exist with the FHLB which provide an additional
source of funds. At September 30, 1997, Bankshares' advances from the FHLB
totaled $48.9 million. Bankshares has in the past utilized borrowings from the
FHLB principally to reduce interest rate risk, rather than for liquidity
purposes.
At September 30, 1997, Bankshares had outstanding loan commitments totalling
$4.7 million, which amount does not include the unfunded portion of loans in
process. Certificates of deposit scheduled to mature in less than one year
totaled $278.4 million at September 30, 1997. Based on prior experience,
management believes that a significant portion of such deposits will remain with
Bankshares.
12
FINANCIAL CONDITION
SEPTEMBER 30, 1997 COMPARED TO DECEMBER 31, 1996
The following table summarizes certain information relating to Bankshares'
financial condition at the dates indicated.
September 30, December 31, Increase
1997 1996 (Decrease)
-------- -------- --------
(Unaudited)
(In Thousands)
Assets:
Total assets $709,220 $655,209 $ 54,011
Cash and cash equivalents 50,297 42,442 7,855
Securities portfolio:
Investment securities 21,409 22,139 (730)
Securities available for sale 139,379 123,152 16,227
Mortgage-backed and related securities 48,326 53,405 (5,079)
-------- -------- --------
Total securities portfolio 209,114 198,696 10,418
Loans receivable, net 418,760 389,040 29,720
Real estate owned, net 593 1,455 (862)
Liabilities and Shareholders' Equity:
Total liabilities 628,778 579,090 49,688
Deposits 544,295 513,709 30,586
Federal Home Loan Bank advances 48,926 34,763 14,163
Advances by borrowers for taxes and insurance 6,968 1,059 5,909
Shareholders' equity 80,442 76,119 4,323
Total assets increased $54.0 million to $709.2 million at September 30, 1997, as
compared to $655.2 million at December 31, 1996 primarily due to a $29.7 million
net increase in Bankshares' loan portfolio to $418.7 million at September 30,
1997 from $389.0 million at December 31, 1996, and a $10.4 million net increase
in the securities portfolio (which includes securities available for sale,
investment securities, and MBS) to $209.1 million at September 30, 1997 from
$198.7 million at December 31, 1996. In addition, cash and cash equivalents
increased $7.9 million to $50.3 million at September 30, 1997 from $42.4 million
at December 31, 1996. The increase in total assets was funded primarily by a
$30.6 million net increase in deposits to $544.3 million at September 30, 1997
from $513.7 million at December 31, 1996. In addition, purchases of securities
available for sale were funded in part by a $14.1 million net increase in FHLB
advances which totaled $48.9 million and $34.8 million at September 30, 1997 and
December 31, 1996, respectively.
The securities portfolio net increase of $10.4 million reflects purchases of
$41.3 million of new securities available for sale as Bankshares utilized funds
raised in odd-term certificates of deposit promotions and FHLB advances, offset
in part by scheduled principal reductions, calls, sales, and amortization of
premiums and discounts amounting to $30.9 million.
Loans receivable increased $29.7 million as a result of Bankshares' continued
emphasis on its lending activities. Loan originations of $89.3 million and
purchases of $4.5 million (primarily consisting of one- to four-family
residential properties) were offset by repayments and other adjustments of $64.1
million. Real estate owned decreased $862,000 to $593,000 at September 30, 1997,
from $1.5 million at December 31, 1996, primarily due to the sale of foreclosed
real estate.
13
Total liabilities increased $49.7 million to $628.8 million at September 30,
1997, from $579.1 million at December 31, 1996. Total deposits increased by
$30.6 million to $544.3 million at September 30, 1997 from $513.7 million at
December 31, 1996 due primarily to increased retail deposits resulting from
special promotions of odd-term certificates as well as competitive pricing
intended to protect and enhance the Association's market share during the
period.
Total equity increased to $80.4 million at September 30, 1997, from $76.1
million at December 31, 1996, reflecting net income for the nine months of $4.3
million, a net increase in the market value of assets available for sale of
$928,000, proceeds totaling $54,000 from the exercise of stock options, and the
stock benefit plans accrual of $603,000, offset in part by the declaration of
dividends totalling $1.5 million. For further information, see the unaudited
consolidated statements of changes in shareholders' equity in the accompanying
consolidated financial statements.
At September 30, 1997, the Association exceeded all regulatory capital
requirements as follows:
To be Considered
Minimum for Well Capitalized
Capital Adequacy for Prompt Corrective
Actual Purposes Action Provision
------------------------- ------------------------- -------------------------
Ratio Amount Ratio Amount Ratio Amount
------------ ------------ ----------- ------------- ------------ ------------
As of September 30, 1997:
Shareholders' equity and ratio
to total assets 11.3% $80,442
=====
Unrealized decrease in market value
of securities available for sale 140
Tangible capital, and ratio to -------
adjusted total assets 11.4% $80,582 1.5% $10,640
===== ======= ==== =======
Tier 1 (core) capital and ratio
to adjusted total assets 11.4% $80,582 3.0% $21,281 5.0% $35,468
===== ======= ==== ======= ==== =======
Tier 1 (core) capital and ratio to
risk-weighted total assets 22.8% $80,582 6.0% $21,162
===== ------- ==== =======
Allowance for loan and lease losses 2,380
Equity investments (1,506)
-------
Tier 2 capital 874
-------
Total risk-based capital and ratio to
risk-weighted total assets 23.1% $81,456 8.0% $28,216 10.0% $35,270
===== ======= ==== ======= ===== =======
Total assets $709,220
========
Adjusted total assets $709,360
========
Risk-weighted assets $352,700
========
14
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. The Association carries real estate owned at the lower of
cost or fair value, less cost to dispose. Management regularly reviews assets to
determine proper valuation. The Association did not have any restructured loans
within the meaning of SFAS No. 15 at September 30, 1997 or December 31, 1996.
The following table sets forth information regarding the Association's
delinquent loans and foreclosed real estate at the dates indicated:
September 30, December 31,
1997 1996
------ ------
(unaudited)
(In Thousands)
Non-performing loans:
Residential real estate loans:
Loans 60 to 89 days delinquent $ 879 $ 446
Loans more than 90 days delinquent 1,248 1,524
------ ------
Total 2,127 1,970
------ ------
Commercial and multi-family real estate loans:
Loans 60 to 89 days delinquent -- --
Loans more than 90 days delinquent -- --
------ ------
Total -- --
------ ------
Consumer and commercial business loans:
Loans 60 to 89 days delinquent 54 72
Loans more than 90 days delinquent 15 107
------ ------
Total 69 179
------ ------
Land
Loans 60 to 89 days delinquent -- --
Loans more than 90 days delinquent -- --
------ ------
Total -- --
------ ------
Total non-performing loans 2,196 2,149
Real estate owned net of related allowance 593 1,455
Loans to facilitate sale of real estate owned 219 224
------ ------
Total non-performing assets and loans to facilitate
sale of real estate owned $3,008 $3,828
====== ======
15
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
GENERAL
Net income for the quarter ended September 30, 1997 increased $1.7 million to
$1.5 million, or $0.31 per share, compared to a loss of $186,000, or $0.04 per
share, for the quarter ended September 30, 1996. The increase in net income was
primarily due to the one time SAIF special assessment recognized during the
quarter ended September 30, 1996 which did not reoccur during the quarter ended
September 30, 1997.
NET INTEREST INCOME
Net interest income was unchanged at $5.9 million for the quarters ended
September 30, 1997 and 1996. The average balance of interest-earning assets
increased $62.7 million to $663.3 million for the three months ended September
30, 1997 from $600.6 million for the same period in the prior year, reflecting
the increases in the loan and securities portfolios. Such increase was offset by
a $63.3 million increase in average interest-bearing liabilities to $607.5
million for the three months ended September 30, 1997 from $544.2 million for
the same period in 1996, reflecting the growth of Bankshares' deposit portfolio,
primarily certificates of deposit, and the use in part of FHLB advances to fund
securities purchases. At the same time, the net interest rate spread narrowed to
3.15% for the quarter ended September 30, 1997 from 3.52% for the same quarter
in 1996, primarily as a result of the increased weighted average cost of
deposits to 4.27 % for the quarter ended September 30, 1997 from 4.02% for the
same period in 1996. The increased cost of deposits reflects the 8.6% increase
in total certificates of deposit which have a higher cost to Bankshares as
compared to a 1.3% growth in lower costing core deposits.
PROVISION FOR LOAN LOSSES
Bankshares maintains an allowance for loan losses based upon a periodic
evaluation of known and inherent risks in the loan portfolio, 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 Bankshares' actual loss experience, as well as
guidelines applied by the OTS and the FDIC. Bankshares' provision for loan
losses was $138,000 for the quarter ended September 30, 1997, as compared to
$28,000 for the quarter ended September 30, 1996 primarily due to additional
specific reserves recognized during the period. Bankshares' allowance for loan
losses as a percentage of net loans receivable was 0.63% and 0.61% at September
30, 1997 and 1996, respectively.
OTHER INCOME
Other income consists of servicing income and fee income, service charges, gain
or loss on the sale of securities available for sale and other assets as well as
income or loss resulting from a real estate venture in which a subsidiary of the
Association is involved. Other income increased $595,000 to $1.5 million for the
quarter ended September 30, 1997 from $927,000 for the same period in 1996
primarily as a result of a $617,000 gain on the sale of other assets, partially
offset by $75,000 in costs expensed in connection with the winding down of the
Association's real estate venture.
16
OPERATING EXPENSE
Operating expense decreased $2.1 million to $5.0 million for the three month
period ended September 30, 1997 from $7.1 million for the same period in 1996.
Operating expense was higher in the 1996 period primarily due to the one-time
$2.8 million SAIF special assessment to recapitalize the SAIF which did not
reoccur during the same period in 1997. However, employee compensation and
benefits increased $344,000 during the quarter ended September 30, 1997 as a
result of increased staffing due to the opening of two new branch offices and
the expanded loan production program. In addition, other increases of $77,000 in
occupancy and equipment costs (also relating to the new branch offices) and
$251,000 in miscellaneous operating expense occurred during the quarter ended
September 30, 1997 as compared to the same quarter in 1996. The increase in
operating expense was partially offset by a $203,000 decrease in federal deposit
insurance premiums reflecting the reduced premium rate paid by Bankshares in the
1997 period. In addition, Bankshares recognized a $243,000 net gain on sale of
real estate owned during the quarter ended September 30, 1996, as compared to a
$26,000 net gain for the same period in 1997.
PROVISION FOR INCOME TAXES
The provision for income taxes was $720,000 for the three months ended September
30, 1997 as compared to a benefit of $164,000 for the same period in 1996
reflecting the increase in net income.
RESULTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
GENERAL
Net income for the nine months ended September 30, 1997 increased $1.4 million
to $4.3 million, or $0.85 per share, compared to $2.9 million, or $0.58 per
share, for the same period in 1996. The increase in net income was primarily due
to the one-time SAIF special assessment recognized during the nine months ended
September 30, 1996 which did not reoccur in 1997. In addition, during the nine
months ended September 30, 1997, there were increases of $1.0 million in net
interest income and $1.1 million in other income, offset in part by increases of
$1.2 million and $2.2 million in other expenses and the provision for income
taxes, respectively.
NET INTEREST INCOME
Net interest income increased $1.0 million to $17.2 million for the nine months
ended September 30, 1997 from $16.2 million for the nine months ended September
30, 1996 primarily as a result of a $60.2 million increase in average
interest-earning assets to $648.6 million for the nine months ended September
30, 1997 from $588.4 million for the same period in the prior year, reflecting
the growth in the Bankshares' loan and securities portfolios, as well as an
increase in the average yield on interest-earning assets to 7.70% for the nine
months ended September 30, 1997 from 7.63% for the same period in 1996. The
increase in interest-earning assets was partially offset by a $60.7 million
increase in average interest-bearing liabilities to $594.4 million for the nine
months ended September 30, 1997 from $533.7 million for the same period in 1996
reflecting the growth of the Bankshares' deposit portfolio, primarily in
certificates of deposit, and the use of FHLB advances to fund securities
purchases as well as an increase in the average cost on interest-bearing
liabilities to 4.55% for the nine months ended September 30, 1997 from 4.37% for
the same period in 1996. The increase in the average cost is primarily
attributable to the increased cost of certificates of deposit which have a
higher cost to Bankshares than do core deposits.
17
PROVISION FOR LOAN LOSSES
As mentioned previously, loan loss provisions are based upon management's
estimate of the fair value of the collateral and Bankshares' actual loss
experience, as well as guidelines applied by the OTS and the FDIC. Bankshares'
provision for loan losses was $221,000 for the nine months ended September 30,
1997, as compared to $68,000 for the nine months ended September 30, 1996
primarily due to additional specific reserves recognized during the period.
Bankshares' allowance for loan losses as a percentage of net loans receivable
was 0.63% and 0.61% at September 30, 1997 and 1996, respectively.
OTHER INCOME
Other income increased $1.1 million to $3.4 million for the nine months ended
September 30, 1997 from $2.3 million for the same period in 1996 primarily as a
result of a $617,000 gain on sale of other assets during the nine months ended
September 30, 1997. In addition, other income for the nine months ended
September 30, 1997 included a $214,000 increase in loan and deposit fees as the
result of changes in Bankshares' fee structure implemented in October 1996.
Other income in the 1996 period included a $144,000 gain on the early maturity
of securities available for sale and a $200,000 loss reserve on an amount due
from a depository institution as well as a $218,000 loss incurred on the sale of
a participation loan, none of which items reoccurred during 1997.
OPERATING EXPENSE
Operating expense decreased $1.6 million to $13.8 million for the nine month
period ended September 30, 1997, from $15.4 million for the same period in 1996,
primarily due to the one-time $2.8 million SAIF special assessment to
recapitalize the SAIF which Bankshares recognized during the nine months ended
September 30, 1996 and which did not reoccur during the 1997 period. This
decrease was partially offset by an increase of $803,000 in employee
compensation and benefits as a result of increased staffing due to the opening
of two new branch offices and the expanded loan production program. In addition,
other increases of $240,000 in occupancy and equipment costs (also relating to
the new branch offices) and $434,000 in miscellaneous operating expense as well
as a decrease of $296,000 in net gain on sale of real estate owned occurred
during the nine months ended September 30, 1997 as compared to the same period
in 1996. The increase in operating expense was partially offset by a $622,000
decrease in federal deposit insurance premiums reflecting the reduced premium
rate paid by the Association in the 1997 period.
PROVISION FOR INCOME TAXES
The provision for income taxes increased to $2.3 million for the nine months
ended September 30, 1997 from $94,000 for the same period in 1996. The increase
was due to increased earnings for the nine months ended September 30, 1997 as
well as management's decision during the nine months ended September 30, 1996 to
reverse a prior year provision which was no longer required.
18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are various claims and lawsuits in which Bankshares is
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
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Association held a Special Meeting of Shareholders on
September 24, 1997 to vote on the reorganization of the
Association into a two-tier holding company structure. Of the
5,090,120 shares eligible to vote, holders of 4,153,712 shares or
81.6%, including 2,620,144 shares owned by ComFed, were
represented in person or by proxy at the meeting.
The votes cast produced the following result:
Number of Votes
For Against Abstain
--- ------- -------
4,119,753 13,056 20,903
19
ITEM 5. OTHER INFORMATION.
(a) MID-TIER HOLDING COMPANY.
On January 16, 1997, the Board of Directors of the Association
adopted a resolution to proceed with filing an application with
the OTS to reorganize the Association into a two-tier holding
company structure. As a result of the reorganization, the
Association is a wholly-owned subsidiary of Bankshares and
shareholders of the Association became the shareholders of
Bankshares.
ComFed, the Association's mutual holding company, holds a majority
of the common stock of the new mid-tier stock holding company,
Bankshares, which owns 100% of the common stock of the
Association. Under the reorganization, each share of Association
common stock held by existing shareholders of the Association was
converted into one share of common stock of Bankshares. The
reorganization of the Association was structured as a tax-free
reorganization and was accounted for in a manner similar to a
pooling of interests. Completion of the reorganization was subject
to regulatory approval by the OTS and to shareholder approval. On
August 4, 1997, the OTS issued its order approving the application
of Bankshares to become the holding company of the Association.
The reorganization was approved by the shareholders at a special
meeting held September 24, 1997. The reorganization, as approved,
was finalized after the close of business on September 30, 1997.
The stock of Bankshares was substituted for that of the
Association on the Nasdaq National Market.
(b) CHANGE OF FISCAL YEAR.
During January 1997, the Board of Directors of the Association
approved a change of the Association's fiscal year from September
30 to December 31, effective December 31, 1996.
Bankshares' fiscal year end is December 31 as well.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
---------
None during the reporting period.
(b) Current Reports on Form 8-K.
----------------------------
None during the reporting period.
20
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: November 4, 1997 James B. Pittard, Jr.
President and Chief Executive Officer
Date: November 4, 1997 /s/ LARRY J. BAKER
---------------------------------------
Larry J. Baker
Senior Vice President and Treasurer
21