Registration No. 333-_____
Filed October 29, 1997
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-8
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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Community Savings Bankshares, Inc.
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(Exact Name of Registrant as specified in its Articles of Incorporation)
United States 65-0780334
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(State of incorporation) (IRS Employer Identification No.)
660 U.S. Highway One
North Palm Beach, Florida 33408
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(Address of principal executive offices, including zip code)
1995 Stock Option Plan, as amended
(Full Title of the Plan)
James B. Pittard, Jr. Copies to:
President and Chief Executive Officer Philip R. Bevan, Esq.
Community Savings Bankshares, Inc. Elias, Matz, Tiernan & Herrick L.L.P.
660 U.S. Highway One 734 15th Street, N.W.
North Palm Beach, Florida 33408 Washington, D.C. 20005
(561) 881-2212 (202) 347-0300
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(Name, address and telephone number of
agent for service)
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<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
Title of Proposed Proposed
Securities Maximum Maximum Amount of
to be Amount to be Offering Price Aggregate Registration
Registered Registered(1) Per Share Offering Price Fee
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<S> <C> <C> <C> <C>
Common Stock, par
value $1.00 214,350 $11.40(3) $2,443,826.25(3) $ 740.55
Common Stock, par
value $1.00 17,616 $35.44(4) $ 624,267.00(4) 189.17
-------- ------------- ---------
Total 231,966(2) $3,068,093.25 $ 929.72
======== ============= =========
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</TABLE>
(1) Represents shares of the common stock, $1.00 par value per share
("Common Stock"), of Community Savings Bankshares, Inc. (the "Company"
or "Registrant"), reserved for issuance pursuant to the Community
Savings, F. A. (the "Association") 1995 Stock Option Plan (the
"Plan").
(2) Represents shares currently reserved for issuance pursuant to the
Plan.
(3) Estimated solely for the purpose of calculating the registration fee,
which has been calculated pursuant to Rule 457(h) promulgated under
the Securities Act of 1933, as amended ("Securities Act"). The
Proposed Maximum Offering Price Per Share is equal to the weighted
average exercise price for options to purchase 214,350 shares of
Common Stock which have been granted under the Plan as of the date
hereof but not yet exercised.
(4) Estimated solely for the purposes of calculating the registration fee
in accordance with Rule 457(c) promulgated under the Securities Act.
The Proposed Maximum Offering Price Per Share for 17,616 shares for
which stock options have not been granted under the Plan is equal to
the average of the high and low sale price of the Common Stock of the
Company on October 27, 1997 on the Nasdaq National Market.
--------------------------
This Registration Statement shall become effective automatically upon
the date of filing in accordance with Section 8(a) of the Securities Act and 17
C.F.R. ss. 230.462.
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PART I*
ITEM 1. PLAN INFORMATION.*
ITEM 2. REGISTRANT INFORMATION AND EMPLOYEE PLAN ANNUAL INFORMATION.*
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* Information required by Part I to be contained in the Section 10(a)
prospectus is omitted from the Registration Statement in accordance with Rule
428 under the Securities Act and the Note to Part I of Form S-8.
PART II
INFORMATION REQUIRED IN THE REGISTRATION STATEMENT
ITEM 3. INCORPORATION OF DOCUMENTS BY REFERENCE.
The following documents filed or to be filed with the Securities and
Exchange Commission (the "Commission") are incorporated by reference in this
Registration Statement:
(a) The Association's Annual Report on Form 10-K for the fiscal
year ended September 30, 1996 filed with the Office of Thrift
Supervision ("OTS") and included as Exhibit 13.1 hereto.
(b) The Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997 filed with the OTS and included as Exhibit 13.2
hereto.
(c) The Association's Transition Report on Form 10-Q for the
period October 1, 1996 to December 31, 1996 filed with the OTS and
included as Exhibit 13.3 hereto.
(d) All reports filed by the Company pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934, as amended ("Exchange
Act"), since the end of the period covered by the Form 10-Q referred to
in clause (b) above.
(e) All documents filed by the Company pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date hereof and
prior to the filing of a post-effective amendment which indicates that
all securities offered have been sold or which deregisters all
securities then remaining unsold.
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Any statement contained in this Registration Statement, or in a
document incorporated or deemed to be incorporated by reference herein, shall be
deemed to be modified or superseded for purposes of this Registration Statement
to the extent that a statement contained herein, or in any other subsequently
filed document which also is or is deemed to be incorporated by reference
herein, modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Registration Statement.
ITEM 4. DESCRIPTION OF SECURITIES.
The Company's Common Stock is deemed registered under Section 12 of
the Exchange Act as successor issuer to the Association pursuant to the
provisions of Rule 12(g)(3) promulgated thereunder. The following information is
provided.
GENERAL. The Charter of the Company authorizes the issuance of capital
stock consisting of 20,000,000 shares of Company Common Stock and 10,000,000
shares of preferred stock ("Company Preferred Stock"). The Company Common Stock
represents non-withdrawable capital, is not an insurable type and is not insured
by the Federal Deposit Insurance Corporation.
In the future, the authorized but unissued and unreserved shares of
Common Stock and the authorized and unissued shares of Company Preferred Stock
will be available for general corporate purposes, including, but not limited to,
possible issuance as stock dividends or stock splits, in future mergers or
acquisitions, pursuant to stock compensations plans of the Company, or in future
private placements or public offerings. Except as otherwise may be required to
approve a merger or other transaction in which the additional authorized shares
of Common Stock or authorized shares of Company Preferred Stock would be issued
or as may then be required by the National Association of Securities Dealers,
Inc. for companies to have their equity securities quoted on the Nasdaq National
Market (or by any exchange on which the Company's capital stock may then be
listed), no shareholder approval is required for the issuance of additional
shares of capital stock of the Company.
COMPANY COMMON STOCK. Each share of Common Stock has the same relative
rights as, and is identical in all respects with, each other share of Common
Stock. Until such time as Company Preferred Stock with voting rights is issued,
if ever, the holders of shares of Common Stock will possess all rights,
including exclusive voting rights, pertaining to the capital stock of the
Company. Each share of Common Stock entitles the holder thereof to one vote on
all matters upon which shareholders have the right to vote. Shareholders of the
Company are not permitted to cumulate their votes for the election of directors
prior to October 24, 1999. The holders of Common Stock will be entitled to
dividends when, as and if declared by the Company's Board of Directors out of
funds legally available therefor.
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Holders of shares of Common Stock will not be entitled to preemptive
rights with respect to any shares which may be issued. The Common Stock will not
be subject to call or redemption and, upon receipt by the Company of the full
purchase price therefor, each share of Common Stock will be fully paid and
non-assessable.
In the event of any liquidation or dissolution of the Company, the
holders of Common Stock will be entitled to receive, after payment or provision
for payment of all debts and liabilities of the Company, all assets of the
Company available for distribution, in cash or in kind. If Company Preferred
Stock should be issued, the holders thereof may have a priority over the holders
of Common Stock in the event of liquidation or dissolution.
COMPANY PREFERRED STOCK. The Board of Directors of the Company is
authorized to issue Company Preferred Stock in series and fix and state voting
powers, designations, preferences or other special rights of the shares of each
such series of Company Preferred Stock and the qualifications, limitations and
restrictions thereof. Company Preferred Stock may rank prior to Company Common
Stock as to dividend rights, liquidation preferences, or both, may have full or
limited voting rights, and may be convertible into Company Common Stock. The
holders of any class or series of Company Preferred Stock also may have the
right to vote separately as a class or series under the terms of such class or
series or as may be otherwise provided by federal law and regulations.
PAYMENT OF DIVIDENDS. It is currently unclear what limitations may
exist with respect to the Company's ability to make capital distributions since
regulations with respect to this matter have not been promulgated by the OTS,
the chartering authority of the Company.
BOARD OF DIRECTORS. The Company's Bylaws provide that if less than the
entire Board is to be removed, no one of the directors may be removed if the
votes cast against the removal would be sufficient to elect a director if then
cumulatively voted at an election of the class of directors of which such
director is a part.
ITEM. 5. INTERESTS OF NAMED EXPERTS AND COUNSEL.
Not applicable.
ITEM. 6. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Board of Directors of the Company adopted the following resolution
in connection with the organization of the Company:
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The Company shall indemnify its directors, its directors emeritus,
officers, and employees in accordance with the following requirements noting
that, in all cases, the references to the masculine gender include the feminine
as well:
(1) Definitions for purposes of this resolution.
(a) ACTION. Any judicial or administrative proceeding, or threatened
proceeding, whether civil, criminal, or otherwise, including any
appeal or other proceeding for review.
(b) COURT. Includes, without limitation, any court to which or in
which any appeal or any proceeding for review is brought.
(c) FINAL JUDGMENT. A judgment, decree, or order which is not
appealable or as to which the period for appeal has expired with
no appeal taken.
(d) SETTLEMENT. Includes entry of a judgment by consent or
confession or a plea of guilty or nolo contendere.
(2) References in this resolution to any individual or other person,
including the Company, shall include legal representatives, successors
and assigns thereof.
(3) Subject to paragraph (4) of this resolution, the Company shall indemnify
any person against whom an action is brought or threatened because that
person is or was a director, officer, or employee of the Company, for:
(a) Any amount for which that person becomes liable under a judgment
in such action; and
(b) Reasonable costs and expenses, including reasonable attorneys'
fees, actually paid or incurred by that person in defending or
settling such action, or in enforcing his rights under this
resolution if he attains a favorable judgement in such
enforcement action.
(4) Indemnification shall be made to such person under paragraph (3) only
if:
(a) Final judgment on the merits is in his favor; or
(b) In case of: (i) settlement, (ii) final judgment against him or
(iii) final judgment in his favor other than on the merits, if a
majority of the disinterested directors of the Company determine
that he was acting in good faith within the scope of his
employment or authority as he could reasonably
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have perceived it under the circumstances and for a purpose he
could reasonably have believed under the circumstances was in
the best interests of the Company or its members. However, no
indemnification shall be made unless the Company gives the
Office of Thrift Supervision ("OTS") or its successor at least
60 days' notice of its intention to make such indemnification.
Such notice shall state the facts on which the action arose, the
terms of any settlement, and any disposition of the action by a
court. Such notice, a copy thereof, and a certified copy of the
resolution containing the required determination by the Board of
Directors shall be sent to the Regional Director, who shall
promptly acknowledge receipt thereof. The notice period shall
run from the date of such receipt. No such indemnification shall
be made if the OTS advises the Company in writing, within such
notice period, of its objection thereto.
(5) The Company may obtain insurance to protect it and its directors,
officers, and employees from potential losses arising from claims
against any of them for alleged wrongful acts, or wrongful acts
committed in their capacity as directors, officers or employees.
However, the Company may not obtain insurance which provides for payment
of losses of any person incurred as a consequence of his willful or
criminal misconduct.
(6) If a majority of the directors of the Company concludes that in
connection with an action, any person ultimately may become entitled to
indemnification under this resolution, the directors may authorize
payment of reasonable costs and expenses, including reasonable
attorneys' fees, arising from the defense or settlement of such action.
Nothing in this resolution shall prevent the directors of the Company
from imposing such conditions on a payment of expenses as they deem
warranted and in the interests of the Company. Before making advance
payment of expenses under this resolution, the Company shall obtain an
agreement that the Company will be repaid if the person on whose behalf
payment is made is later determined not to be entitled to such
indemnification.
(7) The Company shall not indemnify any person referred to in paragraph (3)
of this resolution or obtain insurance referred to in paragraph (5) of
this resolution other than in accordance with this resolution.
The foregoing resolution is consistent with the provisions of 12 C.F.R.
Section 545.121 promulgated by the OTS.
ITEM 7. EXEMPTION FROM REGISTRATION CLAIMED.
Not applicable since no restricted securities will be reoffered or
resold pursuant to this Registration Statement.
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ITEM 8. EXHIBITS
The following exhibits are filed with or incorporated by reference into
this Registration Statement on Form S-8 (numbering corresponds to Exhibit Table
in Item 601 of Regulation S-K):
No. Exhibit
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5 Opinion of Elias, Matz, Tiernan & Herrick L.L.P.
as to the legality of the securities
10.1 1995 Stock Option Plan
13.1 Annual Report on Form 10-K of Community Savings, F. A.
for the year ended September 30, 1996.
13.2 Quarterly report on Form 10-Q of Community Savings, F. A.
for the quarter ended June 30, 1997.
13.3 Transition Report on Form 10-Q of Community Savings, F.
A. for the period October 1, 1996 to December 31, 1996.
23.1 Consent of Elias, Matz, Tiernan & Herrick L.L.P.
(contained in the opinion included as Exhibit 5)
23.2 Consent of Deloitte & Touche LLP
24 Power of attorney for any subsequent amendments
(located in the signature pages of this Registration
Statement).
ITEM 9. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement (i) to include any
prospectus required by Section 10(a)(3) of the Securities Act of 1933, (ii) to
reflect in the prospectus any facts or events arising after the effective date
of the Registration Statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the Registration Statement, and (iii) to include
any material information with respect to the plan of distribution not previously
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disclosed in the Registration Statement or any material change in such
information in the Registration Statement; provided, however, that clauses (i)
and (ii) do not apply if the information required to be included in a
post-effective amendment by those clauses is contained in periodic reports filed
by the Registrant pursuant to Section 13 or Section 15(d) of the Exchange Act
that are incorporated by reference in the Registration Statement.
2. That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
3. To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
4. That, for the purposes of determining any liability under the
Securities Act, each filing of the Registrant's annual report pursuant to
Section 13(a) or Section 15(d) of the Exchange Act that is incorporated by
reference in the Registration Statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
5. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-8 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in North Palm Beach, Florida, on this 29 day of October 1997.
Community Savings Bankshares, Inc.
By: /s/ James B. Pittard, Jr.
-------------------------------
James B. Pittard, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated. Each person whose signature appears below
hereby makes, constitutes and appoints James B. Pittard, Jr. his or her true and
lawful attorney, with full power to sign for such person and in such person's
name and capacity indicated below, and with full power of substitution any and
all amendments to this Registration Statement, hereby ratifying and confirming
such person's signature as it may be signed by said attorney to any and all
amendments.
/s/ Forest C. Beaty, Jr. October 29, 1997
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Forest C. Beaty, Jr.
Director
/s/ Robert F. Cromwell October 29, 1997
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Robert F. Cromwell
Director
/s/ Karl D. Griffin October 29, 1997
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Karl D. Griffin
Director
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/s/ James B. Pittard, Jr.
- -------------------------- October 29, 1997
James B. Pittard, Jr.
President, Chief Executive Officer and Director
/s/ Harold I. Stevenson October 29, 1997
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Harold I. Stevenson
Director
/s/ Frederick A. Teed October 29, 1997
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Frederick A. Teed
Director
/s/ Larry J. Baker October 29, 1997
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Larry J. Baker
Senior Vice President and Chief Financial Officer
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LAW OFFICES
ELIAS, MATZ, TIERNAN & HERRICK L.L.P.
TIMOTHY B. MATZ 12TH FLOOR JEFFREY D. HAAS
STEPHEN M. EGE 734 15TH STREET, N.W. KEVIN M. HOULIHAN
RAYMOND A. TIERNAN WASHINGTON, D.C. 20005 KENNETH B. TABACH
W. MICHAEL HERRICK _______ PATRICIA J. WOHL
GERARD L. HAWKINS JEFFREY R. HOULE
NORMAN B. ANTIN TELEPHONE: (202) 347-0300 DAVID N. PARDYS
JOHN P. SOUKENIK* FACSIMILE: (202) 347-2172 FIORELLO J. VICENCIO*
GERALD F. HEUPEL, JR. WWW.EMTH.COM ______
JEFFREY A. KOEPPEL
DANIEL P. WEITZEL ALLIN P. BAXTER
PHILIP ROSS BEVAN JACK I. ELIAS
HUGH T. WILKINSON SHERYL JONES ALU
*NOT ADMITTED IN D.C.
October 29, 1997
VIA EDGAR
Board of Directors
Community Savings Bankshares, Inc.
660 U.S. Highway One
North Palm Beach, Florida 33408
Re: Registration Statement on Form S-8;
231,966 Shares of Common Stock
Ladies and Gentlemen:
We have acted as special counsel to Community Savings Bankshares, Inc.,
a federally chartered corporation (the "Corporation") and Community Savings, F.
A. (the "Association"), in connection with the preparation and filing with the
Securities and Exchange Commission pursuant to the Securities Act of 1933, as
amended, of a Registration Statement on Form S-8 (the "Registration Statement"),
relating to the registration of up to 231,966 shares of common stock, par value
$1.00 per share (the "Common Stock"), to be issued pursuant to the 1995 Stock
Option Plan (the "Plan") of the Corporation upon the exercise of stock options
and/or limited stock appreciation rights (the "Option Rights") as defined in the
Plan. We have been requested by the Corporation to furnish an opinion to be
included as an exhibit to the Registration Statement. Capitalized terms defined
in the Registration Statement and not otherwise defined herein are used herein
with the meanings as so defined.
In so acting, we have reviewed the Registration Statement, the Charter
and Bylaws of the Corporation, the Plan, a specimen stock certificate evidencing
the Common Stock and such other corporate records and documents as we have
deemed appropriate. We are relying upon the originals, or copies certified or
otherwise identified to our satisfaction, of the corporate records of the
Corporation and the Association and such other instruments, certificates and
representations of public officials, officers and representatives of the
Corporation and the Association, and have made such inquiries of such officers
and representatives as we have deemed relevant or necessary as a basis for this
opinion.
<PAGE>
In such examination, we have assumed, without independent verification,
the genuineness of all signatures and the authenticity of all documents
submitted to us as originals and the conformance in all respects of copies to
originals. Furthermore, we have made such factual inquiries and reviewed such
laws as we determined to be relevant for this opinion.
For purposes of this opinion, we have also assumed that: (i) the shares
of Common Stock issuable pursuant to the Option Rights granted under the terms
of the Plan will continue to be validly authorized on the dates on which the
Common Stock is issued pursuant to the Option Rights; (ii) on the dates on which
the Option Rights are exercised, the Option Rights granted under the terms of
the Plan will constitute valid, legal and binding obligations of the Corporation
and will (subject to applicable bankruptcy, moratorium, insolvency,
reorganization and other laws and legal principles affecting the enforceability
of creditors' rights generally) be enforceable as to the Corporation in
accordance with their terms; (iii) the Option Rights are exercised in accordance
with their terms and the exercise price therefor is paid in accordance with the
terms thereof; (iv) no change shall have occurred in applicable law or the
pertinent facts; and (v) the provisions of "blue sky" and other securities laws
as may be applicable will have been complied with to the extent required.
Based on the foregoing, and subject to the assumptions set forth
herein, we are of the opinion as of the date hereof that the shares of Common
Stock to be issued pursuant to the Plan, when issued and sold pursuant to the
Plan and upon receipt of the consideration required thereby, will be legally
issued, fully paid and non-assessable shares of Common Stock of the Corporation.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement.
Very truly yours,
ELIAS, MATZ, TIERNAN & HERRICK L.L.P.
By: /s/ Philip Ross Bevan
----------------------------------
Philip Ross Bevan, a Partner
COMMUNITY SAVINGS, F.A.
1995 STOCK OPTION PLAN
1. PURPOSE
The purpose of the Community Savings, F. A. 1995 Stock Option Plan (the
"Plan") is to advance the interests of Community Savings, F. A. (the
"Association") and its shareholders by providing Employees of the Association
and its affiliates, including ComFed, M. H. C., the mutual holding company of
the Association (the "Company"), upon whose judgment, initiative and efforts the
successful conduct of the business of the Association and its affiliates largely
depends, with an additional incentive to perform in a superior manner as well as
to attract people of experience and ability.
2. DEFINITIONS
"AFFILIATE" means any "parent corporation" or "subsidiary corporation"
of the Association, as such terms are defined in Section 424(e) or 424(f),
respectively, of the Internal Revenue Code of 1986, as amended.
"AWARD" means an Award of Nonstatutory Stock Options, Incentive Stock
Options, and/or Limited Rights granted under the provisions of the Plan.
"BENEFICIARY" means the person or persons designated by a Recipient to
receive any benefits payable under the Plan in the event of such Recipient's
death. Such person or persons shall be designated in writing on forms provided
for this purpose by the Committee and may be changed from time to time by
similar written notice to the Committee. In the absence of a written
designation, the Beneficiary shall be the Recipient's surviving spouse, if any,
or if none, his estate.
"BOARD OF DIRECTORS" means the Board of Directors of the Association.
"CHANGE IN CONTROL" means:
(1) a reorganization, merger, merger conversion, consolidation or sale
of all or substantially all of the assets of the Association, the Company or the
Stock Holding Company, or a similar transaction in which the Association, the
Company or the Stock Holding Company is not the resulting entity;
(2) individuals who constitute the Incumbent Board of the Association,
the Company, or the Stock Holding Company cease for any reason to constitute a
majority thereof; or
(3) a change in control within the meaning of 12 C.F.R. ss. 574.4, as
determined by the board of directors of the Association or the Company;
(4) In the event that the Company converts to the Stock Holding Company
on a stand-alone basis, a "change in control" of the Association or the Stock
Holding Company (a) shall mean an event of a nature that would be required to be
reported in response to Item 1a of the current report on Form 8-K, as in effect
on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (the "Exchange Act"), or results in a Change in Control of the
Association or the Stock Holding Company within the meaning of the Home Owners'
Loan Act of 1933 and the Rules and Regulations promulgated by the Office of
Thrift Supervision (or its predecessor agency), as in effect on the date hereof,
(b) without limitation shall be deemed to have occurred at such time as (i) any
"person" (as the term is used in Section 13(d) and 14(d) of the Exchange Act)
other than the Stock Holding
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Company is or becomes a "beneficial owner" (as defined in Rule 13-d under the
Exchange Act) directly or indirectly, of securities of the Association
representing 25% or more of the Association's outstanding securities ordinarily
having the right to vote at the election of directors except for any securities
of the Association received by the Stock Holding Company in connection with the
Reorganization and any securities purchased by the Association's employee stock
ownership plan and trust shall not be counted in determining whether such plan
is the beneficial owner of more than 25% of the Association's securities, (ii) a
proxy statement soliciting proxies from stockholders of the Association, by
someone other than the current management of the Association, seeking
stockholder approval of a plan of reorganization, merger or consolidation of the
Stock Holding Company of the Association or similar transaction with one or more
corporations as a result of which the outstanding shares of the class of
securities then subject to the plan or transaction are exchanged or converted
into cash or property or securities not issued by the Association or the Stock
Holding Company, or (iii) a tender offer is made for 25% or more of the voting
securities of the Association and the shareholders owning beneficially or of
record 25% or more of the outstanding securities of the Association have
tendered or offered to sell their shares pursuant to such tender offer and such
tendered shares have been accepted by the tender offeror.
Notwithstanding, the foregoing, a "Change in Control" of the
Association or the Company shall not be deemed to have occurred if the Company
ceases to own at least 51% of all outstanding shares of stock of the Association
in connection with a conversion of the Company from mutual to stock form.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMITTEE" means the Stock Benefits Committee of the Board of
Directors consisting of at least three Outside Directors of the Association or
the Company, and all of whom are and must be "disinterested directors" as that
term is defined under Rule 16b-3 under the Securities Exchange Act of 1934, as
amended.
"COMMON STOCK" means the common stock of the Association, par value
$1.00 per share.
"CONVERSION TRANSACTION" means the conversion of the Company from the
mutual to stock form of organization either on a stand-alone basis or in the
context of a merger conversion, as contemplated by regulations of the OTS or any
successor thereof.
"DATE OF GRANT" means the actual date on which an Award is granted by
the Committee.
"DIRECTOR" means a member of the Board of Directors.
"DISABILITY" means the permanent and total inability by reason of
mental or physical infirmity, or both, of an employee to perform the work
customarily assigned to him. Additionally, a medical doctor selected or approved
by the Board of Directors must advise the Committee that it is either not
possible to determine when such Disability will terminate or that it appears
probable that such Disability will be permanent during the remainder of such
employee's lifetime.
"EMPLOYEE" means any person who is currently employed by the
Association or an Affiliate, including officers.
"FAIR MARKET VALUE" means, when used in connection with the Common
Stock on a certain date, the reported closing price of the Common Stock as
reported by the National Association of Securities Dealers Automated Quotation
("Nasdaq") National Market (as published by the WALL STREET JOURNAL, if
published) on the day prior to such date, or if the Common Stock was not traded
on such date, on the next preceding day on which the Common Stock was traded
thereon; PROVIDED, HOWEVER, that if the Common Stock is not reported on the
Nasdaq National Market, Fair Market Value shall mean the average sale price of
all shares of Common Stock sold during the 30-day period immediately preceding
the date on which such stock option was granted, and if no shares of stock
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have been sold within such 30-day period, the average sale price of the last
three sales of Common Stock sold during the 90-day period immediately preceding
the date on which such stock option was granted. In the event Fair Market Value
cannot be determined in the manner described above, then Fair Market Value shall
be determined by the Committee. The Committee shall be authorized to obtain an
independent appraisal to determine the Fair Market Value of the Common Stock.
"INCENTIVE STOCK OPTION" means an Option granted by the Committee to a
Participant, which Option is designated as an Incentive Stock Option pursuant to
Section 8.
"INCUMBENT BOARD" means, in the case of (i) the Company or the Stock
Holding Company, or (ii) the Association, the Board of Directors of the Company
or the Association, respectively, on the date hereof, provided that any person
becoming a director subsequent to the date hereof whose election was approved by
a vote of at least three-quarters of the directors comprising the Incumbent
Board, or whose nomination for election by members or stockholders was approved
by the same nominating committee serving under an Incumbent Board, shall be
considered as though he were a member of the Incumbent Board.
"LIMITED RIGHT" means the right to receive an amount of cash based upon
the terms set forth in Section 9.
"NONSTATUTORY STOCK OPTION" means an Option granted by the Committee to
(i) an Outside Director or (ii) to any other Participant and such option is
either (A) not designated by the Committee as an Incentive Stock Option, or (B)
fails to satisfy the requirements of an Incentive Stock Option as set forth in
Section 422 of the Code and the regulations thereunder.
"OFFERING" means the initial public offering of the Common Stock of the
Association.
"OPTION" means Award granted under Section 7 or Section 8.
"OUTSIDE DIRECTOR" means a Director who is not also an employee.
"PARTICIPANT" means an Outside Director or an Employee of the
Association or its Affiliates chosen by the Committee to participate in the
Plan.
"REORGANIZATION" means the reorganization of Community Savings, F. A.
as a stock savings association and the establishment of the Company as its
mutual holding company parent.
"STOCK HOLDING COMPANY" means the holding company resulting from a
stock conversion of the Company in a conversion transaction.
"TERMINATION FOR CAUSE" means the termination of employment caused by
the individual's personal dishonesty, willful misconduct, any breach of a
fiduciary duty involving personal profit or intentional failure to perform
stated duties, or willful violation of any law, rule or regulation (other than
traffic violations or similar offenses) or final cease-and-desist order, any of
which results in material loss to the Association, the Company, or one of its
Affiliates.
3. ADMINISTRATION
The Plan shall be administered by the Committee. The Committee is
authorized, subject to the provisions of the Plan, to establish such rules and
regulations as it deems necessary for the proper administration of the Plan and
to make whatever determinations and interpretations in connection with the Plan
it deems necessary or advisable. All determinations and interpretations made by
the Committee shall be binding and conclusive on all Participants in the Plan
and on their legal representatives and beneficiaries.
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<PAGE>
The Awards of Nonstatutory Options to Outside Directors under Section 7
of the Plan are intended to comply with Rule 16b-3 under the Securities Exchange
Act of 1934. Notwithstanding any term to the contrary appearing herein, unless
permitted by Rule 16b-3(c)(2)(ii), neither the Committee nor the Board shall
have the authority to determine the amount and price of securities to be awarded
and/or timing of awards under Section 7 of the Plan to designated directors or
categories of directors, which terms shall be set forth herein. To the extent
any provision of the Plan or action by Plan administrators fails to comply with
this subsection 3, such provision or action shall be deemed null and void to the
extent permitted by law and deemed advisable by the Board.
4. TYPES OF AWARDS
Awards under the Plan may be granted in any one or a combination of (a)
Incentive Stock Options as defined in Section 7; (b) Non-Statutory Stock Options
as defined in Section 8; and (c) Limited Rights as defined herein in Section 9.
5. STOCK SUBJECT TO THE PLAN
Subject to adjustment as provided in Section 14, the maximum number of
shares reserved for issuance under the Plan is ten percent (10%) of the shares
of Common Stock of the Association sold in connection with the Stock Offering
(or 237,986 shares). The maximum number of shares reserved for issuance to
Employees is seven and one-half percent (7.5%) of the shares of Common Stock
issued in connection with the Offering. The maximum number of shares reserved
for issuance to Outside Directors is two and one-half percent (2.5%) of the
shares of Common Stock issued in connection with the Offering.
The shares of Common Stock represented by such options may be either
authorized but unissued shares or shares previously issued and reacquired by the
Association or the Company. To the extent that options or rights granted under
the Plan are exercised, the shares covered will be unavailable for future grants
under the Plan; to the extent that options together with any related rights
granted under the Plan terminate, expire or are cancelled without having been
exercised or, in the case of Limited Rights exercised for cash, new Awards may
be made with respect to these shares.
6. ELIGIBILITY
Officers and other employees of the Association or its affiliates shall
be eligible to receive Incentive Stock Options, Non-Statutory Stock Options
and/or Limited Rights under the Plan. Directors who are not employees or
officers of the Association or its affiliates shall not be eligible to receive
Incentive Stock Options under the Plan. Outside Directors shall be eligible to
receive only Nonstatutory Stock Options.
7. NON-STATUTORY STOCK OPTIONS
7.1 GRANT OF NON-STATUTORY STOCK OPTIONS
(a) GRANTS TO OUTSIDE DIRECTORS. Each Outside Director who is serving
in such capacity on the date of the Association's Offering and at the Effective
Date of the Stock Option Plan, shall be granted Options to purchase 11,850 of
Common Stock of the Association, subject to adjustment pursuant to Section 14.
Each person who becomes an Outside Director subsequent to the Effective Date of
the Stock Option Plan, shall be granted Nonstatutory Stock Options to purchase
200 shares of the Common Stock, subject to adjustment pursuant to Section 14, to
the extent shares remain available under this Stock Option Plan. Nonstatutory
Stock Options granted under this Plan are subject to the terms and conditions
set forth in this Section 7.
(b) GRANTS TO EMPLOYEES. The Committee may, from time to time, grant
Nonstatutory Stock Options to eligible Employees and, upon such terms and
conditions as the Committee may determine, grant Nonstatutory
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Stock Options in exchange for and upon surrender of previously granted Awards
under the Plan. Nonstatutory Stock Options granted under this Plan are subject
to the terms and conditions set forth in this Section 7.
(c) OPTION AGREEMENT. Each Option shall be evidenced by a written
option agreement between the Association and the employee specifying the number
of shares of Common Stock that may be acquired through its exercise and
containing such other terms and conditions that are not inconsistent with the
terms of this grant. The maximum number of shares subject to a Nonstatutory
Option that may be awarded under the Plan to any Employee shall be 40,000.
(d) PRICE. The purchase price per share of Common Stock deliverable
upon the exercise of each Non-Statutory Stock Option shall be determined by the
Committee on the date the Option is granted. Except as provided below, such
purchase price shall not be less than 100% of the Fair Market Value of the
Association's Common Stock on the date the Option is granted. The purchase price
per share of Common Stock deliverable upon the exercise of each Non-Statutory
Stock Option granted in exchange for and upon surrender of previously granted
awards shall be not less than 100% of the Fair Market Value of the Association's
Common Stock on the date the Option is granted, but in no event may the purchase
price of any Non-Statutory Stock Option be less than the par value of the Common
Stock. Shares may be purchased only upon full payment of the purchase price.
Payment of the purchase price may be made, in whole or in part, through the
surrender of shares of the Common Stock of the Association at the Fair Market
Value of such shares determined in the manner described in Section 2.
(e) MANNER OF EXERCISE. Nonstatutory Stock Options granted under the
Stock Option Plan shall vest in a Participant at the rate of twenty percent
(20%) per year commencing one year from the date of grant. The vested Options
may be exercised from time to time, in whole or in part, by delivering a written
notice of exercise to the President or Chief Executive Officer of the
Association. Such notice is irrevocable and must be accompanied by full payment
of the purchase price in cash or shares of previously acquired Common Stock of
the Association at the Fair Market Value of such shares determined on the
exercise date by the manner described in Section 2 hereof. If previously
acquired shares of Common Stock are tendered in payment of all or part of the
exercise price, the value of such shares shall be determined as of the date of
such exercise.
(f) TERMS OF OPTIONS. The term during which each Non-Statutory Stock
Option may be exercised shall be determined by the Committee, but in no event
shall a Non-Statutory Stock Option be exercisable in whole or in part more than
10 years and one day from the Date of Grant. The Nonstatutory Options shall be
exercisable in installments, as determined by the Committee. The Committee shall
determine the date on which each installment shall become exercisable. The
shares comprising each installment may be purchased in whole or in part at any
time after such installment becomes exercisable. The Committee, in its sole
discretion, may accelerate the time at which any Non-statutory Stock Option may
be exercised in whole or in part. Notwithstanding the above, in the event of a
Change in Control of the Association, all Non-Statutory Stock Options shall
become immediately exercisable.
(g) TERMINATION OF EMPLOYMENT OR SERVICE. Upon the termination of an
Employee's employment or upon termination of an Outside Director's service for
any reason other than Disability, death or Termination for Cause, the Employee's
or Outside Director's Non-Statutory Stock Options shall be exercisable only as
to those shares that were immediately purchasable by the Employee or Outside
Directors at the date of termination and only for a period of one year following
termination. In the event of Termination for Cause, all rights under his
Non-Statutory Stock Options shall expire upon termination. In the event of the
death or Disability of any Employee or Outside Director, all Non-Statutory Stock
Options held by such Employee or Outside Director, whether or not exercisable at
such time, shall be exercisable by such person or his legal representatives or
beneficiaries for one year following the date of his death or cessation of
employment or service, applicable, due to Disability, PROVIDED that in no event
shall the period extend beyond the expiration of the Non-Statutory Stock Option
term. Notwithstanding the above, all Nonstatutory Options held by a Participant
whose employment as an Employee or service as an Outside Director terminates
following a Change in Control of the Association or the Company shall
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<PAGE>
be deemed earned as of the last day of employment or service with the
Association or an Affiliate and shall be exercisable for one year following such
termination of employment or service.
8. INCENTIVE STOCK OPTIONS
8.1 GRANT OF INCENTIVE STOCK OPTIONS
The Committee, from time to time, may grant Incentive Stock Options to
eligible Employees. Incentive Stock Options granted pursuant to the Plan shall
be subject to the following terms and conditions:
(a) OPTION AGREEMENT. Each Option shall be evidenced by a written
option agreement between the Association and the Employee specifying the number
of shares of Common Stock that may be acquired through its exercise and
containing such other terms and conditions that are not inconsistent with the
terms of this grant.
(b) PRICE. The purchase price per share of Common Stock deliverable
upon the exercise of each Incentive Stock Option shall be not less than 100% of
the Fair Market Value of the Association's Common Stock on the date the
Incentive Stock Option is granted. However, if an Employee owns stock possessing
more than 10% of the total combined voting power of all classes of Common Stock
of the Association (or under Section 424(d) of the Code, is deemed to own stock
representing more than 10% of the total combined voting power of all classes of
stock of the Association or its Affiliates by reason of the ownership of such
classes of common stock directly or indirectly, by or for any brother, sister,
spouse, ancestor or lineal descendant of such Employee or by or for any
corporation, partnership, estate or trust of which such employee is a
shareholder, partner or beneficiary), the purchase price per share of Common
Stock deliverable upon the exercise of each Incentive Stock Option shall not be
less than 110% of the Fair Market Value of the Association's Common Stock on the
date the Incentive Stock Option is granted. Shares may be purchased only upon
payment of the full purchase price. Payment of the purchase price may be made,
in whole or in part, through the surrender of shares of the Common Stock of the
Association. If previously acquired shares of common stock are tendered in
payment of all or part of the exercise price, the value of such shares shall be
determined as of the date of exercise of the Incentive Stock Option.
(c) MANNER OF EXERCISE. Incentive Stock Options granted under the Stock
Option Plan shall vest in a Participant at the rate of twenty percent (20%) per
year commencing one year from the date of grant. The vested Options may be
exercised from time to time, in whole or in part, by delivering a written notice
of exercise to the President or Chief Executive Officer of the Association,
PROVIDED, HOWEVER, that no Options shall be exercisable prior to approval of the
Plan by stockholders. Such notice is irrevocable and must be accompanied by full
payment of the purchase price in cash or shares of previously acquired Common
Stock of the Association. If previously acquired shares of Common Stock are
tendered in payment of all or part of the exercise price, the value of such
shares shall be determined as of the date of such exercise of the Incentive
Stock Option.
(d) AMOUNT OF OPTIONS. Incentive Stock Options may be granted to any
eligible Employee in such amounts as determined by the Committee; PROVIDED that
the amount granted is consistent with the terms of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"). Notwithstanding the above, the
maximum number of shares that may be subject to an Incentive Stock Option
awarded under the Plan to any Employee shall be 40,000. In granting Incentive
Stock Options the Committee shall consider the position and responsibilities of
the eligible Employee, the length and value of his or her service to the
Association, the compensation paid to the Employee and the Committee's
evaluation of the performance of the Association according to measurements that
include, among others, key financial ratios, levels of classified assets, and
independent audit findings. In the case of an option intended to qualify as an
Incentive Stock Option, the aggregate Fair Market Value (determined as of the
time the option is granted) of the Common Stock with respect to which Incentive
Stock Options granted are exercisable for the first time by the Participant
during any calendar year (under all plans of the Participant's employer
corporation and its parent and subsidiary corporations) shall not exceed
$100,000. The provisions of this
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Section 8.1(d) shall be construed and applied in accordance with Section 422(d)
of the Code and the regulations, if any, promulgated thereunder.
(e) TERM OF OPTIONS. The term during which each Incentive Stock Option
may be exercised shall be determined by the Committee, but in no event shall an
Incentive Stock Option be exercisable in whole or in part more than 10 years
from the Date of Grant. If any Employee, at the time an Incentive Stock Option
is granted to him, owns Common Stock representing more than 10% of the total
combined voting power of the Association or its Affiliates (or, under Section
424(d) of the Code, is deemed to own Common Stock representing more than 10% of
the total combined voting power of all such classes of Common Stock, by reason
of the ownership of such classes of Common Stock, directly or indirectly, by or
for any brother, sister, spouse, ancestor or lineal descendent of such Employee,
or by or for any corporation, partnership, estate or trust of which such
employee is a shareholder, partner or beneficiary), the Incentive Stock Option
granted to him shall not be exercisable after the expiration of five years from
the Date of Grant. No Incentive Stock Option granted under this Plan is
transferable except by will or the laws of descent and distribution and is
exercisable during his lifetime only by the Employee to which it is granted.
The Committee shall determine the date on which each Incentive Stock
Option shall become exercisable and may provide that an Incentive Stock Option
shall become exercisable in installments. The shares comprising each installment
may be purchased in whole or in part at any time after such installment becomes
purchasable, provided that the amount able to be first exercised in a given year
is consistent with the terms of Section 422 of the Code. To the extent required
by Section 422 of the Code, the aggregate fair market value (determined at the
time the Option is granted) of the Common Stock for which Incentive Stock
Options are exercisable for the first time by a Participant during any calendar
year (under all plans of the Association and its Affiliates) shall not exceed
$100,000. The Committee, in its sole discretion, may accelerate the time at
which any Incentive Stock Option may be exercised in whole or in part; PROVIDED
that it is consistent with the terms of Section 422 of the Code. Notwithstanding
the above, in the event of a Change in Control of the Association, all Incentive
Stock Options shall become immediately exercisable unless the fair market value
of the amount exercisable as a result of a Change in Control shall exceed
$100,000 (determined as of the date of grant). In such event, the first $100,000
of Incentive Stock Options (determined as of the date of grant) shall be
exercisable as Incentive Stock Options and any excess shall be exercisable as
Nonstatutory Stock Options.
(f) TERMINATION OF EMPLOYMENT. Upon the termination of an Employee's
employment for any reason other than Disability, Change in Control, death or
Termination for Cause, his Incentive Stock Options shall be exercisable only as
to those shares which were immediately purchasable by him at the date of
termination and only for a period of three months following termination. In the
event of Termination for Cause all rights under his Incentive Stock Options
shall expire upon termination.
In the event of death or Disability of any Employee, all Incentive
Stock Options held by such Employee, whether or not exercisable at such time,
shall be exercisable by such Employee or his legal representatives or
beneficiaries for one year following the date of his death or cessation of
employment due to Disability. Upon termination of an Employee's service due to a
Change in Control, all Incentive Stock Options held by such Employee, whether or
not exercisable at such time, shall be exercisable for a period of one year
following the date of his cessation of employment; PROVIDED, HOWEVER, that such
Option shall not be eligible for treatment as an Incentive Stock Option in the
event such Option is exercised more than three months following the date of the
Change in Control. In no event shall the exercise period extend beyond the
expiration of the Incentive Stock Option term.
(g) COMPLIANCE WITH CODE. The Options granted under this Section 8 of
the Plan are intended to qualify as Incentive Stock Options within the meaning
of Section 422 of the Code, but the Association makes no warranty as to the
qualification of any Option as an incentive stock option within the meaning of
Section 422 of the
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Code. If an Option granted hereunder fails for whatever reason to comply with
the provisions of Section 422 of the Code and such failure is not or cannot be
cured, such Option shall be a Nonstatutory Stock Option.
9. LIMITED RIGHTS
9.1 GRANT OF LIMITED RIGHTS
The Committee may grant a Limited Right simultaneously with the grant
of any Option to any Employee of the Association, with respect to all or some of
the shares covered by such Option. Limited Rights granted under this Plan are
subject to the following terms and conditions:
(a) TERMS OF RIGHTS. In no event shall a Limited Right be exercisable
in whole or in part before the expiration of six months from the date of grant
of the Limited Right. A Limited Right may be exercised only in the event of a
Change in Control of the Association.
The Limited Right may be exercised only when the underlying Option is
eligible to be exercised, provided that the Fair Market Value of the underlying
shares on the day of exercise is greater than the exercise price of the related
Option.
Upon exercise of a Limited Right, the related Option shall cease to be
exercisable. Upon exercise or termination of an Option, any related Limited
Rights shall terminate. The Limited Rights may be for no more than 100% of the
difference between the exercise price and the Fair Market Value of the Common
Stock subject to the underlying Option. The Limited Right is transferable only
when the underlying Option is transferable and under the same conditions.
(b) PAYMENT. Upon exercise of a Limited Right, the holder shall
promptly receive from the Association an amount of cash equal to the difference
between the Fair Market Value on the Date of Grant of the related Option and the
Fair Market Value of the underlying shares on the date the Limited Right is
exercised, multiplied by the number of shares with respect to which such Limited
Right is being exercised. In the event of a Change of Control in which pooling
accounting treatment is a condition to the transaction, the Limited Right shall
be exercisable solely for shares of stock of the Association, or in the event of
a merger transaction, for shares of the acquiring corporation, or its parent, as
applicable. The number of shares to be received on the exercise of such Limited
Right shall be determined by dividing the amount of cash that would have been
available under the first sentence above by the Fair Market Value at the time of
exercise of the shares underlying the Option subject to the Limited Right.
10. SURRENDER OF OPTION
In the event of a Participant's termination of employment or
termination of service as a result of death or Disability, the Participant (or
his personal representative(s), heir(s), or devisee(s)) may, in a form
acceptable to the Committee, make application to surrender all or part of the
Options held by such Participant in exchange for a cash payment from the
Association of an amount equal to the difference between the Fair Market Value
of the Common Stock on the date of termination of employment and the exercise
price per share of the Option on the Date of Grant. Whether the Association
accepts such application or determines to make payment, in whole or part, is
within its absolute and sole discretion, it being expressly understood that the
Association is under no obligation to any Participant whatsoever to make such
payments. In the event that the Association accepts such application and
determines to make payment, such payment shall be in lieu of the exercise of the
underlying Option and such Option shall cease to be exercisable.
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<PAGE>
11. RIGHTS OF A SHAREHOLDER; NON-TRANSFERABILITY
An optionee shall have no rights as a shareholder with respect to any
shares covered by a Non-Statutory and/or Incentive Stock Option until the date
of issuance of a stock certificate for such shares. Nothing in this Plan or in
any Award granted confers on any person any right to continue in the employ of
the Association or its Affiliates or to continue to perform services for the
Association or its Affiliates or interferes in any way with the right of the
Association or its Affiliates to terminate his services as an officer or other
employee at any time.
No Award under the Plan shall be transferable by the optionee other
than by will or the laws of descent and distribution and may only be exercised
during his lifetime by the optionee, or by a guardian or legal representative.
12. AGREEMENT WITH GRANTEES
Each Award of Options, and/or Limited Rights will be evidenced by a
written agreement, executed by the Participant and the Association or its
Affiliates that describes the conditions for receiving the Awards including the
date of Award, the purchase price if any, applicable periods, and any other
terms and conditions as may be required by the Board of Directors or applicable
securities law.
13. DESIGNATION OF BENEFICIARY
A Participant, with the consent of the Committee, may designate a
person or persons to receive, in the event of death, any Option or Limited
Rights Award to which he would then be entitled. Such designation will be made
upon forms supplied by and delivered to the Association and may be revoked in
writing. If a Participant fails effectively to designate a Beneficiary, then his
estate will be deemed to be the Beneficiary.
14. DILUTION AND OTHER ADJUSTMENTS
In the event of any change in the outstanding shares of Common Stock of
the Association by reason of any stock dividend or split, recapitalization,
merger, consolidation, spin-off, reorganization, combination or exchange of
shares, or other similar corporate change, or other increase or decrease in such
shares without receipt or payment of consideration by the Association, the
Committee will make such adjustments to previously granted Awards, to prevent
dilution or enlargement of the rights of the Participant, including any or all
of the following:
(a) adjustments in the aggregate number or kind of shares of Common
Stock which may be awarded under the Plan;
(b) adjustments in the aggregate number or kind of shares of Common
Stock covered by Awards already made under the Plan;
(c) subject to Section 8.1(b) hereof, adjustments in the purchase price
of outstanding Incentive and/or Non-Statutory Stock Options, or any
Limited Rights attached to such options.
No such adjustments, however, may change materially the value of
benefits available to a Participant under a previously granted Award.
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15. LIMITATIONS UPON EXERCISE OF OPTIONS
Notwithstanding any other provision of the Plan, so long as the Company
remains in the mutual form of organization and so long as any applicable statute
or regulation requires the Company to own at least a majority of the outstanding
Common Stock of the Association, an Option granted under this Plan may not be
exercised if the exercise of such an Option would result in the Company owning
less than a majority of the Common Stock of the Association. Nothing herein
shall preclude the Association from issuing additional authorized but unissued
shares of Common Stock to the Company to allow for the exercise of options which
would otherwise have resulted in the Company owning less than a majority of the
Common Stock of the Association.
16. TREATMENT OF OPTIONS IN THE EVENT OF A CONVERSION TRANSACTION
In the event that the Company converts to stock form in a Conversion
Transaction ("Stock Holding Company"), any Options outstanding shall, at the
option of the holder, (i) be convertible into Options for Common Stock of the
Stock Holding Company, or (ii) be exercised by the holder prior to the effective
date of the Conversion Transaction and the holder shall be entitled to exchange,
in the same manner as other minority stockholders of the Association, the shares
of Common Stock of the Association received upon such exercise for shares of
Common Stock of the Stock Holding Company. If for any reason such options are
not to be converted or such shares are not exchanged, the holders of Options
under this plan shall receive cash payment for the shares of stock represented
by the Options in an amount equal to the fair market value of the underlying
Options or the initial offering price of the Common Stock of the Stock Holding
Company for which the Common Stock underlying the Option would otherwise be
exchanged, less the original exercise price of such options and, with respect to
options that have been exercised, the Stock Holding Company shall redeem such
shares for cash in the same manner as such redemption would occur for other
minority stockholders of the Association. Any exchange, conversion of Options,
or cash payment for shares shall be subject to applicable federal and state
regulations and, if necessary, subject to the approval of the appropriate
regulatory authorities.
17. WITHHOLDING
There may be deducted from each distribution of cash and/or Common
Stock under the Plan the amount of tax required by any governmental authority to
be withheld.
18. AMENDMENT OF THE PLAN
The Board of Directors may at any time, and from time to time, modify
or amend the Plan in any respect; PROVIDED, HOWEVER, that if necessary to
continue to qualify the Plan under the Securities and Exchange Commission Rule
16b-3, the approval by a majority of the shares represented in person or by
proxy shall be required for any such modification or amendment that:
(a) increases the maximum number of shares for which options may
be granted under the Plan (SUBJECT, HOWEVER, to the provisions
of Section 14 hereof);
(b) reduces the exercise price at which Awards may be granted
(SUBJECT, HOWEVER, to the provisions of Sections 8.1(a) and 14
hereof):
(c) extends the period during which options may be granted or
exercised beyond the times originally prescribed (subject,
however, to the provisions of Section 8.1(a) hereof); or
(d) changes the persons eligible to participate in the Plan.
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Failure to ratify or approve amendments or modifications to subsections
(a) through (d) of this Section 18 by shareholders shall be effective only as to
the specific amendment or modification requiring such ratification. Other
provisions, sections, and subsections of this Plan will remain in full force and
effect.
No such termination, modification or amendment may affect the rights of
a Participant under an outstanding Award.
19. APPROVAL BY STOCKHOLDERS
The Plan shall be approved by stockholders of the Association within 12
months after the Plan has been adopted. No Options granted pursuant to the Plan
shall be exercisable prior to such stockholder approval.
20. EFFECTIVE DATE OF PLAN
The Plan shall become effective upon the date adopted by the Board of
Directors, following the approval of stockholders (the "Effective Date").
21. TERMINATION OF THE PLAN
The right to grant Awards under the Plan will terminate upon the
earlier of ten (10) years after the Effective Date of the issuance of Common
Stock or the date on which the exercise of Options or related rights equaling
the maximum number of shares reserved under the Plan occurs as set forth in
Section 5 hereof. The Board of Directors has the right to suspend or terminate
the Plan at any time; PROVIDED that no such action will, without the consent of
a Participant, affect adversely his rights under a previously granted Award.
(Remainder of Page Intentionally Left Blank]
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22. APPLICABLE LAW
The Plan will be administered in accordance with the laws of the State
of Florida.
Adopted January 18, 1995
ATTEST: COMMUNITY SAVINGS, F. A.
/s/ Deborah Rousseau /s/ James B. Pittard, Jr.
- ----------------------------------- -------------------------------------
Secretary James B. Pittard, Jr., President and
Chief Executive Officer
January 18, 1995
- ------------------------------------
Date Approved by Stockholders
12
OFFICE OF THRIFT SUPERVISION
WASHINGTON, DC 20552
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transaction period from
______________________to _______________________
OTS Docket Number: 05939
COMMUNITY SAVINGS, F. A.
------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
UNITED STATES 65-0525685
- --------------------------------- ------------------------------------
(State or Other Jurisdiction (IRS Employer Identification Number)
of Incorporation or Organization)
660 US HIGHWAY ONE, NORTH PALM BEACH, FL 33408
- ------------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(561) 881-4800
------------------------------------------------------------------------
(Registrant's Telephone Number including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
----
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $1.00 PER SHARE
---------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) his filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file reports) and (2) has been subject to such
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [ X ]
As of December 12, 1996, there were issued and outstanding 5,090,120
shares of the Registrant's Common Stock. The aggregate value of the voting stock
held by non-affiliates (persons other than the Mutual Holding Company, the
employee stock ownership plan, directors and officers) of the Registrant,
computed by reference to the closing price of the Common Stock as of December
12, 1996 ($18.25) was $39,233,339.
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of Annual Report to Shareholders for the fiscal year ended
September 30, 1996 (Parts II and IV).
2. Proxy Statement for the Annual Meeting of Shareholders (III).
1
<PAGE>
PART I
ITEM 1. BUSINESS
- --------------------------
GENERAL
Community Savings, F. A. (the "Association") is a federally chartered
stock savings and loan association headquartered in North Palm Beach, Florida.
The Association's deposits are insured by the Federal Deposit Insurance
Corporation ("FDIC"). The Association was chartered as a federal savings and
loan association in 1955 and has been a member of the Federal Home Loan Bank
("FHLB") System since 1955. At September 30, 1996, the Association had total
assets of $650.3 million, total loans of $376.2 million, total deposits of
$498.9 million, and total shareholders' equity of $75.1 million.
The Association is primarily engaged in the business of attracting
deposits from the general public in the Association's market area (as described
below), and investing such deposits, together with other sources of funds,
primarily in loans secured by one- to four-family residential real estate. The
Association also originates to a lesser extent commercial real estate loans and
land loans, as well as construction loans and multi-family residential loans.
See "Lending Activities." The Association also invests a portion of its assets
in mortgage-backed securities, United States Government and agency securities,
mutual funds, corporate debt securities, interest-earning deposits in the FHLB
of Atlanta and FHLB of Atlanta stock. See "Mortgage-Backed and Related
Securities" and "Investment Activities." The Association's principal sources of
funds are deposits and principal and interest payments on loans and investments.
Principal sources of income are interest received from loans and securities. The
Association's principal expenses are interest paid on deposits and employee
compensation and benefits. See "Sources of Funds."
On October 24, 1994, Community Savings, F. A. in mutual form (the
"Mutual Association") reorganized from a federally chartered mutual savings and
loan association into ComFed, M. H. C., a federally chartered mutual holding
company (the "Holding Company"), and concurrently formed the Association.
The Association's principal executive office is located at 660 U.S.
Highway One, North Palm Beach, Florida, and its telephone number at that address
is (561) 881-4800.
MARKET AREA AND COMPETITION
The Association is headquartered in North Palm Beach, Florida, and
operates in Palm Beach, Martin, St. Lucie, and Indian River counties in Florida.
The Association has 18 offices in its market area, four of which are located in
Martin County, eleven of which are located in Palm Beach County, three of which
are located in St. Lucie County as well as a loan production office located in
Indian River County. During fiscal year 1996, the Association also operated a
loan production office in Southern Palm Beach County for a brief time which was
closed on September 30, 1996. Palm Beach and Martin counties, located in
southeastern Florida, have experienced considerable growth and development since
the 1960s, and had a total population of approximately one million as of the
1990 census. In recent years, this area has been subjected to significant growth
controls established at the state and local governmental levels. In addition,
economic growth and migration in the Association's market area has moderated.
For these reasons, management believes growth of the local market area will be
moderate in the future and that demand for mortgages may also be moderate.
The economy in the Association's market area is service-oriented and is
significantly dependent upon government, foreign trade, tourism, and its
continued attraction as a retirement area. Cooperative efforts between Palm
Beach County and local municipalities are producing business growth and
expansion in the County. A variety of County supported programs have been
instituted to create new jobs and to encourage relocation or expansion of
companies with an emphasis placed on high-technology and service industries.
Consequently, commercial building vacancies are at a low level. Major employers
in the Association's market area include Pratt & Whitney, IBM, Motorola,
Siemans, St. Mary's Hospital, Florida Power and Light, and Bell South.
2
<PAGE>
The Association's market area in Southeast Florida has a large
concentration of financial institutions, many of which are significantly larger
and have greater financial resources than the Association, and all of which are
competitors of the Association to varying degrees. As a result, the Association
encounters strong competition both in attracting deposits and in originating
real estate and other loans. Its most direct competition for deposits has come
historically from commercial banks, securities broker-dealers, other savings
associations, and credit unions in its market area, and the Association expects
continued strong competition from such financial institutions in the foreseeable
future. The Association's market area includes branches of several commercial
banks that are substantially larger than the Association in terms of state-wide
deposits. The Association competes for savings by offering depositors a high
level of personal service and expertise together with a wide range of financial
services. In recent years many financial institutions have been aggressively
expanding through the acquisition of branch locations or entire financial
institutions, thereby increasing competition.
The competition for real estate and other loans comes principally from
commercial banks, mortgage banking companies, and other savings associations.
This competition for loans has increased substantially in recent years as a
result of the large number of institutions competing in the Association's market
area as well as the increased efforts by commercial banks to expand mortgage
loan originations.
The Association competes for loans primarily through the interest rates
and loan fees it charges and the efficiency and quality of services it provides
borrowers, real estate brokers, and builders. Factors that affect competition
include general and local economic conditions, current interest rate levels, and
volatility of the mortgage markets.
Based on total assets as of June 30, 1996, the Association was the
third largest savings institution headquartered in Palm Beach County, and the
Association held approximately 2.13% of all bank and savings association
deposits in Palm Beach County.
LENDING ACTIVITIES
GENERAL. Historically, the principal lending activity of the
Association has been the origination of fixed and adjustable-rate mortgage loans
collateralized by one- to four-family residential properties located in its
market area. The Association currently emphasizes the origination of
adjustable-rate mortgage ("ARM") loans and fixed-rate loans with terms of 15
years or less for retention in its portfolio. Generally, it has been the
Association's policy to sell all fixed-rate mortgage loan originations with
terms greater than 15 years on a servicing retained basis. However, based on
management's assessment of the market at a particular time, the Association may
periodically decide to retain such loans in the Association's portfolio.
Included in loans receivable at September 30, 1996 was $207,000 of loans held
for sale. Loans serviced for other institutions totaled $22.5 million. The
Association participates with other financial institutions in programs which
provide residential mortgage loans to low income and middle income borrowers. At
September 30, 1996, the Association's net loan portfolio totaled $376.2 million,
of which $284.5 million or 75.6%, consisted of one- to four-family residential
mortgage loans; $35.7 million, or 9.5%, consisted of construction loans; $16.8
million, or 4.5%, consisted of land loans; $8.2 million, or 2.2%, consisted of
multi-family loans; $38.4 million, or 10.2%, consisted of commercial real estate
loans; $15.6 million, or 4.2%, consisted of consumer loans; and $1.9 million, or
0.5%, consisted of commercial business loans. At September 30, 1996, the
weighted average remaining term to maturity of the Association's loan portfolio
was approximately 16.9 years. At September 30, 1996, $242.9 million, or 64.6% of
the Association's total net loan portfolio consisted of loans with adjustable
interest rates. To supplement local loan originations, the Association also
invests in mortgage-backed and related securities that directly or indirectly
provide funds principally for residential home buyers in the United States. It
is the Association's intention to offer varied products in the residential
mortgage loan area. In this regard, the Association offers a residential
mortgage loan which provides for a fixed-rate of interest during the first five
or seven years and which thereafter converts to an ARM loan which interest rate
adjusts on an annual basis.
3
<PAGE>
ANALYSIS OF LOAN PORTFOLIO. Set forth below is selected data relating
to the composition of the Association's loan portfolio by type of loan as of the
dates indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------------- ------------------ ------------------- ---------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Real estate loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential 1-4 family (1) $284,474 75.61% $248,769 75.51% $247,866 78.16% $262,480 79.84% $305,793 79.98%
Construction loans 35,720 9.49 27,314 8.29 12,265 3.87 7,965 2.42 6,277 1.64
Land loans 16,846 4.48 15,601 4.74 20,476 6.46 17,072 5.19 18,725 4.90
Multi-family (2) 8,153 2.17 7,351 2.23 6,772 2.14 5,952 1.81 5,385 1.41
Commercial (3) 38,433 10.22 35,402 10.75 32,612 10.28 34,953 10.63 40,714 10.65
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total real estate loans 383,626 101.97 334,437 101.52 319,922 100.91 328,422 99.90 376,894 98.58
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Non-real estate loans:
Consumer loans (4) 15,606 4.15 12,638 3.84 10,237 3.23 10,844 3.30 12,301 3.22
Commercial business 1,874 0.50 1,958 0.59 1,058 0.33 929 0.28 1,244 0.33
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total non-real estate loans 17,480 4.65 14,596 4.43 11,295 3.56 11,773 3.58 13,545 3.54
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans receivable 401,106 106.62 349,033 105.95 331,287 104.47 340,195 103.48 390,439 102.12
Less:
Undisbursed loan proceeds 22,318 5.93 15,253 4.63 9,872 3.11 6,466 1.97 4,182 1.09
Unearned discount and net
deferred fees 257 0.07 846 0.26 908 0.29 1,234 0.38 1,650 0.43
Allowance for loan losses 2,312 0.61 3,492 1.06 3,390 1.07 3,748 1.14 2,281 0.60
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans receivable, net $376,219 100.00% $329,442 100.00% $317,117 100.00% $328,747 100.00% $382,236 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
</TABLE>
- -------------------------------
(1) Includes participations of $1.8 million, $2.2 million, $2.6 million, $3.6
million, and $5.0 million at September 30, 1996, 1995, 1994, 1993, and 1992,
respectively.
(2) Includes participations of $360,000,$0, $0, $0, and $0, at September 30,
1996, 1995, 1994, 1993, and 1992, respectively.
(3 Includes participations of $198,000, $4.9 million, $5.0 million, $5.5
million, and $5.8 million, at September 30, 1996, 1995, 1994, 1993, and
1992, respectively.
(4) Includes primarily home equity lines of credit, automobile loans, and loans
secured by savings deposits. At September 30, 1996 the disbursed portion of
home equity lines of credit totaled $9.1 million.
4
<PAGE>
LOAN AND MORTGAGE-BACKED AND RELATED SECURITIES MATURITY AND REPRICING
SCHEDULE. The following table sets forth certain information as of September 30,
1996, regarding the dollar amount of loans and mortgage-backed and related
securities maturing in the Association's portfolio based on their contractual
terms to maturity. Demand loans, loans having no stated schedule of repayments
and no stated maturity, and overdrafts are reported as due in one year or less.
Adjustable and floating rate loans are included in the period in which interest
rates are next scheduled to adjust rather than in which they contractually
mature, and fixed-rate loans are included in the period in which the final
contractual repayment is due. Fixed-rate mortgage-backed securities are assumed
to mature in the period in which the final contractual payment is due on the
underlying mortgage.
<TABLE>
<CAPTION>
WITHIN 1 1-3 3-5 5-10 MORE THAN
YEAR YEARS YEARS YEARS 10 YEARS TOTAL
---- ----- ----- ----- -------- -----
(IN THOUSANDS)
Real estate loans:
<S> <C> <C> <C> <C> <C> <C>
One- to four-family residential $213,724 $ 30,576 $ 24,795 $ 29,115 $ 15,081 $313,291
Commercial, multi-family and land 50,603 15,441 1,963 1,347 981 70,335
Consumer loans (excluding lines of credit) 2,955 2,767 674 146 - 6,542
Equity line of credit loans (1) 9,064 - - - - 9,064
Commercial business loans 1,716 143 15 - - 1,874
-------- -------- -------- -------- -------- --------
Total loans receivable (gross) $278,062 $ 48,927 $ 27,447 $ 30,608 $ 16,062 $401,106
======== ======== ======== ======== ======== ========
Mortgage-backed and related securities $ 22,091 $ 22,012 $ 27,305 $ 34,167 $ 2,688 $108,263
======== ======== ======== ======== ======== ========
</TABLE>
- ----------------------------------------------------------
(1) Variable rate equity lines of credit reprice on a monthly basis.
The following table sets forth at September 30, 1996, the dollar amount of all
fixed-rate and adjustable-rate loans due after September 30, 1997.
<TABLE>
<CAPTION>
FIXED ADJUSTABLE TOTAL
----- ---------- -----
(IN THOUSANDS)
Real estate loans:
<S> <C> <C> <C>
One- to four-family residential $ 96,718 $ 2,849 $ 99,567
Commercial, multi-family and land 8,982 10,750 19,732
Consumer and commercial business loans 3,745 - 3,745
-------- -------- --------
Total $109,445 $ 13,599 $123044
======== ======== ========
Mortgage-backed and related securities $ 86,172 $ - $ 86,172
======== ======== ========
</TABLE>
ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LOANS. The Association's
primary lending activity consists of the origination of one- to four-family,
owner-occupied, residential mortgage loans secured by properties located in the
Association's market area. One- to four-family residential owner-occupied
mortgage loans are generally underwritten in conformity with the criteria
established by the Federal National Mortgage Association ("FNMA"), with the
exception of loans exceeding applicable agency dollar limits and loans purchased
through the Association's affiliation with a consortium of financial
institutions which provides loans to low and moderate income borrowers
(discussed below). The Association generally does not originate one- to
four-family residential loans secured by properties outside of its market area.
At September 30, 1996, $284.5 million, or 75.6%, of the Association's total loan
portfolio consisted of one- to four-family residential mortgage loans. The
weighted average contractual maturity of one-to four-family residential mortgage
loans at the time they are originated is 22.5 years. However, it has been the
Association's experience that the average length of time which such loans remain
outstanding is 7.4 years.
The Association currently offers one- to four-family residential
mortgage loans with terms typically ranging from 15 to 30 years, and with
adjustable or fixed interest rates. Originations of fixed-rate mortgage loans
and ARM loans are monitored on an ongoing basis and are affected significantly
by the level of market interest rates, customer preference, the Association's
interest rate sensitivity gap position, and loan products offered by the
Association's competitors. In a
5
<PAGE>
relatively low interest rate environment, which currently exists, borrowers
typically prefer fixed-rate loans to ARM loans. The Association has in the past
emphasized its ARM loan products. ARM loan originations totaled $50.6 million,
or 50.9%, of all one- to four-family loan originations during the year ended
September 30, 1996. In connection with the Association's effort to increase
mortgage lending, the Association offers residential mortgage loans which
provide for a fixed-rate of interest during the first five or seven years and
which thereafter convert to ARM loans on which the interest rate adjusts on an
annual basis. This loan product allows the Association to offer a loan with a
relatively short period during which the interest rate remains fixed but which
typically provides for an initial interest rate which is greater than could be
obtained from ARM loans. This loan may be offered for terms of up to 30 years.
The Association's fixed-rate loans generally are originated and
underwritten according to standards that permit sale in the secondary mortgage
market. Whether the Association can or will sell fixed-rate loans into the
secondary market, however, depends on a number of factors including the yield
and the term of the loan, market conditions, and the Association's current
interest rate sensitivity gap position. The Association's current policy is to
retain in its portfolio fixed-rate mortgage loan originated with terms of 15
years or less, and to sell fixed-rate mortgage loans originated (servicing
retained) with terms of more than 15 years. Periodically, management and its
board may decide to retain all loans originated, including loans with terms
greater that 15 years based on conditions in effect at that time. The
Association's fixed-rate mortgage loans are amortized on a monthly basis with
principal and interest due each month. One- to four-family residential real
estate loans often remain outstanding for significantly shorter periods than
their contractual terms because borrowers may refinance or prepay loans at their
option.
The Association participates with other financial institutions in local
consortiums which are committed to provide financing of one- to four-family
mortgage loans for low and moderate income borrowers. The consortiums underwrite
and package the loans which are generally sold to participating financial
institutions on a whole loan basis. These loans are originated to borrowers
within the Association's market area and provide for either fixed or
adjustable-rates of interest. The Association determines which loans it will
purchase after conducting its own due diligence review of the loan package
offered. For the fiscal year ended September 30, 1996, the Association did not
purchase any loans originated by the consortiums. It is the Association's
intent, subject to market conditions, to continue to participate in consortiums
of this nature.
The Association also purchases loans from other sources, such as
mortgage origination companies, or brokers, under the same guidelines as
described above. In addition, such loan purchases include a contract between the
mortgage origination company and Community Savings which contains an
indemnification clause protecting the Association from loss resulting from
misrepresentations in the loan applications or other information provided to the
Association. The Association purchased $16.8 million of such loans during fiscal
year 1996. It is the Association's intent, subject to market conditions, to
continue purchasing such loans.
The Association currently offers ARM loans with an initial interest
rate adjustment period of one year based on changes in a designated market
index. Each ARM loan currently adjusts annually with an annual interest rate
adjustment limitation of 200 basis points and a maximum lifetime adjustment of
600 basis points above the initial rate. Interest rates on the Association's ARM
loans currently adjust to either the changes in the weekly average yield on
United States Treasury Securities adjusted to a constant maturity of one year
plus a margin, or to the National Monthly Median Cost of Funds plus a margin.
The Association originates ARM loans with initially discounted rates, which vary
depending upon market conditions and which provide for an adjustment period of
one year. The Association determines whether a borrower qualifies for an ARM
loan based on the fully indexed rate of the ARM loan at the time the loan is
originated. The Association does not allow negative amortization of its ARM
loans. One- to four-family residential ARM loans totaled $181.5 million at
September 30, 1996.
The primary purpose of offering ARM loans is to make the Association's
loan portfolio more interest rate sensitive. However, as the interest income
earned on ARM loans varies with prevailing interest rates, such loans do not
offer the Association as consistently predictable interest income as long-term,
fixed-rate loans. ARM loans carry increased credit risk associated with
potentially higher monthly payments by borrowers as general market interest
rates increase. It is possible, therefore, that during periods of rising
interest rates, the risk of default on ARM loans may increase due to the upward
adjustment of interest costs to the borrower.
The Association's one- to four-family residential first mortgage loans
customarily include due-on-sale clauses, which are provisions giving the
Association the right to declare a loan immediately due and payable in the
event, among
6
<PAGE>
other things, that the borrower sells or otherwise disposes of the underlying
real property serving as security for the loan. Due-on-sale clauses are an
important means of adjusting the rates on the Association's fixed-rate mortgage
loan portfolio (and to a lesser extent ARM loans), and the Association has
generally exercised its rights under these clauses.
Regulations limit the amount that a savings association may lend
relative to the appraised value of the real estate securing the loan, as
determined by an appraisal at the time of loan origination. Appraisals are
generally performed by an independent outside appraiser. Such regulations permit
a maximum loan-to-value ratio of 95% for residential property and 80% for all
other real estate loans. The Association's lending policies generally limit the
maximum loan-to-value ratio on both fixed-rate and ARM loans without private
mortgage insurance to 80% of the lesser of the appraised value or the purchase
price of the property to serve as collateral for the loan. For one- to
four-family real estate loans with loan-to-value ratios of between 80% and 95%,
the Association generally requires the borrower to obtain private mortgage
insurance. The Association may charge an origination fee of between 1 % and 2%
of the total loan amount on all one- to four-family loans depending on the
market. The Association requires fire and casualty insurance (and flood
insurance if the property is within a designated flood plain), as well as a
title guaranty regarding good title, on all properties securing real estate
loans made by the Association.
In recent years, the Association has not entered into any loan
participations secured by one- to four-family residences. At September 30, 1996,
the Association's loan portfolio included $1.8 million of loan participations
secured by one- to four-family residences.
CONSTRUCTION AND LAND LOANS. The Association currently offers
fixed-rate and adjustable-rate residential construction loans primarily for the
construction of owner-occupied single-family residences in the Association's
market area to builders who have a contract for sale of the property or owners
who have a contract for construction. Such terms would remain the same during
the life of the permanent loan at the end of the construction period. Advances
are made as construction is completed. In addition, the Association also makes
construction loans to builders for single-family homes held for sale. Such loans
totaled $2.3 million at September 30, 1996. Construction loans for
owner-occupied single-family residences are generally structured to become
permanent loans upon completion of construction, and are originated with terms
of up to 30 years with an allowance of up to six months for construction during
which period the borrower is obliged to make interest-only payments.
Construction loans to builders for homes held for sale are generally originated
for a term of up to one year and provide for interest-only payments.
Disbursements are made as affidavits of progress are presented to the
Association.
At September 30, 1996, the Association's largest construction loan had
an aggregate principal outstanding balance of $1.5 million, which balance is
within the Association's loans-to-one-borrower limit. This loan is secured by a
construction loan to build a storage unit which is located in the Association's
market area, and is currently performing in accordance with its terms.
In addition, the Association originates loans within its market area
which are secured by individual unimproved or improved lots which are zoned
primarily to become single-family residences, as well as commercial and
agricultural properties. Land loans are currently offered with either one-year
adjustable-rates or fixed-rates for terms of up to 15 years. The maximum
loan-to-value ratio for the Association's land loans is 75%.
Construction lending generally involves a greater degree of credit risk
than one- to four-family residential mortgage lending. Risk of loss on a
construction loan is dependent largely upon the accuracy of the initial estimate
of the property's value at completion of construction or development and the
estimated cost (including interest) of construction. During the construction
phase, a number of factors could result in delays and cost overruns. If the
estimate of value proves to be inaccurate, the Association may be confronted, at
or prior to the maturity of the loan, with a project, when completed, having a
value which is insufficient to assure full repayment. Loans on lots may run the
risk of adverse zoning changes, environmental, or other restrictions on future
use.
Adjustable-rate single-family construction and land loans are currently
offered at the weekly average yield on United States Treasury Securities
adjusted to a constant maturity of one year plus a margin. Adjustable-rate
construction loans and land loans have an annual interest rate cap of 200 basis
points and a lifetime interest rate cap of 600 basis points over the initial
interest rate. Initial interest rates may be below the fully indexed rate but
the loan is underwritten at the fully indexed rate. At September 30, 1996, $35.7
million, or 9.5%, and $16.8 million, or 4.5%, of the Association's total net
loan portfolio consisted of construction loans and land loans, respectively.
7
<PAGE>
MULTI-FAMILY RESIDENTIAL REAL ESTATE LOANS. Loans secured by
multi-family real estate constituted approximately $8.2 million, or 2.2%, of the
Association's total net loan portfolio at September 30, 1996. At September 30,
1996, the Association had a total of 35 loans secured by multi-family
properties. The Association's multi-family real estate loans are secured by
multi-family residences, such as rental properties with between five and thirty
six units. At September 30, 1996, substantially all of the Association's
multi-family loans were secured by properties located within the Association's
market area. At September 30, 1996, the Association's multi-family real estate
loans had an average principal balance of approximately $233,000 and the largest
multi-family real estate loan had a principal balance of $1.4 million, and was
performing in accordance with its terms. Multi-family real estate loans are
currently offered with adjustable interest rates, although in the past the
Association originated fixed-rate multi-family real estate loans. Multi-family
loans typically have adjustable interest rates tied to a market index with a 600
basis point lifetime interest rate cap and a 200 basis point cap on annual
adjustments, and amortize over 20 to 25 years. An origination fee of between
1.5% to 2.0% is usually charged on multi-family loans. The Association generally
makes multi-family mortgage loans up to 75% of the appraised value of the
property securing the loan. The initial interest rate on multi-family real
estate loans is currently priced at the weekly average yield on United States
Treasury Securities adjusted to a constant maturity of one year plus a margin,
depending on the nature and size of the project. The Association's originations
of multi-family loans have been limited in recent years due to the limited
demand for such projects in the Association's market area.
In underwriting multi-family real estate loans, the Association reviews
the expected net operating income generated by the real estate to support the
debt service, the age and condition of the collateral, the financial resources
and income level of the borrower and the borrower's experience in owning or
managing similar properties and any financial reserves the borrower may have.
The Association generally requires a debt service coverage ratio of at least
125% of the monthly loan payment. The Association generally obtains personal
guarantees from all the principals of the multi-family real estate borrowers.
Loans secured by multi-family real estate generally involve a greater
degree of credit risk than one- to four-family residential mortgage loans and
carry larger loan balances. This increased credit risk is a result of several
factors, including the concentration of principal in a limited number of loans
and borrowers, the effects of general economic conditions on income producing
properties, and the increased difficulty of evaluating and monitoring these
types of loans. Furthermore, the repayment of loans secured by multi-family
property is typically dependent upon the successful operation of the related
real estate property. If the cash flow from the project is reduced, the
borrower's ability to repay the loan may be impaired.
COMMERCIAL REAL ESTATE LOANS. Loans secured by commercial real estate
constituted approximately $38.4 million, or 10.2%, of the Association's total
net loan portfolio at September 30, 1996. The Association's commercial real
estate loans are secured by improved property such as offices, hotels, small
business facilities, strip shopping centers, warehouses, commercial land and
other non-residential buildings. At September 30, 1996, substantially all of the
Association's commercial real estate loans were secured by properties located
within the Association's market area. At September 30, 1996, the Association had
a total of 160 loans secured by commercial real estate with an average principal
balance of approximately $240,000. Commercial real estate loans are currently
only offered with adjustable-rates, although in the past the Association has
originated fixed-rate commercial real estate loans. The terms of each commercial
real estate loan are negotiated on a case-by-case basis, although such loans
typically have adjustable interest rates tied to a market index. An origination
fee of up to 2% of the principal balance of the loan is typically charged on
commercial real estate loans. Commercial real estate loans originated by the
Association generally amortize over 15 to 20 years and have a maximum
loan-to-value ratio of 75%.
During fiscal year 1996, the Association decided that a need existed in
the local market for commercial real estate and business loans. In order to
better serve its customers and to increase its share of the commercial loan
market, the Association began an expansion of both its commercial real estate
and business lending activities in late fiscal 1996 with the addition of an
experienced commercial loan officer and a credit analyst to the lending
department staff. The Association intends to pursue such loans aggressively in
the future.
At September 30, 1996, the Association's largest commercial real estate
borrower had an aggregate principal outstanding balance of $4.1 million, which
balance is within the Association's loans-to-one-borrower limit. The loan is
secured by a hotel which is located in the Association's market area, and is
currently performing in accordance with its terms.
8
<PAGE>
In underwriting commercial real estate loans the Association employs
the same underwriting standards and procedures as are employed in underwriting
multi-family real estate loans. Loans secured by commercial real estate
generally involve a higher degree of risk than one- to four-family residential
mortgage loans and carry larger loan balances. This increased credit risk is a
result of several factors, including the concentration of principal in a limited
number of loans and borrowers, the effects of general economic conditions on
income producing properties, and the increased difficulty of evaluating and
monitoring these types of loans. Furthermore, the repayment of loans secured by
commercial real estate is typically dependent upon the successful operation of
the related real estate project. If the cash flow from the project is reduced,
the borrower's ability to repay the loan may be impaired.
CONSUMER LOANS. As of September 30, 1996, consumer loans totaled $15.6
million, or 4.2%, of the Association's total net loan portfolio. The principal
types of consumer loans offered by the Association are home equity lines of
credit, fixed-rate second mortgage loans, automobile loans, unsecured personal
loans, and loans secured by deposit accounts. Consumer loans are offered
primarily on a fixed-rate basis with maturities generally of five years or less.
The Association's home equity lines of credit are secured by the borrower's
principal residence with a maximum loan-to-value ratio, including the principal
balances of both the first and second mortgage loans, of 80% or less. Such loans
are offered on a monthly adjustable-rate basis with terms of up to ten years. At
September 30, 1996, the disbursed portion of home equity lines of credit totaled
$9.1 million, or 58.3%, of consumer loans. The Association anticipates it will
modestly expand its home equity product line.
The underwriting standards employed by the Association for consumer
loans include a determination of the applicant's credit history and an
assessment of ability to meet existing obligations and payments on the proposed
loan. Creditworthiness of the applicant is of primary consideration; however,
the underwriting process also includes a comparison of the value of the
collateral in relation to the proposed loan amount, and in the case of home
equity lines of credit, the Association engages an independent company to
conduct a title search.
Consumer loans generally have shorter terms and higher interest rates
than traditional mortgage loans, but generally entail greater credit risk than
do residential mortgage loans, particularly in the case of consumer loans that
are unsecured or secured by assets that depreciate rapidly, such as automobiles,
mobile homes, boats, and recreational vehicles. In such cases, repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment for the outstanding loan and the remaining deficiency often does not
warrant further substantial collection efforts against the borrower. In
particular, amounts realizable on the sale of repossessed automobiles may be
significantly reduced based upon the condition of the automobiles and the uneven
demand for used automobiles.
COMMERCIAL BUSINESS LOANS. The Association currently offers commercial
business loans to finance small businesses in its market area. Historically, the
Association offered commercial business loans as a customer service to business
account holders. During the last quarter of fiscal 1996, the Association began
expanding its activities in the commercial business lending market and intends
to pursue such loans more aggressively in the future. At September 30, 1996, the
Association had 78 commercial business loans outstanding with an aggregate
balance of $1.9 million and an average loan balance of approximately $24,000.
Commercial business loans are offered with both fixed-and adjustable-interest
rates. Adjustable-rates on commercial business loans are priced against the
Citibank or WALL STREET JOURNAL prime rate, plus a margin. The loans are offered
with prevailing terms of up to five years.
Underwriting standards employed by the Association for commercial
business loans include a determination of the applicant's ability to meet
existing obligations and payments on the proposed loan from normal cash flows
generated by the applicant's business. The financial strength of each applicant
also is assessed through a review of financial statements provided by the
applicant as well as conducting a credit review.
Commercial business loans generally bear higher interest rates than
residential loans, but they also may involve a higher risk of default since
their repayment is generally dependent on the successful operation of the
borrower's business. The Association generally obtains personal guarantees from
the borrower or a third party as a condition to originating its commercial
business loans.
LOAN ORIGINATIONS, SOLICITATION, PROCESSING, COMMITMENTS, AND
PURCHASES. Loan originations are derived from a number of sources such as real
estate broker referrals, existing customers, developers and walk-in customers.
Upon receiving a loan application, the Association obtains a credit report and
income verification to verify specific
9
<PAGE>
information relating to the applicant's employment, income, and credit standing.
In the case of a real estate loan, an independent appraiser approved by the
Association appraises the real estate intended to secure the proposed loan. A
loan processor in the Association's loan department checks the loan application
file for accuracy and completeness, and verifies the information provided. All
loans of up to $200,000 may be approved by any one of the Association's
designated vice presidents in the lending division; loans between $200,000 and
$500,000 must be approved by at least two of the designated vice presidents in
the lending division; loans between $500,000 and $750,000 must be approved by
both the President and the Senior Vice President of the Lending Division; loans
between $750,000 and $1 million must be approved by three persons, who must
include at least one Director, either the President or the Senior Vice President
of the Lending Division, and one of two designated vice presidents of the
Lending Division. Loans in excess of $1 million must be approved by the same
persons who may approve loans in excess of $750,000 but only after notifying the
entire Board of Directors that such loan application will be considered and only
if the Board of Directors does not disapprove of such loan. The Loan Committee
meets as needed to review and verify that management's loan approvals are made
within the scope of management's authority. After the loan is approved, a loan
commitment letter is promptly issued to the borrower. At September 30, 1996, the
Association had commitments to originate $16.6 million of loans.
If the loan is approved, the commitment letter specifies the terms and
conditions of the proposed loan including the amount of the loan, interest rate,
amortization term, a brief description of the required collateral, and required
insurance coverage. Fire and casualty insurance is required at the time the loan
is made and throughout the term of the loan, and upon request of the
Association, flood insurance may be required. Title insurance is required on all
loans secured by real property.
In addition to originations, the Association also purchases loans
secured by one- to four-family residences from consortiums, mortgage origination
companies, or brokers, as previously discussed in "One- to Four-Family
Residential Real Estate Loans." In addition the Association may purchase
participation loans when there is low demand for loans in the local market, or
to facilitate funding of large projects. Such participation loans, which totaled
$2.4 million at September 30, 1996, are secured by one- to four-family,
multi-family, or commercial real estate loans.
LOAN SERVICING. While the Association primarily originates loans for
its own portfolio, it also has sold fixed-rate loans to the Federal Home Loan
Mortgage Corporation ("FHLMC") and to the FNMA. At September 30, 1996, the
unpaid balances of loans sold totaled approximately $22.5 million. The
Association retains servicing of such loans and receives a fee of between
one-fourth to three-eights of a percent per loan. The Association does not
purchase loan servicing from other sources.
10
<PAGE>
ORIGINATION, PURCHASE AND SALE OF LOANS. The table below shows the
Association's loan origination, purchase and sales activity for the periods
indicated.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------------
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Loans receivable, beginning of period $ 329,442 $ 317,117 $ 328,747
Originations:
Real estate:
One- to four-family residential(1) 82,596 35,909 49,718
Land loans 6,848 18,163 6,418
Multi-family 1,263 - 696
Commercial 16,102 8,197 2,813
--------- --------- ---------
Total real estate loans 106,809 62,269 59,645
Non-real estate loans:
Consumer 5,698 4,154 2,425
Commercial business 796 646 718
--------- --------- ---------
Total originations 113,303 67,069 62,788
Transfer of mortgage loans to foreclosed real estate (400) (1,394) (5,528)
Loan purchases 16,775 2,728 2,395
Repayments (72,114) (50,452) (63,471)
Loan sales (5,429) (105) (5,115)
Decrease (increase) in allowance for loan losses 1,180 (102) 358
Decrease in amortization of unearned discount
and net deferred fees 589 62 326
Increase in loans in process (7,065) (5,381) (3,406)
Change in other (62) (100) 23
--------- --------- ---------
Net loan activity 46,777 12,325 (11,630)
--------- --------- ---------
Total loans receivable at end of period $ 376,219 $ 329,442 $ 317,117
========= ========= =========
</TABLE>
- ----------------------------------------------------------------
(1) Includes loans to finance the construction of one- to four-family
residential properties, and loans originated for sale in the secondary
market.
LOAN ORIGINATION FEES AND OTHER INCOME. In addition to interest earned
on loans, the Association may receive loan origination fees. To the extent that
loans are originated or acquired for the Association's portfolio, Statement of
Financial Accounting Standards No. 91, "Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases" ("SFAS No. 91") requires that the Association defer loan origination
fees and costs and amortize such amounts as an adjustment of yield over the life
of the loan by use of the level yield method. ARM loans originated below the
fully-indexed interest rate will have a substantial portion of the deferred
amount recognized as income in the initial adjustment period. Fees deferred
under SFAS No. 91 are recognized into income immediately upon prepayment or the
sale of the related loan. At September 30, 1996, the Association had $257,000 of
unearned discounts and deferred loan origination fees. Loan origination fees
vary with the volume and type of loans and commitments made and purchased,
principal repayments, and competitive conditions in the mortgage markets which,
in turn, respond to the demand and availability of money.
In addition to loan origination fees, the Association also receives
other fees, service charges, and other income that consist primarily of deposit
transaction account service charges, late charges and income from REO
operations. The Association recognized fees and service charges of $3.3 million,
$3.4 million and $3.3 million for the fiscal years ended September 30, 1996,
1995, and 1994, respectively.
LOANS-TO-ONE BORROWER. Savings and loan associations are subject to the
same loans-to-one borrower limits as those applicable to national banks which,
under current regulations, restrict loans to one borrower to an amount equal to
15% of unimpaired capital and unimpaired surplus on an unsecured basis, and an
additional amount equal to 10% of
11
<PAGE>
unimpaired capital and unimpaired surplus if the loan is secured by readily
marketable collateral (generally, financial instruments and bullion, but not
real estate). The 15% limitation resulted in a dollar limitation of
approximately $11.3 million at September 30, 1996. At September 30, 1996, the
Association's largest lending relationship totaled $5.4 million, of which $3.2
million had been disbursed, and consisted of construction loans to build
single-family homes, residential acquisition and development loans, and a line
of credit secured by commercial property. The Association's second largest
lending relationship totaled $4.9 million, of which $4.8 million had been
disbursed, and consisted of construction loans to build two single-family homes.
The Association's third largest lending relationship totaled $4.1 million and
was secured by a hotel. The Association's fourth largest lending relationship
totaled $4.0 million, of which $490,000 had been disbursed, and consisted of a
loan for the construction of single-family residences. The Association's fifth
largest lending relationship totaled $3.5 million, of which $3.4 million had
been disbursed, and was comprised of construction loans on four single-family
homes. At September 30, 1996 all of the aforementioned loans were performing in
accordance with their terms.
DELINQUENCIES AND CLASSIFIED ASSETS
DELINQUENCIES. The Association's collection procedures provide that
when a loan is 15 days past due, a computer-generated late charge notice is sent
to the borrower requesting payment. If delinquency continues, at 30 days a
delinquent notice is sent and personal contact efforts are attempted, either in
person or by telephone, to strengthen the collection process and obtain reasons
for the delinquency. Also, plans to arrange a repayment plan are made. If a loan
becomes 60 days past due, and no progress has been made in resolving the
delinquency, the Association will send a 10-day demand letter and attempt
personal contact. The loan also becomes subject to possible legal action if
suitable arrangements to repay have not been made. In addition, the borrower is
advised that they may obtain access to consumer counseling services, to the
extent required by regulations of the Department of Housing and Urban
Development ("HUD"). When a loan continues in a delinquent status for 90 days or
more, and a repayment schedule has not been made or kept by the borrower,
generally a notice of intent to foreclose is sent to the borrower, giving the
borrower 10 days to repay all outstanding interest and principal. If the
delinquency is not cured, foreclosure proceedings are initiated.
DELINQUENT LOANS. Loans are reviewed on a regular basis and are placed
on a non-accrual status when, in the opinion of management, the collection of
additional interest is doubtful. In addition, loans are placed on non-accrual
status when either principal or interest is 90 days or more past due, or less
than 90 days, in the event the loan has been referred to the Association's legal
counsel for foreclosure. Interest accrued and unpaid at the time a loan is
placed on a non-accrual status is charged against interest income.
NON-PERFORMING ASSETS. At September 30, 1996, the Association had
non-performing assets (non-performing loans and real estate owned ("REO")) of
$2.6 million, and a ratio of non-performing assets to total assets of 0.4%.
REAL ESTATE OWNED. Real estate acquired by the Association as a result
of foreclosure or by deed in lieu of foreclosure is classified as REO until such
time as it is sold. REO is recorded at cost which is the estimated fair value of
the property at the time the loan is foreclosed. Subsequent to foreclosure,
these properties are carried at lower of cost or fair value less estimated costs
to sell. REO totaled $1.4 million, $1.9 million, and $3.7 million at September
30, 1996, 1995, and 1994. respectively.
12
<PAGE>
DELINQUENT LOANS AND NON-PERFORMING ASSETS
The following table sets forth information regarding the Association's
non-accrual loans delinquent 90 days or more, and real estate acquired or deemed
acquired by foreclosure at the dates indicated. When a loan is delinquent 90
days or more, the Association fully reserves all accrued interest thereon and
ceases to accrue interest thereafter. For all the dates indicated, the
Association did not have any material restructured loans within the meaning of
SFAS 15.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
--------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
Delinquent loans:
<S> <C> <C> <C> <C> <C>
One- to four-family residential $ 832 $ 605 $1,571 $2,374 $2,287
Commercial and multi-family
real estate - - 1,282 4,316 1,528
Consumer and commercial
business loans 10 39 20 36 92
Land - 18 82 9 45
------ ------ ------ ------ ------
Total delinquent loans 842 662 2,955 6,735 3,952
REO 1,384 1,910 3,686 1,324 4,455
Other non-performing assets 400 - - - -
------ ------ ------ ------ ------
Total non-performing assets (1) $2,626 $2,572 $6,641 $8,059 $8,407
====== ====== ====== ====== ======
Total loans delinquent 90 days or more
to net loans receivable 0.22% 0.20% 0.93% 2.05% 1.03%
Total loans delinquent 90 days or more
to total assets 0.13% 0.12% 0.53% 1.29% 0.73%
Total non-performing loans and REO to
total assets 0.40% 0.45% 1.19% 1.54% 1.55%
</TABLE>
- ------------------------------------------
(1) Net of specific valuation allowances.
The Association's largest non-performing asset had a balance of
$914,000 at September 30, 1996. In December 1985, the Association made a land
loan in the amount of $1.4 million for the purchase of 37 acres of vacant
commercial property located in Fort Pierce, Florida. In August 1988, the
Association refinanced the loan and increased the principal amount of the loan
to $1.5 million. This loan had a balloon feature which was due in September
1993. Upon maturity, the borrower was unable to satisfy the balloon payment. The
Association subsequently commenced foreclosure proceedings and a foreclosure
sale occurred in April 1994 at which time the property was classified as REO.
During fiscal year 1996, the Association recovered $200,000, reducing the
balance at September 30, 1996 to $914,000. The property was appraised at $1.2
million as of August 1996.
OTHER NON-PERFORMING ASSETS. In connection with its mutual holding
company reorganization and stock offering, the Association's employee stock
ownership plan and trust ("the ESOP") borrowed funds from Nationar, a New York
trust company which was owned by savings banks in the state of New York, and
used the funds to purchase eight percent of the shares of the Association's
common stock in the open market. All of such shares were pledges as collateral
to support the ESOP loan. On February 6, 1995, Nationar was seized by the New
York Banking Department because of liquidity problems and continuing losses. In
connection with the ESOP loan, the Association placed $1.2 million in a
non-insured interest-earning deposit account with Nationar as collateral to
secure the ESOP loan. During the year ended September 30, 1995, the Association
was uncertain as to the recoverability of the collateral securing the ESOP loan.
During fiscal year 1995, the Superintendent transferred $200,000 of the
Association's collateral to a new interest-earning deposit account with
Northwest Savings Bank, leaving $1.0 million in the Nationar account. During the
year ended September 30, 1996, the Association received $400,000 as a partial
settlement from the New York Banking Department. Management believes, based on
correspondence with the New York Banking Department, that the full settlement of
$600,000 will be received in December 1996.
During the year ended September 30, 1996, gross interest income of
$97,000 would have been recorded on non-performing assets accounted for on a
non-accrual basis if the loans and assets had been current throughout the
period. No interest income on non-accrual loans and assets was included in
income during the such periods.
13
<PAGE>
The following table sets forth information with respect to loans past
due 60 to 89 days in the Association's portfolio at the dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(IN THOUSANDS)
Loans past due 60-89 days:
<S> <C> <C> <C> <C> <C>
One- to four-family residential $ 209 $ 493 $ 193 $ 202 $1,627
Commercial and multi-family real estate - - - - 153
Consumer and commercial
business loans 3 24 - -
Land loans - - 95 - 134
------ ------ ------ ------ ------
Total past due 60-89 days $ 212 $ 517 $ 288 $ 202 $1,914
====== ====== ====== ====== ======
</TABLE>
The following table sets forth information regarding the Association's
delinquent loans, REO and loans to facilitate the sale of REO at September 30,
1996.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1996
---------------------
BALANCE NUMBER
------- ------
(DOLLARS IN THOUSANDS)
Residential real estate:
<S> <C> <C>
Loans 60 to 89 days delinquent $ 209 3
Loans more than 89 days delinquent 832 17
Commercial and multi-family real estate:
Loans 60 to 89 days delinquent - -
Loans more than 89 days delinquent - -
Consumer and commercial business loans:
Loans 60 to 89 days delinquent 3 2
Loans more than 89 days delinquent 10 1
Land - -
REO 1,384 5
Restructured loans within the meaning of Statement of
Financial Accounting Standards No. 15 (not included
in other non-performing categories above) - -
Loans to facilitate sale of REO 226 4
------ ------
Total $2,664 32
====== ======
</TABLE>
CLASSIFICATION OF ASSETS. Federal regulations provide for the
classification of loans and other assets such as debt and equity securities
considered by the Office of Thrift Supervision ("OTS") to be of lesser quality
as "substandard," "doubtful," or "loss" assets. An asset is considered
"substandard" if it is inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the savings institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard," with the added characteristic that
the weaknesses present make "collection or liquidation in full, " on the basis
of currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. Assets that do not
expose the savings institution to risk sufficient to warrant classification in
one of the aforementioned categories, but which possess some weaknesses, are
required to be designated "special mention" by management.
When a savings institution classifies problem assets as either
substandard or doubtful, it is required to establish general allowances for loan
losses in an amount deemed prudent by management. General allowances represent
loss allowances that have been established to recognize the inherent risk
associated with lending activities, but which, unlike specific allowances, have
not been allocated to particular problem assets. When a savings institution
classifies problem
14
<PAGE>
assets as "loss," it is required either to establish a specific
allowance for losses equal to 100% of the amount of the assets so classified, or
to charge off such amount. A savings institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the OTS, which can order the establishment of additional
general or specific loss allowances. The Association regularly reviews the
problem loans in its portfolio to determine whether any loans require
classification in accordance with applicable regulations.
The following table sets forth the aggregate amount of the
Association's classified assets at the dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
---------------------------
1996 1995 1994
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Substandard assets $ 3,745 $ 8,652 $10,166
Doubtful assets - - -
Loss assets 544 1,565 1,520
------- ------- -------
Total classified assets $ 4,289 $10,217 $11,686
======= ======= =======
</TABLE>
ALLOWANCE FOR LOAN LOSSES. Management's policy is to provide for
estimated losses on the Association's loan portfolio based on management's
evaluation of the potential losses that may be incurred. Provisions for losses,
which increase the allowances for loan losses, are established by charges to
income. Such allowances represent the amounts which, in management's judgment,
are adequate to absorb charge-offs of existing loans which may become
uncollectible. The adequacy of the allowance is determined by management's
monthly evaluation of the loan portfolio and related collateral, in light of
past loss experience, present economic conditions and other factors considered
relevant by management. Anticipated changes in economic factors which may
influence the level of the allowances are considered in the evaluation by
management when the likelihood of the changes can be reasonably determined.
Management continues to review the entire loan portfolio to determine
the extent, if any, to which further additional loan loss provisions may be
deemed necessary. Management believes that the Association's current allowance
for loan losses is adequate, However, there can be no assurance that the
allowance for loan losses will be adequate to cover losses that may in fact be
realized in the future or that additional provisions for loan losses will not be
required.
15
<PAGE>
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES. The following table sets
forth the analysis of the allowance for loan losses for the periods indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
---------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total loans outstanding $ 376,219 $ 329,442 $ 317,117 $ 328,747 $ 382,326
========= ========= ========= ========= =========
Average loans outstanding for the period $ 346,880 $ 321,849 $ 321,721 $ 352,173 $ 416,139
========= ========= ========= ========= =========
Allowance balance (at beginning of period) 3,492 3,390 3,748 2,281 1,017
Provision for losses:
Real estate loans 84 234 967 2,395 1,632
Consumer and commercial business loans 14 6 22 3 48
Charge-offs:
Real estate loans (1,264)(1) (132) (1,325) (885) (311)
Consumer and commercial business loans (14) (6) (22) (46) (105)
--------- --------- --------- --------- ---------
Allowance balance (at end of period) $ 2,312 $ 3,492 $ 3,390 $ 3,748 $ 2,281
========= ========= ========= ========= =========
Allowance for loan losses as a percent
of net loans receivable at end of period 0.61% 1.06% 1.07% 1.14% 0.60%
Net loans charged off as a percent of average
loans outstanding 0.37% .04% 0.41% 0.26% 0.10%
Ratio of allowance for loan losses to total
non-performing loans at end of period (2) 274.58% 527.49% 114.72% 55.65% 57.72%
Ratio of allowance for loan losses to total
non-performing loans and REO
at end of period (2) 103.86% 135.77% 51.05% 46.51% 27.13%
</TABLE>
- -------------------------------------
(1) Charge offs at September 30, 1996 primarily reflected the reversal of a
specific reserve of $1.2 million which was related to a participation
interest in a note which was sold during the year.
(2) Net of specific reserves.
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES. The following table sets forth
the allocation of allowance for loan losses by loan category for the periods
indicated. Management believes that the allowance can be allocated by category
only on an approximate basis. The allocation of the allowance by category is not
necessarily indicative of future losses and does not restrict the use of the
allowance to absorb losses in any category.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
------------------------------------------------------------------------------
1996 1995 1994
---------------------- -------------------------- ------------------------
% OF LOANS % OF LOANS % OF LOANS
IN EACH IN EACH IN EACH
CATEGORY TO CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS(1) AMOUNT TOTAL LOANS(1) AMOUNT TOTAL LOANS(1)
------ ----------- ------ ----------- ------ -----------
(DOLLARS IN THOUSANDS)
Balance at end of period applicable to:
<S> <C> <C> <C> <C> <C> <C>
One- to four-family residential
mortgage $870 79.83% $790 79.10% $700 78.52%
Land loans 630 4.20 630 4.47 630 6.18
Multi-family residential mortgage 300 2.03 300 2.11 300 2.05
Commercial real estate 452 9.58 1,712 10.14 1,700 9.84
Consumer and commercial business 60 4.36 60 4.18 60 3.41
------ ------ ------ ------ ------ ------
Total allowance for loan losses $2,312 100.00% $3,492 100.00% $3,390 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
- ----------------------------------------
(1) Percentages do not reflect adjustments for undisbursed loan proceeds,
unearned discount and net deferred fees, and allowance for loan losses.
16
<PAGE>
RECOVERIES. During the year ended September 30, 1996, the Association's
largest recoveries of losses from previous years included $470,000 which
represented a final settlement of the Association's claim with the State of
Florida Department of Insurance, as Receiver for International Medical Centers,
Inc., of Miami ("IMC"). In addition, the Association received $400,000 from the
New York Banking Department as a partial settlement for the Nationar deposit
(see "Other Non-Performing Assets"). The Association also received a partial
payment of $200,000 on land classified as REO (see "Delinquent Loans and
Non-Performing Assets").
SECURITIES PORTFOLIO
The Association's primary focus is the origination of loans. However
during past periods when mortgage loan demand was moderate and the Association
had de-emphasized the origination of fixed-rate loans, management of the
Association invested excess liquidity in investment securities, including mutual
funds, and in mortgage-backed and related securities rather than purchasing
whole loans or loan participations. Such securities are subject to
classification based on the intentions of the Association. Securities purchased
for the Association's portfolio are classified as either held to maturity or as
available for sale. The Association has no securities classified as trading.
During December 1995, the Association adopted the provisions of SFAS No. 115
"Questions and Answers Guide ("SFAS No. 115 Q & A") which allowed a one-time
reclassification of securities between held to maturity and available for sale
between November 15, 1995 and December 31, 1995. The Association reclassified
$49.5 million of securities from investments-held to maturity and
mortgage-backed and related securities-held to maturity to securities available
for sale. Such reclassification resulted in a credit of $247,000 to
shareholders' equity. The Association subsequently sold $749,000 of the
securities at no gain or loss.
The Association maintains an Investment Committee which meets on a
monthly basis to review the Association's securities portfolio and make
recommendations to be carried out by management. All investments must be rated
BBB or higher by a recognized rating service. The Investment Committee consists
of the Association's Chairman of the Board, Frederick A. Teed, President and
Chief Executive Officer, James B. Pittard, Jr., Director, Harold I. Stevenson,
and Senior Vice President, Chief Financial Officer and Treasurer, Larry J.
Baker.
MORTGAGE-BACKED AND RELATED SECURITIES. At September 30, 1996, net
mortgage-backed and related securities totaled $108.3 million, or 16.7%, of
total assets. Of this amount, $55.0 million was classified as held to maturity
and $53.3 million was available for sale. At September 30, 1996, the market
value of the Association's net mortgage-backed securities portfolio totaled
approximately $108.3 million. The Association primarily invests in fixed-rate
mortgage-backed securities with weighted average lives of five to seven years.
Management believes that investing in short-term mortgage-backed and related
securities limits the Association's exposure to higher interest rates. During
fiscal year 1996, $43.7 million of mortgage-backed securities were purchased.
These purchases were funded with public fund deposits, odd-term certificates of
deposit and FHLB advances, instead of excess liquidity as in previous years.
Also included in the Association's mortgage-backed securities portfolio at
September 30, 1996, was $91.9 million of collateralized mortgage obligations
("CMOs"), $10.0 million of pass-through securities issued by the FHLMC, $4.1
million of pass-through securities issued by the FNMA and $2.2 million of
pass-through securities issued by the Government National Mortgage Association
("GNMA"). The FHLMC and FNMA pass-through securities are primarily comprised of
five-year and seven-year balloon mortgage loans. The GNMA pass-through
securities were purchased in the early 1980s and the loans underlying the GNMAs
are well seasoned. The Association has a limited amount of mortgage-backed
securities issued by the Agency for International Development ("AID"). The AID
mortgage-backed securities are fixed-rate instruments and are securitized with
loans to Korea, Venezuela, and Israel. At September 30, 1996, the Association
had $335,000 in AID mortgage-backed securities. Such mortgage-backed securities
are guaranteed by governmental agencies or quasi-governmental agencies of the
United States Government. By investing in mortgage-backed securities, the
Association has reduced significantly the credit risk of its asset base in
exchange for lower yields than would typically be available on internally
generated loans.
CMOs are typically issued by a special-purpose entity (in the
Association's case, private issuers), which may be organized in a variety of
legal forms, such as a trust, a corporation, or a partnership. The entity
aggregates pools of pass-through securities, which are used to collateralize the
CMO. Once combined, the cash flows are divided into "tranches" or "classes" of
individual bonds, thereby creating more predictable average durations for each
bond than the underlying pass-through pools. Accordingly, under the CMO
structure all principal paydowns from the various mortgage pools are allocated
to a CMO's first class until it has been paid off, then to a second class until
such class has been paid off, and then to the next classes. Substantially all of
the CMOs held in the Association's mortgage-backed securities portfolio
17
<PAGE>
consist of senior sequential tranches, primarily investments in one of the first
three tranches of the CMO. By purchasing senior sequential tranches, the
Association is attempting to ensure the cash flow associated with such an
investment. Generally, such tranches have stated maturities ranging from 6.5
years to 30 years; however, because of prepayments, the expected weighted
average life of these securities is less than the stated maturities. At
September 30, 1996, the Association's fixed-rate CMOs had coupon rates ranging
from 6.0% to 12.0% with a weighted average yield of 7.54%. The Association's
adjustable-rate CMOs are indexed to the London InterBank Offered Rate ("LIBOR")
or to the Ten Year Treasury Index. The Association's policy is to purchase
tranches in CMOs which are deemed to be investment grade by the Federal
Financial Institutions Examination Council. In the past, the Association
purchased CMO residuals in which the repayment of principal is only made after
the senior tranches of the CMO are repaid in full as to principal. Consequently,
investments in CMO residuals are riskier than investments in senior sequential
tranches because of their relatively junior position to more senior tranches and
the interest rate risk associated with such securities, in that they could
result in a loss of a substantial portion of the original investment. Cash flows
from residual interests are very sensitive to prepayments and, therefore,
contain a high degree of interest rate risk. Residual interests represent an
ownership interest in the underlying collateral, subject to the first lien of
the CMO investors. At September 30, 1996, the carrying value of the
Association's CMO residuals was $20,000. The Association no longer invests in
CMO residuals.
The OTS regulations require the classification of CMOs as high-risk if
they fail the FFIEC test. The Association does not purchase any CMOs which fail
the FFIEC test at the time of purchase. The FFIEC test is reperformed annually
during the life of the securities. During fiscal year 1996, two CMO issues
totaling $9.0 million failed the FFIEC test and are currently classified as
high-risk for OTS reporting purposes.
18
<PAGE>
The following tables set forth the carrying value of, and activity in,
the Association's mortgage-backed and related securities portfolio at the dates
indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
--------------------------------
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
Mortgage-backed and related securities:
Held to maturity:
<S> <C> <C> <C>
CMO residuals $ 20 $ 118 $ 155
Collateralized mortgage obligations 38,308 57,586 21,010
FHLMCs 9,973 11,943 13,460
GNMAs 2,233 2,774 1,075
FNMAs 4,076 4,691 5,079
Conventional pass-through certificates -- -- 68
AID loans 335 387 434
-------- -------- --------
Total mortgage-backed and related securities 54,945 77,499 41,281
-------- -------- --------
Available for sale: (shown at market value)
Collateralized mortgage obligations 53,318 -- --
-------- -------- --------
Total mortgage-backed and related securities
available for sale 53,318 -- --
-------- -------- --------
Total mortgage-backed and related securities $108,263 $ 77,499 $ 41,281
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------------
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
Mortgage-backed and related securities at:
<S> <C> <C> <C>
Beginning of period $ 77,499 $ 41,281 $ 14,290
Purchases 43,703 41,549 32,460
Calls (311) - -
Sales (749) - -
Repayments (11,454) (5,286) (5,628)
Discount (premium) amortization 189 (45) 159
Gain on call 254 - -
(Increase) decrease in market value available for sale (net) (868) - -
--------- --------- ---------
Mortgage-backed and related securities at
end of period $ 108,263 $ 77,499 $ 41,281
========= ========= =========
</TABLE>
19
<PAGE>
The following table sets forth the allocation of fixed- and
adjustable-rate mortgage-backed and related securities for the periods
indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-------------------------------------------------------------------------
1996 1995 1994
------------------------- ---------------------- ---------------------
$ % $ % $ %
------------------------- ---------------------- ---------------------
(DOLLARS IN THOUSANDS)
Mortgage-backed and related securities, net:
Held to maturity:
<S> <C> <C> <C> <C> <C> <C>
Adjustable-rate CMOs $3,030 2.80% $3,980 5.14% $1,763 4.27%
-------- ------ ------- ------ ------- ------
Fixed-rate:
FHLMCs 9,973 9.21 11,943 15.41 13,460 32.62
FNMAs 4,076 3.76 4,691 6.05 5,079 12.30
GNMAs 2,233 2.06 2,774 3.58 1,075 2.60
CMOs 35,298 32.60 53,724 69.32 19,402 47.00
Conventional pass-through certificates - - - - 68 0.16
AID loans 335 0.32 387 .50 434 1.05
-------- ------ ------- ------ ------- ------
Total fixed-rate 51,915 47.95 73,519 94.86 39,518 95.73
-------- ------ ------- ------ ------- ------
Total mortgage-backed and related
securities-held to maturity, net 54,945 50.75 77,499 100.00 41,281 100.00
-------- ------ ------- ------ ------- ------
Available for sale: (at market value)
Adjustable-rate CMOs 3,670 3.39% - - - -
Fixed-rate CMOs 49,648 45.85% - - - -
-------- ------ ------- ------ ------- ------
Total mortgage-backed and related
securities available for sale, net 53,318 49.24% - - - -
-------- ------ ------- ------ ------- ------
Total mortgage-backed and related securities, net $108,263 100.00% $77,499 100.00% $41,281 100.00%
======== ====== ======= ====== ======= ======
</TABLE>
INVESTMENTS. The Association purchases investments which are comprised
primarily of United States Government and agency obligations, mutual funds that
invest in mortgage-backed securities and government and agency obligations,
corporate debt securities and FHLB stock, as well as interest-earning deposits
at the FHLB. The carrying value of the Association's interest-earning deposits,
investments and securities available for sale totaled $128.0 million or 19.7% of
total assets.
The Association is required under federal regulations to maintain a
minimum amount of liquid assets that may be invested in specified short-term
securities and certain other investments. The Association generally has
maintained a portfolio of liquid assets that exceeds regulatory requirements.
Liquidity levels may be increased or decreased depending upon the yields on
investment alternatives and upon management's judgment as to the attractiveness
of the yields then available in relation to other opportunities and its
expectation of the level of yield that will be available in the future, as well
as management's projections as to the short term demand for funds to be used in
the Association's loan origination and other activities. For further information
regarding the Association's investments see Notes 1, 2 and 3 to the Notes to
Consolidated Financial Statements contained in the Association's Annual Report
to Shareholders for the Year Ended September 30, 1996 (the "Annual Report")
attached hereto as Exhibit 13.
INTEREST-EARNING DEPOSITS. The Association primarily invests excess
funds on a daily basis in an interest-earning overnight account at the FHLB of
Atlanta. The balance of this account was $28.6 million at September 30, 1996.
Such funds are available to provide liquidity to meet lending requirements and
daily operations.
INVESTMENT SECURITIES. At September 30, 1996, investment securities
included United States Government and agency obligations totaling $11.7 million,
corporate debt issues totaling $10.6 million, and FHLB stock totaling $5.4
million.
Included in corporate debt issues are asset-backed securities which
include two debt securities secured by automobile loan receivables totaling $3.3
million at September 30, 1996 purchased during fiscal year 1994 by the
Association, the repayment of which is secured by automobile receivables. These
securities are rated BBB or above by Standard & Poors and provide the
Association with an effective yield of 6.33%. While these securities have a
stated maturity of six years, it is expected that the receivables underlying the
securities have a weighted average life of 2.2 years. Debt instruments which
depend on the repayment of automobile loans involve a certain degree of risk
since in the event
20
<PAGE>
that borrowers of the automobile loan default, the issuer of the security may
have insufficient funds to repay the principal or interest of the security in
accordance with its terms.
The FHLB requires its members to own a required level of FHLB stock.
During 1996, the FHLB decided to begin redeeming all stock held by members in
excess of the required levels. During September 1996, the Association received
$2.0 million leaving a FHLB stock balance of $5.4 million. A further reduction
of $2.5 million will occur during the first quarter of fiscal year 1997.
SECURITIES AVAILABLE FOR SALE. Securities available for sale are
carried on the Association books at fair value as required by FASB No. 115 and
totaled $71.0 million at September 30, 1996. Included in securities available
for sale are equity securities totaling $115,000, mutual funds totaling $42.9
million, and United States and Government and agency obligations totaling $27.9
million.
The Association's mutual fund investments include mutual funds that
invest primarily in mortgage-backed securities and government and agency
securities, and are classified as available for sale for accounting purposes.
The mutual funds which invest in mortgage-backed securities have characteristics
similar to the mortgage-backed securities in which they invest. The
Association's mutual fund investments include approximately $40.5 million in
funds which invest in adjustable-rate mortgage-backed securities issued by FNMA,
FHLMC and GNMA, as well as CMOs and real estate mortgage investment conduits and
other securities collateralized by or representing interests in real estate
mortgages, and approximately $2.4 million in funds which invest in government
and agency obligations. Since the Association's mutual fund investments are
available for sale, they are carried at fair value as required by FASB No. 115.
INVESTMENT PORTFOLIO. The following tables set forth the carrying value
of the Association's investments and investment securities available for sale at
the dates indicated. At September 30, 1996, the market value of the
Association's investments was approximately $131.6 million. The market value of
investments and securities available for sale includes interest-earning deposits
and FHLB stock at book value, which approximates market value.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
---------------------------------
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
Interest-earning deposits:
<S> <C> <C> <C>
FHLB-Atlanta $ 28,580 $ 28,171 $ 54,699
Other deposits 600 1,200 -
-------- -------- --------
Total 29,180 29,371 54,699
-------- -------- --------
Investment securities:
United States Government and agency obligations 11,691 38,987 35,921
Corporate debt issues 10,602 13,692 16,283
Certificates of deposit - 7,000 -
FHLB stock 5,384 7,384 7,384
-------- -------- --------
Total 27,677 67,063 59,588
-------- -------- --------
Securities available for sale: (shown at fair value)
Equity securities (1) 115 96 65
Mutual funds 42,912 26,932 26,664
United States Government and agency obligations 27,942 - -
-------- -------- --------
Total 70,969 27,028 26,729
-------- -------- --------
Total securities portfolio $127,826 $123,462 $141,016
======== ======== ========
</TABLE>
- -------------------------------------------------------------------------
(1) Consists of $14,000 in FNMA stock which was purchased in order for thE
Association to qualify as a FNMA servicer and $101,000 in securities
issued by the Financial Institutions Insurance Group Limited.
21
<PAGE>
SECURITIES PORTFOLIO MATURITIES. The following table sets forth the
scheduled maturities, carrying values, market values and average yields for the
Association's investment securities and securities available for sale at
September 30, 1996.
<TABLE>
<CAPTION>
At September 30, 1996
-----------------------------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years More than Ten Years
---------------- ----------------- ----------------- -------------------
Annualized Annualized Annualized Annualized Total Annualized
Weighted Weighted Weighted Weighted --------------- Average Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Market Life in Average
Value Yield Value Yield Value Yield Value Yield Value Value Years(1) Yield
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- --------------
Interest-earning deposits:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FHLB of Atlanta $28,580 5.80% $ -- --% $ -- --% $ -- --% $28,580 $28,580 -- 5.80%
Other deposits 600 1.92 -- -- -- -- -- -- 600 600 -- 1.92
------ ---- ------ ---- ------ ---- ------ ---- ------ ------- ---- ----
Total Interest-earning 29,180 5.72 -- -- -- -- -- -- 29,180 29,180 -- 5.72
------ ---- ------ ---- ------ ---- ------ ---- ------ ------- ---- ----
deposits
Investment securities:
United States Government and
agency obligations 300 7.50 1,097 11.33 9,842 10.79 452 8.96 11,691 15,125 6.54 10.68
Corporate debt issues -- -- 3,282 6.33 -- -- 7,321 6.66 10,602 10,967 10.14 6.56
FHLB stock 2,521 7.25 -- -- -- 2,863 7.25 5,384 5,384 -- 7.25
------ ---- ------ ---- ------ ---- ------ ---- ------ ------- ---- ----
Total investment 2,821 7.28 4,379 7.58 9,842 10.79 10,636 6.92 27,677 31,426 8.25 8.43
------ ---- ------ ---- ------ ---- ------ ---- ------ ------- ---- ----
securities
Securities available for sale:
Equity securities 115 1.91 -- -- -- -- -- -- 115 115 -- 1.91
Mutual funds:
Mortgage-backed 40,486 6.01 -- -- -- -- -- -- 40,486 10,486 -- 6.01
Government and agency 2,426 5.15 -- -- -- -- -- -- 2,426 2,426 -- 5.15
backed
United States Government and
agency obligations 2,992 4.80 18,968 6.16 5,982 6.93 -- -- 27,942 27,942 3.96 6.18
------ ---- ------ ---- ------ ---- ------ ---- ------ ------- ---- ----
Total securities available
for sale 46,019 5.88 18,968 6.16 5,982 6.93 -- -- 70,969 70,969 3.96 6.04
------ ---- ------ ---- ------ ---- ------ ---- ------ ------- ---- ----
Total investment
securities and securities 48,840 5.96 23,347 6.43 15,824 9.33 10,636 6.92 98,646 102,445 5.28 6.71
------ ---- ------ ---- ------ ---- ------ ---- ------ ------- ---- ----
available for sale
Total securities $78,020 5.87% $23,347 6.43% $15,824 9.33% $10,636 6.92% $127,826 $131,625 5.28% 6.47%
======= ==== ======= ==== ======= ==== ======= ==== ======== ======== ==== ====
portfolio
</TABLE>
- --------------------------------
(1) Total weighted average life in years calculated only on United States
Government and agency obligations.
22
<PAGE>
SOURCES OF FUNDS
GENERAL. Deposits are the major source of the Association's funds for
lending and other investment purposes. In addition to deposits, the Association
derives funds from the amortization and prepayment of loans and mortgage-backed
and related securities, the maturity of investment securities, operations and,
if needed, advances from the FHLB. Scheduled loan principal repayments are a
relatively stable source of funds, while deposit inflows and outflows and loan
prepayments are influenced significantly by general interest rates and market
conditions. Borrowings may be used on a short-term basis to compensate for
reductions in the availability of funds from other sources or on a longer term
basis for general business purposes.
DEPOSITS. Consumer and commercial deposits are attracted principally
from within the Association's market area through the offering of a broad
selection of deposit instruments including non-interest-bearing demand accounts,
NOW accounts, passbook savings, money market deposit accounts, term certificate
accounts and individual retirement accounts. While the Association accepts
deposits of $100,000 or more, it does not currently offer premium rates for such
deposits. Deposit account terms vary according to the minimum balance required,
the period of time during which the funds must remain on deposit, and the
interest rate, among other factors. The Association has a committee which meets
weekly to evaluate the Association's internal cost of funds, survey rates
offered by competing institutions, review the Association's cash flow
requirements for lending and liquidity and the amount of certificates of deposit
maturing in the upcoming weeks. This committee executes rate changes when deemed
appropriate. The Association does not obtain funds through brokers, nor does it
solicit funds outside its market area.
The following table sets forth information regarding interest rates,
terms, minimum amounts and balances of the Association's savings and other
deposits in the Association as of September 30, 1996:
<TABLE>
<CAPTION>
WEIGHTED PERCENTAGE
AVERAGE MINIMUM MINIMUM OF TOTAL
INTEREST RATE TERM CHECKING AND SAVINGS DEPOSITS (1) AMOUNT BALANCES DEPOSITS
------------- ---- ------------------------------ ------ -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
0.00% None Non-interest-bearing account None $ 19,532 3.91%
1.24 None NOW accounts $10 63,098 12.65
1.73 None Passbook accounts 100 30,875 6.19
3.15 None Money market deposit accounts 1,000 69,421 13.91
-------- ------
Total checking and savings deposits 182,926 36.66
-------- ------
CERTIFICATES OF DEPOSIT (1)
---------------------------
4.73 1 - 5 months Fixed term, fixed-rate 1,000 13,690 2.75%
5.04 6-11 months Fixed term, fixed-rate 1,000 55,930 11.21
5.28 12-17 months Fixed term, fixed-rate 1,000 137,812 27.62
5.55 24-30 months Fixed term, fixed-rate 1,000 37,636 7.54
5.70 36-47 months Fixed term, fixed-rate 1,000 11,927 2.39
5.36 48-59 months Fixed term, fixed-rate 1,000 2,664 0.53
6.12 Over 60 months Fixed term, fixed-rate 1,000 51,333 10.29
1.74 Various Fixed term, fixed-rate 1,000 1,600 0.32
4.96 Various Negotiated Jumbo 100,000 3,411 0.69
-------- ------
Total certificates of deposit 316,003 63.34
-------- ------
Total deposits $498,929 100.00%
======== ======
</TABLE>
- ---------------------------------------------------------------------------
(1) IRA and KEOGH accounts are generally offered throughout all terms stated
above with balances of $40.5 million and $1.4 million, respectively.
23
<PAGE>
The following tables sets forth the change in dollar amount of savings
deposits in the various types of savings accounts offered by the Association
between the dates indicated:
<TABLE>
<CAPTION>
Balance Percent Balance Percent Balance Percent
at of Incr. at of Incr. at of Incr.
9/30/96 Deposits (Decr.) 9/30/95 Deposits (Decr.) 9/30/94 Deposits (Decr.)
---------- ----------------------- ---------- --------------------- ----------- -----------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest-bearing demand
accounts $19,532 3.91% $4,688 $14,844 3.39% $3,490 $11,354 2.47% $2,017
NOW accounts 63,098 12.65 (763) 63,861 14.60 (6,141) 70,002 15.22 803
Passbooks 30,875 6.19 1,174 29,701 6.79 (9,981) 39,682 8.63 6,674
Deposits held pending close
of reorganization (1) - - - - - (30,332) 30,332 6.59 30,332
Money market deposit
accounts 69,421 13.91 (6,299) 75,720 17.32 (21,507) 97,227 21.14 354
Time deposits which mature:
Within 12 months 240,240 48.15 46,740 193,500 44.24 30,582 162,918 35.41 (30,781)
Within 12-36 months 42,714 8.56 10,290 32,424 7.41 4,745 27,679 6.02 4,845
Beyond 36 months 33,049 6.63 5,723 27,326 6.25 6,541 20,785 4.52 (4,621)
-------- ------ ------- -------- ------ -------- -------- ------ ------
Total $498,929 100.00% $61,553 $437,376 100.00% $(22,603) $459,979 100.00% $9,623
- ----------------------------- ======== ====== ======= ======== ====== ========= ======== ====== ======
</TABLE>
(1) Deposits submitted in connection with the Association's reorganization to
purchase shares of common stock.
24
<PAGE>
The following table sets forth the certificates of deposit in the
Association classified by rates as of the dates indicated:
AT SEPTEMBER 30,
-------------------------------------------------
1996 1995 1994
---- ---- ----
Rate (IN THOUSANDS)
3.00% or less $ 1,600 $ 930 $ 920
3.01 - 3.99% 903 5,257 119,411
4.00 - 4.99% 80,831 55,583 51,618
5.00 - 5.99% 193,281 108,608 24,936
6.00 - 6.99% 29,571 70,456 9,076
7.00 - 7.99% 9,817 12,416 5,421
-------- -------- --------
$316,003 $253,250 $211,382
======== ======== ========
The following table sets forth the amount and maturities of
certificates of deposit at September 30, 1996.
<TABLE>
<CAPTION>
AMOUNT DUE
----------------------------------------------------------------------------------------------------
LESS THAN 1-2 2-3 3-4 4-5 AFTER 5
ONE YEAR YEARS YEARS YEARS YEARS YEARS TOTAL
-------- ----- ----- ----- ----- ----- -----
RATE (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
3.00% or less $176 $ - $ 38 $ 2 $ 30 $1,354 $ 1,600
3.01 - 3.99% 892 - - 11 - - 903
4.00 - 4.99% 77,045 1,346 2,440 - - - 80,831
5.00 - 5.99% 152,176 26,463 5,755 2,314 6,572 1 193,281
6.00 - 6.99% 8,781 4,445 2,227 9,979 4,136 3 29,571
7.00% and above 1,170 - - 8,647 - - 9,817
-------- ------- ------- ------- ------- ------ --------
$240,240 $32,254 $10,460 $20,953 $10,738 $1,358 $316,003
======== ======= ======= ======= ======= ====== ========
</TABLE>
The following table indicates the amount of the Association's
negotiable certificates of deposit of $100,000 or more by time remaining until
maturity as of September 30, 1996.
CERTIFICATES
OF DEPOSIT
OF $100,000
REMAINING MATURITY OR MORE
------------------
(IN THOUSANDS)
Three months or less $28,965
Three through six months 11,010
Six through twelve months 3,263
Over twelve months 9,476
-------
Total $52,714
=======
The Association uses deposits to fund loan originations and the
purchase of securities. The deposit growth in fiscal year 1996 of $61.4 million
reflected the introduction of a 13-month certificate of deposit product, an
increase in the use of public fund deposits, as well as increased retail
deposits.
25
<PAGE>
The following table sets forth the net changes in the deposit
activities of the Association for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Deposits $ 2,158,898 $ 1,952,009 $ 1,987,409
Withdrawals 2,114,903 1,988,577 1,989,071
----------- ----------- -----------
Net increase (decrease) before interest credited 43,995 (36,568) (1,662)
Interest credited 17,558 13,965 11,285
----------- ----------- -----------
Net increase (decrease) in deposits $ 61,553 $ (22,603) $ 9,623
=========== =========== ===========
</TABLE>
BORROWINGS. Savings deposits are the primary source of funds of the
Association's lending and investment activities and for its general business
purposes. If the need arises, the Association may rely upon advances from the
FHLB to supplement its supply of lendable funds and to meet deposit withdrawal
requirements. Advances from the FHLB typically are collateralized by the
Association's stock in the FHLB and a blanket floating lien on the Association's
one- to four-family first mortgage loans. At September 30, 1996, the Association
had $36.4 million of FHLB advances outstanding with a weighted average interest
rate of 6.36%.
The FHLB functions as a central reserve bank providing credit for the
Association and other member savings institutions and financial institutions. As
a member, the Association is required to own capital stock in the FHLB and is
authorized to apply for advances on the security of such stock and certain of
its home mortgages and other assets (principally, securities that are
obligations of, or guaranteed by, the United States) provided certain standards
related to creditworthiness have been met. Advances are made pursuant to several
different programs. Each credit program has its own interest rate and range of
maturities. Depending on the program, limitations on the amount of advances are
based either on a fixed percentage of a member institution's net worth or on the
FHLB's assessment of the institution's creditworthiness. Although advances may
be used on a short-term basis for cash management needs, FHLB advances have not
been, nor are they expected to be, a significant long-term funding source for
the Association, although the Association periodically utilizes its ability to
access advances in order to take advantage of investment opportunities which may
arise.
On September 30, 1983, the Association sold two of its branches to
another financial institution. Under terms of the sale, the Association issued a
10.94%, 30-year term mortgage-backed bond (the "Bond") for approximately $41.6
million. The Bond issue has a stated interest rate which was less than the
market rate (assumed to have been 17.53 %) for similar debt at the effective
date of the sale. Accordingly, the Association recorded a discount on the Bond
which is being accreted on the interest method of accounting over the life of
the Bond. The Bond bears an interest rate that is adjustable semi-annually on
each April 1 and October 1 to reflect changes in the average of the United
States 10-year and 30-year long-term bond rates. At September 30, 1996, the
outstanding balance of the Bond was $17.5 million with a rate of 10.52%. For
further information, see Note 16 to the Notes to the Consolidated Financial
Statements in the Annual Report attached hereto in Exhibit 13.
On October 24, 1994, in connection with the Association's Plan of
Reorganization into a Mutual Holding Company, the Association established an
Employee Stock Ownership Plan ("ESOP") for all eligible employees. As of
September 30, 1995, the ESOP had borrowed $2.8 million from Nationar and
purchased 190,388 shares of common stock in the open market. Collateral for the
loan, which was subsequently transferred to Northwest Savings Bank
("Northwest"), is the common stock purchased by the ESOP, as well as
Association's funds on deposit with Northwest. The loan will be repaid
principally from the Association's contributions to the ESOP over a period of up
to seven years and had an outstanding balance of $2.1 million at September 30,
1996. The loan bears interest at a monthly average of the Federal Funds high and
low rate plus 2.35%, which was 7.77% at September 30, 1996. For further
information, see Notes 14 and 15 to the Notes to the Consolidated Financial
Statements in the Annual Report, attached hereto in Exhibit 13. See also
"Contingencies".
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The following table sets forth the source, balance, and rate of
borrowings for the years ended September 30, 1996, 1995, and 1994.
<TABLE>
<CAPTION>
DURING THE YEAR ENDED SEPTEMBER 30,
------------------------------------
1996 1995 1994
---------- --------- ---------
(DOLLARS IN THOUSANDS)
FHLB advances:
<S> <C> <C> <C>
Maximum month-end balance $36,350 $18,679 $25,000
Balance at end of period 36,350 18,200 -
Average balance (1) 22,110 3,846 3,846
Weighted average interest rate during the period 6.36% 10.80% -
Weighted average interest rate at end of period 6.70% 6.86% 4.78%
Mortgage-backed bond:
Maximum month-end balance $18,660 $19,618 $20,198
Balance at end of period 17,454 18,344 19,233
Average balance (1) 18,033 19,030 19,811
Weighted average interest rate during the period 10.41% 11.72% 10.02%
Weighted average interest rate at end of period 10.52% 11.65% 9.39%
ESOP loan:
Maximum month-end balance $ 2,409 $ 2,776 -
Balance at end of period 2,114 2,557 -
Average balance (1) 2,273 2,257 -
Weighted average interest during the period 7.98% 8.83% -%
Weighted average interest rate at end of period 7.77% 8.20% -%
</TABLE>
- -------------------------------------------------------
(1) Computed on the basis of month-end balances.
SUBSIDIARY ACTIVITIES
The Association has two active subsidiaries. A description of the
business activities of such subsidiaries is set forth below.
ComFed Development Co. ("ComFed") is a wholly owned subsidiary of the
Association which is engaged in real estate development activities under joint
venture arrangements with local developers. The principal business activity of
ComFed is its 50% interest in a joint venture to develop and construct a
202-unit single-family residential project located in Palm Beach Gardens,
Florida. As of September 30, 1996, 201 units had been sold. At September 30,
1996, the Association had an equity investment in ComFed of $218,000, all of
which is excluded from the Association's capital for purposes of satisfying the
Association's regulatory capital requirements. The joint venture records the
income from the sale of each unit when the related real estate transaction
closes. Consequently, the income of the joint venture and ComFed fluctuate from
period to period based primarily on the number of units closed. Prior to fiscal
year 1995, the Association had two other wholly-owned subsidiaries, Select
Florida Properties, Inc. and Select Florida Properties 11, Inc., which were
formed to acquire and sell foreclosed assets, as well as hold delinquent loans.
These subsidiaries were dissolved into ComFed during September 1995, and all
remaining properties were transferred to the Association. ComFed had a net loss
of $11,000 for the year ended September 30, 1996. For additional information
regarding the Association's investment in ComFed and its business activities,
see Note 8 to the Notes to the Consolidated Financial Statements in the Annual
Report attached herewith as Exhibit 13.
ComFed, Inc. was formed in February 1971 for the purpose of owning and
operating an insurance agency, Community Insurance Agency, which sells property
and casualty insurance. ComFed, Inc. also receives income and incurs related
expenses from the sale of third party mutual funds and annuities. Such third
party mutual funds and annuities include products widely marketed to the
investing public and have investment advisors that are not affiliated with
ComFed, Inc.. For the year ended September 30, 1996, ComFed, Inc. reported net
income of $64,000. At September 30, 1996, the Association had an equity
investment in ComFed, Inc. of $463,000.
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<PAGE>
Under the Financial Institutions Reform, Recovery, and Enforcement Act
of 1989 ("FIRREA"), Savings Association Insurance Fund ("SAIF") insured
institutions are required to provide 30 days advance notice to the OTS and FDIC
before establishing or acquiring a subsidiary or conducting a new activity in a
subsidiary. The insured institution must also provide the FDIC and the OTS such
information as may be required by applicable regulations and must conduct the
activity in accordance with the rules and orders of the OTS. In addition to
other enforcement and supervision powers, the OTS may determine after notice and
opportunity for a hearing that the continuation of an institution's ownership of
or relation to a subsidiary (i) constitutes a serious risk to the safety,
soundness or stability of the institution; or (ii) is inconsistent with the
purposes of FIRREA. Upon the making of such a determination, the OTS may order
the institution to divest the subsidiary or take other actions.
CONTINGENCIES.
In connection with its mutual holding company reorganization and stock
offering, the Association's employee stock ownership plan and trust (the "ESOP")
borrowed funds from Nationar, a New York trust company which was owned by
savings banks in the state of New York, and used the funds to purchase eight
percent of the shares of the Association's common stock in the open market. All
of such shares were pledged as collateral to support the ESOP loan. In
connection with the ESOP loan, the Association placed $1.2 million in a
non-insured interest-earning deposit account with Nationar as collateral to
secure the ESOP loan. On February 6, 1995, Nationar was seized by the New York
Banking Department because of liquidity problems and continuing losses. During
the year ended September 30, 1995, the Association was uncertain as to the
recoverability of the collateral securing the ESOP loan. During fiscal year
1995, the Superintendent transferred $200,000 of the Association's collateral to
a new interest-earning deposit account with Northwest, leaving $1.0 million in
the Nationar account. During the year ended September 30, 1996, the Association
received $400,000 as a partial settlement from the New York Banking Department.
Management believes, based on correspondence with the New York Banking
Department, that the full settlement of $600,000 will be received in December
1996.
In addition, the Association is investigating a possible employee
defalcation which may have been occurring for several years. The Association
maintains insurance to cover possible defalcation losses with a claim deductible
of $200,000. The Association has established a liability for the amount of the
deductible in the accompanying financial statements. Management currently
estimates that the loss in excess of the deductible will not involve material
amounts and will be covered by insurance. Although the Association has notified
its insurance company of the potential claim and the insurance company has
acknowledged coverage, the insurance company has not begun its investigation of
the claim.
REGULATION
As a federally chartered SAIF-insured savings and loan association, the
Association is subject to examination, supervision and extensive regulation by
the OTS and the FDIC. The Association is a member of and owns stock in the FHLB
of Atlanta, which is one of the twelve regional banks in the Federal Home Loan
Bank System. This regulation and supervision establishes a comprehensive
framework of activities in which an institution can engage and is intended
primarily for the protection of the insurance fund and depositors.
The Association also is subject to regulation by the Board of Governors
of the Federal Reserve System (the "Federal Reserve Board") governing reserves
to be maintained against deposits and certain other matters. The Holding Company
is also subject to supervision and regulation by the OTS.
The OTS regularly examines the Association and prepares reports for the
consideration of the Association's Board of Directors on any deficiencies that
they may find in the Association's operations. The FDIC also examines the
Association in its role as the administrator of the SAIF. The Association's
relationship with its depositors and borrowers also is regulated to a great
extent by both federal and state laws especially in such matters as the
ownership of savings accounts and the form and content of the Association's
mortgage documents. Any change in such regulation, whether by the FDIC, OTS, or
Congress, could have a material adverse impact on the Holding Company and the
Association and their operations.
INDUSTRY RECAPITALIZATION OF SAIF
The deposits of savings and loans, such as the Association, are
presently insured by the SAIF. SAIF and the Bank Insurance Fund ("BIF") are the
two insurance funds administered by the FDIC. On August 8, 1995, in recognition
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<PAGE>
of BIF achieving its mandated reserve ratio, the FDIC revised the premium
schedule for BIF members to provide a new range of .04% to .31% of deposits (as
compared to the range of .23% to .31% of deposits for SAIF insured
institutions). In 1996, the FDIC further reduced such range to 0% to .27% of
deposits. As a result, well capitalized and healthy BIF members pay
significantly lower premiums. Without a substantial increase in premium rates,
or the imposition of special assessments or other significant developments, such
as a merger of SAIF and BIF, it was not anticipated that SAIF would be
adequately recapitalized until 2002. As a result of the disparity in BIF and
SAIF premium rates, SAIF members could be placed at a significant competitive
disadvantage in relation to BIF members with respect to pricing of loans and
deposits and the ability to lower their operating costs.
On September 30, 1996 Congress passed, and the President signed, the
Deposit Insurance Funds Act of 1996 which mandated that all thrifts and savings
banks that are insured by SAIF are required to pay a one-time special assessment
of 65.7 basis points on SAIF-insured deposits (subject to adjustment for certain
types of banks with SAIF deposits) that were held at March 31, 1995 payable by
November 27, 1996 to recapitalize the SAIF. The assessment will bring the SAIF's
reserve ratios to a comparable level of the BIF at 1.25% of total insured
deposits. The Association's share of this special assessment totaled $2.8
million and is reflected in the 1996 operating results. The FDIC, in connection
with the recapitalization, also lowered SAIF premiums from $0.23 per $100 to
$0.065 per $100 of insured deposits beginning in January 1997 in order to fund
the Financing Corporation bonds while BIF member institutions will pay
approximately $.013 per $100 of insured deposits.
THE FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991
On December 19, 1991, the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") became law. FDICIA primarily addresses the
recapitalization of the FDIC, which insures the deposits of commercial banks and
savings and loan associations. In addition, FDICIA established a number of new
mandatory supervisory measures for savings associations and banks.
STANDARDS FOR SAFETY AND SOUNDNESS. FDICIA requires the federal bank
regulatory agencies to prescribe regulatory standards for all insured depository
institutions and depository institution holding companies relating to: (i)
internal controls, information systems and audit systems; (ii) loan
documentation; (iii) credit underwriting; (iv) interest rate risk exposure; (v)
asset growth; and (vi) compensation, fees and benefits. The compensation
standards would prohibit employment contracts, compensation or benefit
arrangements, stock option plans, fee arrangements or other compensatory
arrangements that provide excessive compensation, fees or benefits which could
lead to material financial loss. In addition, the federal banking regulatory
agencies are required to prescribe by regulation standards specifying: (i)
maximum classified assets to capital ratios; (ii) minimum earnings sufficient to
absorb losses without impairing capital; and (iii) to the extent feasible, a
minimum ratio of market value to book value for publicly traded shares of
depository institutions and depository institution holding companies. In July
1995, the federal banking agencies, including the OTS and the FDIC, adopted
final rules regarding implementation of these standards.
FINANCIAL MANAGEMENT REQUIREMENTS. Pursuant to FDICIA, in May 1993, the
FDIC adopted rules establishing annual independent audits and financial
reporting requirements for all depository institutions with assets of more than
$500 million. The rules also establish new requirements for the composition,
duties, and authority of such institutions' audit committees and boards of
directors, effective in fiscal years beginning after September 30, 1993. Among
other things, all depository institutions with assets in excess of $500 million
are required to prepare and make available to the public annual reports on their
financial condition and management, including statements of management's
responsibility under regulations relating to safety and soundness, and an
assessment of the institution's compliance with internal controls, laws and
regulations. The institution's independent auditors are required to attest to
these management assessments. Each such institution also is required to have an
audit committee composed of independent directors. Audit committees of large
institutions (institutions with assets exceeding $3.0 billion) must: (i) include
members with banking or related financial management experience; (ii) have the
ability to engage their own independent legal counsel; and (iii) must not
include as members any large customers (as defined) of the institution.
PROMPT CORRECTIVE ACTION REGULATION. FDICIA establishes a system of
prompt corrective action to resolve the problems of undercapitalized
institutions. Under this system, which became effective on December 19, 1992,
the OTS and the other banking regulators established five capital categories
("well-capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized" and "critically undercapitalized") and to take
certain mandatory supervisory actions (and are authorized to take other
discretionary actions) with respect to institutions in the three
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<PAGE>
undercapitalized categories, the severity of which will depend upon the capital
category in which the institution is placed. Generally, FDICIA requires the
requisite banking regulator to appoint a receiver or conservator for an
institution that is critically undercapitalized.
Under the OTS rule implementing the prompt corrective action
provisions, a savings institution that: (i) has a total risk-based capital ratio
of 10.0% or greater, a Tier I (core) risk-based capital ratio of 6.0% or greater
and a leverage ratio of 5.0% or greater; and (ii) is not subject to any written
agreement, order, capital directive or prompt corrective action directive issued
by the OTS, is deemed to be well-capitalized. An institution with a total
risk-based capital ratio of 8.0% or greater, a Tier I risk-based capital ratio
of 4.0% or greater and a leverage ratio of 4.0% or greater, is considered to be
adequately capitalized. A savings institution that has a total risk-based
capital ratio of less than 8.0%, a Tier I risk-based capital ratio of less than
4.0%, or a leverage ratio that is less than 4.0 % is considered to be
undercapitalized. A savings institution that has a total risk-based capital
ratio of less than 6.0%, a Tier I risk-based capital ratio of less than 3.0% or
a leverage ratio that is less than 3.0%, is considered to be significantly
undercapitalized. A savings institution that has a tangible equity capital to
assets ratio equal to or less than 2.0% is deemed to be critically
undercapitalized. For purposes of the regulation, the term "tangible equity"
includes core capital elements counted as Tier I capital for purposes of the
risk-based capital standards plus the amount of outstanding cumulative perpetual
preferred stock (including related surplus), minus all intangible assets except
certain purchased mortgage servicing rights and qualifying supervisory goodwill.
At September 30, 1996, the Association was in the "well capitalized" category.
FDICIA authorizes the appropriate federal banking agency, after notice
and an opportunity for a hearing, to treat a well-capitalized, adequately
capitalized or undercapitalized insured depository institution as if it had a
lower capital classification if it is in an unsafe or unsound condition or is
engaging in an unsafe or unsound practice. Thus, an adequately capitalized
institution can be subjected to the restrictions on undercapitalized
institutions (provided that a capital restoration plan cannot be required of the
institution) described below and an undercapitalized institution can be
subjected to the restrictions applicable to significantly undercapitalized
institutions.
OTHER DEPOSIT INSURANCE REFORMS. FDICIA amended the FDI Act to prohibit
insured depository institutions that are not well-capitalized from accepting
brokered deposits unless a waiver has been obtained from the FDIC. Deposit
brokers are required to register with the FDIC.
The FDIC is required to establish a risk-based assessment system for
deposit insurance to become effective no later than January 1, 1993. The FDIC
established a transactional risk-based insurance assessment system which is
effective for the semi-annual assessment period beginning January 1, 1993.
Furthermore, the FDIC has proposed a risk-based system to replace the
transitional system and is in the process of adopting final regulations with
respect to this matter. FDICIA also authorizes the FDIC to privately reinsure up
to 10% of its risk loss with respect to an institution and base its assessment
on the cost of such reinsurance.
FEDERAL REGULATIONS
REGULATORY CAPITAL. The OTS capital requirements consist of a "tangible
capital requirement," a "leverage capital requirement" and a "risk-based capital
requirement."
Under the tangible capital requirement, a savings association must
maintain tangible capital in an amount equal to at least 1.5% of adjusted total
assets. Tangible capital is defined as core capital less all intangible assets
(including supervisory goodwill), plus a specified amount of purchased mortgage
servicing rights.
Under the leverage capital requirement adopted by the OTS, associations
maintain "capital" in an amount equal to at least 3% of adjusted total assets.
Core capital is defined as common stockholders' equity (including retained
earnings), non-cumulative perpetual preferred stock, and minority interests in
the equity accounts of consolidated subsidiaries, plus purchased mortgage
servicing rights valued at the lower of 90% of fair market value, 90% of
original cost or the current amortized book value as determined under generally
accepted accounting principles ("GAAP"), and "qualifying supervisory goodwill,"
less non-qualifying intangible assets. At September 30, 1996, the Association's
ratio of core capital to total adjusted assets was 11.30%.
Under the risk-based capital requirement, a savings association must
maintain total capital (which is defined as core capital plus supplementary
capital) equal to at least 8.0% of risk-weighted assets. A savings association
must
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<PAGE>
calculate its risk-weighted assets by multiplying each asset and off-balance
sheet item by various risk factors, which range from 0% for cash and securities
issued by the United States Government or its agencies to 100% for repossessed
assets or loans more than 90 days past due. Qualifying one- to four-family
residential real estate loans and qualifying multi-family residential real
estate loans (not more than 90 days delinquent and having an 80% or lower
loan-to-value ratio), which at September 30, 1996, represented 76.9% of the
Association's total loans receivable, are weighted at a 50% risk factor.
Supplementary capital may include, among other items, cumulative perpetual
preferred stock, perpetual subordinated debt, mandatory convertible subordinated
debt, intermediate-term preferred stock, and general allowances for loan losses.
The allowance for loan losses includable in supplementary capital is limited to
1.25% of risk-weighted assets. Supplementary capital is limited to 100% of core
capital.
Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital, in addition to the adjustments
required for calculating core capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
non-residential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. However, in calculating
regulatory capital, institutions can add back unrealized losses and deduct
unrealized gains net of taxes, on debt securities reported as a separate
component of GAAP capital.
The OTS regulations establish special capitalization requirements for
savings associations that own service corporations and other subsidiaries,
including subsidiary savings associations. According to these regulations,
certain subsidiaries are consolidated for capital purposes and others are
excluded from assets and capital. In determining compliance with the capital
requirements, all subsidiaries engaged solely in activities permissible for
national banks, engaged solely in mortgage-banking activities, or engaged in
certain other activities solely as agent for its customers are "includable"
subsidiaries that are consolidated for capital purposes in proportion to the
association's level of ownership, including the assets of includable
subsidiaries in which the association has a minority interest that is not
consolidated for GAAP purposes. For excludable subsidiaries, the debt and equity
investments in such subsidiaries are deducted from assets and capital, with a
five-year transition period beginning on July 1, 1990, for investments made
before April 12, 1989. During the transition period, the assets of the
subsidiary are consolidated for capital purposes in inverse proportion to the
level of investment that is excluded. At September 30, 1996 the Association had
$2.7 million of investments (comprised solely of the Association's investment in
ComFed Development Co.) subject to a deduction from tangible capital.
The OTS amended its risk-based capital requirements that would require
institutions with an "above normal" level of interest rate risk to maintain
additional capital. A savings association is considered to have a " normal "
level of interest rate risk if the decline in the market value of its portfolio
equity after an immediate 200 basis point increase or decrease in market
interest rates (whichever leads to the greater decline) is less than two percent
of the current estimated market value of its assets. The market value of
portfolio equity is defined as the net present value of expected cash inflows
and outflows from an association's assets, liabilities and off-balance sheet
items. The amount of additional capital that an institution with an above normal
interest rate risk is required to maintain (the "interest rate risk component")
equals one-half of the dollar amount by which its measured interest rate risk
exceeds the normal level of interest rate risk. The interest rate risk component
is in addition to the capital otherwise required to satisfy the risk-based
capital requirement. Implementation of this component has been postponed by the
OTS. The final rule was to be effective as of January 1, 1994, subject however
to a three quarter lag time in implementation. However, the OTS has recently
indicated that no savings association will be required to deduct capital for
interest rate risk until further notice.
The OTS and the FDIC generally are authorized to take enforcement
action against a savings association that fails to meet its capital
requirements, which action may include restrictions on operations and banking
activities, the imposition of a capital directive, a cease-and-desist order,
civil money penalties or harsher measures such as the appointment of a receiver
or conservator or a forced merger into another institution. In addition, under
current regulatory policy, an association that fails to meet its capital
requirements is prohibited from paying any dividends.
FEDERAL HOME LOAN BANK SYSTEM. The Association is a member of the
Federal Home Loan Bank ("FHLB") of Atlanta, which is one of the 12 regional
FHLBs. As a member of the FHLB, the Association is required to purchase and
maintain stock in the FHLB of Atlanta in an amount equal to the greater of 1% of
its aggregate unpaid residential mortgage loans, home purchase contracts or
similar obligations at the beginning of each year, or 1/20 (or such greater
fraction as established by the FHLB) of outstanding FHLB advances. During 1996,
the FHLB required all stock owners
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<PAGE>
with stock in excess of the required amount to redeem the excess stock at par.
The Association's excess was $4.5 million of which $2.0 million was redeemed
during fiscal year 1996, leaving a balance of $5.4 million at September 30,
1996. The remaining $2.5 million will be redeemed by the FHLB during fiscal year
1997. In past years, the Association has received dividends on its FHLB stock.
Such dividends were 7.25% for the fiscal years ended September 30, 1996 and
1995. Certain provisions of FIRREA require all 12 FHLBs to provide financial
assistance for the resolution of troubled savings associations and to contribute
to affordable housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions could cause rates on the FHLB advances to increase
and could affect adversely the level of FHLB dividends paid and the value of
FHLB stock in the future.
Each FHLB serves as a reserve or central bank for its members within
its assigned region. It is funded primarily from proceeds derived from the sale
of consolidated obligations of the FHLB System. It makes loans to members (i.e.,
advances) in accordance with policies and procedures established by the board of
directors of the FHLB. These policies and procedures are subject to the
regulation and oversight of the Federal Housing Finance Board (the "FHFB").
QUALIFIED THRIFT LENDER TEST. The Qualified Thrift Lender ("QTL") test,
requires that a savings association maintain either at least 65 % of its total
tangible assets in "qualified thrift investments" on an average basis in nine
out of every twelve months in accordance with the Homeowners Loan Act ("HOLA"),
or meet the requirements to qualify as a domestic building and loan association
as defined in the Internal Revenue Code of 1986, as amended ("Code").
For purposes of the test under HOLA, portfolio assets are defined as
the total assets of the savings association minus: goodwill and other intangible
assets; the value of property used by the savings association to conduct its
business; and liquid assets not to exceed 20% of the savings association's total
assets.
Under the QTL statutory and regulatory provisions, all forms of home
mortgages, home improvement loans, home equity loans, and loans on the security
of other residential real estate and mobile homes as well as consumer loans and
small business loans are "qualified thrift investments," as are shares of stock
of an FHLB, investments or deposits in other insured institutions, securities
issued by the FNMA, FHLMC, GNMA, or the RTC Financing Corporation and other
mortgage-related securities. Investments in nonsubsidiary corporations or
partnerships whose activities include servicing mortgages or real estate
development are also considered qualified thrift investments in proportion to
the amount of primary revenue such entities derive from housing-related
activities. Also included in qualified thrift investments are mortgage servicing
rights, whether such rights are purchased by the insured institution or created
when the institution sells loans and retains the right to service such loans.
A savings institution that fails to become or maintain its status as a
qualified thrift lender must either become a bank (other than a savings and loan
association) or be subject to certain restrictions. A savings institution that
fails to meet the QTL test and does not convert to a bank will be: (1)
prohibited from making any investment or engaging in activities that would not
be permissible for national banks; (2) prohibited from establishing any new
branch office where a national bank located in the savings institution's home
state would not be able to establish a branch office; (3) ineligible to obtain
new advances from any FHLB; and (4) subject to limitations on the payment of
dividends comparable to the statutory and regulatory dividend restrictions
applicable to national banks. Also, beginning three years after the date on
which the savings institution ceases to be a qualified thrift lender, the
savings institution would be prohibited from retaining any investment or
engaging in any activity not permissible for a national bank and would be
required to repay any outstanding advances to any FHLB. A savings institution
may requalify as a qualified thrift lender if it thereafter complies with the
QTL test.
As of September 30, 1996, the Association was in compliance with the
QTL requirement with approximately 79.1% of the Association's assets being
"qualified thrift investments."
LIQUIDITY REQUIREMENTS. Federally insured savings associations are
required to maintain an average daily balance of liquid assets equal to a
certain percentage of the sum of average daily balances of net withdrawable
deposit accounts and borrowings payable in one year or less. The liquidity
requirement may vary from time to time (between 4.0% and 10.0%) depending upon
economic conditions and savings flows of all savings associations. At the
present time, the required liquid asset ratio is 5.0%.
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For purposes of this ratio, liquid assets include specified short-term
assets (such as cash, certain time deposits, certain bankers' acceptances and
short-term United States Treasury obligations), and long-term assets such as
United States Treasury obligations of more than one and less than five years and
federal agency obligations with a minimum term of 18 months. Short-term liquid
assets currently must constitute at least 1% of an association's average daily
balance of net withdrawable deposit accounts and current borrowings. Penalties
may be imposed upon associations for violations of the liquidity requirements.
The monthly average liquidity ratio of the Association for September 1996 was
11.4% and exceeded the then applicable requirement of 5.0%.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC. The Association's
deposits are insured up to $100,000 per insured member (as defined by law and
regulation) by the FDIC. This insurance is backed by the full faith and credit
of the United States Government. As insurer, the FDIC is authorized to conduct
examinations of and to require reporting by insured associations. It also may
prohibit any insured association from engaging in any activity the FDIC
determines by regulation or order to pose a serious threat to the insurance
fund. The FDIC also has the authority to initiate enforcement actions against
savings associations, after first giving the OTS an opportunity to take such
action.
Pursuant to the FDICIA, the FDIC has issued a new regulation that
imposes, on a transitional basis, a risk-based deposit insurance premium based
on the condition of the insured institution, and that increases the average
assessment rate paid by insured institutions. The risk-based system, which
applies to insured members, establishes nine assessment risk classifications; an
institution assigned to the highest risk classification will pay deposit
insurance premiums at a rate of 0.31 % while an institution assigned to the
lowest risk classification will pay a premium of 0.23 %. However, the FDIC has
recently adopted final rules which adjust such premium levels between 0% and
.27%.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines, after a hearing, that the institution has engaged
or is engaging in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations or has violated any applicable law, regulation,
order, or any condition imposed by an agreement with the FDIC. The FDIC also may
suspend deposit insurance temporarily for any savings association during the
hearing process for the permanent termination of insurance, if the association
has no tangible capital. If insurance of accounts is terminated, the insured
accounts at the institution at the time of the termination, less subsequent
withdrawals, shall continue to be insured for a period of six months to two
years, as determined by the FDIC.
OTS REGULATORY ASSESSMENTS. As a result of FIRREA, the OTS will not
receive funds from contributions of the FHLBs and the insurance funds in order
to fund its operations. The OTS has adopted a regulation to assess fees to fund
its operations and expenses. These fees include: ( i) semi-annual assessments
based on the consolidated assets of a savings association; (ii) fees of $485 per
day, per examiner, to cover the costs of examinations of savings associations,
holding companies, subsidiaries, and their affiliates; (iii) application fees
which apply to nearly all regulatory and securities applications and filings;
and (iv) fees to recover the costs of OTS seminars and publications. Based on
its assets at September 30, 1996, the Association is required to pay a
semi-annual assessment of approximately $71,000.
LIMITATIONS ON CAPITAL DISTRIBUTIONS. OTS regulations impose
limitations on all capital distributions by savings institutions. Capital
distributions include cash dividends, payments to repurchase or otherwise
acquire the savings association's shares, payments to stockholders of another
institution in a cash-out merger, and other distributions charged against
capital. The rule establishes three tiers of institutions. An institution that
exceeds all fully phased-in capital requirements before and after a proposed
capital distribution ("Tier 1 Association") may, after prior notice but without
the approval of the OTS, make capital distributions during a calendar year up to
the greater of (i) 100% of its net income to date during the calendar year plus
the amount that would reduce by one-half its surplus capital at the beginning of
the calendar year or (ii) 75% of its net income over the most recent
four-quarter period. Any additional capital distributions would require prior
regulatory approval. An institution that meets its minimum regulatory capital
requirement before and after its capital distribution ("Tier 2 Association")
may, after prior notice but without the approval of the OTS, make capital
distributions of up to 75% of its net income over the most recent four quarter
period. A savings institution that does not meet its current regulatory capital
requirement before or after payment of a proposed capital distribution or has
been notified that it needs more than normal supervision ("Tier 3 Association")
may not make any capital distributions without the prior approval of the OTS. As
of September 30, 1996, the Association was a Tier 1 Association.
33
<PAGE>
LOAN-TO-VALUE LIMITATIONS. As required by FDICIA, the banking agencies,
including the OTS, recently adopted regulations that require insured depository
institutions to adopt and maintain a written policy that establishes appropriate
limits and standards for extensions of credit that are secured by liens on or
interests in real estate, or are made for the purpose of constructing buildings
or other improvements. In addition, the regulations establish maximum
loan-to-value limits for certain categories of loans. A loan-to-value limit has
not been established for permanent mortgage or home equity loans on
owner-occupied, one- to four-family residential property. The regulations state
that for my such loan with a loan-to-value ratio that equals or exceeds 90% at
origination, an institution should require appropriate credit enhancement in the
form of either mortgage insurance or readily marketable collateral. The
Association's current internal loan-to-value limits are less than the maximum
established by the regulation.
HOLDING COMPANY REGULATION
Upon completion of the Reorganization, the Holding Company became a
mutual savings and loan holding company within the meaning of Section 10(o) of
the HOLA. As such, the Holding Company is registered with and is subject to OTS
examination and supervision as well as certain reporting requirements. In
addition, the operations of the Holding Company are subject to the Regulations
as well as other regulations promulgated by the OTS from time to time. As an
insured subsidiary of a savings and loan holding company, the Association is
subject to certain restrictions in dealing with the Holding Company and with
other persons affiliated with the Holding Company, and continues to be subject
to examination and supervision by the OTS and the FDIC.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, from: (i) acquiring control (as defined) of another insured
institution (or holding company thereof) without prior OTS approval; (ii)
acquiring more than 5% of the voting shares of another insured institution (or
holding company thereof which is not a subsidiary), subject to certain
exceptions; (iii) acquiring through merger, consolidation or purchase of assets,
another savings association or holding company thereof, or acquiring all or
substantially all of the assets of such institution (or holding company thereof)
without prior OTS approval; or (iv) acquiring control of a savings association
not insured by the SAIF (except through a merger with and into the holding
company's savings association subsidiary that is approved by the OTS). A savings
and loan holding company may acquire up to 15% of the voting shares of an
undercapitalized savings association. A savings and loan holding company may not
acquire as a separate subsidiary an insured institution that has principal
offices outside of the state where the principal offices of its subsidiary
institution is located, except: (i) in the case of certain emergency
acquisitions approved by the FDIC; (ii) if the holding company controlled (as
defined) such insured institution as of March 5, 1987; or (iii) if the laws of
the state in which the insured institution to be acquired is located
specifically authorize a savings association chartered by that state to be
acquired by a savings association chartered by the state where the acquiring
savings association or savings and loan holding company is located, or by a
holding company that controls such a state chartered association. No director or
officer of a savings and loan holding company or person owning or controlling
more than 25% of such holding company's voting shares may, except with the prior
approval of the OTS, acquire control of any SAIF-insured institution that is not
a subsidiary of such holding company. If the OTS approves such an acquisition,
any holding company controlled by such officer, director or person shall be
subject to the activities limitations that apply to multiple savings and loan
holding companies, unless certain supervisory exceptions apply.
34
<PAGE>
RESTRICTIONS APPLICABLE TO MUTUAL HOLDING COMPANIES. Pursuant to
Section 10(o) of the HOLA and the Regulations, a mutual holding company may
engage in the following activities:
(i) Investing in the stock of a savings association.
(ii) Acquiring a mutual association through the merger of
such association into a savings association subsidiary
of such holding company or an interim savings
association subsidiary of such holding company.
(iii) Merging with or acquiring another holding company, one
of whose subsidiaries is a savings association.
(iv) Investing in a corporation the capital stock of which is
available for purchase by a savings association under
federal law or under the law of any state where the
subsidiary savings association or associations share
their home offices.
(v) Furnishing or performing management services for a
savings association subsidiary of such company.
(vi) Holding, managing, or liquidating assets owned or
acquired from a savings association subsidiary of such
company.
(vii) Holding or managing properties used or occupied by a
savings association subsidiary of such company.
(viii) Acting as trustee under deed of trust.
(ix) Any other activity (A) that the Federal Reserve Board,
by regulation, has determined to be permissible for bank
holding companies under section 4(c) of the Bank Holding
Company Act of 1956, unless the Director, by regulation,
prohibits or limits any such activity for savings and
loan holding companies; or (B) in which multiple savings
and loan holding companies were authorized (by
regulation) to directly engage on March 5, 1987.
(x) Purchasing, holding, or disposing of stock acquired in
connection with a qualified stock issuance if the
purchase of such stock by such savings and loan holding
company is approved by the Director of the OTS.
If a mutual holding company acquires or merges with another holding
company, the holding company acquired or the holding company resulting from such
merger or acquisition may only invest in assets and engage in activities listed
in (i) through (x) above, and has a period of two years to cease any
non-conforming activities and divest of any nonconforming investments.
TRANSACTIONS WITH AFFILIATES
Section 11 of HOLA provides that transactions between an insured
subsidiary of a holding company and an affiliate thereof will be subject to the
restrictions that apply to transactions between banks that are members of the
Federal Reserve System and their affiliates pursuant to Sections 23A and 23B of
the Federal Reserve Act ("FRA"). Generally, Sections 23A and 23B: (i) limit the
extent to which a financial institution or its subsidiaries may engage in
"covered transactions" with an "affiliate," to an amount equal to 10% of the
institution's capital and surplus, and limit all "covered transactions" in the
aggregate with all affiliates to an amount equal to 20% of such capital and
surplus; and (ii) require that all transactions with an affiliate, whether or
not "covered transactions," be on terms substantially, the same, or at least as
favorable to the institution or subsidiary as those provided to a non-affiliate.
The term "covered transaction" includes the making of loans, purchase of assets,
issuance of a guarantee and similar types of transactions. Management believes
that the Association is in compliance with the requirements of Sections 23A and
23B. In addition to the restrictions that apply to financial institutions
generally under Sections 23A and 23B, Section 11 of the HOLA places three other
restrictions on savings associations, including those that are part of a holding
company organization. First,
35
<PAGE>
savings associations may not make any loan or extension of credit to an
affiliate unless that affiliate is engaged only in activities permissible for
bank holding companies. Second, savings associations may not purchase or invest
in affiliate securities except for those of a subsidiary. Finally, the Director
is granted authority to impose more stringent restrictions when justifiable for
reasons of safety and soundness.
Extensions of credit by the Association to executive officers,
directors, and principal shareholders and related interests of such persons are
subject to Sections 22 (g) and 22(h) of the FRA and Subpart A of the Federal
Reserve Board's Regulation 0. These rules prohibit loans to any such individual
where the aggregate amount exceeds an amount equal to 15% of an institution's
unimpaired capital and surplus plus an additional 10% of unimpaired capital and
surplus in the case of loans that are fully secured by readily marketable
collateral, and/or when the aggregate amount outstanding to all such individuals
exceeds the institution's unimpaired capital and unimpaired surplus. The rules
identify limited circumstances in which an institution is permitted to extend
credit to executive officers. Management believes that the Association is in
compliance with Sections 22(g) and 22(h) of the FRA and Subpart A of the Federal
Reserve Board's Regulation 0.
THE FEDERAL RESERVE SYSTEM
Federal Reserve Board regulations require all depository institutions
to maintain non-interest earning reserves against their transaction accounts
(primarily NOW and Super NOW checking accounts) and non-personal time deposits.
At September 30, 1996, the Association was in compliance with these reserve
requirements. The balances maintained to meet the reserve requirements imposed
by the Federal Reserve Board may be used to satisfy liquidity requirements that
may be imposed by the OTS.
Savings associations are authorized to borrow from a Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require savings
associations to exhaust other reasonable alternative sources of funds, including
FHLB advances, before borrowing from a Federal Reserve Bank.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
For federal income tax purposes, the Association files a federal income
tax return on a fiscal year basis. Since the Holding Company owns less than 80%
of the outstanding Common Stock of the Association, the Holding Company is not
permitted to file a consolidated federal income tax return with the Association.
Because the Holding Company has nominal assets other than the stock of the
Association, it has no material federal income tax liability.
The Holding Company and the Association are subject to the rules of
federal income taxation generally applicable to corporations under the Code.
Most corporations are not permitted to make deductible additions to bad debt
reserves under the Code. However, savings and loan associations and savings
associations such as the Association, which meet certain tests prescribed by the
Code may benefit from favorable provisions regarding deductions from taxable
income for annual additions to their bad debt reserve. For purposes of the bad
debt reserve deduction, loans are separated into "qualifying real property
loans," which generally are loans secured by interests in real property, and
non-qualifying loans, which are all other loans. The bad debt reserve deduction
with respect to non-qualifying loans must be based on actual loss experience.
The amount of the bad debt reserve deduction with respect to qualifying real
property loans may be based upon actual loss experience (the "experience
method") or a percentage of taxable income determined without regard to such
deduction (the "percentage of taxable income method").
The Association has elected to use the method that results in the
greatest deduction for federal income tax purposes, which historically has been
the percentage of taxable income method. The amount of the bad debt deduction
that a thrift institution may claim with respect to additions to its reserve for
bad debts is subject to certain limitations. First, the full deduction is
available only if at least 60% of the institution's assets fall within certain
designated categories. Second, under the percentage of taxable income method the
bad debt deduction attributable to "qualifying real property loans" cannot
exceed the greater of (i) the amount deductible under the experience method or
(ii) the amount which, when added to the bad debt deduction for non-qualifying
loans, equals the amount by which 12% of the sum of the total deposits and the
advance payments by borrowers for taxes and insurance at the end of the taxable
years exceeds the sum of the surplus, undivided profits, and reserves at the
beginning of the taxable year. Third, the amount of the bad debt deduction
36
<PAGE>
attributable to qualifying real property loans computed using the percentage of
taxable income method is permitted only to the extent that the institution's
reserve for losses on qualifying real property loans at the close of the taxable
year does not exceed 6% of such loans outstanding at such time.
In August 1996, Congress passed legislation which repeals the
Association's present method of accounting for bad debts for federal income tax
purposes. As discussed in Note 13 to the Consolidated Financial Statements in
the Annual Report, the Association currently uses the percentage of taxable
income method to determine its bad debt deduction in the computation of its
taxable income. Under the new legislation, the Association will be required to
use the specific charge-off method, which may result in a different deduction
for bad debts in determining taxable income than as presently computed under its
current method. Additionally, the Association will be required to recapture its
post-1987 additions to its bad debt reserves over a six-taxable year period,
subject to an extension of up to two years if certain residential lending
requirements are met. As the Association had provided deferred taxes for the
income tax bad debt reserves established after 1987, management does not
anticipate any additional income tax liability related to the recapture. The new
legislation is effective for taxable years beginning after December 31, 1995.
Deferred income taxes arise from the recognition of certain items of
income and expense for tax purposes in years different from those in which they
are recognized in the financial statements. In February 1992, the FASB issued
SFAS 109 "Accounting for Income Taxes." SFAS 109 was implemented by the
Association retroactively, effective October 1, 1993. The liability method
accounts for deferred income taxes by applying the enacted statutory rates in
effect at the balance sheet date to differences between the book cost and the
tax cost of assets and liabilities. The resulting deferred tax liabilities and
assets are adjusted to reflect changes in tax laws.
The Association is subject to the corporate alternative minimum tax
which is imposed to the extent it exceeds the Association's regular income tax
for the year. The alternative minimum tax will be imposed at the rate of 20% of
a specially computed tax base. Included in this base will be a number of
preference items, including the following: (i) 100% of the excess of a thrift
institution's bad debt deduction over the amount that would have been allowable
on the basis of actual experience; and (ii) interest on certain tax-exempt bonds
issued after August 7, 1986. In addition. for purposes of the new alternative
minimum tax, the amount of alternative minimum taxable income that may be offset
by net operating losses is limited to 90% of alternative minimum taxable income.
The Association was audited by the Internal Revenue Service ("IRS") for
the tax year 1990 during fiscal year 1994. Based upon the audit the Association
received a "no-change" letter from the IRS. See Notes 1 and 13 to the Notes to
the Consolidated Financial Statements in the Annual Report. The Association has
not been audited by the State of Florida.
STATE TAXATION
Under the laws of the State of Florida, the Association and its
subsidiaries are generally subject to 5.5% tax on net income. The tax may be
reduced by a credit of up to 65% (40% prior to July 1, 1990) of the tax due as a
result of certain intangible taxes. The tax is deductible by the Association in
determining its federal income tax liability.
PERSONNEL
As of September 30, 1996, the Association had 206 full-time and 66
part-time employees. None of the Association's employees is represented by a
collective bargaining group. The Association believes its relationship with its
employees to be good.
37
<PAGE>
ITEM 2. PROPERTIES
- -------------------------------
The Association conducts its business through its home office located
in North Palm Beach, Florida, and 17 full service branch offices, and one loan
processing office located in Palm Beach, Martin, St. Lucie and Indian River
Counties. The following table sets forth certain information concerning the home
office, each branch office and the loan processing office of the Association at
September 30, 1996. The aggregate net book value of the Association's premises
and equipment was $16.4 million at September 30, 1996. For additional
information regarding the Association's properties, see Note 9 to the Notes to
the Consolidated Financial Statements in the Annual Report.
LOCATION OPENING DATE OWNED/LEASE
Home Office 02/19/88 Owned
660 U.S. Highway I
North Palm Beach, Florida
BRANCH OFFICES
- --------------
Riviera Beach 08/19/55 Owned
2600 Broadway
Riviera Beach, Florida
Tequesta 07/19/59 Owned
101 N. U.S. Highway 1
Tequesta, Florida
Port Salerno 11/05/74 Owned
5545 SE Federal Highway
Port Salerno, Florida
Palm Beach Gardens 12/19/74 Owned
9600 N. Alternate AlA
Palm Beach Gardens, Florida
Jensen Beach 01/28/75 Owned
1170 NE Jensen Beach Blvd.
Jensen Beach, Florida
Singer Island 04/01/75 Owned
1100 East Blue Heron Blvd.
Riviera Beach, Florida
Gallery Square 01/30/76 Lease(1)
389 Tequesta Drive
Tequesta, Florida
Ft. Pierce 07/23/85 Owned
1050 Virginia Ave.
Ft. Pierce, Florida
Port St. Lucie 07/30/84 Lease(2)
1540 SE Floresta Drive
Port St. Lucie, Florida
38
<PAGE>
LOCATION OPENING DATE OWNED/LEASE
- -------- ------------ -----------
Martin Downs 07/24/85 Lease(3)
3102 Martin Downs Blvd.
Palm City, Florida
Chasewood 02/26/86 Lease(4)
6350 Indiantown Rd., Suite 1
Jupiter, Florida
Bluffs 09/18/86 Lease(5)
3950 U.S. Highway I
Jupiter, Florida
Village Commons 06/26/89 Lease(6)
971 Village Boulevard
West Palm Beach, Florida
Hobe Sound 02/05/90 Owned
11400 SE Federal Highway
Hobe Sound, Florida
St. Lucie West 06/06/94 Owned
1549 St. Lucie West Blvd.
Port St. Lucie, Florida
Jupiter 07/10/95 Owned
520 Toney Penna Drive
Jupiter, Florida
PGA 04/22/96 Lease(7)
PGA Shoppes on the Green
7102 Fairway Drive
Palm Beach Gardens, Florida
Vero Loan Processing Office 12/01/95 Lease(8)
Univest Building
Vero Beach, Florida
(1)This lease expires on December 31, 2000 and provides for a renewal option
which runs through December 31, 2015
(2)This lease expires on January 31, 1999and provides for a renewal option which
runs through January 31, 2004.
(3)Thislease expires on August 8, 1998 and provides for a renewal option which
runs through August 8, 2004.
(4)This lease expires on January 31, 1998 and provides for a renewal option
which runs through January 31, 2006.
(5)This lease expires on October 31, 2001 and provides for a renewal option
which runs through October31, 2016.
(6)This lease expires on June 25, 2004 and provides for a renewal option which
runs through June 25, 2014.
(7)This lease expires on December 31,2000 and provides for a renewal option
which runs through December 31, 2005.
(8)This lease is on a month-to-month basis with no stated expiration date.
39
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
- -----------------------------------
There are various claims and lawsuits in which the Association is
periodically involved incident to the Association's business. In the opinion of
management, no material loss is expected from any of such pending claims or
lawsuits. See Note 14 in the Notes to the Consolidated Financial Statements in
the Annual Report, attached hereto as Exhibit 13.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ---------------------------------------------------------------------
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS
- --------------------------------------------------------------------------------
The Association had 5,090,120 issued and outstanding shares at
September 30, 1996. For information concerning the market for the Association's
common stock, see the section captioned "Corporate Information" in the
Association's Annual Report which is incorporated herein by reference.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
- --------------------------------------------------------------------------------
The "Financial Highlights" section of the Association's Annual Report
is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section of the Association's Annual Report is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The financial statements identified in Item 14(a)(1) hereof are
incorporated by reference to the Association's Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
- --------------------------------------------------------------------------------
There were no changes in or disagreements with the accountants in the
Association's accounting and financial disclosure during fiscal 1996.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
- -------------------------------------------------------------------------------
Information concerning Directors and Executive Officers of the
Association is incorporated herein by reference from the Association's
definitive Proxy Statement for the Annual Meeting of Shareholders dated December
19, 1996 (the "Proxy Statement"), specifically the section captioned
"Information with Respect to Nominees for Directors, Directors Whose Term
Continues and Executive Officers".
40
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
- -------------------------------
Information concerning executive compensation is incorporated herein by
reference from the Association's Proxy Statement, specifically the sections
captioned "Management Compensation".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- --------------------------------------------------------------------------------
Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the Association's Proxy
Statement, specifically the section captioned "Beneficial Ownership of Common
Stock by Certain Beneficial Owners and Management".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------------------------------
Information concerning relationships and transactions is incorporated
herein by reference from the Association's Proxy Statement, specifically the
section captioned "Indebtedness of Management and Affiliated Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
- --------------------------------------------------------------------------------
The exhibits and financial statement schedules filed as a part of this
Form 10-K are as follows:
(a)(1) FINANCIAL STATEMENTS
--------------------
Independent Auditors' Report
Consolidated Statements of Financial Condition,
September 30, 1996 and 1995
Consolidated Statements of Operations,
Years Ended September 30, 1996, 1995 and 1994
Consolidated Statements of Shareholders' Equity,
Years Ended September 30, 1996, 1995 and 1994
Consolidated Statements of Cash Flows,
Years Ended September 30, 1996, 1995 and 1994
Notes to Consolidated Financial Statements.
(a)(2) FINANCIAL STATEMENT SCHEDULES
-----------------------------
No financial statement schedules are filed because the
required information is not applicable or is included in the
consolidated financial statements or related notes.
(a)(3) EXHIBITS
--------
*3.1 Federal Stock Charter of Community Savings, F. A.
(Incorporated by reference to Exhibit 2(C)(1) of
the Association's Form MHC-1, as amended)
*3.2 Bylaws of Community Savings, F. A. (Incorporated by
reference to Exhibit 2(C)(2) of the Association's
Form MHC-1, as amended)
*4 Common Stock Certificate of the Association
(Incorporated by reference to Exhibit 2(B)(1) of
the Association's Form MHC-1, as amended)
*10.1 Employee Stock Ownership Plan (Incorporated by
reference to Exhibit 2(D)(1) of the Association's
Form MHC-1, as amended)
*10.2 1995 Stock Option Plan (Incorporated by reference
to Exhibit 10.2 of the Association's Form 10-K for
the year ended September 30, 1994).
41
<PAGE>
*10.3 1995 Recognition and Retention Plan for Employees
and Outside Directors (Incorporated by reference to
Exhibit 10.3 of the Association's Form 10-K for the
year ended September 30, 1994.)
13 1996 Annual Report to Shareholders
21 Subsidiaries of the Registrant - Reference is made
to Item 1 "Business" for the required information
(b) REPORTS ON FORM 8-K:
--------------------
The Association did not file any Current Reports on Form 8-K
in the fourth quarter of fiscal year 1996.
(c) The exhibits listed under (a)(3) above are filed herewith.
(d) Not applicable.
------------------------
*Previously filed.
42
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, F. A.
Date: December 23, 1996 By: /s/ JAMES B. PITTARD, JR.
-------------------------
James B. Pittard, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
By: /s/ James B. Pittard, Jr. By: /s/ Larry J. Baker, CPA
------------------------------------------ ------------------------------------------------
James B. Pittard, Jr., President and Chief Larry J. Baker, CPA, Senior Vice President,
Executive Officer Chief Financial Officer and Treasurer
Principal Executive Officer) (Principal Financial and Accounting Officer)
Date: December 23, 1996 Date: December 23, 1996
By: /s/ FREDERICK A. TEED By: /s/ FOREST C. BEATY, JR.
--------------------------------------- ------------------------------------------------
Frederick A. Teed, Chairman of the Board Forest C. Beaty, Jr., Director
Date: December 23, 1996 Date: December 23, 1996
By: /s/ ROBERT F. CROMWELL By: /s/ KARL D. GRIFFIN
------------------------------------------ ------------------------------------------------
Robert F. Cromwell, Director Karl D. Griffin, Director
Date: December 23, 1996 Date: December 23, 1996
By: /s/ HAROLD I. STEVENSON
-----------------------
Harold I. Stevenson, CPA, Director
Date: December 23, 1996
</TABLE>
43
<PAGE>
EXHIBIT 13
1996 ANNUAL REPORT TO SHAREHOLDERS
44
<PAGE>
[Cover of annual report with graphic logo]
Community Savings, F.A.
Annual Report
1996
<PAGE>
TABLE OF CONTENTS
President's Message 2
Financial Highlights 3
Locations 4
Management's Discussion and Analysis 5
Independent Auditors' Report 16
Consolidated Statements of Financial Condition 17
Consolidated Statements of Operations 18
Consolidated Statements of Changes in Shareholders' Equity 19
Consolidated Statements of Cash Flows 20
Notes to Consolidated Financial Statements 21
Corporate Directory 46
Corporate Information 47
1
<PAGE>
[PICTURE OF JAMES B. PITTARD, JR. PRESIDENT OF COMMUNITY SAVINGS, F. A.]
Dear Fellow Shareholders:
Fiscal year 1996 represents our second complete year as a public company. This
year was a significant year for us based upon our growth as a company. It was
also significant because some very important legislation was passed by Congress
on September 30, 1996, which affected all Savings Association Insurance Fund
("SAIF") insured financial institutions. This legislation was a portion of the
Deposit Insurance Funds Act of 1996. Under this bill, Community Savings is
required to pay approximately $2.8 million to increase the SAIF fund of the
Federal Deposit Insurance Corporation ("FDIC") to the required 1.25% level of
insured deposits. Beginning in 1997, the SAIF premium expense for Community
Savings will drop from $1.2 million annually to around $325,000 per year. This
will result in an annual expense savings of approximately $875,000.
Net income for our fiscal year ended September 30, 1996, PRIOR to the SAIF
special assessment, was $5.7 million or $1.16 per share, a 23% increase in our
earnings, as compared to our previous year's income of $4.6 million or $0.94 per
share. AFTER the recognition of the SAIF special assessment, Community Savings
earned net income for the year ended September 30, 1996, of $3.9 million or
$0.79 per share.
As indicated earlier, we experienced significant growth during the last twelve
months. Assets increased $83.3 million to $650.3 million at September 30, 1996
from $567.0 million at September 30, 1995. The increase in total assets was
primarily due to a $46.8 million increase in the Association's loan portfolio as
well as a $37.3 million increase in the Association's securities portfolio.
These increases resulted from the Association's decision to expand its balance
sheet, which included the implementation of a new incentive-based loan
origination program as well as the acquisition of specific investment
transactions. The increase in total assets was funded primarily by a $61.6
million increase in deposits to $498.9 million at September 30, 1996 as compared
to $437.4 million at September 30, 1995. The deposit increase resulted from
increases in our retail deposits and public fund deposits. Additionally, some of
the specific investment transactions were funded by an $18.2 million increase in
Federal Home Loan Bank ("FHLB") advances. Shareholders' equity increased to
$75.1 million or $15.33 per share at September 30, 1996 from $72.8 million or
$15.04 per share at September 30, 1995, reflecting the net income for the year
less the dividends paid to our shareholders.
Our Board of Directors is always concerned about shareholder value and
recognizes the importance of the dividends we pay to you, our shareholders. On
June 30, 1996, our dividend was increased to $.20 per share per quarter,
resulting in a current annual payment per share of $.80. Since Community Savings
became a public company, dividends have grown from $.45 per share per year to
$.80 per share per year, which is a 78% increase.
This year, Community Savings opened its 18th office in the Shoppes on the Green
in the PGA National community. During 1996, an enhancement to Community Savings'
electronic banking was established with the implementation of our website on the
Internet. We see great potential convenience for our customers through the use
of electronic banking. Community Savings already offers several electronic
banking services to keep our customers in touch with their accounts through
ATM's, automatic funds transfer, Informline voice response system, and VISA
CheckCard.
Many exciting things are happening at Community Savings and none of them would
be possible without our biggest asset --our customers. We value all of our
customers and want to earn the privilege every day to be their primary financial
institution. On behalf of all our loyal and dedicated employees, our officers,
and our directors, we would like to thank you for your vote of confidence by
owning shares in our company.
We look forward to another successful year in 1997.
/s/ James B. Pittard, Jr.
- -------------------------------------
James B. Pittard, Jr.
President and Chief Executive Officer
2
<PAGE>
FINANCIAL HIGHLIGHTS
Community Savings' common stock trades on the Nasdaq National Market under the
symbol "CMSV".
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
FOR THE YEAR (In Thousands)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $ 43,889 $ 37,720 $ 34,130 $ 39,747 $ 48,438
Interest expense 22,859 18,634 15,525 17,639 25,299
Net interest income 21,030 19,086 18,605 22,108 23,139
Net income 3,915 4,574 3,737 5,401 7,221
AVERAGE FOR THE YEAR (In Thousands)
- ------------------------------------------------------------------------------------------------------------
Assets $612,004 $544,555 $528,286 $532,222 $553,119
Loans receivable, net 346,880 321,849 321,721 352,173 416,139
Cash and cash equivalents 48,367 53,736 40,946 36,356 25,677
Mortgage-backed securities 99,959 53,349 28,843 15,428 23,674
Investments - held to maturity and securities
available for sale 87,280 130,094 106,031 92,897 47,809
Deposits 478,955 429,893 452,070 455,816 464,188
Borrowed funds 42,416 29,086 23,657 27,040 45,122
Shareholders' equity 74,638 69,263 36,376 31,734 25,707
YEAR END (In Thousands)
- ------------------------------------------------------------------------------------------------------------
Assets $650,332 $567,006 $560,268 $523,248 $540,764
Loans receivable net 376,219 329,442 317,117 328,747 382,326
Cash and cash equivalents 44,780 42,497 89,843 35,188 33,142
Mortgage-backed securities 54,945 77,499 41,281 14,290 17,742
Investments - held to maturity 22,293 59,679 52,204 43,789 29,983
Securities available for sale 124,287 27,028 26,729 69,459 39,128
Real estate owned 1,384 1,910 3,686 1,324 4,455
Deposits 498,929 437,376 459,979 450,356 459,918
Borrowed funds 55,867 39,101 19,233 20,113 31,994
Shareholders' equity 75,056 72,848 38,110 34,846 29,445
SIGNIFICANT PERFORMANCE RATIOS
- ------------------------------------------------------------------------------------------------------------
Return on average assets 0.64% 0.84% 0.71% 1.01% 1.31%
Return on average equity 5.25 6.60 10.27 17.02 28.09
Interest rate spread 3.24 3.40 3.69 4.43 4.55
Equity to assets at period end 11.54 12.85 6.80 6.65 5.45
Non-interest income to average assets 0.55 0.62 0.63 0.96 0.97
Non-interest expense to average assets 3.20 2.74 2.82 2.93 2.77
Non-performing loans to total loans 0.22 0.20 0.93 2.05 1.03
Non-performing assets to total assets 0.40 0.45 1.25 1.54 1.55
Allowance for loan losses to non-performing loans 274.58 527.49 114.72 55.65 57.72
Allowance for loan losses to net loans receivable 0.61 1.06 1.07 1.14 0.60
</TABLE>
3
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[This page dedicated for the Location Map.]
[GRAPHIC MAP DEPICTING INDIAN RIVER COUNTY, ST. LUCIE COUNTY,
MARTIN COUNTY AND PALM BEACH GARDENS IN RELATION
TO THE ENTIRE STATE OF FLORIDA]
PALM BEACH COUNTY
Bluffs (Jupiter), 3950 U.S. Highway One
Chasewood (Jupiter, 6350 Indiantown Road
Jupiter, 520 Toney Penna Drive
North Palm Beach, 660 U.S. Highway One
Shoppes on the Green (PGA), 7102 Fairway Drive
Palm Beach Gardens, 9600 N. Alternate A1A
Riviera Beach, 2600 Broadway
Singer Island, 1100 E. Blue Herron Boulevard
Tequesta, 101 N. U.S. Highway One
Gallery Square (Tequesta), 389 Tequesta Drive
Village Commons (West Palm Beach), 971 Village Boulevard
MARTIN COUNTY
Hobe Sound, 11400 SE Federal Highway
Jensen Beach, 1170 NE Jensen Beach Boulevard
Martin Downs (Palm City), 3102 Martin Downs Boulevard
Port Salerno, 5545 SE Federal Highway
ST. LUCIE COUNTY
Fort Pierce, 1050 Virginia Avenue
Port St. Lucie, 1540 SE Floresta Drive
St. Lucie West, 1549 St. Lucie West Boulevard
INDIAN RIVER COUNTY
Vero Beach Loan Production Office, 2770 Indian River Boulevard, Suite #319
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
Community Savings, F. A. (the "Association" or "Community"), 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 FDIC
through the SAIF. The Association has been a member of the FHLB of Atlanta since
1955. On October 24, 1994, Community Savings successfully completed a stock
offering by issuing 5,000,000 shares of common stock of which 47.6% or 2,379,856
shares were purchased at $15.00 a share by the public and 2,620,144 shares were
issued to the Association's newly formed mutual holding company, ComFed M. H. C.
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 borrowings, to invest in various consumer-based real estate
loans and investment grade securities. Community's plan is to operate as a
well-capitalized, profitable and independent institution. The Association's
profitability is highly dependent on its net interest income which, in turn, is
a function of the relative amounts of interest-earning assets and
interest-bearing liabilities, combined with the rates earned or paid on such
rate-sensitive instruments. The Association manages 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 originating or purchasing mainly
secured or guaranteed assets.
LIQUIDITY AND CAPITAL RESOURCES
The Association is required to maintain minimum levels of liquid assets as
defined by Office of Thrift Supervision ("OTS") regulations. This requirement,
which varies from time to time depending upon economic conditions and deposit
flows, is based upon a percentage of deposits and short-term borrowings. The
required ratio currently is 5.0%. The Association's liquidity ratio averaged
11.4% during the month of September 1996 and 14.8% for fiscal 1996. 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.
The Association's primary sources of funds are deposits, amortization and
prepayment of loans and mortgage-backed securities, maturities of investment
securities and other short-term investments, FHLB advances, and earnings and
funds provided from operations. While scheduled principal repayments on loans
and mortgage-backed 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 to maintain a desired deposit balance. In addition, the
Association invests excess funds in short-term interest-earning and other
assets, which provide liquidity to meet lending requirements. Short-term
interest-bearing deposits with the FHLB of Atlanta amounted to $28.6 million at
September 30, 1996. Other assets qualifying for liquidity outstanding at
September 30, 1996 amounted to $34.7 million. 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. For additional
information about cash flows from the Association's operating, financing, and
investing activities, see 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 the Association requires funds beyond its ability to generate
them internally, borrowing agreements exist with the FHLB of Atlanta which
provide an additional source of funds. At September 30, 1996, the Association
had $36.4 million in advances from the FHLB of Atlanta. At September 30, 1996,
the Association had outstanding loan commitments, excluding the unfunded portion
of loans in process of $17.6 million and commitments to purchase loans of
$619,000. Certificates of deposit scheduled to mature in less than one year at
September 30, 1996, totaled $240.2 million. Based on prior experience,
management believes that a significant portion of such deposits will remain with
the Association.
The deposits of savings and loan associations, such as the Association, are
presently insured by the SAIF. SAIF and the Bank Insurance Fund ("BIF") are the
two insurance funds administered by the FDIC. On August 8, 1995, in recognition
of BIF achieving its mandated reserve ratio, the FDIC revised the premium
schedule for BIF members to provide a new range of .04% to .31% of deposits (as
compared to the current range of .23% to .31% of deposits for BIF and SAIF
insured institutions). Subsequent revisions in such schedule resulted in most
BIF-insured institutions paying the statutory annual minimum premium of $2,000.
As a result, well capitalized and healthy BIF members pay significantly lower
premiums than SAIF-insured institutions.
5
<PAGE>
Without a substantial increase in premium rates, or the imposition of special
assessments or other significant developments, such as a merger of SAIF and BIF,
it was not anticipated that SAIF would be adequately recapitalized until 2002.
As a result of the disparity in BIF and SAIF premium rates, SAIF members were
placed at a significant competitive disadvantage in relation to BIF members with
respect to pricing of loans and deposits and the ability to lower their
operating costs.
On September 30, 1996 Congress passed, and the President signed, the Deposit
Insurance Funds Act of 1996 which mandated that all institutions which have
deposits insured by SAIF are required to pay a one-time special assessment of
65.7 basis points on SAIF-insured deposits (subject to adjustment for certain
types of banks with SAIF deposits) that were held at March 31, 1995 payable by
November 27, 1996 to recapitalize the SAIF. The assessment will increase the
SAIF's reserve ratio to a level comparable to that of the BIF at 1.25% of total
insured deposits. The FDIC, in connection with the recapitalization, also
lowered SAIF premiums from $0.23 per $100 to $0.065 per $100 of insured deposits
beginning in January 1997. The Association's share of this special assessment
totaled $2.8 million and is reflected in the 1996 operating results.
In August 1996, Congress passed legislation which repeals the Association's
present method of accounting for bad debts for federal income tax purposes. As
discussed in Note 13 to the consolidated financial statements, the Association
currently uses the percentage of taxable income method to determine its bad debt
deduction, in the computation of its taxable income. Under the new legislation,
the Association will be required to use the specific charge-off method, which
may result in a different deduction for bad debts in determining taxable income
than as presently computed under the current method. Additionally, the
Association will be required to recapture its post-1987 additions to its bad
debt reserves. Since the Association had previously provided deferred taxes for
the income tax bad debt reserves established after 1987, management does not
anticipate any additional income tax liability related to the recapture. The new
legislation is effective for taxable years beginning after December 31, 1995.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements of the Association and notes thereto,
presented elsewhere herein, have been prepared in accordance with generally
accepted accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time and
due to inflation. The impact is reflected in the increased cost of the
Association's operations. Unlike most industrial companies, nearly all the
assets and liabilities of the Association are monetary. As a result, interest
rates have a greater impact on the Association's performance than do the effects
of general levels of inflation. Interest rates do not necessarily move in the
same direction or to the same extent as the price of goods and services.
FINANCIAL CONDITION
SEPTEMBER 30, 1996 COMPARED TO SEPTEMBER 30, 1995
Total assets increased $83.3 million to $650.3 million at September 30, 1996 as
compared to $567.0 million at September 30, 1995. The increase in total assets
was primarily due to a $46.8 million increase in the Association's loan
portfolio as well as a $37.3 million increase in the Association's securities
portfolio (which includes securities available for sale, investment securities,
and mortgage-backed and related securities). These increases were the result of
implementation of the Association's growth strategy for fiscal year 1996. This
strategy emphasized increased loan production funded by retail deposits,
combined with the purchase of securities funded by public fund deposits,
odd-term certificates of deposit, or FHLB of Atlanta advances. To increase the
loan portfolio, the Association implemented a new incentive-based loan
origination program which resulted in new loan originations of $113.3 million,
as well as purchases totaling $16.8 million, primarily consisting of loans
secured by one- to four-family residential real estate, offset in part by
repayments, sales, and other adjustments of $83.3 million.
The securities portfolio underwent not only an increase in its overall size but
experienced a shift in its composition during the year. Investment securities
held to maturity decreased $37.4 million to $22.3 million at September 30, 1996
from $59.7 million at September 30, 1995, as did mortgage-backed and related
securities which decreased $22.6 million to $54.9 million at September 30, 1996
from $77.5 million at September 30, 1995. These decreases were due primarily to
a one-time reclassification of $49.5 million of securities held to maturity to
securities available for sale in accordance with the provisions of Financial
Accounting Standards Board ("FASB") "A Guide to Implementation of SFAS No. 115
on Accounting for Certain Investments in Debt and Equity Securities - Questions
and Answers". Securities available for sale increased $97.3 million to $124.3
million at September 30, 1996 from $27.0 million at September 30, 1995 due to
the $49.5 million reclassification, as well as purchases of new securities of
$67.6 million, which included $13.9 million in U. S. Government and agency
securities, $37.7 million in mortgage-backed and related securities, and $16.0
million in mutual funds. These purchases were partially offset by sales, calls,
repayments, and other adjustments of $19.8 million.
6
<PAGE>
The increase in total assets was funded primarily by a $61.6 million increase in
deposits to $498.9 million at September 30, 1996 as compared to $437.4 million
at September 30, 1995. The deposit growth reflected the introduction in fiscal
1996 of a 13-month certificate of deposit product, an increase in the use of
public fund deposits, as well as increased retail deposits. In addition,
advances from the FHLB increased $18.2 million to $36.4 million at September 30,
1996 from $18.2 million at September 30, 1995 primarily to fund the purchase of
securities.
Shareholders' equity increased to $75.1 million or $15.33 per share at September
30, 1996 from $72.8 million or $15.04 per share at September 30, 1995,
reflecting net income for the year of $3.9 million offset primarily by dividends
paid on the common stock totaling $1.7 million.
RESULTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995
GENERAL
Net income for the year ended September 30, 1996 decreased 15.2% to $3.9
million, or $0.79 per share, compared to $4.6 million, or $0.94 per share, for
the same period last year due primarily to the $2.8 million special SAIF
assessment as well as a $1.8 million increase in other operating expense. Such
increases in expenses were partially offset by an increase in net interest
income of $1.9 million, a decrease of $142,000 in provision for loan loss, and a
decrease in the provision for income taxes of $2.0 million
INTEREST INCOME
Interest income for the year ended September 30, 1996 totaled $43.9 million, an
increase of $6.2 million, or 16.4%, from $37.7 million for the year ended
September 30, 1995. The increase was due primarily to an increase in average
interest-earning assets of $70.6 million to $575.9 million for the year ended
September 30, 1996 from $505.3 million for the same period in 1995, enhanced by
an increase in the average yield on average interest-earning assets to 7.62% for
the year ended September 30, 1996 from 7.46% for the year ended September 30,
1995. Interest income on loans increased $3.4 million, or 13.7%, to $28.3
million for the year ended September 30, 1996 compared to $24.9 million for the
same period in 1995. Interest income on real estate loans increased by $3.1
million, or 11.7%, to $26.8 million for the year ended September 30, 1996 from
$23.7 million for the same period in 1995, primarily because of an increase in
the average yield on real estate loans to 8.09% from 7.66%, and an increase in
average balance of real estate loans of $22.4 million, or 7.3%. Interest income
on consumer and other loans increased by $288,000 in 1996 as compared to 1995,
principally because of an increase in the average balance of such loans of $2.6
million to $15.7 million for the year ended September 30, 1996 from $13.1
million for the year ended September 30, 1995. Interest income on
mortgage-backed and related securities increased by $205,000, or 4.9%, to $4.4
million. The increase in interest income from mortgage-backed and related
securities is primarily attributable to an increase in the average balance of
mortgage-backed and related securities to $100.0 million from $53.3 million,
partially offset by a decrease in the average yield to 7.43% from 7.87%.
Interest income from investment securities and securities available for sale
increased by $2.8 million, or 46.7%, to $8.7 million for the year ended
September 30, 1996 from $5.9 million for the year ended September 30, 1995. The
increase in income from investment securities and securities available for sale
was primarily caused by an increase in the average balance of $3.6 million to
$87.3 million for the year ended September 30, 1996 from $83.7 million, offset
by a decrease in the average yield to 6.53% for the year ended September 30,
1996 from 7.11% for the year ended September 30, 1995. Interest income from
other investments decreased $226,000, or 8.3%, to $2.5 million for the year
ended September 30, 1996 from $2.7 million for the year ended September 30,
1995. The decrease in interest from other investments is primarily attributable
to a $4.6 million, or 9.9%, decrease in the average balance of other investments
to $41.8 million during 1996 from $46.4 million during 1995, partially offset by
an increase in the average yield on other investments to 5.96% for the year
ended September 30, 1996 from 5.85% for the year ended September 30, 1995.
INTEREST EXPENSE
Interest expense increased $4.2 million, or 22.7%, to $22.9 million for the year
ended September 30, 1996 from $18.6 million for the same period in 1995.
Interest on deposits increased $3.6 million, or 22.8%, to $19.2 million for the
year ended September 30, 1996 from $15.7 million for the year ended September
30, 1995. The increase was due primarily to the increase in average cost of
deposits to 4.02% from 3.65%, and to a lesser degree, an increase in the average
balance of deposits of $49.1 million, or 11.4%, to $479.0 million during 1996
from $429.9 million during 1995. In order to maintain, and if possible, to
increase its market share of total deposits, during fiscal 1996 the Association
placed an increased emphasis on certificate of deposit products, including a new
odd-term certificate of deposit product, as well as existing certificate of
deposit products as part of its asset liability policy. Certificates of deposit
typically have a higher interest rate cost to the Association than transaction
accounts. Interest expense attributable to borrowed funds increased $657,000, or
22.2%, to $3.6 million for the year ended September 30, 1996 from $3.0 million
for the year ended
7
<PAGE>
September 30, 1995. The increase in interest expense attributable to borrowed
funds is due to an increase in the average balance of borrowed funds to $42.4
million during fiscal 1996 from $29.1 million during fiscal 1995, partially
offset by a decrease in the average cost of borrowed funds to 8.52% for the year
ended September 30, 1996 from 10.16% for the same period in 1995. During fiscal
year 1996, the Association used additional advances from the FHLB primarily to
fund the purchase of securities with higher interest yields than the interest
cost of the FHLB advances.
PROVISION FOR LOAN LOSSES
The Association maintains an allowance for loan losses based upon a periodic
evaluation of known and inherent risks in the loan portfolio, the 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 the Association's actual loss experience, as
well as standards applied by the OTS and the FDIC. The Association's provision
for loan losses was $98,000 for the year ended September 30, 1996 as compared to
$240,000 for the year ended September 30, 1995. The decrease in the provision
for loan losses for fiscal 1996 was attributable to management's assessment that
the allowance for loan losses was sufficient to absorb risk inherent in the
Association's portfolio. Management reviews the adequacy of its allowances for
loan losses monthly through asset classification review. The Association's
allowance for loan losses as a percentage of net loans receivable at September
30, 1996 was 0.61%.
OTHER INCOME
Other income consists of servicing income and fee income, service charges, gain
or loss on the sale or call of mortgage-backed and related securities and
investment securities and income or loss from the Association's subsidiary's
real estate venture. Other income decreased $50,000, or 1.5%, to $3.3 million
for the year ended September 30, 1996 from $3.4 million for the year ended
September 30, 1995. The decrease in other income was primarily due to a
substantial decrease in the Association's income from its subsidiary's real
estate venture to $47,000 from $326,000 reflecting the smaller number of
closings on sales of units during fiscal 1996 as the Association's real estate
venture has sold the majority of the units, and a net loss on the sale of loans
of $225,000. For more information on the real estate venture, see Note 8 to the
Notes to the Consolidated Financial Statements. Such declines were partially
offset by increases of $383,000 in NOW account and other customer fees
(consisting of fees from money orders, transaction accounts, safe deposit boxes,
and overdraft fees), $53,000 in gains on calls of securities, and $54,000 in
miscellaneous other income.
OPERATING EXPENSE
Total operating expense increased $4.7 million to $19.6 million for the year
ended September 30, 1996 from $14.9 million for the year ended September 30,
1995. The increase in operating expense is primarily attributable to a one-time
$2.8 million special assessment for recapitalization of the SAIF. This special
assessment was levied against institutions having SAIF-insured deposits as of
March 31, 1995, as mandated by the Deposit Insurance Funds Act of 1996, passed
by Congress and signed by the President on September 30, 1996. In addition,
employee compensation and benefits increased by $492,000 to $7.8 million during
1996 from $7.3 million during 1995, miscellaneous expense increased by $636,000
to $3.0 million during 1996 from $2.3 million during 1995, and the net gain on
real estate owned decreased by $569,000 to $243,000 for 1996 from $812,000 for
1995. During fiscal year 1996, the Association received an additional payment of
$470,000 representing a final settlement of the Association's claim with the
State of Florida Department of Insurance, as Receiver for International Medical
Centers, Inc. of Miami ("IMC"). Of this amount, $260,000 was classified as net
gain on real estate owned while the remaining $210,000 was classified as
interest income. During fiscal 1995, the Association received an initial
settlement of this claim of $816,000 which was classified as net gain on real
estate owned. Occupancy and equipment expense increased $75,000 to $4.6 million
for 1996 from $4.5 million for 1995 primarily due to the opening of a new
office, and advertising and promotion increased $71,000 to $616,000 for 1996
from $545,000 for 1995 primarily due to increased advertising for the
Association's lending products.
PROVISION FOR INCOME TAXES
Provision for income taxes decreased $2.0 million to $761,000 for the year ended
September 30, 1996 from $2.8 million for the same period in 1995. The decrease
in income tax expense reflected lower pre-tax income during the comparative
periods as well as the reversal of a $1.1 million prior accrued liability which
in management's opinion was no longer required and which was reversed with a
credit to the 1996 income tax provision.
8
<PAGE>
RESULTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1995 AND 1994
GENERAL
Net income for the year ended September 30, 1995 increased 22.4% to $4.6
million, or $0.94 per share, compared to $3.7 million for fiscal 1994 due
primarily to an increase in net interest income of $481,000, a decrease of
$749,000 in the provision for loan loss, and a decrease in operating expenses of
$36,000. This was partially offset by an increase in the provision for income
taxes combined with a decrease of $77,000 in other income.
INTEREST INCOME
Interest income for the year ended September 30, 1995 totaled $37.7 million, an
increase of $3.6 million, or 10.6%, from $34.1 million for the year ended
September 30, 1994. The increase was due primarily to an increase in the average
yield on average interest-earning assets to 7.46% for the year ended September
30, 1995 from 6.96% for the year ended September 30, 1994, enhanced by an
increase in the average balance of interest-earning assets of $14.6 million to
$505.3 million for the year ended September 30, 1995 from $490.7 million for the
same period in 1994. Interest income on loans decreased $303,000, or 1.3%, to
$23.7 million for the year ended September 30, 1995 compared to $23.4 million
for the same period in 1994. Interest income on real estate loans decreased by
$305,000, or .1%, to $23.7 million for the year ended September 30, 1995 from
$24.0 million for the same period in 1994, primarily because of a decrease in
the average yield on real estate loans to 7.66% from 7.72%, and a decrease in
average real estate loans of $1.6 million, or .5%. Interest income on consumer
and other loans increased by $187,000 in 1995 as compared to 1994, principally
because of a $1.8 million increase in the average balance of such loans to $13.1
million for the year ended September 30, 1995 from $11.3 million for the year
ended September 30, 1994. Interest income on mortgage-backed and related
securities increased by $1.7 million, or 68.0%, to $4.2 million. The increase in
interest income from mortgage-backed and related securities is primarily
attributable to an increase in the average balance of mortgage-backed and
related securities to $53.3 million from $28.8 million, partially offset by a
decrease in the average yield to 7.87% from 8.82%. Interest income from
investment securities increased by $651,000, or 1.2%, to $5.9 million for the
year ended September 30, 1995 from $5.3 million for the year ended September 30,
1994. The increase in income from investment securities was primarily caused by
an increase in the average yield of 2.12% to 7.11% from 4.99%, offset by a $22.3
million decrease in the average balance to $83.7 million for the year ended
September 30, 1995 from $106.0 million for the year ended September 30, 1994.
Interest income from other investments increased $1.4 million, or 107.7%, to
$2.7 million for the year ended September 30, 1995 from $1.3 million for the
year ended September 30, 1994. The increase in interest from other investments
is primarily attributable to a $12.3 million, or 36.1%, increase in the average
balance of other investments to $46.4 million during 1995 from $34.1 million
during 1994, as well as an increase in the average yield on other investments to
5.85% for the year ended September 30, 1995 from 3.87% for the year ended
September 30, 1994.
INTEREST EXPENSE
Interest expense increased $3.1 million, or 20.0%, to $18.6 million for the year
ended September 30, 1995 from $15.5 million for the same period in 1994.
Interest on deposits increased $2.4 million, or 18.0%, to $15.7 million for the
year ended September 30, 1995 from $13.3 million for the year ended September
30, 1994. The increase was due primarily to the increase in average cost of
deposits to 3.65% from 2.94%, offset by a decrease in the average balance of
deposits of $22.1 million, or 4.9%, to $429.9 million during 1995 from $452.1
million during 1994. Interest expense attributable to borrowed funds increased
$728,000, or 32.7%, to $3.0 million for the year ended September 30, 1995 from
$2.2 million for the year ended September 30, 1994. The increase in interest
expense attributable to borrowed funds is due to a increase in the average
balance of borrowed funds to $29.1 million during 1995 from $23.7 million during
1994, as well as an increase in the average cost of borrowed funds of 77 basis
points to 10.16% for the year ended September 30, 1995 from 9.39% for the same
period in 1994. During fiscal year 1995, the Association used advances from the
FHLB to fund the purchase of mortgage-backed and related securities, and
borrowed $2.8 million from an unaffiliated third party lender in order to
purchase 190,388 shares of the Association's common stock in the open market to
fund the ESOP plan.
PROVISION FOR LOAN LOSSES
The Association's provision for loan losses was $240,000 for the year ended
September 30, 1995 as compared to $989,000 for the year ended September 30,
1994. The decrease in provision for loan losses was attributable to management's
assessment that the allowance for loan losses was sufficient to absorb risk
inherent in the Association's portfolio as well as a lower level of charge-offs
for the fiscal year ended September 30, 1995 as compared to the fiscal year
ended September 30, 1994. Management reviews the adequacy of its allowances for
loan losses monthly through asset classification review. The Association's
allowance for loan losses as a percentage of net loans receivable at September
30, 1995 was 1.06%.
9
<PAGE>
OTHER INCOME
Other income consists of servicing income and fee income, service charges, gain
or loss on the sale of mortgage-backed and related securities and investment
securities and income or loss from the Association's subsidiary's real estate
venture. Other income increased $77,000, or 2.3%, to $3.4 million for the year
ended September 30, 1995, from $3.3 million for the year ended September 30,
1994. The increase in other income was primarily due to a net gain on sale of
securities available for sale of $2,000 for the year ended September 30, 1995 as
compared to a net loss of $369,000 for the same period in 1994. This increase of
$371,000 as well as increases of $21,000 in servicing income and other fees,
$17,000 in NOW account and other customer fees (consisting of fees from money
orders, transaction accounts, safe deposit boxes, and overdraft fees), and
$41,000 in miscellaneous other income were offset by a substantial decrease in
the Association's income from its subsidiary's real estate venture to $326,000
from $444,000. The decrease was due to the fewer number of closings on sales of
units during fiscal 1995 as the Association's real estate venture continued to
wind down. In addition, for the year ended September 30, 1994, the Association
experienced net gains on the early maturity of mortgage-backed and related
securities and on the sale of loans both of which did not reoccur in 1995.
OPERATING EXPENSE
Total operating expense remained essentially unchanged during the year ended
September 30, 1995 from the year ended September 30, 1994. The slight decrease
in operating expense of $36,000 is primarily attributable to an increase in net
gain on real estate owned of $907,000 to $812,000 for the year ended September
30, 1995, from a loss of $95,000 for the same period in 1994. The increase in
net gain on real estate owned resulted from the receipt of $816,000,
representing a partial settlement of Community Savings' claim with the State of
Florida Department of Insurance, as Receiver for IMC, offset by other net losses
of real estate owned totaling $4,000. This increase was partially offset by an
increase in employee compensation and benefits of $487,000 to $7.3 million for
the year ended September 30, 1995 as compared to $6.8 million for the same
period in 1994, primarily due to the granting of stock awards pursuant to the
stock compensation benefit plans adopted during fiscal 1995. Advertising and
promotion increased $228,000 to $545,000 for the year ended September 30, 1995
as compared to $317,000 for the same period in 1994, which resulted from
increased marketing efforts promoting new and existing products. Occupancy and
equipment increased $85,000 in 1995 due primarily to the opening of a new branch
in Jupiter, and miscellaneous expense increased $91,000 primarily due to public
company related expenses.
PROVISION FOR INCOME TAXES
Provision for income taxes increased $506,000 million, or 22.4%, to $2.8 million
for the year ended September 30, 1995 from $2.3 million for the same period in
1994. The increase in income tax expense reflected higher pre-tax income during
fiscal 1995.
IMPACT OF NEW ACCOUNTING STANDARDS
ACCOUNTING FOR MORTGAGE SERVICING RIGHTS - In May, 1995, the FASB issued
Statement of Financial Accounting Standards ("SFAS") No. 122, "Accounting for
Mortgage Servicing Rights". The Statement, which amends SFAS No. 65, "Accounting
for Certain Mortgage Banking Activities", requires mortgage banking enterprises
that acquire mortgage servicing rights through either the purchase of or
origination of mortgage loans and sell or securitize those loans with servicing
rights retained to allocate the total cost of the mortgage loans to the mortgage
servicing rights and the loans based on their relative fair values. Mortgage
banking enterprises include commercial banks and thrift institutions that
conduct operations substantially similar to the primary operations of a mortgage
banking enterprise. SFAS No. 122 applies prospectively in fiscal years beginning
after December 15, 1995, to sales of mortgage loans with servicing rights
retained and to impairment evaluations of all amounts capitalized as mortgage
servicing rights, including those purchased before the adoption of this
Statement. Management is in the process of evaluating the impact of SFAS No.
122.
ACCOUNTING FOR STOCK-BASED COMPENSATION - In October, 1995, FASB issued SFAS No.
123, "Accounting for Stock-Based Compensation". This Statement requires certain
disclosures about stock-based employee compensation arrangements, regardless of
the method used to account for them, and defines a fair value based method of
accounting for an employee stock option or similar equity instrument and
encourages all entities to adopt that method of accounting for all of their
employee stock compensation plans. However, it also allows an entity to continue
to measure compensation cost for stock-based compensation plans using the
intrinsic value method of accounting prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees". Entities electing to remain with the
accounting in APB Opinion No. 25 must make pro forma disclosures of net income
and, if presented, earnings per share, as if the fair value method of accounting
defined in this Statement had been applied. Under the fair value method,
compensation cost is measured at the grant date based on the value of the award
and is recognized over the service period, which is usually the vesting period.
Under the intrinsic value based method, compensation cost is the excess, if any,
of the quoted market price of the stock at grant date or other measurement date
over the amount an employee must pay to acquire the stock. The disclosure
requirements of this Statement are effective for financial statements for fiscal
years
10
<PAGE>
beginning after December 15, 1995. Pro forma disclosures required for entities
that elect to continue to measure compensation cost using APB No. 25 must
include the effects of all awards granted in fiscal years that begin after
December 15, 1994. Management is in the process of evaluating the impact of SFAS
No. 123.
AVERAGE BALANCE SHEET
The following table sets forth certain information relating to the Association's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated and the average yields earned and rates
paid. Such yields and costs are derived by dividing income or expense by the
average balance of assets or liabilities, respectively, for the periods
presented. The use of monthly average balances (except as noted otherwise)
instead of daily average balances has not caused any material difference in the
information presented.
<TABLE>
<CAPTION>
For the Years Ended September 30,
-------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
-------------------------------------------------------------------------------------------------------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
=========================================================================================================================
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Real estate loans $331,134 $26,765 8.09% $308,793 $23,661 7.66% $310,380 $23,999 7.73%
Consumer and other loans 15,746 1,508 9.48 13,056 1,197 9.17 11,341 977 8.61
Mortgage-backed securities 99,959 7,423 7.43 53,349 4,198 7.87 28,843 2,543 8.82
Investment securities 87,280 5,700 6.53 83,650 5,945 7.11 106,031 5,294 4.99
Other investments (1) 41,817 2,493 5.96 46,444 2,719 5.85 34,056 1,317 3.87
-------- ------- ------ ----- ------ -----
Total interest-earning assets 575,936 43,889 7.62 505,292 37,720 7.46 490,651 34,130 6.96
Non-interest-earning assets 36,068 39,263 37,635
-------- -------- --------
Total assets $612,004 $544,555 $528,286
======== ======== ========
Interest-bearing liabilities:
Deposits $478,955 19,247 4.02% $429,893 15,679 3.65% $452,070 13,298 2.94%
Stock subscriptions (2) -- -- -- -- -- -- 252 5 1.98
Borrowed funds 42,416 3,612 8.52 29,086 12,955 10.16 23,657 2,222 9.39
-------- ------- -------- ------ -------- ------
Total interest-bearing
liabilities 521,371 22,859 4.38 458,979 28,634 4.06 475,979 15,525 3.26
Non-interest-bearing
liabilities 15,995 16,313 15,931
-------- -------- --------
Total liabilities 537,366 475,292 491,910
Equity 74,638 69,263 36,376
-------- -------- --------
Total liabilities
and equity $612,004 $544,555 $528,286
======== ======== ========
Net interest income $21,030 $19,086 $18,605
======= ======= =======
Net interest rate spread (3) 3.24% 3.40% 3.69%
======= ======= =======
Net yield on interest-
earning assets (4) 3.65% 3.78% 3.79%
======= ======= =======
Ratio of average interest
-earning assets to average
interest-bearing liabilities 110.47% 110.09% 103.08%
======= ======= =======
</TABLE>
- ------------------------------------------------------------
(1) Includes interest-earning deposits and FHLB stock.
(2) Calculated on a daily average basis - all funds received in September
1994.
(3) Net interest-rate spread represents the difference between the average
yield earned on interest-earning assets and the average rate paid on
interest-bearing liabilities.
(4) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
11
<PAGE>
RATE VOLUME ANALYSIS
Net interest income can also be analyzed in terms of the impact of changing
interest rates on interest-earning assets and interest-bearing liabilities and
changing the volume or amount of these assets and liabilities. The following
table represents the extent to which changes in interest rates and changes in
the volume of interest-earning assets and interest-bearing liabilities have
affected the Association's interest income and interest expense during the
periods indicated. Information is provided in each category with respect to (i)
changes attributable to changes in average volume (change in average volume
multiplied by prior rate); (ii) changes attributable to changes in rate (changes
in rate multiplied by prior average volume); (iii) changes in rate-volume
(changes in rate multiplied by changes in average volume); and (iv) the net
change.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
Year Ended September 30,
=====================================================================================================
1996 vs. 1995 1995 vs. 1994 1994 vs. 1993
-----------------------------------------------------------------------------------------------------
Increase/(Decrease) Increase/(Decrease) Increase/(Decrease)
Due to Due to Due to
----------------------- Total -------------------- Total ----------------------- Total
Rate/ Increase Rate/ Increase Rate/ Increase
Volume Rate Volume (Decrease)Volume Rate Volume (Decrease) Volume Rate Volume (Decrease)
-----------------------------------------------------------------------------------------------------
(In Thousands)
INTEREST INCOME:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First mortgage loans $1,711 $1,297 $ 96 $3,104 $(123) $(186) $ 4 $ (305) $(2,612) $(3,874) $ 348 $(6,138)
Consumer and other loans 247 54 10 311 153 29 5 187 (87) (10) 2 (95)
Mortgage-backed securities 3,668 (235) (208) 3,225 2,161 (274) (232) 1,655 1,953 (886) (771) 296
Investment securities 258 (485) (18) (245) (1,117) 2,248 (480) 651 733 (548) (73) 112
Interest-earning deposits (271) 51 (6) (226) 479 674 249 1,402 96 103 9 208
------ ------ ----- ------ ------ ----- ----- ----- ------- ------- ----- -------
Total interest-earning
assets 5,613 682 (126) 6,169 1,553 2,491 (454) 3,590 83 (5,215) (485) (5,617)
------ ------ ----- ------ ------ ----- --=-- ----- ------- ------- ----- -------
INTEREST EXPENSE
Deposits 1,791 1,591 186 3,568 (652) 3,210 (177) 2,381 (201) (1,595) (9) (1,805)
Borrowed funds 1,354 (477) (220) 657 482 203 43 728 (317) 22 (14) (309)
------ ------ ----- ------ ------ ----- ----- ----- ------ ------ ----- -------
Total interest-bearing
liabilities 3,145 1,114 (34) 4,225 (170) 3,413 (134) 3,109 (518) (1,573) (23) (2,114)
------ ------ ----- ------ ------ ----- ----- ----- ------ ------ ----- -------
Net change in net interest
income $2,467 $(415) $ (108) $1,944 $1,723 $(922) $(320) $ 481 $ 601 $ (3,642) $ (462) $(3,503)
====== ====== ====== ====== ====== ===== ===== ====== ====== ======== ====== =======
</TABLE>
ASSET AND LIABILITY MANAGEMENT-INTEREST RATE SENSITIVITY ANALYSIS
The extent to which assets and liabilities are "interest rate sensitive" is
measured by an institution's interest rate sensitivity "gap". An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between the amount of interest-earning assets
maturing or repricing within a specific time period and the amount of
interest-bearing liabilities maturing or repricing within that time period. A
gap is considered positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities. A gap is considered
negative when the amount of interest rate sensitive liabilities exceeds the
amount of interest rate sensitive assets. Based on the model presented in the
following table, during a period of rising interest rates, a negative gap would
tend to positively affect net interest income. Conversely, during a period of
falling interest rates, a negative gap would tend to positively affect net
interest income while a positive gap would tend to adversely affect net interest
income.
In the declining interest rate environment that has existed over the past
several years, the Association invested a substantial portion of its assets in
short- and medium-term liquid assets. While such investments typically yield
less than could be obtained in investments in mortgage loans, the Association
believes such investments will allow it to reinvest at higher yields if interest
rates rise. In this regard, the Association has emphasized the origination of
adjustable-rate mortgage ("ARM") loans and other adjustable-rate or short-term
loans, as well as purchased short-term and medium-term investments. In recent
years, the Association has de-emphasized the origination of fixed-rate
residential loans. In a low interest rate environment, borrowers typically
prefer fixed-rate loans, resulting in a decreased volume of loan originations.
During fiscal year 1996, the Association sought to increase its loan
originations with the implementation of a new incentive-based loan origination
program and increased emphasis on its commercial lending program. The
Association currently sells fixed-rate residential mortgage loans with
maturities of more that 15 years in the secondary market, and retains ARM loans
and fixed-rate loans with maturities of 15 years or less. The Association also
invests in United States Government and agency securities, investment
securities, including mutual funds that invest in adjustable-rate securities,
and short-term and medium-term fixed-rate mortgage-backed and government
securities. Of the Association's total investment in loans, mortgage-backed
securities and investment securities at September 30, 1996, $321.9 million, or
12
<PAGE>
53.0%, had adjustable interest rates. In addition, the Association does not
solicit high-rate certificates of deposit in excess of $100,000 or brokered
funds.
At September 30, 1996, total interest-earning assets maturing or repricing
within one year exceeded total interest-bearing liabilities maturing or
repricing in the same period by $15.0 million, representing a cumulative
one-year gap ratio of a positive 2.3% (See table on page 14). The Association
has an Asset-Liability Committee which is responsible for reviewing the
Association's asset and liability policies. The Committee meets on a regular
basis and reports to the Board of Directors on interest rate risks and trends,
as well as liquidity and capital ratios and requirements.
MARKET VALUE PORTFOLIO EQUITY
In 1994, the OTS adopted amendments to its risk-based capital regulations
requiring savings associations to calculate the market value of their portfolio
equity ("MVPE"). These calculations are based upon data concerning
interest-earning assets, interest-bearing liabilities and other rate sensitive
assets and liabilities provided to the OTS on schedule CMR of the Quarterly
Thrift Financial Report. The amendments to the risk-based capital regulations
require institutions to hold additional risk-based capital in an amount equal to
one-half the amount an institution's interest rate risk exceeds the normal
amount of interest rate risk. Normal interest rate risk is defined as 2% of the
MVPE at static interest rates. If, after applying a rate shock of 200 basis
points ("bp") (one basis point equals .01%) of either a decline or increase in
rates, the resultant negative change in MVPE exceeds 2% of MVPE at static
interest rates, an institution is deemed to have excess interest rate risk.
Although the final rule was scheduled to be effective January 1994, the OTS has
indicated it will delay invoking application of the interest rate risk rule
until appeal procedures are implemented and evaluated. The OTS has not yet
established an effective date for the capital deduction.
The following table presents the Association's internal calculations of MVPE at
September 30, 1996.
<TABLE>
<CAPTION>
Change in Interest Rates In Basis Actual Net Market Value of Portfolio Equity
Points
(Rate Shock) Amount $ Change % Change
- ------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
400 61,366 (30,536) (33.2)%
300 68,228 (23,674) (25.8)%
200 75,573 (16,329) (17.8)%
100 83,447 (8,455) (9.2)%
Static 91,902 -- --
(100) 100,995 9,093 9.9%
(200) 110,790 18,888 20.6%
(300) 121,358 29,456 32.1%
(400) 132,779 40,877 44.5%
</TABLE>
13
<PAGE>
GAP TABLE
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at September 30, 1996, which are
expected to reprice or mature, based on certain assumptions, in each of the
future time periods shown. Except as stated below, the amounts of assets and
liabilities shown that reprice or mature during a particular period were
determined in accordance with the earlier term of repricing or the contractual
terms of the asset or liability.
<TABLE>
<CAPTION>
Amounts Maturing or Repricing
--------------------------------------------------------------------------------------
Less than 3 to 6 6 Months 1 to 3 3 to 5 5 to 10 More than
3 Months Months to 1 Year Years Years Years 10 Years Total
--------------------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Real estate loans:
Residential one- to four-family:
Market index ARMs $10,608 $78,740 $89,316 $2,800 $ 49 $ -- $ -- $181,513
Fixed-rate 5,635 5,329 9,523 27,776 24,746 29,115 15,081 117,205
Commercial and multi-family:
ARMs 9,001 15,528 15,339 10,273 477 -- -- 50,618
Fixed-rate 665 1,590 734 5,168 1,486 1,347 981 11,971
Valuation allowances -- -- -- -- -- -- (2,312) (2,312)
Yield adjustments (13) (13) (26) (103) (102) -- -- (257)
Consumer loans 765 901 1,289 2,767 674 146 -- 6,542
Equity line of credit loans 7,169 1 2 9 9 1,874 -- 9,064
Commercial business loans 1,691 14 11 143 15 -- -- 1,874
Collateralized mortgage
obligations 8,863 2,909 5,741 15,733 23,584 32,128 2,688 91,646
Other mortgage-backed securities 1,247 1,174 2,157 6,279 3,721 2,039 -- 16,617
Investment securities 79,995 3,737 816 7,651 14,262 15,529 452 122,442
FHLB stock 5,384 -- -- -- -- -- -- 5,384
------- ------- ------- ------ ------- -------- -------- -------
Total interest-earning
assets 131,010 109,910 124,902 78,496 68,921 82,178 16,890 612,307
------- ------- ------- ------ ------- -------- -------- -------
Interest-bearing liabilities:
Passbook accounts 1,314 1,314 2,625 6,616 3,200 6,374 9,432 30,875
NOW accounts 5,837 5,837 11,674 13,458 2,384 4,799 19,109 63,098
Money market accounts 13,710 13,710 27,420 1,608 680 584 11,709 69,421
Certificate accounts 91,087 97,517 51,839 42,510 31,690 1,360 -- 316,003
FHLB advances 1,588 2,123 3,711 14,843 11,943 2,142 -- 36,350
Borrowed funds 17,453 -- -- -- -- -- -- 17,453
------- ------- ------- ------ ------- -------- -------- -------
Total interest-bearing
liabilities 133,053 120,501 97,269 79,035 49,897 15,259 40,250 535,264
------- ------- ------ ------ ------- -------- -------- -------
Interest-earning assets less
interest-bearing liabilities
("interest rate sensitivity gap") $(2,043) $(10,591) $27,633 $ (539) $19,024 $ 66,919 $ (23,360) $77,043
======= ======== ======= ======= ======= ======== ========= =======
Cumulative excess (deficiency) of
interest-sensitive assets
over interest-sensitive
liabilities $(2,043) $(12,634) $14,999 $14,460 $33,484 $100,403 $ 77,043
======= ======== ======= ======= ======= ======== ========
Interest sensitivity gap to
total assets (0.31)% (1.63)% 4.25% (0.08)% 2.93% 10.29% (3.59)%
Cumulative interest sensitivity
gap to total assets (0.31)% (1.94)% 2.31% 2.22% 5.15% 15.44% 11.85%
Ratio of interest-earning
assets to interest-bearing
liabilities 98.46% 91.21% 128.41% 99.32% 138.13% 538.55% 41.96%
Cumulative ratio of interest-earning
assets to interest bearing
liabilities 98.46% 95.02% 104.28% 103.36% 106.98% 120.28% 114.39%
Cumulative interest-sensitive
assets $131,010 $240,920 $365,822 $444,318 $513,239 $595,417 $612,307
Cumulative interest-bearing
liabilities $133,053 $253,554 $350,823 $429,858 $479,755 $495,014 $535,264
</TABLE>
In preparing the table above, it has been assumed, consistent with the
assumptions used by the FHLB of Atlanta, as of June 1996, in assessing the
interest rate sensitivity of savings associations, that: (i) adjustable-rate
first mortgage loans will prepay at a rate of 16% per year; (ii) fixed-rate
mortgage loans on one- to four-family residences with terms to maturity of 15
years or less will prepay at a rate of 10% per year; (iii) second mortgage loans
on one- to four-family
14
<PAGE>
residences will prepay at a rate of 13% per year; (iv) fixed-rate first mortgage
loans on one- to four-family residential properties with remaining terms to
maturity of over 15 years will prepay annually as follows:
Prepayment Interest Rate Assumption
------------------------------------------------------------------
Less than 8% 9%
8 to 8.99% 11%
9 to 9.99% 14%
10 to 10.99% 21%
11 to 11.99% 21%
12 to 13.99% 21%
14% and over 21%
(v) fixed maturity deposits will not be withdrawn prior to maturity; and (vi)
these withdrawal rates as well as loan prepayment assumptions are based on
certain assumptions for loan prepayments and deposit withdrawals. Management
believes that these assumptions approximate actual experience and considers them
appropriate and reasonable. NOW, passbook and money market accounts will decay
at the following rates:
<TABLE>
<CAPTION>
Over 1 Over 3 Over 5 Over 10
1 Year Through Through Through Through Over 20
or Less 3 Years 5 Years 10 Years 20 Years Years
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NOW accounts 37% 34% 9% 20% 20% 20%
Passbook accounts 17% 26% 17% 40% 40% 40%
Money market deposit accounts 79% 11% 5% 5% 5% 5%
</TABLE>
The above assumptions utilized by the FHLB of Atlanta are annual percentages
based on remaining balances and should not be regarded as indicative of the
actual prepayments and withdrawals that may be experienced by the Association.
Moreover, certain shortcomings are inherent in the analysis presented by the
foregoing tables. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, interest rates on certain types of
assets and liabilities may fluctuate in advance of or lag behind changes in
market interest rates. Additionally, certain assets, such as ARM loans, have
features that restrict changes in interest rates on a short-term basis and over
the life of the assets. Moreover, in the event of a change in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table. For information regarding the
contractual maturities of the Association's loans, investments, and deposits,
see Notes to Consolidated Financial Statements.
15
<PAGE>
INDEPENDENT AUDITORS' REPORT
- ----------------------------
Community Savings, F. A.:
We have audited the accompanying consolidated statements of financial condition
of Community Savings, F. A. (the "Association") and its subsidiaries as of
September 30, 1996 and 1995, and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for each of the three
years in the period ended September 30, 1996. These consolidated financial
statements are the responsibility of the Association's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Association and its
subsidiaries as of September 30, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1996, in conformity with generally accepted accounting principles.
As discussed in the Notes to the Consolidated Financial Statements, the
Association changed its method of accounting for debt and equity securities,
effective October 1, 1993, to conform with Statement of Financial Accounting
Standards No.
115.
/s/ DELOITTE & TOUCHE LLP
- -------------------------
Deloitte & Touche LLP
Certified Public Accountants
West Palm Beach, Florida
November 15, 1996
16
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- -------------------------------------------------------------------------------------------------
September 30,
1996 1995
- -------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and amounts due from depository institutions $ 15,600 $ 13,126
Interest-bearing deposits (Note 1) 29,180 29,371
--------- ---------
Total cash and cash equivalents 44,780 42,497
Securities available for sale (Approximate cost -
1996, $125,928; 1995, $27,499)(Notes 1,2) 124,287 27,028
Investments - held to maturity (Approximate fair value - 1996,
$26,093; 1995, $64,135)(Notes 1,3,6,16) 22,293 59,679
Mortgage-backed and related securities - held to maturity
(Approximate fair value - 1996, $54,988; 1995, $77,818) (Notes 1,4,6) 54,945 77,499
Loans receivable, net of allowance for loan losses
(1996, $2,312; 1995, $3,492)(Notes 1,5,6) 376,219 329,442
Accrued interest receivable (Notes 1,7) 2,208 2,143
Investment in and advances to real estate venture (Notes 1,8) 218 1,523
Office properties and equipment, net (Notes 1,9) 16,359 16,255
Real estate owned, net (Notes 1,10) 1,384 1,910
Federal Home Loan Bank Stock - at cost (Notes 3,6) 5,384 7,384
Other assets 2,255 1,646
--------- ---------
Total assets $ 650,332 $ 567,006
========= =========
LIABILITIES
Deposits (Notes 6,11) $ 498,929 $ 437,376
Mortgage-backed bond, net (Notes 6,16) 17,453 18,344
Advances from Federal Home Loan Bank (Notes 6, 12) 36,350 18,200
Employee Stock Ownership Plan borrowings (Notes 14, 15) 2,064 2,557
Advances by borrowers for taxes and insurance 6,861 6,997
Other liabilities (Note 15) 11,599 7,175
Deferred income taxes, net (Notes 1,13) 2,020 3,509
--------- ---------
Total liabilities 575,276 494,158
--------- ---------
Commitments and contingencies (Note 14)
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, 1996, 5,090,120 and 1995, 5,088,900 shares
issued and outstanding 5,090 5,089
Additional paid in capital 29,881 30,182
Retained income - substantially restricted (Notes 13,17) 43,902 41,666
Common stock purchased by Employee Stock Ownership Plan (1,965) (2,456)
Common stock issued to Recognition and Retention Plan (654) (1,162)
Unrealized decrease in market value of securities available
for sale, net of income taxes (1,198) (471)
--------- ---------
Total shareholders' equity 75,056 72,848
--------- ---------
Total liabilities and shareholders' equity $ 650,332 $ 567,006
========= =========
</TABLE>
See notes to consolidated financial statements.
17
<PAGE>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
For the Years Ended September 30,
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Interest income:
Real estate loans (Note 1) $ 26,765 $ 23,661 $ 23,999
Consumer and commercial business loans 1,508 1,197 977
Investment securities and securities available for sale (Notes 2,3) 8,720 5,945 5,294
Mortgage-backed and related securities (Note 4) 4,403 4,198 2,543
Interest-earning deposits 2,493 2,719 1,317
----------- ----------- -----------
Total interest income 43,889 37,720 34,130
----------- ----------- -----------
Interest expense:
Deposits (Note 11) 19,247 15,679 13,298
Advances from Federal Home Loan Bank and other borrowings (Notes 12, 16) 3,612 2,955 2,227
----------- ----------- -----------
Total interest expense 22,859 18,634 15,525
----------- ----------- -----------
Net interest income 21,030 19,086 18,605
Provision for loan losses (Notes 1,5) 98 240 989
----------- ----------- -----------
Net interest income after provision for loan losses 20,932 18,846 17,616
----------- ----------- -----------
Other income:
Servicing income and other fees 148 184 163
NOW account and other customer fees 3,150 2,767 2,750
Net loss on sale of securities available for sale -- -- (369)
Gain on early maturity of investments 254 -- 236
Net gain (loss) on sale of loans (225) -- 19
Equity in net income of real estate venture (Note 8) 47 326 444
Miscellaneous 170 117 74
----------- ----------- -----------
Total other income 3,544 3,394 3,317
----------- ----------- -----------
Operating expense:
Employee compensation and benefits (Note 15) 7,785 7,293 6,806
Occupancy and equipment (Notes 9,14) 4,581 4,506 4,421
Net (gain) loss on real estate owned (243) (812) 95
Advertising and promotion 616 545 317
Federal deposit insurance premium 3,883 1,029 1,049
Miscellaneous 3,178 2,342 2,251
----------- ----------- -----------
Total operating expense 19,800 14,903 14,939
----------- ----------- -----------
Income before provision for income taxes 4,676 7,337 5,994
----------- ----------- -----------
Provision (benefit) for income taxes: (Notes 1,13)
Current 1,817 3,126 2,697
Deferred (1,056) (363) (440)
----------- ----------- -----------
Total provision for income taxes 761 2,763 2,257
----------- ----------- -----------
Net income $ 3,915 $ 4,574 $ 3,737
=========== =========== ===========
Primary and fully diluted earnings per share $ 0.79 $ 0.94 N/A
=========== =========== ===========
Weighted average common shares outstanding 4,936,763 4,845,383 N/A
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
18
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995, AND 1994
- --------------------------------------------------------------------------------------------------------------------------
Unrealized
Increase
(Decrease) in
Market Value
Additional Retained Employee Recognition of
Paid Income- Stock and Securities
Common In Substantially Ownership Retention Available for
Stock Capital Restricted Plan Plan Sale Total
---------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - September 30, 1993 $ -- $ -- $34,846 $ -- $ -- $ -- $34,846
Net income for the year ended
September 30, 1994 -- -- 3,737 -- -- -- 3,737
Adjustment for change in method
of accounting for investments
in mutual funds and equity
securities (See Notes 1,2) -- -- -- -- -- 69 69
Unrealized decrease in market value
of assets available for sale,
pursuant to adoption of SFAS
115 (net of income taxes) -- -- -- -- -- (542) (542)
------------------------------------------------------------------------------------
Balance - September 30, 1994 -- -- 38,583 -- -- (473) 38,110
Issuance of Common Stock
pursuant to Reorganization, net
of costs of issuance of $1,712 5,000 28,984 -- -- -- -- 33,984
Assets distributed to Mutual
Holding Company pursuant to
Reorganization -- -- (200) -- -- -- (200)
Purchase of Common Stock by Employee
Stock Ownership Plan -- -- -- (2,753) -- -- (2,753)
Distribution of Common Stock to
Recognition and
Retention Plan 89 1,278 -- -- (1,367) -- --
Net income for the year ended
September 30, 1995 -- -- 4,574 -- -- -- 4,574
Unrealized increase in market value
of assets available for sale
(net of income taxes) -- -- -- -- -- 2 2
Amortization of deferred
compensation - Employee Stock
Ownership Plan and Recognition
and Retention Plan -- (80) -- 297 205 -- 422
Dividends declared -- -- (1,291) -- -- -- (1,291)
------------------------------------------------------------------------------------
Balance - September 30, 1995 5,089 30,182 41,666 (2,456) (1,162) (471) 72,848
Net income for the year ended
September 30, 1996 -- -- 3,915 -- -- -- 3,915
Stock options exercised 1 12 -- -- -- -- 13
Transfer from securities held to
maturity to securities available
for sale (net of income taxes) -- -- -- -- -- 247 247
Unrealized decrease in market value
of assets available for sale (net of
income taxes) -- -- -- -- -- (974) (974)
Adjustment to deferred compensation-
Recognition and Retention Plan -- (378) -- -- 378 -- --
Amortization of deferred compensation
Employee Stock Ownership Plan and
Recognition and Retention Plan -- 65 -- 491 130 -- 686
Dividends declared -- -- (1,679) -- -- -- (1,679)
------------------------------------------------------------------------------------
Balance - September 30, 1996 $5,090 $29,881 $43,902 $(1,965) $ (654) $(1,198) $75,056
====================================================================================
See notes to consolidated financial statements.
19
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------------------------------------------
For the Years Ended September 30,
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Cash flows from (for) operating activities:
Net income $ 3,915 $ 4,574 $ 3,737
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation 1,304 1,353 1,434
Employee Stock Ownership Plan and Recognition
compensation expense and Retention Plan 686 422 --
Deferred income tax provision (1,056) (363) (440)
Federal Home Loan Bank stock dividend -- -- (182)
Accretion of discounts, amortization of
items premiums, and other deferred yield (1,494) (1,497) (1,725)
Provision for losses on other assets 200 -- --
Provision for loan losses 98 240 989
Provision for losses and net losses on sales of real estate owned (67) (102) (20)
Amortization of discount on mortgage-backed bond 496 498 506
Net (gain) loss on sale of: Securities available for sale -- -- 369
Loans and other assets 208 4 (7)
Net gain on call of securities (254) -- (237)
(Increase) decrease in accrued interest receivable (65) (1,181) 176
(Increase) decrease in other assets (609) 473 (725)
Decrease (increase) in loans available for sale 109 (316) 566
Increase in other liabilities 4,424 85 734
-------- -------- --------
Net cash provided by operating activities 7,895 4,190 5,175
-------- -------- --------
Cash flows from (for) investing activities:
Loan originations and principal payments on loans - net (34,182) (10,825) 8,290
Principal payments received on mortgage-backed and related securities 11,454 5,286 5,628
Principal payments received on investments 2,671 2,694 898
Purchases of: Loans (16,775) (2,728) (2,395)
Mortgage-backed and related securities (6,013) (41,549) (32,460)
Investments -- (30,085) (34,053)
Securities available for sale (67,641) -- (41,122)
Office property and equipment (1,481) (1,805) (1,762)
Proceeds from sales of: Securities available for sale 749 -- 82,712
Federal Home Loan Bank stock 2,000 -- --
Office property and equipment 443 25 189
Real estate acquired in settlement of loans 767 3,130 1,767
Loans purchased 3,452 -- --
Proceeds from maturities of investments 22,012 21,000 26,687
Investment in real estate venture 1,305 1,588 1,920
Other investing (455) 148 (71)
-------- -------- --------
Net cash provided by (used for) investing activities (81,694) (53,121) 16,228
-------- -------- --------
Cash flows from (for) financing activities:
Net increase (decrease) in: NOW accounts, demand deposits, and savings
accounts (1,200) (34,139) 9,848
Certificates of deposit 62,753 41,868 (30,557)
Stock subscriptions applied or returned -- (55,716) --
Proceeds from sale of stock subscriptions -- -- 55,716
Advances from Federal Home Loan Bank 22,500 19,000 --
Repayment of advances from Federal Home Loan Bank (4,350) (800) --
Advances by borrowers for taxes and insurance (136) 99 (368)
Proceeds from borrowings under lines of credit -- -- 25,000
Payments made on lines of credit -- -- (25,000)
Employee Stock Ownership Plan loan (493) 2,557 --
Purchases of Employee Stock Ownership Plan shares -- (2,753) --
Sale of common stock-net of issuance costs 13 33,758 --
Payments made on mortgage-backed bond (1,387) (1,387) (1,387)
Dividends paid (1,618) (902) --
-------- -------- --------
Net cash provided by financing activities 76,082 1,585 33,252
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 2,283 (47,346) 54,655
Cash and cash equivalents, beginning of period 42,497 89,843 35,188
-------- -------- --------
Cash and cash equivalents, end of period $ 44,780 $ 42,497 $ 89,843
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
20
<PAGE>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995, AND 1994
1. SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Community Savings, F. A. (the
"Association") and its subsidiaries conform to generally accepted
accounting principles and to general practices within the savings and loan
industry. The following summarizes the more significant of these policies
and practices:
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of the Association and its wholly- owned
subsidiaries, ComFed, Inc. ("ComFed") and ComFed Development Co. ("ComFed
Development"). ComFed was formed for the purpose of owning and operating
an insurance agency, Community Insurance Agency. ComFed Development is
engaged in real estate development activities under joint venture
arrangements with local developers. Prior to fiscal year 1995, the
Association had two other wholly-owned subsidiaries, Select Florida
Properties, Inc. and Select Florida Properties II, Inc., which were formed
to acquire and sell foreclosed assets as well as hold delinquent loans.
These subsidiaries were dissolved into ComFed Development during September
1995. All significant intercompany balances and transactions have been
eliminated.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and that affect the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from
those estimates.
CASH AND CASH EQUIVALENTS - For presentation purposes in the consolidated
financial statements, the Association considers all highly liquid debt
instruments purchased with an original maturity of three months or less to
be cash equivalents.
INVESTMENTS - HELD TO MATURITY - Investments - held to maturity are
carried at cost, adjusted for amortization of premiums and accretion of
discounts using the interest method. The Association has the intent and
ability to hold these securities to maturity.
SECURITIES AVAILABLE FOR SALE - Securities available for sale are carried
at fair value. In accordance with Statement of Financial Accounting
Standards No. 115 ("SFAS No. 115"), "Accounting for Certain Investments in
Debt and Equity Securities", unrealized gains or losses related to
securities available for sale are excluded from earnings and reported as a
net amount as a separate component of equity. The Association adopted the
provisions of SFAS No. 115, effective October 1, 1993. Gains and losses on
sales of securities available for sale are computed using the specific
identification method.
MORTGAGE-BACKED AND RELATED SECURITIES - HELD TO MATURITY -
Mortgage-backed and related securities - held to maturity are carried at
cost, adjusted for amortization of premiums and accretion of discounts
using the interest method. The Association has the intent and ability to
hold these securities to maturity.
INTEREST RATE RISK - The Association is engaged principally in providing
first mortgage loans (both adjustable-rate and fixed-rate) to individuals
and commercial enterprises. At September 30, 1996 and 1995, the
Association's assets consisted primarily of assets that earned interest at
adjustable interest rates. Those assets were funded primarily with
short-term liabilities that have interest rates that vary with market
rates over time.
PROVISIONS FOR LOSSES - Provisions for losses, which increase the
allowances for loan losses and real estate losses, are established by
charges to income. Such allowances represent the amounts which, in
management's judgment, are adequate to absorb charge-offs of both existing
loans which may become uncollectable and for future declines in the fair
value of real estate owned. The adequacy of the allowances are determined
by management's monthly evaluation of the loan and real estate portfolios
in light of past loss experience, present economic conditions and other
factors considered relevant by management. Anticipated changes in economic
factors which may influence the level of the allowances are considered in
the evaluation by management when the likelihood of the changes can be
reasonably determined.
UNCOLLECTED INTEREST - The Association reverses accrued interest on
mortgage loans which are more than ninety days past due and ceases
accruing interest on such loans thereafter. Any such interest ultimately
collected is credited to income in the period of recovery.
21
<PAGE>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OFFICE PROPERTIES AND EQUIPMENT - Office properties and equipment are
carried at cost less accumulated depreciation. Depreciation is computed on
the straight-line method over the estimated useful lives of the assets
which range from 13 to 50 years for buildings, executed lease terms for
leasehold improvements, and from 3 to 10 years for furniture and
equipment.
LOANS HELD FOR SALE - Mortgage loans originated and intended for sale in
the secondary market are carried at the lower of cost or estimated fair
value determined on an aggregate loan basis. Net unrealized losses are
recognized in a valuation allowance by charges to income.
REAL ESTATE OWNED - Real estate owned is recorded at cost which is the
estimated fair value of the property at the time the loan is foreclosed.
Subsequent to foreclosure, these properties are carried at the lower of
cost or fair value minus estimated costs to sell. Provisions for losses on
real estate owned are summarized in Note 10.
The amounts the Association could ultimately recover from real estate
owned could differ materially from the amounts used in arriving at the net
carrying value of the assets because of future market factors beyond the
Association's control or changes in the Association's strategy for
recovering its investment.
LOAN FEES - Loan origination fees and certain direct incremental costs
related to such loans are deferred. Net deferred loan fees are amortized
to income using the interest method over the contractual life of the loan.
Unamortized net loan fees on loans sold prior to maturity are credited to
income as an adjustment to the gain or loss at the time of sale.
PREMIUMS AND DISCOUNTS ON LOANS - Unearned discounts on home improvement
loans and other installment loans are amortized to income over the terms
of the related loans using the interest method. Premiums and discounts on
loans purchased are amortized to income using the interest method.
INCOME TAXES - The Association and its subsidiaries file consolidated
federal and state income tax returns. Income taxes are allocated
proportionately to the Association and its subsidiaries as though separate
tax returns were being filed.
Deferred income taxes are provided on items recognized for financial
reporting purposes in periods different than such items are recognized for
income tax purposes in accordance with the provisions of SFAS No. 109,
"Accounting for Income Taxes" ("SFAS No.109").
EARNINGS PER SHARE - The weighted average number of shares of common stock
used in calculating earnings per share was determined by reducing
outstanding shares by unallocated Employee Stock Ownership ("ESOP") shares
and unvested Recognition and Retention Plan ("RRP") shares. The effect of
stock options on weighted average shares outstanding are calculated using
the Treasury Stock method. Fully diluted shares outstanding include the
maximum dilutive effect of stock issuable upon exercise of common stock
options and unallocated ESOP and RRP shares of common stock. Earnings per
share information for periods prior to 1995 are not presented because the
Association did not complete its Reorganization until October 24, 1994.
IMPACT OF NEW ACCOUNTING ISSUES - In May, 1995, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights" ("SFAS No. 122"). The Statement, which amends SFAS No.
65, "Accounting for Certain Mortgage Banking Activities", requires
mortgage banking enterprises that acquire mortgage servicing rights
through either the purchase of or origination of mortgage loans and sell
or securitize those loans with servicing rights retained to allocate the
total cost of the mortgage loans to the mortgage servicing rights and the
loans based on their relative fair values. Mortgage banking enterprises
include commercial banks and thrift institutions that conduct operations
substantially similar to the primary operations of a mortgage banking
enterprise. SFAS No. 122 applies prospectively in fiscal years beginning
after December 15, 1995 to sales of mortgage loans with servicing rights
retained and to impairment evaluations of all amounts capitalized as
mortgage servicing rights, including those purchased before the adoption
of this Statement. Management is in the process of evaluating the impact
of SFAS No. 122.
In October, 1995, FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). This Statement requires certain
disclosures about stock-based employee compensation arrangements,
regardless of the method used to account for them, defines a fair value
based method of accounting for an employee stock option or similar equity
instrument, and encourages all entities to adopt that method of accounting
for all of their employee stock compensation plans. However, it also
allows an entity to continue to measure compensation cost for stock-based
compensation plans using the intrinsic value method of accounting
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB Opinion No. 25"). Entities electing to remain with the
accounting in APB Opinion No. 25 must make pro forma
22
<PAGE>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
disclosures of net income and, if presented, earnings per share, as if the
fair value method of accounting defined in this Statement had been
applied. Under the fair value method, compensation cost is measured at the
grant date based on the value of the award and is recognized over the
service period, which is usually the vesting period. Under the intrinsic
value based method, compensation cost is the excess, if any, of the quoted
market price of the stock at grant date or other measurement date over the
amount an employee must pay to acquire the stock. The disclosure
requirements of this Statement are effective for financial statements for
fiscal years beginning after December 15, 1995. Pro forma disclosures
required for entities that elect to continue to measure compensation cost
using APB Opinion No. 25 must include the effects of all awards granted in
fiscal years that begin after December 15, 1994. Management is in the
process of evaluating the impact of SFAS No. 123.
IMPACT OF NEW LEGISLATIVE ISSUES.
In August 1996, Congress passed legislation which repeals the
Association's present method of accounting for bad debts for federal
income tax purposes. As discussed in Note 13 to the consolidated financial
statements, the Association currently uses the percentage of taxable
income method to determine its bad debt deduction, in the computation of
its taxable income. Under the new legislation, the Association will be
required to use the specific charge-off method, which may result in a
different deduction for bad debts in determining taxable income than as
presently computed under the current method. Additionally, the Association
will be required to recapture its post-1987 additions to its bad debt
reserves. As the Association had provided deferred taxes for the income
tax bad debt reserves established after 1987, management does not
anticipate any additional income tax liability related to the recapture.
The new legislation is effective for taxable years beginning after
December 31, 1995.
On September 30, 1996, Congress passed, and the President signed, the
Deposit Insurance Fund Act of 1996 which mandated that all institutions
which have SAIF-insured deposits are required to pay a one-time special
assessment of 65.7 basis points (subject to certain adjustments) on
SAIF-insured deposits that were held at March 31, 1995 payable by November
27, 1996 to recapitalize the SAIF which is administered by the Federal
Deposit Insurance Corporation ("FDIC"). The assessment will bring the
SAIF's reserve ratio to a comparable level of the Bank Insurance Fund's
("BIF'") at 1.25 percent of total insured deposits. The FDIC in connection
with the recapitalization also lowered SAIF premiums from $0.23 per $100
to $0.065 per $100 of insured deposits beginning in January 1997. The
Association's share of this special assessment totaled $2.8 million, and
is included in the consolidated financial statements at September 30,
1996.
RECLASSIFICATIONS - Certain amounts in the 1995 and 1994 consolidated
financial statements have been reclassified to conform to the presentation
for 1996.
23
<PAGE>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SECURITIES AVAILABLE FOR SALE
During the quarter ended December 31, 1995, the Association adopted the
provisions of SFAS No. 115 Questions and Answers Guide ("SFAS No. 115
Q&A") which allowed a one time reclassification of securities between held
to maturity and available for sale between November 15, 1995 and December
31, 1995. The Association reclassified $49.5 million of securities from
held to maturity to available for sale. Such reclassification resulted in
a credit of $247,000 to shareholders' equity. The Association subsequently
sold $749,000 of such securities at no gain or loss.
Securities available for sale at September 30, 1996 and 1995 are
summarized as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
September 30, 1996:
Equity securities $ 57 $ 58 $ -- $ 115
United States Government and agency obligations 28,238 31 (327) 27,942
Mutual funds 43,443 5 (536) 42,912
Collateralized mortgage obligations:
Government backed 3,677 -- (7) 3,670
Private issue 50,513 239 (1,104) 49,648
-------- ---- ------ --------
Total collateralized mortgage obligations 54,190 239 (1,111) 53,318
-------- ---- ------ --------
Total securities available for sale $125,928 $333 $(1.974) $124,287
======== ==== ======== ========
Weighted average interest rate 6.60%
======
September 30, 1995:
Equity securities $ 57 $ 39 $ -- $ 96
Mutual funds 27,442 -- (510) 26,932
-------- ---- ------ --------
Total securities available for sale $ 27,499 $ 39 $ (510) $ 27,028
======== ==== ====== ========
Weighted average interest rate 6.11%
======
</TABLE>
All securities available for sale at September 30, 1996 and 1995 had
contractual maturities of one year or less.
Proceeds from the sale of securities available for sale were $749,000, $0
and $82,712,000 during the fiscal years ended September 30, 1996, 1995,
and 1994, respectively. There were no gross realized gains or losses
during the fiscal years ended September 30, 1996 and 1995. For the year
ended September 30, 1994, sales resulted in gross losses of $369,000.
The fair value of securities available for sale is based on quoted market
prices.
24
<PAGE>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS - HELD TO MATURITY
Investments - held to maturity at September 30, 1996 and 1995 are
summarized as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
September 30, 1996:
United States Government and agency obligations $11,391 $3,431 $ -- $14,822
Municipal obligations 300 4 -- 304
Corporate debt issues:
Chase Federal mortgage-backed bond 7,320 359 -- 7,679
Auto Bond Receivables Corp. 3,282 8 (2) 3,288
------- ------ ----- -------
Total corporate debt issues 10,602 367 (2) 10,967
------- ------ ----- -------
Total investment securities $22,293 $3,802 $ (2) $26,093
======= ====== ===== =======
Weighted average interest rate 8.72%
=======
September 30, 1995:
United States Government and agency obligations $38,187 $4,134 $(134) $42,187
Certificates of deposit 7,000 33 7,033
Municipal obligations 800 23 -- 823
Corporate debt issues:
Chase Federal mortgage-backed bond 7,673 392 -- 8,065
Pru-Bache zero coupon 468 17 -- 485
Auto Bond Receivables Corp. 5,551 19 (28) 5,542
------- ------ ----- -------
Total corporate debt issues 13,692 428 (28) 14,092
------- ------ ----- -------
Total investment securities $59,679 $4,618 $(162) $64,135
======= ====== ===== =======
Weighted average interest rate 7.05%
=======
</TABLE>
The table below sets forth the contractual maturity distribution of the
Association's investment securities at September 30, 1996 and 1995:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
September 30, 1996 September 30, 1995
Carrying Fair Carrying Fair
Value Value Value Value
---------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Due in one year or less $ 300 $ 304 $ 9,566 $ 9,608
Due after one year through five years 4,379 4,517 24,871 24,958
Due after five years through ten years 9,843 13,049 17,150 20,975
Due after ten years 7,771 8,223 8,092 8,594
------- ------- ------- -------
Total $22,293 $26,093 $59,679 $64,135
======= ======= ======= =======
</TABLE>
There were no sales of investment securities during the years ended
September 30, 1996, 1995, and 1994. The fair value of investment
securities is based on quoted market prices.
25
<PAGE>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEDERAL HOME LOAN BANK STOCK - At September 30, 1996 and 1995 the
Association held $5,384,000 and $7,384,000, respectively, of FHLB Stock,
which approximates fair value. FHLB Stock is not readily marketable as it
is not traded on a registered security exchange.
4. MORTGAGE-BACKED AND RELATED SECURITIES - HELD TO MATURITY
Mortgage-backed and related securities - held to maturity at September 30,
1996 and 1995 are summarized as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
September 30, 1996:
FHLMC $ 9,973 $ 73 $ (269) $ 9,777
GNMA - pass throughs 2,233 79 (14) 2,298
FNMA - pass throughs 4,076 2 (140) 3,938
Agency for International
Development - pass throughs 335 -- -- 335
Collateralized mortgage obligations:
Government-backed 12,763 510 (34) 13,239
Private issue 25,545 353 (517) 25,381
------- ------ ----- -------
Total collateralized mortgage obligations 38,308 863 (551) 38,620
CMO residual interest bonds 20 -- -- 20
------- ------ ------- -------
Total mortgage-backed and related securities $54,945 $1,017 $ (974) $54,988
======= ====== ======= =======
September 30, 1995:
FHLMC $11,943 $ 73 $ (291) $11,725
GNMA - pass throughs 2,774 108 (6) 2,876
FNMA - pass throughs 4,691 -- (46) 4,645
Agency for International
Development - pass throughs 387 -- -- 387
Collateralized mortgage obligations:
Government-backed 15,395 761 (213) 15,943
Private issue 42,191 321 (528) 41,984
------- ------ ------- -------
Total collateralized mortgage obligations 57,586 1,082 (741) 57,927
CMO residual interest bonds 118 140 -- 258
------- ------ ------- -------
Total mortgage-backed and related securities $77,499 $1,403 $(1,084) $77,818
======= ====== ======= =======
</TABLE>
There were no sales of mortgage-backed and related securities during the
years ended September 30, 1996, 1995, and 1994. The fair value of
mortgage-backed and related securities is based on quoted market prices.
Mortgage-backed securities represent participating interest in pools of
long-term first mortgage loans. Although mortgage-backed securities are
initially issued with a stated maturity date, the underlying mortgage
collateral may be prepaid by the mortgagee and, therefore, such
certificates may not reach their maturity date.
The Association also invests in mortgage-related securities such as
collateralized mortgage obligations ("CMOs"), CMO residual interest bonds,
and real estate investment conduits ("REMICs"). These securities are
generally divided into tranches whereby principal repayments from the
underlying mortgages are used sequentially to retire the securities
according to the priority of the tranches. The Association invests
primarily in senior sequential tranches of collateralized
26
<PAGE>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
mortgage obligations. Such tranches have stated maturities ranging from
6.5 years to 30 years; however, because of prepayments, the expected
weighted average life of these securities is less than the stated
maturities. At September 30, 1996, the Association had $38,328,000 in such
mortgage-related securities, which were held for investment and had a
market value of $38,640,000. The Association's fixed-rate CMOs have coupon
rates ranging from 6.0% to 12.0%.
The Association's variable-rate CMOs are indexed to the London Interbank
Offered Rate ("LIBOR") or the Ten-Year Treasury Index, and the residual
tranches do not have a stated coupon. The weighted average yield of the
Association's CMO securities was 7.54% at September 30, 1996. The residual
interest is in a CMO in which at least one class of bonds has a variable
interest rate. In these investments, a rise in the variable-rate index
reduces the cash flows available to the residual owner. Conversely, in a
low interest rate environment, collateral prepayments will usually
accelerate. The Association's ability to recover its investment in the CMO
residuals is dependent on the future outcome of the above factors. At
September 30, 1996, the Association's interest in CMO residual bonds was
$20,000 with a market value of $20,000.
5. LOANS RECEIVABLE
Loans receivable consisted of the following:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
September 30,
1996 1995
-------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
Real estate loans:
Residential 1-4 family $284,267 $248,453
Residential 1-4 family held for sale (at
lower of cost or estimated fair value) 207 316
Residential construction loans 33,520 27,314
Nonresidential construction loans 2,200 --
Land loans 16,846 15,601
Multi-family loans 8,153 7,351
Commercial 38,433 35,402
-------- --------
Total real estate loans 383,626 334,437
-------- --------
Non-real estate loans:
Consumer loans 15,606 12,638
Commercial business 1,874 1,958
-------- --------
Total non-real estate loans 17,480 14,596
-------- --------
Total loans receivable 401,106 349,033
Less:
Undisbursed loan proceeds 22,318 15,253
Unearned discount and net deferred loan fees 257 846
Allowance for loan losses 2,312 3,492
-------- --------
Total loans receivable, net $376,219 $329,442
======== ========
</TABLE>
The Association's lending market is concentrated in Palm Beach, Martin,
St. Lucie, and Indian River Counties, Florida.
The amount of loans on which the Association has ceased accruing interest
aggregated approximately $842,000, $662,000, and $3,195,000 at September
30, 1996, 1995, and 1994, respectively. The amount of interest not accrued
related to these loans was approximately $44,000, $49,000, and $243,000 at
September 30, 1996, 1995, and 1994, respectively.
27
<PAGE>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
An analysis of the changes in the allowance for loan losses for the years
ended September 30, 1996, 1995, and 1994 is as follows:
--------------------------------------------------------------------------
For the Years Ended September 30,
1996 1995 1994
--------------------------------------------------------------------------
(In Thousands)
Balance, beginning of period $ 3,492 $ 3,390 $ 3,748
Provision charged to income 98 240 989
Losses charged to allowance (1,278) (138) (1,292)
Recoveries -- -- (55)
------- ------- -------
Balance, end of year $ 2,312 $ 3,492 $ 3,390
======= ======= =======
During the year ended September 30, 1996, the Association sold a
participation interest in a note with a net carrying value of $3,453,000.
Included in the allowance for loan losses for the year ended September 30,
1995 was a $1,200,000 specific reserve related to such participation
interest. In connection with the sale of the participation interest, the
Association recorded an additional loss of $217,000.
LOANS HELD FOR SALE - The Association originates both adjustable- and
fixed-rate loans. The adjustable-rate loans are held in the Association's
portfolio and currently, all fixed-rate loans with maturities greater than
15 years are sold when originated, except those originated for special
financing on low income housing. Included in the loans receivable at
September 30, 1996 and 1995 are $207,000 and $316,000, respectively, of
loans held for sale.
LOANS SERVICED FOR OTHERS - Mortgage loans serviced for others are not
included in the accompanying consolidated statements of financial
condition. The unpaid balances of these loans at September 30, 1996, 1995,
and 1994 were $22,466,000, $26,466,000, and $32,380,000, respectively.
Custodial escrow balances maintained in connection with the foregoing loan
servicing were $497,000, $600,000, and $595,000, respectively.
RATE COMPOSITION OF LOANS - The Association originates and purchases both
adjustable- and fixed-rate loans. At September 30, 1996, fixed-rate loans
totaled $133,338,000 and adjustable-rate loans totaled $242,881,000. The
adjustable-rate loans have interest rate adjustment limitations and are
generally indexed to the OTS National Monthly Median Cost of Funds. Future
market factors may affect the correlation of the interest rate adjustment
with the rates the Association pays on the short-term deposits that have
been primarily utilized to fund those loans.
COMMERCIAL REAL ESTATE LENDING - The Association originates and purchases
commercial real estate and construction loans, which totaled $40,633,000
and $35,402,000 at September 30, 1996 and 1995, respectively. These loans
are considered by management to be of a somewhat greater risk of
collectibility due to the dependency on income production or future
development of the real estate. Accordingly, Association management
establishes a greater provision for probable, but not yet identified,
losses on these loans than on less risky residential mortgage loans. The
composition of commercial real estate loans and its primary collateral at
September 30, 1996 and 1995 are approximately as follows:
--------------------------------------------------------------------------
September 30,
1996 1995
--------------------------------------------------------------------------
(In Thousands)
Commercial land $ 120 $ 495
Office buildings 4,583 8,986
Hotel property 4,310 5,113
Shopping centers 3,293 3,115
Light industrial and warehouses 7,444 4,276
Churches 4,433 3,854
Other commercial 14,250 9,563
------- -------
Total commercial real estate 38,433 35,402
Commercial construction projects 2,200 --
------- -------
Total commercial real estate and construction loans $40,633 $35,402
======= =======
28
<PAGE>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under the Financial Institutions Reform, Recovery, and Enforcement Act of
1989 ("FIRREA"), a federally chartered savings and loan association's
aggregate commercial real estate loans may not exceed 400% of its capital
as determined under the capital standards provisions of FIRREA. The
Association is federally chartered and subject to this limitation. FIRREA
does not require divestiture of any loan that was lawful when it was
originated. At September 30, 1996, the Association estimates that, while
complying with this limitation, it could originate an additional
$261,791,000 of commercial real estate loans, but has no immediate plans
to do so.
LOANS TO ONE-BORROWER LIMITATION - Under FIRREA, the Association may not
make real estate loans to one borrower in excess of 15% of its unimpaired
capital and surplus. This 15% limitation results in a dollar limitation of
approximately $11,258,000 at September 30, 1996. At September 30, 1996,
the Association met the loans to one borrower limitation under current
regulations.
LOANS TO OFFICERS AND DIRECTORS - The Association offers loans to its
employees, including directors and senior management, at prevailing market
interest rates. The Association waives the points charged for employee
loans, however, directors and senior management pay points based on
current loan terms. These loans are made in the ordinary course of
business and on substantially the same terms and collateral requirements
as those of comparable transactions prevailing at the time. The total
loans to such persons did not exceed 5% of retained earnings at September
30, 1996. At September 30, 1996, the total of loans to directors,
executive officers, and associates of such persons was $337,000.
TROUBLED DEBT RESTRUCTURING - Included in loans receivable at September
30, 1996 and 1995 are loans considered to be troubled debt restructured
with an aggregate recorded investment of $1,081,000 and $1,577,000,
respectively. Included in interest income is interest on these loans which
totaled $94,000, $69,000, and $34,000 for the years ended September 30,
1996, 1995, and 1994, respectively.
IMPAIRED LOANS - Impaired loans owned by the Association have been
recognized in conformity with SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan" as amended by SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan-Income Recognition and Disclosures" as of October
1, 1995. A loan is impaired when, based on current information and events,
it is probable that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement. An analysis of
the Association's recorded investment in impaired loans at September 30,
1996 and 1995 and the related allowance for those loans is as follows:
--------------------------------------------------------------------------
September 30,
1996 1995
--------------------------------------------------------------------------
(In Thousands)
Impaired loan balance $1,081 $6,244
Related allowance $ 252 $1,452
The Association's policy on interest income on impaired loans is to
reverse all accrued interest against interest income if a loan becomes
more than 90 days delinquent and cease accruing interest thereafter. Such
interest ultimately collected is credited to income in the period of
recovery.
6. PLEDGED ASSETS
In the normal course of doing business the Association is required to
comply with certain collateral requirements.
29
<PAGE>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables set forth amounts of various asset components, as of
September 30, 1996 and 1995, which were pledged as collateral.
--------------------------------------------------------------------------
September 30,
1996 1995
--------------------------------------------------------------------------
(In Thousands)
Real estate loans (unpaid principal balance) $30,833 $10,682
FHLB Stock and accrued interest 5,517 7,518
------- -------
Total pledged to the FHLB $36,350 $18,200
======= =======
Other pledged assets:
Deposits of public funds - State of Florida
Mortgage-backed and related securities $21,681 $ 5,100
Line of credit - Federal Reserve Bank of Atlanta
United States Government and agency obligations 1,800 1,950
Treasury tax and loan deposits
United States Government and agency obligations 200 50
Mortgage-backed bond
Unpaid principal balance of loans 38,863 35,604
------- -------
Total for other pledged assets $62,544 $42,704
======= =======
FHLB ADVANCES - The Association has a security agreement with the FHLB
which includes a blanket floating lien that requires the Association to
maintain as collateral for its advances, the Association's FHLB capital
stock and first mortgage loans equal to 100% of the unpaid amount of FHLB
advances outstanding.
7. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at September 30, 1996 and 1995 consisted of
the following:
--------------------------------------------------------------------------
September 30,
1996 1995
--------------------------------------------------------------------------
(In Thousands)
Loans $ 612 $ 253
Investments 184 1,080
Securities available for sale 979 140
Mortgage-backed and related securities 433 670
------ ------
Total accrued interest receivable $2,208 $2,143
====== ======
8. INVESTMENT IN AND ADVANCES TO REAL ESTATE VENTURE
On February 27, 1989, the Association's wholly-owned subsidiary, ComFed
Development, entered into a Development Agreement ("Agreement") with
Channing Corporation XX ("Channing") to construct and sell patio homes and
townhouses on a parcel of land owned by the Association at PGA National in
Palm Beach County, Florida.
The terms of the Agreement provide for ComFed Development to fund all
construction and development costs, via advances from the Association to
ComFed Development, including the costs of acquiring the land, and to
receive interest on any outstanding funding. Such loans are included
within "Investment in and Advances to Real Estate Venture" in the
Consolidated Statements of Financial Condition. Profits from home sales,
after interest, are to be split evenly between ComFed Development and
Channing. Cash flows are first allocated to ComFed Development to pay off
any outstanding funding and interest, then split evenly between the
parties.
30
<PAGE>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Since the substance of the Agreement is that of a joint venture, the
Association accounts for it as such. The condensed financial information
is as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
September 30,
Balance Sheet 1996 1995
--------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
Assets:
Cash $ 40 $ 40
Cash escrow deposits -- 85
Land 38 431
Construction in progress 117 1,209
Receivables from partners 805 2,349
------ ------
Total assets $1,000 $4,114
====== ======
Liabilities and partners' capital:
Customers' deposits $ -- $ 85
Interest payable to ComFed Development -- 3,021
Partners' capital:
ComFed Development 500 504
Channing Corporation 500 504
------ ------
Total liabilities and partners' capital $1,000 $4,114
====== ======
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
For the Years Ended September 30,
Summary of Operations 1996 1995 1994
-------------------------------------------------------------------------
(Dollars In Thousands)
Income:
<S> <C> <C> <C>
Sales $2,406 $4,579 $6,788
Miscellaneous 28 154 80
------ ------ ------
Total income 2,434 4,733 6,868
------ ------ ------
Expenses:
Cost of sales 2,050 4,044 6,094
General and administrative 392 813 962
------ ------ ------
Total expenses 2,442 4,857 7,056
------ ------ ------
Net loss $ (8) $ (124) $ (188)
====== ====== ======
Units sold and closed 201 189 166
Units under contract -- 7 12
Units under construction -- 6 24
Remaining units 1 -- --
------ ------ ------
Total Units 202 202 202
====== ====== ======
</TABLE>
31
<PAGE>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income from real estate venture consisted of the Association's proportionate
share of income or loss in the venture and interest.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
For the Year Ended September 30,
Reconciliation of Joint Venture Activity 1996 1995 1994
-------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Net loss $ (8) $ (124) $(188)
Adjustments to convert joint venture accounting
to that followed by the Association and
to eliminate partners' share 6 62 95
Adjustments to reflect interest recognized on project loan
to the joint venture 53 388 539
Other adjustments (4) -- (2)
---- -- -----
Equity in net income of real estate venture $ 47 $ 326 $ 444
==== ====== =====
</TABLE>
9. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment at September 30, 1996 and 1995 are
summarized as follows:
-------------------------------------------------------------------------
September 30,
1996 1995
-------------------------------------------------------------------------
(In Thousands)
Land $ 3,317 $ 2,835
Buildings and improvements 15,558 15,387
Furniture and equipment 12,974 12,397
------- -------
Total 31,849 30,619
Less accumulated depreciation 15,490 14,364
------- -------
Total office properties and equipment - net $16,359 $16,255
======= =======
10. REAL ESTATE OWNED
Real estate owned consisted of the following:
-------------------------------------------------------------------------
September 30,
1996 1995
-------------------------------------------------------------------------
(In Thousands)
Real estate owned $1,476 $2,023
Less allowance for loss 92 113
------ ------
Total real estate owned $1,384 $1,910
====== ======
32
<PAGE>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Changes in allowance for losses on real estate owned were as follows:
------------------------------------------------------------------------
September 30,
1996 1995 1994
------------------------------------------------------------------------
(In Thousands)
Balance, beginning of period $113 $ 80 $ --
Provision charged to income 8 141 129
Losses charged to allowance (29) (108) (49)
---- ----- ---
Balance, end of period $ 92 $ 113 $ 80
==== ===== ====
11. DEPOSITS
The weighted-average interest rates on deposits at September 30, 1996 and
1995 were 4.09% and 4.05%, respectively. Deposit accounts, by type and
range of rates at September 30, 1996 and 1995 consisted of the following:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
September 30,
1996 1995
------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
Account type and rate:
Non-interest-earning NOW accounts $ 19,532 $ 14,844
NOW, Super NOW and funds transfer accounts 1996, 1995,
and 1994, 1.24% through 1.98% 63,098 63,861
Passbook and statement accounts 1996, 1995, and
1994, 1.73% through 1.98% 30,875 29,701
Money market accounts 1996, 1995, and 1994, 2.27% through 3.15% 69,421 75,720
-------- --------
Total non-certificate accounts 182,926 184,126
-------- --------
Certificates:
3.00% or less 1,600 930
3.01% - 3.99% 903 5,257
4.00% - 4.99% 80,831 55,583
5.00% - 5.99% 193,281 108,608
6.00% - 6.99% 29,571 70,456
7.00% - 7.99% 9,817 12,416
-------- --------
Total certificates of deposit 316,003 253,250
-------- --------
Total deposits $498,929 $437,376
======== ========
</TABLE>
Individual deposits greater than $100,000 at September 30, 1996 and 1995
aggregated approximately $67,467,000 and $36,189,000, respectively.
Deposits in excess of $100,000 are not insured.
33
<PAGE>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Scheduled maturities of certificate accounts were as follows:
-------------------------------------------------------------------------
September 30,
1996 1995
-------------------------------------------------------------------------
(In Thousands)
Maturity
Less than 1 year $240,240 $193,500
1 year - 2 years 32,254 16,956
2 years - 3 years 10,460 15,468
3 years - 4 years 20,953 6,430
4 years - 5 years 10,738 20,103
Thereafter 1,358 793
-------- --------
Total certificates of deposit $316,003 $253,250
======== ========
Interest expense on deposits consisted of the following during the years
ended September 30, 1996, 1995, and 1994:
--------------------------------------------------------------------------
For the Years Ended September 30,
1996 1995 1994
--------------------------------------------------------------------------
(In Thousands)
Passbook accounts $ 560 $ 625 $ 660
NOW accounts 930 1,002 1,111
Money market accounts 2,023 2,143 2,306
Certificate accounts 15,734 11,909 9,221
------- ------- -------
Total interest expense $19,247 $15,679 $13,298
======= ======= =======
12. ADVANCES FROM FEDERAL HOME LOAN BANK
At September 30, 1996, outstanding advances from the FHLB totaled
$36,350,000.
Scheduled maturities of FHLB advances are as follows:
--------------------------------------------------------------------------
Years Ending Average Interest $
September 30 Rate Maturing
--------------------------------------------------------------------------
(Dollars in Thousands)
1997 6.79% $ 7,422
1998 6.79 7,422
1999 6.79 7,422
2000 6.85 3,871
2001 6.38 8,071
2002 6.63 1,071
2003 6.63 1,071
-------
Total FHLB advances 6.70% $36,350
===== =======
34
<PAGE>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. INCOME TAXES
The Association is permitted under the Internal Revenue Code to deduct an
annual addition to a reserve for bad debts in determining taxable income,
subject to certain limitations. The bad debt deduction allowable equals 8%
of taxable income determined without regard to that deduction and with
certain adjustments. This addition differs from the provision for loan
losses used for financial reporting purposes. Pursuant to the provisions
of SFAS No. 109, no deferred taxes have been provided for the income tax
bad debt reserves prior to September 30, 1988 of $11,388,000. This tax
reserve for bad debts is included in taxable income of later years only if
the bad debt reserve is used subsequently for purposes other than to
absorb bad debt losses. Because the Association does not intend to use the
reserve for purposes other than to absorb losses, no deferred income taxes
have been provided. SFAS No. 109 requires the recognition of deferred tax
consequences due to differences between financial statement and income tax
treatment of allowances for loan losses arising after September 30, 1988.
Income tax provision consists of the following components for the years
ended September 30, 1996, 1995, and 1994:
--------------------------------------------------------------------------
For the Years Ended September 30,
1996 1995 1994
--------------------------------------------------------------------------
(In Thousands)
Current - federal $ 1,592 $2,789 $2,384
Current - state 225 337 313
-------- ------ ------
Total current 1,817 3,126 2,697
Deferred - federal and state (1,056) (363) (440)
-------- ------ ------
Total provision for income taxes $ 761 $2,763 $2,257
======== ====== ======
The Association's provision for income taxes differs from the amounts
determined by applying the statutory federal income tax rate to income
before income taxes for the following reasons:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
For the Years Ended September 30,
1996 1995 1994
Amount % Amount % Amount %
------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Tax at federal tax rate $ 1,637 35.0% $2,568 35.0% $2,098 35.0%
State income taxes, net of
federal income tax benefits 139 3.0 186 2.5 259 4.3
Reversal of prior year liability (1,140) (24.4) -- -- -- --
Other 172 3.7 82 1.1 (40) (0.7)
Benefit of graduated tax rate (47) (1.0) (73) (1.0) (60) (1.0)
-------- ----- ------ ----- ------ -----
Total provision for income taxes $ 761 16.3% $2,763 37.6% $2,257 37.6%
======== ===== ====== ===== ====== =====
</TABLE>
During the year ended September 30, 1996, management concluded that a
liability accrued in prior years was no longer required and reversed such
liability resulting in a $1,140,000 credit to the 1996 income tax
provision.
For the year ended September 30, 1996, the Association's taxable income
did not exceed $10,000,000. Therefore, the Association was taxed at a 34%
federal income tax rate.
35
<PAGE>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effect of temporary differences that gave rise to deferred tax
assets and deferred tax liabilities are presented below:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
September 30,
1996 1995 1994
-----------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Deferred tax liabilities:
Depreciation $ 639 $ 551 $ 558
Loan fee income 188 319 582
FHLB stock dividends 868 1,172 1,166
Deferred loan costs 392 208 183
Unamortized discount on mortgage-backed bond 2,350 2,526 2,718
Book over tax on investments in partnerships 937 882 696
Other -- 17 --
------ ------ ------
Gross deferred tax liabilities 5,374 5,675 5,903
------ ------ ------
Deferred tax assets:
Excess of book bad debt reserve over tax reserve 907 1,298 1,263
Retirement plans 686 586 602
Unrealized loss on decrease in fair value
of securities available for sale 615 182 297
Deferred loss on loans held for sale 48 60 63
Deferred compensation 109 105 84
SAIF recapitalization 1,088 -- --
Other 83 117 20
------ ------ ------
Gross deferred tax assets 3,536 2,348 2,329
------ ------ ------
Valuation allowance on unrealized loss
on decrease in fair value
of securities available for sale (182) (182) --
------ ------ --
Gross deferred tax assets - net of valuation allowance 3,354 2,166 2,329
------ ------ ------
Net deferred tax liability $2,020 $3,509 $3,574
====== ====== ======
</TABLE>
14. COMMITMENTS AND CONTINGENCIES
LOAN COMMITMENTS - In the normal course of business, the Association makes
commitments to extend credit. Commitments to extend credit are agreements
to lend to a customer as long as there is no violation of any condition
established in the contract. The interest rates on both fixed- and
variable-rate loans are based on the market rates in effect on the date of
closing.
Commitments generally have fixed expiration dates of 30 to 60 days and
other termination clauses. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Association evaluates
each customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained if deemed necessary by the Association upon extension
of credit is based on management's credit evaluation of the customer.
Collateral held varies, but may include single-family homes, marketable
securities and income-producing residential and commercial properties.
Credit losses may occur when one of the parties fails to perform in
accordance with the terms of the contract. The Association's exposure to
credit risk is represented by the contractual amount of the commitments to
extend credit. The Association had commitments to extend credit for
mortgage loans, excluding undisbursed portions of loans in process,
approximating $16,551,000 at September 30, 1996 and $8,485,000 at
September 30, 1995. At September 30, 1996, the $16,551,000 of loan
commitments were comprised of approximately $7,194,000 of fixed-rate
commitments and $9,357,000 of variable-rate commitments. These commitments
are at prevailing market rates and terms. Interest rates on fixed-rate
loan commitments were from 6.750% to 9.125% and 7.000% to 8.500% at
September 30, 1996 and September 30, 1995, respectively. The Association
places no value on the commitments as the borrower is required to close at
the market rates in effect on the date of closing. No fees are received in
connection with such commitments. The Association had unused consumer
lines of credit of $5,657,000 and $6,321,000 at September 30, 1996 and
1995, respectively.
36
<PAGE>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Association had commercial lines and letters of credit and other loan
commitments of $4,345,000 and $13,309,000 at September 30, 1996 and 1995,
respectively. The Association had commitments to sell loans to FNMA of
$207,000 and $316,000, respectively, at September 30, 1996 and 1995. The
Association had commitments to purchase loans of approximately $619,000 at
September 30, 1996 and $765,000 at September 30, 1995.
LEASE COMMITMENTS - The Association leases various properties for original
periods ranging from 2 to 25 years. Rent expense for the years ended
September 30, 1996, 1995, and 1994, was approximately $545,000, $535,000,
and $523,000 respectively. At September 30, 1996, future minimum lease
payments under these operating leases are as follows:
---------------------------------------
Years Ending
September 30, Amount
---------------------------------------
(In Thousands)
1997 $ 529
1998 501
1999 444
2000 444
2001 335
Thereafter 396
Total $2,649
LINE OF CREDIT - The Association has a $1,800,000 available line of credit
with the Federal Reserve Bank of Atlanta which is secured by United States
Government and agency obligations (see Note 6). At September 30, 1996 and
1995, the Association had no outstanding advances.
CONTINGENCIES - In connection with its mutual holding company
reorganization and stock offering, the Association's employee stock
ownership plan and trust (the "ESOP") borrowed funds from Nationar, a New
York trust company which was owned by savings banks in the state of New
York, and used the funds to purchase eight percent of the shares of the
Association's common stock in the open market. All of such shares were
pledged as collateral to support the ESOP loan. In connection with the
ESOP loan, the Association placed $1,200,000 in a non-insured
interest-earning deposit account with Nationar as collateral to secure the
ESOP loan. On February 6, 1995, Nationar was seized by the New York
Banking Department because of liquidity problems and continuing losses.
During the year ended September 30, 1995, the Association was uncertain as
to the recoverability of the collateral securing the ESOP loan. During
fiscal year 1995, the Superintendent transferred $200,000 of the
Association's collateral to a new interest-earning deposit account with
Northwest Savings Bank, leaving $1,000,000 in the Nationar account. During
the year ended September 30, 1996, the Association received $400,000 as a
partial settlement from the New York Banking Department. Management
believes, based on correspondence with the New York Banking Department,
that the full settlement of $600,000 will be received in December 1996.
In addition, the Association is investigating a possible employee
defalcation which may have been occurring for several years. The
Association maintains insurance to cover possible defalcation losses with
a claim deductible of $200,000. The Association has established a
liability for the amount of the deductible in the accompanying financial
statements. Management currently estimates that the loss in excess of the
deductible will not involve material amounts and will be covered by
insurance. Although the Association has notified its insurance company of
the potential claim and the insurance company has acknowledged coverage,
the insurance company has not begun its investigation of the claim.
15. BENEFIT PLANS
PENSION PLAN - The Association has a noncontributory, qualified pension
plan covering substantially all employees. The plan calls for benefits to
be paid to eligible employees at retirement based primarily upon years of
service with the Association and compensation rates during those years.
Currently, the Association's policy is to fund the qualified retirement
plan in an amount that is determined in accordance with the minimum
funding standards of the Employee Retirement Income Security Act, but
falls below the tax deductible contribution. Plan assets consist primarily
of corporate and government agency bonds, mutual funds, common stock, and
managed funds.
37
<PAGE>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pension expense for the plan amounted to $403,000, $578,000 and $581,000
for the years ended September 30, 1996, 1995, and 1994, respectively, and
included the following components:
--------------------------------------------------------------------------
Years ended September 30,
1996 1995 1994
--------------------------------------------------------------------------
(In Thousands)
Service cost $551 $603 $636
Interest cost 453 460 540
Actual return on assets (533) (417) (184)
Net amortization and deferral (68) (68) (411)
---- ---- ----
Net periodic pension cost $403 $578 $581
==== ==== ====
For the years ended September 30, 1996, 1995, and 1994, pension expense
amounts were based upon actuarial computations.
In accordance with the actuarially determined computation under SFAS No.
87, no funding was required for the 1996, 1995, and 1994 plan years.
The following sets forth the funded status of the qualified plan:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
September 30,
1996 1995
-------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits $3,515 $3,598
Nonvested benefits 442 447
------ ------
Accumulated benefit obligation 3,957 4,045
Effect of anticipated future compensation levels and other events 2,683 2,943
------ ------
Projected benefit obligation 6,640 6,988
Fair value of assets held in the plan (estimated) 7,381 6,679
------ ------
Unfunded plan assets over projected benefit obligation $ 741 $ 309
====== ======
The unfunded plan assets consist of the following:
Unamortized net asset transition $ 428 $ (500)
Accrued pension cost (1,272) 1,031
Unrecognized net loss (gain) due to changes in assumptions 1,616 (256)
Prior service cost (31) 34
------ ------
Total $ 741 $ 309
====== ======
</TABLE>
The pension plan invests primarily in GNMA certificates, conventional
mortgage pass-through certificates, mutual funds, and common and preferred
stocks.
SUPPLEMENTAL RETIREMENT INCOME PLAN - During 1989, the Association's Board
of Directors established a nonqualified unfunded defined benefit plan for
certain officers. For the years ended September 30, 1996, 1995, and 1994,
the net periodic expense for the officers' plan totaled $60,000, $65,000,
and $52,000 respectively. The projected benefit obligation as of September
30, 1996 and 1995 was estimated at $380,000 and $358,000, respectively.
38
<PAGE>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The actuarial present value of benefit obligations was as follows:
------------------------------------------------------------------------
September 30,
1996 1995
------------------------------------------------------------------------
(In Thousands)
Projected benefit obligation $380 $358
Prior service cost 43 50
Unrecognized net gains 87 58
---- ----
Accrued retirement plan cost 510 466
Prior years accrual (466) (417)
Employer contributions 16 16
---- ----
Net periodic retirement plan expense $ 60 $ 65
==== ====
ACTUARIAL ASSUMPTIONS - Actuarial assumptions represent estimates of
future experience based on the characteristics of the plan and its covered
employees. The actuarial assumptions used in the pension plan and
retirement plan valuations were as follows:
-------------------------------------------------------------------------
Year ended September 30,
1996 1995 1994
------------------------------------------------------------------------
Discount rate 6.50% 6.50% 7.00%
Asset rate 8.00% 8.00% 8.00%
Salary scale 5.00% 6.00% 6.00%
The Association does not provide any material postretirement or
postemployment benefits.
EMPLOYEE STOCK OWNERSHIP PLAN - On October 24, 1994, in connection with
the Association's Plan of Reorganization (the "Reorganization") into a
Mutual Holding Company (See Note 19), the Association established an
Employee Stock Ownership Plan ("ESOP") for all eligible employees. As of
September 30, 1995, the ESOP had borrowed $2,800,000 from Nationar and
purchased 190,388 shares of common stock in the open market. Collateral
for the loan is the common stock purchased by the ESOP as well as
Association's funds on deposit with Nationar (See Note 14). The loan will
be repaid principally from the Association's contributions to the ESOP
over a period of up to seven years, and bears interest at the monthly
average of Federal Funds high and low rate plus 2.35%, which was 7.77% at
September 30, 1996.
Statement of Position 93-6 "Employers' Accounting for Employee Stock
Ownership Plan" ("SOP 93-6") requires that the Association reflect shares
allocated to employees under the ESOP as compensation expense at their
fair value, rather than cost. The difference between the cost of such
shares and their fair value is treated, net of tax, as an adjustment of
additional paid in capital. During the years ended September 30, 1996 and
1995, the Association incurred compensation expense related to the ESOP of
$556,000 and $272,000, respectively. No expense was incurred for the year
ended September 30, 1994 as the ESOP was established as part of the
Reorganization.
Contributions to the ESOP will be in an amount proportional to the
repayment of the ESOP loan, and will be allocated among participants on
the basis of compensation in the year of allocation, up to an annual
adjusted maximum level of compensation. In accordance with generally
accepted accounting principles, the unallocated shares held by the ESOP
are shown as a deduction from shareholders' equity.
39
<PAGE>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RECOGNITION AND RETENTION PLAN - In January 1995, the shareholders of the
Association approved the Recognition and Retention Plan (the "Recognition
Plan") for certain officers and non-employee directors of the Association.
Concurrent with such approval, such officers and directors were awarded
88,900 shares of the Association's common stock, which vest in five equal
annual installments, starting January 1996. The fair value of the shares
on the date of award will be recognized as compensation expense over the
vesting period. To fund this plan, the Association issued 88,900 shares
from authorized but unissued shares of the Association's common stock in
July 1995. During the year ended September 30, 1996, unamortized deferred
compensation and additional paid in capital were adjusted to correct
amounts initially recorded in connection with the Recognition Plan.
Unamortized deferred compensation of $654,000 at September 30, 1996 is
reflected as a reduction of shareholders' equity. Compensation expense
related to this plan was $130,000 and $148,000 for the years ended
September 30, 1996 and 1995, respectively.
STOCK OPTION PLAN - The Association has adopted a stock option plan for
the benefit of directors, officers, and other key employees. The number of
shares of common stock reserved for issuance under the stock option plan
was equal to 237,986 shares or 10% of the total number of common shares
issued to persons other than ComFed, M.H.C. pursuant to the Association's
conversion to the stock form of ownership. The option exercise price
cannot be less than the fair value of the underlying common stock as of
the date of the option grant and the maximum option term cannot exceed ten
years. The stock options granted to the directors, officers, and employees
are exercisable in five equal annual installments. The first installment
became exercisable on January 18, 1996. At January 18, 1995, there were
237,450 options granted with 536 options reserved for future use. Below is
a summary of transactions:
Options Outstanding:
Balance - September 30, 1994 --
Granted - January 18, 1995 237,450
Exercised --
Canceled (14,500)
-------
Balance - September 30, 1995 222,950
Granted --
Exercised (1,220)
Canceled (4,880)
-------
Balance - September 30, 1996 216,850
=======
Options exercisable at year
end under stock option plan 43,370
=======
Option price per share of all
outstanding options $11,125
=======
16. MORTGAGE-BACKED BOND
On September 30, 1983, the Association sold two of its branch offices to
another financial institution with the approval of the Federal Home Loan
Bank Board ("FHLBB"). Under terms of the sale, the Association issued a
10.94%, 30-year term mortgage-backed bond (the "Bond") for approximately
$41,601,000. The Bond issue has a stated interest rate which was less than
the market rate (assumed to have been 17.53%) for similar debt at the
effective date of the sale. Accordingly, the Association recorded a
discount on the Bond which is being accreted on the interest method over
the life of the Bond.
The Bond bears an interest rate that is adjustable semi-annually, on April
1 and October 1, to reflect changes in the average of the United States
10-year and 30-year long-term bond rates. The Bond's interest rate on
September 30, 1996 and 1995 was 5.7% and 6.59% respectively. The
unamortized discount at September 30, 1996 and 1995 was $6,052,000 and
$6,548,000, respectively. Principal and interest payments are due
quarterly. During the fiscal years ended September 30, 1996, 1995, and
1994, approximately $496,000, $498,000, and $506,000, respectively, of the
discount was accreted.
At September 30, 1996 and 1995, the Association held $11,391,000 and
$10,233,000 (net of discounts of $11,809,000 and $12,967,000),
respectively, of Salomon Brothers Certificates of Accrual on Treasury
Securities ("CATS") which were purchased at the time of issuing the
mortgage-backed bond. The accrual of interest on the CATS offsets the
discount amortization of the mortgage-backed bond. The CATS are included
in United States Government and agency obligations in Note 3 to the
consolidated financial statements.
40
<PAGE>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Bond at September 30, 1996 was repayable as follows:
-----------------------------------------------------
Years Ending Amount
September 30, (In Thousands)
-----------------------------------------------------
1997 $ 1,387
1998 1,387
1999 1,387
2000 1,387
2001 1,387
2002 and after 16,570
-------
Total 23,505
Less unamortized discount 6,052
-------
Total mortgage-backed bond $17,453
=======
17. REGULATORY RESTRICTIONS ON RETAINED INCOME AND REGULATORY CAPITAL
REQUIREMENT
The Association is subject to various regulatory capital requirements
administered by the Office of Thrift Supervision ("OTS"). Failure to meet
minimum capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken,
could have a direct material effect on the Association's financial
statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Association must meet specific capital
guidelines that involve quantitative measures of the Association's assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Association's capital amounts and
classifications are also subject to qualitative judgments by regulators
about components, risk-weighting, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Association to maintain minimum amounts and ratios of Tangible
capital of not less that 1.5% of adjusted total assets, Total capital to
risk-weighted assets of not less that 8.0%, Tier I capital equal to
adjusted total assets of 3.0%, and Tier I capital to risk-weighted assets
of 4.0% (as defined in the regulations). Management believes, as of
September 30, 1996, that the Association meets all capital adequacy
requirements to which it is subject.
As of September 30, 1996, the most recent notification from the OTS
categorized the Association as "Well Capitalized" under the framework for
prompt corrective action. To be considered well capitalized under Prompt
Corrective Action Provisions, the Association must maintain total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in
the following table. There are no conditions or events since that
notification that management believes have changed the Association's
categorization.
41
<PAGE>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Association's actual capital amounts and ratios are presented in the
following table:
<TABLE>
<CAPTION>
Minimum for To be Considered
Capital Well Capitalized
Adequacy for Prompt Corrective
Actual Purposes Action Provisions
---------------------------------------------------------------------------
Ratio Amount Ratio Amount Ratio Amount
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
As of September 30, 1996:
Shareholders' equity, and ratio
to total assets 11.5% $ 75,056
=====
Investment in subsidiary (2,655)
Intangible assets 1,198
--------
Tangible capital, and ratio to
adjusted total assets 11.3% $ 73,599 1.5% $ 9,770
===== ======== ==== =======
Tier 1 (core) capital, and ratio
to adjusted total assets 11.3% $ 73,599 4.0% $26,052 5.0% $32,565
===== ======== ==== ======= ==== =======
Tier 1 (core) capital, and ratio to
risk-weighted total assets 23.4% $ 73,599 6.0% $18,837
===== -------- ==== =======
Allowance for loan and lease losses 2,060
Equity investments (682)
--------
Tier 2 capital 1,378
--------
Total risk-based capital, and ratio
to risk-weighted total assets 23.9% $ 74,977 8.0% $25,115 10.0% $31,394
===== ======== ==== ======= ===== =======
Total assets $650,332
========
Adjusted total assets $651,306
========
Risk-weighted assets $313,942
========
As of September 30, 1995:
Shareholders' equity, and ratio
to total assets 12.8% $ 72,848
=====
Investment in subsidiary (3,956)
Intangible assets 472
--------
Tangible capital, and ratio to
adjusted total assets 12.3% $ 69,364 1.5% $ 8,489
===== ======== ==== =======
Tier 1 (core) capital, and ratio
to adjusted total assets 12.3% $ 69,364 4.0% $22,638 5.0% $28,297
===== ======== ==== ======= ==== =======
Tier 1 (core) capital, and ratio to
risk-weighted total assets 24.1% $ 69,364 6.0% $17,263
===== -------- ==== =======
Allowance for loan and lease losses 2,040
Equity investments (132)
--------
Tier 2 capital 1,908
--------
Total risk-based capital, and ratio to
risk-weighted total assets 24.8% $ 71,272 8.0% $23,018 10.0% $28,772
===== ======== ==== ======= ===== =======
Total assets $567,006
========
Adjusted total assets $565,942
========
Risk-weighted assets $287,720
========
42
</TABLE>
<PAGE>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
18. SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
---------------------------------------------------------------------------------------------------------------------
For the Years Ended September 30,
1996 1995 1994
---------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 1,877 $ 3,200 $ 2,737
======= ======= =======
Cash paid for interest on deposits and other borrowings $22,146 $17,949 $15,031
======= ======= =======
Supplemental schedule of noncash investing and financing activities:
Real estate acquired in settlement of loans $ 400 $ 1,394 $ 5,528
======= ======= =======
Distribution of Common Stock to fund the Recognition
and Retention Plan $ -- $ 989 $ --
======= ======= =======
</TABLE>
19. CONVERSION TO MUTUAL HOLDING COMPANY
On March 31, 1994, the Board of Directors of the Association unanimously
adopted a plan of reorganization pursuant to which the Association
proposed to reorganize into a federally chartered mutual holding company.
The Reorganization was completed on October 24, 1994. As part of the
Reorganization, the Association organized a new federally chartered stock
savings association (the "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 outstanding upon consummation of the Reorganization.
In connection with the Reorganization, $200,000 of the net proceeds were
contributed to the holding company, ComFed, M.H.C.
Concurrent with the Reorganization, the Association undertook an offering
of 2,379,856 shares of newly issued common stock at a price of $15.00 per
share. Costs of issuing the common stock in the amount of $1,712,000 were
deducted from the gross proceeds totaling $35,697,000, resulting in net
proceeds of $33,984,000. In addition, the Association issued 2,620,144
shares of common stock to ComFed, M.H.C.
The Reorganization was accounted for as change in corporate form with the
historic basis of the Association's assets, liabilities and equity
unchanged as a result. Subsequent to the Reorganization, the existing
rights of the Association's depositors upon liquidation as of the
effective date were transferred to the holding company and records
maintained to ensure such rights receive statutory priority in the event
of a future mutual to stock conversion, or in the event of the holding
company's liquidation.
20. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, as amended by SFAS No. 119, "Disclosures about Fair Value of
Financial Instruments" ("SFAS No. 107"), requires the estimation of fair
values of financial instruments, as defined in SFAS No. 107.
Estimates of fair value are made at a specific date, based upon, where
available, relevant market prices and information about the financial
instrument. For a substantial portion of the Association's financial
instruments, no quoted market exists. Therefore, estimates of fair value
are necessarily based on a number of significant assumptions (many of
which involve events outside the control of management). Such assumptions
include assessments of current economic conditions, perceived risks
associated with these financial instruments and their counterparties,
future expected loss experience and other factors. Given the uncertainties
surrounding these assumptions, the reported fair values represent
estimates only and, therefore, cannot be compared to the historical
accounting model. Use of different assumptions or methodologies are likely
to result in significantly different fair value estimates.
Although management uses its best judgment in estimating the fair value of
the financial instruments, there are inherent limitations in any
estimation technique. Therefore, the fair value estimates presented herein
are not necessarily indicative of the amounts which the Association could
realize in a current transaction.
43
<PAGE>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The estimated fair values presented neither include nor give effect to the
values associated with the Association's existing customer relationships,
extensive branch banking network or property, or certain tax implications
related to the realization of unrealized gains or losses. Also under SFAS
No. 107, the fair value of non-interest-bearing NOW deposits,
interest-bearing NOW accounts, passbook and statement accounts, and money
market accounts is equal to the carrying amount because these deposits
have no stated maturity. The approach to estimating fair value excludes
the significant benefit that results from the low-cost funding provided by
such deposit liabilities, as compared to alternative sources of funding.
The following methods and assumptions were used to estimate the fair value
of each major classification of financial instruments at September 30,
1996 and 1995:
CASH AND CASH EQUIVALENTS - The carrying amounts reported in the Statement
of Financial Condition for cash and cash equivalents approximates their
fair value.
INVESTMENTS - HELD TO MATURITY AND SECURITIES AVAILABLE FOR SALE - Fair
value is determined by reference to quoted market prices or by use of
broker price estimates.
LOANS RECEIVABLE - The fair value of loans was estimated by using a method
which approximates the effect of discounting the estimated future cash
flows over the expected repayment periods using rates which consider
credit risk, servicing costs and other relevant factors.
MORTGAGE-BACKED AND RELATED SECURITIES - Fair value is determined by
reference to quoted market prices or by use of broker price estimates.
DEPOSITS - Current carrying amounts approximate estimated fair value of
deposits with no stated maturity, including demand deposits, interest
bearing NOW accounts, passbooks and statement accounts, and money market
accounts. Fair value for fixed maturity certificate of deposit accounts
was estimated by discounting the contractual cash flow using a rate which
reflects the Association's cost of funds adjusted for the cost of
servicing deposit accounts.
MORTGAGE-BACKED BOND - The carrying amount of the mortgage-backed bond is
a reasonable estimate of fair market value.
ADVANCES FROM FEDERAL HOME LOAN BANK - Fair value is estimated using the
Association's cost of funds adjusted for the cost of operations.
ESOP LOAN - The carrying amount of the ESOP loan is a reasonable estimate
of fair market value.
COMMITMENTS TO EXTEND CREDIT - At September 30, 1996 and 1995, the fair
value of commitments to extend credit was considered insignificant due to
the short-term nature of the commitments.
The estimated fair values of the Association's financial instruments were
as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
September 30, 1996 September 30, 1995
Carrying Value Fair Value Carrying Value Fair Value
----------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents $ 44,780 $ 44,780 $ 42,497 $ 42,497
Investments - held to maturity 22,293 26,093 59,679 64,135
Securities available for sale 124,287 124,287 27,028 27,028
Mortgage-backed and related securities 54,945 54,988 77,499 77,818
Loans receivable - net 376,219 385,491 329,442 335,627
Financial Liabilities:
Deposits $498,929 $496,529 $437,376 $435,867
Mortgage-backed bond 17,453 17,453 18,344 18,344
Advances from FHLB 36,350 36,545 18,200 18,365
ESOP borrowings 2,064 2,064 2,557 2,557
</TABLE>
44
<PAGE>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter
----------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Year ended September 30, 1996:
Interest income $ 10,205 $ 10,748 $ 11,091 $ 11,845
Interest expense 5,349 5,834 5,724 5,952
--------- --------- --------- ----------
Net interest income 4,856 4,914 5,367 5,893
Provision for loan losses 30 2 38 28
Other income 1,080 967 370 927
Operating expense 4,189 3,992 4,277 7,142
Provision (benefit) for income taxes 667 619 (361) (164)
--------- --------- --------- ----------
Net income (loss) $ 1,050 $ 1,268 $ 1,783 $ (186)
========= ========= ========= ==========
Earnings (loss) per share $ 0.22 $ 0.26 $ 0.36 $ (0.04)
========= ========= ========= ==========
Weighted average common
shares outstanding 4,850,672 4,876,633 4,885,991 4,956,358
========= ========= ========= ==========
</TABLE>
<TABLE>
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter
----------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Year ended September 30, 1995:
Interest income $ 8,872 $ 9,076 $ 9,657 $ 10,115
Interest expense 3,960 4,278 5,087 5,309
--------- --------- --------- ---------
Net interest income 4,912 4,798 4,570 4,806
Provision for loan losses 108 37 156 (61)
Other income 850 827 796 921
Operating expense 3,915 3,983 3,016 3,989
Provision for income taxes 673 617 822 651
--------- --------- --------- ---------
Net income $ 1,066 $ 988 $ 1,372 $ 1,148
========= ========= ========= ==========
Earnings per share $ 0.22 $ 0.21 $ 0.28 $ 0.24
========= ========= ========= ==========
Weighted average common
shares outstanding 4,887,160 4,817,262 4,822,362 4,838,575
========= ========= ========= =========
</TABLE>
The fiscal 1996 third quarter results of operations include a $1,140,000
credit to the income tax provision related to the reversal of a liability
accrued in prior years which management concluded was no longer necessary.
The fiscal 1996 fourth quarter results of operations include a one-time
special assessment of $2.8 million for the recapitalization of the SAIF
administered by the FDIC.
45
<PAGE>
<TABLE>
<CAPTION>
C O R P O R A T E D I R E C T O R Y
BOARD OF DIRECTORS
<S> <C> <C> <C>
FREDERICK A. TEED FOREST C. BEATY, JR. ROBERT F. CROMWELL
CHAIRMAN OF THE BOARD DIRECTOR DIRECTOR AND CHAIRMAN EMERITUS OF THE
BOARD
KARL D. GRIFFIN JAMES B. PITTARD, JR. HAROLD I. STEVENSON, CPA
DIRECTOR AND SECRETARY EMERITUS OF THE PRESIDENT AND CHIEF EXECUTIVE OFFICER DIRECTOR
BOARD
COMMUNITY SAVINGS' MANAGEMENT
ADMINISTRATIVE DIVISION
James B. Pittard, Jr. Joe L. Knorr Juanita Parkinson
CHIEF EXECUTIVE OFFICER INTERNAL AUDITOR MARKETING COORDINATOR
Deborah M. Rousseau Judith M. Hogan Jane H. Ryder
CORPORATE SECRETARY COMPLIANCE OFFICER PERSONNEL MANAGER
FINANCE DIVISION
Larry J. Baker, CPA Donna L. Sheppard, CPA Bruce C. Tissot
CHIEF FINANCIAL OFFICER CONTROLLER STAFF ACCOUNTANT
DIVISION DIRECTOR - FINANCE
LOAN DIVISION
Cecil F. Howard, Jr. Charles J. Gifford Michael E. Reinhardt
DIVISION DIRECTOR - LENDING NEW LOAN OPERATIONS MANAGER LOAN SERVICE AND ASSOCIATION
PROPERTIES MANAGER
Johnny L. Morris Mildred C. Lodge Carla Alexander
LENDING SALES MANAGER LOAN OFFICER/CONSUMER AND RESIDENTIAL LOAN ORIGINATOR
Priscilla D. Bailey Carole Blair Bruce Kerman
LOAN OFFICER LOAN ORIGINATOR LOAN ORIGINATOR
Donna Lubinsky Lawrence Richardson
LOAN ORIGINATOR LOAN ORIGINATOR
OPERATIONS DIVISION
Mary L. Kaminske Elizabeth A. DeLosh Rizwana Khalid
DIVISION DIRECTOR - OPERATIONS BRANCH OPERATIONS MANAGER DEPOSITS PRODUCTS MANAGER
Cindy L. Sheppard Theresa J. Brooks Patricia Dent
DATA SYSTEMS MANAGER REGIONAL BRANCH MANAGER DEPOSIT SALES REPRESENTATIVE
Darlene L. Deaton Allen Revell
REGIONAL BRANCH MANAGER DEPOSIT SALES REPRESENTATIVE
BRANCH MANAGERS
NORTH REGION
Helena Dumich Deana Fessel Judy Hamm Diane Lents
HOBE SOUND JENSEN BEACH PORT ST. LUCIE FORT PIERCE
Lesa Murphy Jeanne Powell Kevin Smith
MARTIN DOWNS PORT SALERNO ST. LUCIE WEST
SOUTH REGION
Naomi Belk Elizabeth Colgan Wendy Green Teresa Hazel
RIVIERA BEACH VILLAGE COMMONS TEQUESTA GALLERY SQUARE
Mary Beth Hoyla Corliss Jackson Charlene McBride Calvin Miller
PGA NORTH PALM BEACH BLUFFS SINGER ISLAND
Diana Miner Eileen St. Denis Thomas Welly
TONEY PENNA PALM BEACH GARDENS CHASEWOOD
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
C O R P O R A T E I N F O R M A T I O N
<S> <C> <C>
HOME OFFICE AUDITORS
& CORPORATE HEADQUARTERS Deloitte & Touche LLP
660 U.S. Highway One 1645 Palm Beach Lakes Boulevard, Suite 900
North Palm Beach, FL 33408 West Palm Beach, FL 33401
ANNUAL MEETING SPECIAL COUNSEL
January 15, 1997 Elias, Matz, Tiernan & Herrick L.L.P.
1:30 p.m. 734 15th Street, NW
Embassy Suites PGA 12th Floor
4350 PGA Boulevard Washington, DC 20005
Palm Beach Gardens, FL 33410
FORM 10-K
REGISTRAR & TRANSFER AGENT A copy of the Association's Annual Report on
ChaseMellon Shareholder Services, L.L.C. Form 10-K, as filed with the Office of Thrift
450 West 33rd Street Supervision, is available without charge.
15th Floor
New York, NY 10001-2697
(800) 526-0801 STOCK LISTING
The Common Stock
DIVIDEND SERVICES of Community Savings, F. A.
Dividend Reinvestment and Optional is traded on the Nasdaq National
Cash Investment Plan - provides shareholders Market under the symbol CMSV.
a regular way of investing cash Many newspaper stock tables
dividends in additional shares and list Community Savings'
investing optional cash payments stock as CommSv.
without payment of brokerage commissions.
SHAREHOLDER RELATIONS
SHAREHOLDER ACCOUNT ASSISTANCE Deborah M. Rousseau
Shareholders who wish to change the name Corporate Secretary
address or ownership of stock or report lost (561) 881-2212
certificates should contact the Registrar
and Transfer Agent at the address INVESTOR RELATIONS
or phone number above. James B. Pittard, Jr.
Chief Executive Officer
GENERAL COUNSEL (561) 881-2213
Cromwell, Pfaffenberger, Dahlmeier
Barner, Griffin & Colton Larry J. Baker, CPA
631 U.S. Highway One, Suite 410 Chief Financial Officer
North Palm Beach, FL 33408 (561) 881-2213
</TABLE>
Community Savings' Common Stock began trading on October 24, 1994. As of
September 30, 1996, there were 5,090,120 shares of Common Stock outstanding and
930 shareholders of record, not including the number of persons or entities
whose stock is held in nominee or "street" name through various brokerage firms
or banks. The following tables sets forth quarter ending book value, high, low,
and closing trade prices, and dividend per share information.
<TABLE>
<CAPTION>
QUARTERLY COMMON STOCK DATA
CLOSING PRICES
BOOK ------------------------------------------------- DIVIDEND
VALUE HIGH LOW CLOSE PER SHARE
----- ---- --- ----- ---------
<S> <C> <C> <C> <C> <C>
September 30, 1996 $15.33 $17 $15 3/4 $16 3/4 $ .20
June 30, 1996 $15.38 $16 $14 1/4 $16 $ .20
March 31, 1996 $15.35 $17 $15 1/2 $15 1/2 $.1750
December 31, 1995 $15.35 $18 3/8 $16 3/4 $17 $.1750
September 30, 1995 $15.04 $17 3/4 $14 5/8 $17 5/8 $.1750
June 30, 1995 $14.93 $15 1/4 $11 3/8 $14 7/8 $.15
March 31, 1995 $14.69 $13 1/8 $10 3/4 $11 7/8 $.15
December 31, 1994 $14.51 $15 $10 $11 $.1125
</TABLE>
47
<PAGE>
[BACK COVER OF ANNUAL REPORT]
COMMUNITY SAVINGS, F.A.
660 U.S. HIGHWAY ONE, NORTH PALM BEACH, FLORIDA 33408
OFFICE OF THRIFT SUPERVISION
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, 1997
--------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------- ---------------
OTS Docket number 05939
------
COMMUNITY SAVINGS, F. A.
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
UNITED STATES 65-0525685
- ---------------------------------------- ---------------------------------
(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) 881-4800
----------------------
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 August 11, 1997 there were 5,090,120 shares of the Registrant's
common stock outstanding.
<PAGE>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
- ----------------------------- ----
Item 1. Financial Statements
<S> <C>
Unaudited Consolidated Statements of Financial Condition as of June 30,
1997 and December 31, 1996 (Unaudited) 2
Consolidated Statements of Operations for the three and the six months
ended June 30, 1997 and 1996 (Unaudited) 3
Consolidated Statements of Changes in Shareholders' Equity for the year
ended December 31, 1996 and for the six months ended June 30, 1997
(Unaudited) 4
Consolidated Statements of Cash Flows for the six months ended June 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 10
PART II. OTHER INFORMATION
- --------------------------
Item 1 Legal Proceedings 16
Item 2 Changes in Securities 16
Item 3 Default Upon Senior Securities 16
Item 4 Submission of Matters to a Vote of Security Holders 16
Item 5 Other Information 16
Item 6 Exhibits and Reports on Form 8-K 16
Signature Page 17
</TABLE>
1
<PAGE>
ITEM 1. FINANCIAL STATEMENTS.
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AT JUNE 30, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---- ----
(Unaudited)
ASSETS (In Thousands)
Cash and cash equivalents:
<S> <C> <C>
Cash and amounts due from depository institutions $14,524 $13,547
Interest-bearing deposits 23,546 28,895
------ ------
Total cash and cash equivalents 38,070 42,442
Securities available for sale 150,106 123,152
Investments - held to maturity 21,563 22,139
Mortgage-backed and related securities - held to maturity 50,206 53,405
Loans receivable, net of allowance for loan losses 409,895 389,040
Accrued interest receivable 2,880 2,354
Office properties and equipment, net 18,467 16,368
Investment in and advances to real estate venture 89 62
Real estate owned, net 1,353 1,455
Federal Home Loan Bank stock - at cost 3,263 2,864
Other assets 3,895 1,928
-------- --------
Total assets $699,787 $655,209
======== ========
LIABILITIES
Deposits $540,533 $513,709
Mortgage-backed bond - net 16,782 17,230
Advances from Federal Home Loan Bank 46,052 34,763
ESOP borrowings 1,719 1,915
Advances by borrowers for taxes and insurance 4,835 1,059
Other liabilities 8,904 8,378
Deferred income taxes 2,284 2,036
------- -------
Total liabilities 621,109 579,090
------- -------
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, 5,090,120 shares outstanding 5,090 5,090
Additional paid in capital 30,000 29,950
Retained income - substantially restricted 46,308 44,603
Common stock purchased by Employee Stock Ownership Plan (1,620) (1,848)
Common stock issued to Recognition and Retention Plan (515) (608)
Unrealized decrease in market value of assets available
for sale, net of income taxes (585) (1,068)
-------- --------
Total shareholders' equity 78,678 76,119
-------- --------
Total liabilities and shareholders' equity $699,787 $655,209
======== ========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996
<TABLE>
<CAPTION>
For the three months For the six months
ended June 30, ended June 30,
1997 1996 1997 1996
---- ---- ---- ----
(Unaudited)
(In Thousands)
<S> <C> <C> <C> <C>
Interest income:
Real estate loans $7,791 $6,718 $15,479 $13,190
Consumer and commercial business loans 410 355 817 707
Investment securities and securities available for sale 2,909 2,383 5,280 4,316
Mortgage-backed and related securities 1,021 1,070 2,010 2,190
Interest-earning deposits 426 565 991 1,436
------ ------ ------ ------
Total interest income 12,557 11,091 24,577 21,839
------ ------ ------ ------
Interest expense:
Deposits 5,661 4,873 11,031 9,764
Advances from Federal Home Loan Bank
and other borrowings 1,152 851 2,229 1,794
------ ------ ------ ------
Total interest expense 6,813 5,724 13,260 11,558
------ ------ ------ ------
Net interest income 5,744 5,367 11,317 10,281
Provision for loan losses 53 38 83 40
------ ------ ------ ------
Net interest income after provision for loan losses 5,691 5,329 11,234 10,241
------ ------ ------ ------
Other income:
Servicing income and other fees 104 32 158 63
NOW account and other customer fees 829 767 1,608 1,543
Net gain on sale of securities
available for sale - - - 138
Net loss on amounts due from depository institutions - (200) - (200)
Net loss on sale of loans receivable - (218) - (218)
Loss incurred in real estate venture - (48) (1) (58)
Miscellaneous 38 37 97 69
------ ------ ------ ------
Total other income 971 370 1,862 1,337
------ ------ ------ ------
Operating expense:
Employee compensation and benefits 2,122 1,933 4,253 3,794
Occupancy and equipment 1,226 1,137 2,420 2,257
Net gain on real estate owned (9) (5) (3) (82)
Advertising and promotion 238 210 432 362
Federal deposit insurance premium 83 265 99 518
Miscellaneous 852 737 1,604 1,420
------ ------ ------ ------
Total operating expense 4,512 4,277 8,805 8,269
------ ------ ------ ------
Income before provision for (benefit from) income taxes 2,150 1,422 4,291 3,309
Provision for (benefit from) income taxes 767 (361) 1,556 258
------ ------ ------ ------
Net income $1,383 $1,783 $2,735 $3,051
====== ====== ====== ======
Primary and fully diluted earnings per share $ 0.27 $ 0.36 $ 0.54 $ 0.62
====== ====== ====== ======
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C> <C>
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 six months ended
June 30, 1997 -- -- 2,735 -- -- -- 2,735
Unrealized increase in market value
of assets available for sale
(net of income taxes) -- -- -- -- -- 483 483
Amortization of deferred
compensation - Employee Stock
Ownership Plan and Recognition
and Retention Plan -- 50 -- 228 93 -- 371
Dividends declared -- -- (1,030) -- -- -- (1,030)
--------------------------------------------------------------------------------
Balance-June 30, 1997(unaudited) $ 5,090 $ 30,000 $ 46,308 $ (1,620) $ (515) $ (585) $ 78,678
================================================================================
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
For the six months ended
June 30,
1997 1996
---- ----
(Unaudited)
(In Thousands)
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 2,735 $ 3,051
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 677 606
ESOP and Recognition and Retention Plan compensation expense 371 243
Accretion of discounts, amortization of premiums, and other deferred
yield items (766) (737)
Provision for losses on other assets -- 200
Provision for loan losses 83 40
Provision for gains and net gains on sales of real estate owned (2) (99)
Amortization of discount on mortgage-backed bond 246 248
Net (gain)loss on sale of other assets (14) 220
Increase in accrued interest receivable (526) (132)
Increase in other assets (1,967) (696)
(Increase) decrease in loans available for sale (10) 526
Increase (decrease) in other liabilities 526 (134)
-------- --------
Net cash provided by operating activities 1,353 3,336
-------- --------
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
Loan originations and principal payments on loans (18,406) (17,821)
Principal payments received on mortgage-backed and related securities 6,389 5,747
Principal payments on investments 939 1,462
Purchases of:
Loans (2,590) (10,849)
Securities available for sale (41,309) (63,332)
Federal Home Loan Bank stock (399) --
Office property and equipment (2,756) (1,097)
Proceeds from sales of:
Office property and equipment 78 79
Participation loan purchased -- 3,452
Real estate acquired in settlement of loans 189 548
Proceeds from maturities of investments 12,300 13,000
Investment in real estate venture (27) (233)
Other investing (159) (128)
-------- --------
Net cash used for investing activities (45,751) (69,172)
-------- --------
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
Net increase (decrease) in:
NOW accounts, demand deposits, and savings accounts 3,445 (4,029)
Certificates of deposit 23,379 37,479
Advances from Federal Home Loan Bank 15,000 5,000
Repayment of advances from Federal Home Loan Bank (3,711) (2,175)
Advances by borrowers for taxes and insurance 3,776 3,314
ESOP loan (196) (295)
Sale of common stock - net issuance -- 13
Payments made on mortgage-backed bond (694) (693)
Dividends paid (973) (783)
-------- --------
Net cash provided by financing activities 40,026 37,831
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (4,372) (28,005)
CASH AND CASH EQUIVALENTS, beginning of period 42,442 59,642
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 38,070 $ 31,637
======== ========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited consolidated interim financial statements for Community
Savings, F. A. and its subsidiaries ("Community Savings" or the
"Association"), the majority-owned subsidiary of ComFed, M. H. C., reflect
all adjustments (consisting only of normal recurring accruals) which, in
the opinion of management, are necessary to present fairly the
Association's 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.
2. REORGANIZATION TO A MUTUAL HOLDING COMPANY AND CONVERSION TO STOCK FORM
OF OWNERSHIP
The Association was reorganized into a federal mutual holding company,
ComFed, M.H.C. (the "Holding Company") on October 24, 1994. In connection
with the reorganization, the Holding Company retained $200,000 for
operating capital. The Holding Company is chartered and regulated by the
Office of Thrift Supervision ("OTS").
Simultaneously with the reorganization into a mutual holding company, the
Association sold shares of common stock which represent a minority
interest in the Association to officers, directors, employees, and certain
depositors and borrowers of the Association, and to certain members of the
general public. The remaining issued and outstanding shares are owned by
the Holding Company. The reorganization and minority stock offering were
completed on October 24, 1994. The Association sold 2,379,856 shares at
$15 per share for total gross proceeds of $35,697,840. The minority stock
offering represented a minority ownership of 47.6% of the Association. The
net proceeds of the stock offering, after reflecting conversion expenses
of approximately $1,712,000, were $33,985,840. The net proceeds, less the
$200,000 retained by the Holding Company, were added to the Association's
general funds to be used for general corporate purposes.
In connection with the reorganization to the stock form of ownership, the
Community Savings, F. A. Employee Stock Ownership Plan ("ESOP") purchased
190,388 shares of the Association common stock at an average price of
$14.45 per share, or $2,752,977 in the aggregate, which was funded by a
loan from an unaffiliated lender. The Association makes scheduled cash
contributions to the ESOP sufficient to service the amount borrowed. For
the six months ended June 30, 1997, total contributions made to the ESOP,
which are used to fund principal and interest payments on the ESOP debt,
totaled approximately $270,000.
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.
4. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 130 "Reporting Comprehensive Income"
which requires 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 the Association's
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.
6
<PAGE>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. LOANS RECEIVABLE
Loans receivable consist of the following:
JUNE 30, DECEMBER 31,
--------- ------------
1997 1996
-------- --------
(In Thousands)
Real estate loans:
Residential 1-4 family $311,493 $293,296
Residential 1-4 family held for sale
(at lower of cost or fair value) 80 70
Residential construction loans 28,360 33,158
Non-residential construction loans 3,104 2,200
Land loans 15,880 19,426
Multi-family loans 9,059 8,096
Commercial 51,777 37,815
-------- --------
Total real estate loans 419,753 394,061
-------- --------
Non-real estate loans:
Consumer loans 15,716 16,028
Commercial business 2,820 2,458
-------- --------
Total non-real estate loans 18,536 18,486
-------- --------
Total loans receivable 438,289 412,547
Less:
Undisbursed loan proceeds 25,751 20,765
Unearned discount and net deferred loan fees 41 200
Allowance for loan losses 2,602 2,542
-------- --------
Total loans receivable, net $409,895 $389,040
======== ========
The amount of loans on which the Association has ceased accruing interest
aggregated approximately $1,466,000 and $1,631,000 at June 30, 1997 and
December 31, 1996, respectively. The amount of interest not accrued
related to these loans was approximately $98,000 and $65,000 at June 30,
1997 and December 31, 1996, respectively.
An analysis of the changes in the allowance for loan losses is as follows:
For the six months
ended June 30,
----------------------
1997 1996
---- ----
(In Thousands)
Balance, beginning of period $ 2,542 $ 3,492
Provision charged to income 83 40
Losses charged to allowance (23) (1,240)
Recoveries -- --
------- -------
Balance, end of period $ 2,602 $ 2,292
======= =======
7
<PAGE>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Association 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 the
Association at June 30, 1997 and the related allowance for those loans is
as follows:
<TABLE>
<CAPTION>
June 30, 1997
------------------------
Loan Related
BALANCES ALLOWANCES
-------- ----------
(In Thousands)
<S> <C> <C>
Impaired loan balances and related
allowances for loan losses $ 1,056 $ 252
======= =====
6. REAL ESTATE OWNED
Real estate owned consists of the following:
June 30, December 31,
1997 1996
------- -------
(In Thousands)
Real estate owned $ 1,402 $ 1,547
Less allowance for loss 49 92
------ -------
Total $ 1,353 $ 1,455
====== =======
Changes in allowance for loss are as follows:
For the six months
ended June 30,
--------------
1997 1996
------- -------
(In Thousands)
Balance, beginning of period $ 92 $ 149
Provision charged to income -- (69)
Losses charged to allowance (43) --
------- -------
Balance, end of period $ 49 $ 80
======= =======
</TABLE>
8
<PAGE>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. DEPOSITS
The weighted-average interest rates on deposits at June 30, 1997 and
December 31, 1996 were 4.25% and 4.15%, respectively. Deposit accounts, by
type and range of rates at June 30, 1997 and December 31, 1996, consist of
the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
---- ----
(In Thousands)
Account Type and Rate
---------------------
<S> <C> <C>
Non-interest-bearing NOW accounts $20,140 $18,627
NOW, Super NOW and funds transfer accounts 68,281 67,076
Passbook and statement accounts 30,675 30,821
Money market accounts 70,387 69,514
-------- --------
Total non-certificate accounts 189,483 186,038
-------- --------
Certificates:
3.00% or less 1,067 1,035
3.01% - 3.99% 13 598
4.00% - 4.99% 18,146 51,484
5.00% - 5.99% 289,454 232,313
6.00% - 6.99% 33,685 33,568
7.00% - 7.99% 8,685 8,673
-------- --------
Total certificates of deposit 351,050 327,671
-------- --------
Total $540,533 $513,709
======== ========
</TABLE>
Individual deposits greater than $100,000 at June 30, 1997 and December
31, 1996 aggregated approximately $79,348,000 and $72,504,000,
respectively. Deposits in excess of $100,000 are not insured.
8. CONTINGENCIES
The Association is continuing to investigate a previously reported
possible employee defalcation which may have been occurring for several
years. The Association maintains insurance to cover possible defalcation
losses with a claim deductible of $200,000. The Association established a
liability for the amount of the deductible during fiscal year 1996.
Management currently estimates that the loss in excess of the deductible
will not involve material amounts and will be covered by the insurance.
Although the Association has notified its insurance company of the
potential claim and the insurance company has acknowledged coverage, the
insurance company has not completed its investigation of the claim.
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 June 30, 1997, the
primary and fully diluted weighted-average number of shares was 5,032,938
and 5,037,053, respectively. For the quarter ended June 30, 1996, the
primary and fully diluted weighted-average number of shares was 4,930,842
and 4,941,183, 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, the Association 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 June 30, 1997, basic and diluted earnings per share
as computed under the provisions of SFAS No. 128, would be $0.28 and $0.27
per share, respectively.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Community Savings, 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, Community Savings successfully completed a
stock offering by issuing 5,000,000 shares of common stock of which 47.6% or
2,379,856 shares were purchased at $15.00 a share by the public and 2,620,144
shares were issued to the newly formed mutual holding company, ComFed, M. H. C.
During July 1995, 88,900 shares of common stock were issued from authorized but
unissued shares to fund the Association's RRP, and during April 1996, 1,220
shares were issued upon the exercise of stock options, resulting in total shares
of common stock currently issued and outstanding of 5,090,120.
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"). Community Savings' plan is
to operate as a well-capitalized, profitable and independent institution.
Community Savings 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.
LIQUIDITY AND CAPITAL RESOURCES
The Association is required to maintain minimum levels of liquid assets as
defined by OTS regulations. This requirement, which varies from time to time
depending upon economic conditions and deposit flows, is based upon a percentage
of deposits and short-term borrowings. The required ratio is currently 5.0%. The
Association's liquidity ratio averaged 13.23% during the six months ended June
30, 1997 while liquidity ratios averaged 14.10% for the year ended December 31,
1996. The Association adjusts its liquidity levels in order to meet funding
needs of deposit outflows, payment of real estate taxes on mortgage loans,
repayment of borrowings, and loan commitments. The Association also adjusts
liquidity as appropriate to meet its asset and liability management objectives.
A major portion of the Association's liquidity consists of cash and cash
equivalents, which are a product of its operating, investing, and financing
activities.
The Association's 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. The Association
manages the pricing of its deposits to maintain a desired deposit balance. 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 amounted to $23.3 million at June 30, 1997. Other assets qualifying
for liquidity outstanding at June 30, 1997 amounted to $47.5 million. For
additional information about cash flows from the Association's operating,
financing, and investing activities, see the unaudited consolidated statements
of cash flows included in the financial statements. .
11
<PAGE>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
Liquidity management is both a daily and long-term function of business
management. If the Association requires funds beyond its ability to generate
them internally, borrowing agreements exist with the FHLB which provide an
additional source of funds. At June 30, 1997, the Association's advances from
the FHLB totaled $46.1 million. The Association has in the past utilized
borrowings from the FHLB principally to reduce interest rate risk, rather than
for liquidity purposes.
At June 30, 1997, the Association had outstanding loan commitments totalling
$5.0 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 $270.2 million at June 30, 1997. Based on prior experience, management
believes that a significant portion of such deposits will remain with the
Association.
FINANCIAL CONDITION
JUNE 30, 1997 COMPARED TO DECEMBER 31, 1996
The following table summarizes certain information relating to the Association's
financial condition at the dates indicated.
<TABLE>
<CAPTION>
June 30, December 31, Increase
1997 1996 (Decrease)
------- ----- ----------
(Unaudited)
(In Thousands)
Assets:
<S> <C> <C> <C>
Total assets $699,787 $655,209 $ 44,578
Cash and cash equivalents 38,070 42,442 (4,372)
Securities portfolio:
Investment securities 21,563 22,139 (576)
Securities available for sale 150,106 123,152 26,954
Mortgage-backed and related securities 50,206 53,405 (3,199)
-------- -------- --------
Total securities portfolio 221,875 198,696 23,179
Loans receivable, net 409,895 389,040 20,855
Real estate owned, net 1,353 1,455 (102)
Liabilities:
Total liabilities 621,109 579,090 42,019
Deposits 540,533 513,709 26,824
Federal Home Loan Bank advances 46,052 34,763 11,289
ESOP borrowings 1,719 1,915 (196)
Advances by borrowers for taxes and insurance 4,835 1,059 3,776
Shareholders' equity 78,678 76,119 2,559
</TABLE>
Total assets increased $44.6 million to $699.8 million at June 30, 1997, as
compared to $655.2 million at December 31, 1996 primarily due to a $20.9 million
increase in the Association's loan portfolio to $409.9 million at June 30, 1997
from $389.0 million at December 31, 1996, and a $23.2 million increase in the
securities portfolio (which includes securities available for sale, investment
securities, and MBS) to $221.9 million at June 30, 1997 from $198.7 million at
December 31, 1996. Such increases were partially offset by a $4.3 million
decrease in cash and cash equivalents to $38.1 million at June 30, 1997 from
$42.4 million at December 31, 1996. The increase in total assets was funded
primarily by a $26.8 million increase in deposits to $540.5 million at June 30,
1997 from $513.7 million at December 31, 1996. In addition, purchases of
securities available for sale were funded in part by an $11.3 million increase
in FHLB advances which totaled $46.1 million and $34.8 million at June 30, 1997
and December 31, 1996, respectively.
The securities portfolio net increase of $23.2 million reflects purchases of
$41.3 million of new securities available for sale as the Association utilized
funds raised in an odd-term certificate of deposit promotion and FHLB advances,
offset by scheduled principal reductions, calls, and amortization of premiums
and discounts amounting to $18.1 million.
11
<PAGE>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
Loans receivable increased $20.9 million as a result of the Association's
continued emphasis on its lending activities. Loan originations of $63.2 million
and purchases of $2.6 million (primarily consisting of one- to four-family
residential properties) were offset by repayments and other adjustments of $44.9
million. Real estate owned decreased $102,000 to $1.4 million at June 30, 1997,
from $1.5 million at December 31, 1996, primarily due to the sale of foreclosed
real estate.
Total liabilities increased $42.0 million to $621.1 million at June 30, 1997,
from $579.1 million at December 31, 1996. Total deposits increased by $26.8
million to $540.5 million at June 30, 1997 from $513.7 million at December 31,
1996 due primarily to increased retail deposits resulting from a special
promotion 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 $78.7 million at June 30, 1997, from $76.1 million at
December 31, 1996, reflecting net income for the six months of $2.7 million, a
net increase in the market value of assets available for sale of $483,000, and
the stock benefit plans accrual of $371,000, offset in part by the declaration
of dividends totalling $1.0 million. For further information, see the unaudited
consolidated statements of changes in shareholders' equity in the accompanying
consolidated financial statements.
At June 30, 1997, the Association exceeded all regulatory capital requirements
as follows:
<TABLE>
<CAPTION>
To be Considered
Minimum for Well Capitalized
Capital Adequacy for Prompt Corrective
Actual Purposes Action Provision
-------------------------------------------------------------------------
Ratio Amount Ratio Amount Ratio Amount
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1997:
Shareholders' equity, and ratio
to total assets 11.2% $78,678
=====
Unrealized decrease in market value
of securities available for sale 585
Tangible capital, and ratio to -------
adjusted total assets 11.3% $79,263 1.5% $10,506
===== ======= ==== =======
Tier 1 (core) capital, and ratio
to adjusted total assets 11.3% $79,263 3.0% $21,011 5.0% $35,019
===== ======= ==== ======= ==== =======
Tier 1 (core) capital, and ratio to
risk-weighted total assets 23.3% $79,263 6.0% $20,422
===== ------- ==== =======
Allowance for loan and lease losses 2,350
Equity investments (1,662)
-------
Tier 2 capital 688
-------
Total risk-based capital, and ratio to
risk-weighted total assets 23.5% $79,951 8.0% $27,229 10.0% $34,037
===== ======= ==== ======= ===== =======
Total assets $699,787
========
Adjusted total assets $700,372
========
Risk-weighted assets $340,365
========
</TABLE>
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 June 30, 1997 or December 31, 1996.
12
<PAGE>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
The following table sets forth information regarding the Association's
delinquent loans and foreclosed real estate at the dates indicated:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------ ------
(unaudited)
(In Thousands)
<S> <C> <C>
Non-performing loans:
Residential real estate loans:
Loans 60 to 89 days delinquent $ 354 $ 446
Loans more than 90 days delinquent 1,443 1,524
------ ------
Total 1,797 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 22 72
Loans more than 90 days delinquent 23 107
------ ------
Total 45 179
------ ------
Land
Loans 60 to 89 days delinquent -- --
Loans more than 90 days delinquent -- --
------ ------
Total -- --
------ ------
Total non-performing loans 1,842 2,149
Real estate owned net of related allowance 1,353 1,455
Loans to facilitate sale of real estate owned 220 224
------ ------
Total non-performing assets and loans to facilitate sale of real estate owned $3,415 $3,828
====== ======
</TABLE>
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996
GENERAL
Net income for the quarter ended June 30, 1997 decreased $400,000 to $1.4
million, or $0.27 per share, compared to $1.8 million, or $0.36 per share, for
the quarter ended June 30, 1996. The decrease in net income was primarily due to
events totaling approximately $560,000 which occurred during the three months
ended June 30, 1996 which did not reoccur during 1997. The effect of these
events was partially offset by a $377,000 increase in net interest income for
the three months ended June 30, 1997.
NET INTEREST INCOME
Net interest income increased to $5.7 million for the quarter ended June 30,
1997 from $5.4 million for the quarter ended June 30, 1996 primarily as a result
of a $60.7 million increase in average interest-earning assets to $653.1 million
for the three months ended June 30, 1997 from $592.4 million for the same period
in the prior year, reflecting the increases in the loan and securities
portfolios, as well as an increase in the average yield on interest-earning
assets to 7.69% for the three months ended June 30, 1997 from 7.49% for the same
period in 1996. The increase in interest-earning assets was partially offset by
a $60.9 million increase in average interest-bearing liabilities to $598.7
million for the three months ended June 30, 1997 from $537.8 million for the
same period in 1996 reflecting the growth of the Association's deposit
portfolio, primarily certificates of deposits, and the use of FHLB advances to
fund securities purchases, as well as an increase in the average yield on
interest-bearing liabilities to 4.55% for the three months ended June 30, 1997
from 4.26% for the same period in 1996. The increase in the average yield is
primarily attributable to the increased cost of certificates of deposit and
advances which have a higher cost to the Association than do core deposits.
13
<PAGE>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
PROVISION FOR LOAN LOSSES
The Association 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 the Association's actual loss experience, as
well as guidelines applied by the OTS and the FDIC. The Association's provision
for loan losses was $53,000 for the quarter ended June 30, 1997, as compared to
$38,000 for the quarter ended June 30, 1996. The Association's allowance for
loan losses as a percentage of net loans receivable was 0.63 % and 0.64 % at
June 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 income or loss from the
Association's subsidiary's real estate venture. Other income increased $601,000
to $971,000 for the quarter ended June 30, 1997 from $370,000 for the same
period in 1996. Other income for the three months ended June 30, 1997 reflected
a $134,000 increase in loan and deposit fees resulting from changes in the
Association's fee structure which were implemented in October 1996. In addition,
other income in the 1996 period included 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, neither of which items reoccurred during 1997.
OPERATING EXPENSE
Operating expense increased $235,000 to $4.5 million for the three month period
ended June 30, 1997 from $4.3 million for the same period in 1996, primarily due
to an increase of $189,000 in employee compensation and benefits as a result of
increased staffing due to both a branch office opening and the expanded loan
production program. In addition, other increases of $89,000 in occupancy and
equipment costs (also relating to the new branch office) and $115,000 in
miscellaneous operating expense occurred during the quarter ended June 30, 1997
as compared to the same quarter in 1996. The increase in operating expense was
partially offset by a $182,000 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 was $767,000 for the three months ended June 30,
1997. A benefit of $361,000 was recognized for the three months ended June 30,
1996 due to the reversal of a prior year provision which was no longer required
in management's opinion.
RESULTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996
GENERAL
Net income for the six months ended June 30, 1997 decreased $316,000 to $2.7
million, or $0.54 per share, compared to $3.1 million, or $0.62 per share, for
the same period in 1996. The decrease in net income was primarily due to events
totaling approximately $698,000 which occurred during the six months ended June
30, 1996 which did not reoccur during 1997, and a $536,000 increase in operating
expense for the six months ended June 30, 1997. The effect of these events was
partially offset by a $1.0 million increase in net interest income for the six
months ended June 30, 1997.
NET INTEREST INCOME
Net interest income increased $1.0 million to $11.3 million for the six months
ended June 30, 1997 from $10.3 million for the six months ended June 30, 1996
primarily as a result of a $60.2 million increase in average interest-earning
assets to $641.7 million for the six months ended June 30, 1997 from $581.5
million for the same period in the prior year, reflecting the growth in the
Association's loan and securities portfolios, as well as an increase in the
average yield on interest-earning assets to 7.66% for the six months ended June
30, 1997 from 7.51% for the same period in 1996. The increase in
interest-earning assets was partially offset by a $60.5 million increase in
average interest-bearing liabilities
14
<PAGE>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
to $588.4 million for the six months ended June 30, 1997 from $527.9 million for
the same period in 1996 reflecting the growth of the Association's 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 yield on
interest-bearing liabilities to 4.51% for the six months ended June 30, 1997
from 4.38% for the same period in 1996. The increase in the average yield is
primarily attributable to the increased cost of certificates of deposit and
advances which have a higher cost to the Association.
PROVISION FOR LOAN LOSSES
As mentioned previously, loan loss provisions are based upon management's
estimate of the fair value of the collateral and the Association's actual loss
experience, as well as guidelines applied by the OTS and the FDIC. The
Association's provision for loan losses was $83,000 for the six months ended
June 30, 1997, as compared to $40,000 for the six months ended June 30, 1996.
The Association's allowance for loan losses as a percentage of net loans
receivable was 0.63 % and 0.64 % at June 30, 1997 and 1996, respectively.
OTHER INCOME
Other income increased $525,000 to $1.9 million for the six months ended June
30, 1997 from $1.3 million for the same period in 1996. Other income for the six
months ended June 30, 1997 increased in part due to a $160,000 increase in loan
and deposit fees as the result of changes in the Association's fee structure
which were implemented in October 1996. In addition, other income in the 1996
period included 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, offset in part by a $138,000 net gain on the sale of securities available
for sale, none of which items reoccurred during 1997.
OPERATING EXPENSE
Operating expense increased $536,000 to $8.8 million for the six month period
ended June 30, 1997, from $8.3 million for the same period in 1996, primarily
due to an increase of $459,000 in employee compensation and benefits as a result
of increased staffing due to both a branch office opening and the expanded loan
production program. In addition, other increases of $163,000 in occupancy and
equipment costs (also relating to the new branch office) and $184,000 in
miscellaneous operating expense occurred during the six months ended June 30,
1997 as compared to the same period in 1996. The increase in operating expense
was partially offset by a $419,000 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 $1.6 million for the six months
ended June 30, 1997 from $258,000 for the same period in 1996. The increase was
due to management's decision during the six months ended June 30, 1996 to
reverse a prior year provision which was no longer required.
15
<PAGE>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
PART II. OTHER INFORMATION
--------------------------
ITEM 1. LEGAL PROCEEDINGS
There are various claims and lawsuits in which the Association is
periodically involved incidental to the Association's 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
None.
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 Community Savings into a two-tier holding
company structure. As a result of the reorganization, the
Association will be a wholly-owned subsidiary of a
federally-chartered company which will be owned by the existing
shareholders.
ComFed, M. H. C., the Association's mutual holding company, will
hold a majority of the common stock of the new mid-tier stock
holding company, Community Savings Bankshares, Inc., which will
own 100% of the common stock of Community Savings. Under the
reorganization, each share of Association common stock held by
existing shareholders of Community Savings will be converted into
one share of common stock of Community Savings Bankshares, Inc.
The reorganization of the Association will be structured as a
tax-free reorganization and will be accounted for in a manner
similar to a pooling of interests. Completion of the
reorganization is subject to regulatory approval by the OTS and to
shareholder approval. It is expected to be completed during the
fourth quarter of 1997. On April 25, 1997, the proposed mid-tier
stock holding company filed an application with the OTS requesting
permission to become the holding company for the Association. On
August 4, 1997, the OTS issued its order approving the application
of Community Savings Bankshares, Inc. The Association expects to
hold a special meeting of shareholders on September 24, 1997 to
consider and vote upon the reorganization.
(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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
--------
None.
(b) CURRENT REPORTS ON FORM 8-K.
---------------------------
None.
16
<PAGE>
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, F. A.
/s/ JAMES B. PITTARD, JR.
---------------------------------------
Date: August 11, 1997 James B. Pittard, Jr.
President and Chief Executive Officer
Date: August 11, 1997 /s/ LARRY J. BAKER
---------------------------------------
Larry J. Baker
Senior Vice President and Treasurer
17
OFFICE OF THRIFT SUPERVISION
WASHINGTON, DC 20552
------
FORM 10-Q
(Mark One)
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended:
----------------
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from OCTOBER 1, 1996 to DECEMBER 31, 1996
--------------------- -------------------
OTS Docket number 05939
-----
COMMUNITY SAVINGS, F. A.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
UNITED STATES 65-0525685
- ---------------------------------------- ---------------------------------
(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)
881-4800
-------------------------------------------------------
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 February 7, 1997 there were 5,090,120 shares of the Registrant's
common stock outstanding.
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
----------------------------- ----
<S> <C> <C>
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
December 31, 1996 (unaudited) and September 30, 1996 2
Consolidated Statements of Operations for the three months
ended December 31, 1996 and 1995 (unaudited) 3
Consolidated Statements of Changes in Shareholders' Equity for the
three months ended December 31, 1996 (unaudited) and the year
ended September 30, 1996 4
Consolidated Statements of Cash Flows for the three months
ended December 31, 1996 and 1995 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II. OTHER INFORMATION
- --------------------------
Item 1 Legal Proceedings 15
Item 2 Changes in Securities 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 16
Signature Page 17
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AT DECEMBER 31, 1996 AND SEPTEMBER 30, 1996
December 31, September 30,
1996 1996
------------ -------------
(unaudited)
ASSETS (In Thousands)
Cash and cash equivalents:
<S> <C> <C>
Cash and amounts due from depository institutions $ 13,547 $ 15,600
Interest-bearing deposits 28,895 29,180
--------- ---------
Total cash and cash equivalents 42,442 44,780
Securities available for sale 123,152 124,287
Investments - held to maturity 22,139 22,293
Mortgage-backed and related securities - held to maturity 53,405 54,945
Loans receivable, net of allowance for loan losses 389,040 376,219
Accrued interest receivable 2,354 2,208
Office properties and equipment, net 16,368 16,359
Investment in and advances to real estate venture 62 218
Real estate owned, net 1,455 1,384
Federal Home Loan Bank stock - at cost 2,864 5,384
Other assets 1,928 2,255
--------- ---------
Total assets $ 655,209 $ 650,332
========= =========
LIABILITIES
Deposits $ 513,709 $ 498,929
Mortgage-backed bond - net 17,230 17,453
Advances from Federal Home Loan Bank 34,763 36,350
ESOP borrowings 1,915 2,064
Advances by borrowers for taxes and insurance 1,059 6,861
Other liabilities 8,378 11,599
Deferred income taxes 2,036 2,020
--------- ---------
Total liabilities 579,090 575,276
--------- ---------
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, 5,090,120 shares outstanding 5,090 5,090
Additional paid in capital 29,950 29,881
Retained income - substantially restricted 44,603 43,902
Common stock purchased by Employee Stock Ownership Plan (1,848) (1,965)
Common stock issued to Recognition and Retention Plan (608) (654)
Unrealized decrease in market value of assets available
for sale, net of income taxes (1,068) (1,198)
--------- ---------
Total shareholders' equity 76,119 75,056
--------- ---------
Total liabilities and shareholders' equity $ 655,209 $ 650,332
========= =========
See Notes to consolidated financial statements.
</TABLE>
2
<PAGE>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED
DECEMBER 31, 1996 AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
For the three months
ended December 31,
1996 1995
---- ----
(unaudited)
(In Thousands)
Interest income:
<S> <C> <C>
Real estate loans $ 7,427 $ 6,278
Consumer and commercial business loans 408 344
Investment securities and securities available for sale 2,566 1,361
Mortgage-backed and related securities 1,004 1,565
Interest-earning deposits 491 657
------- -------
Total interest income 11,896 10,205
------- -------
Interest expense:
Deposits 5,251 4,499
Advances from Federal Home Loan Bank
and other borrowings 1,127 850
------- -------
Total interest expense 6,378 5,349
------- -------
Net interest income 5,518 4,856
------- -------
Provision for loan losses 243 30
------- -------
Net interest income after provision for loan losses 5,275 4,826
------- -------
Other income:
Servicing income and other fees 33 35
NOW account and other customer fees 820 789
Net gain on sale of securities
available for sale 51 110
Net gain on sale of loans receivable 3 --
Equity in net income of real estate venture 72 107
Miscellaneous 246 39
------- -------
Total other income 1,225 1,080
------- -------
Operating expense:
Employee compensation and benefits 2,125 2,003
Occupancy and equipment 1,201 1,144
Net loss on real estate owned 37 81
Advertising and promotion 240 105
Federal deposit insurance premium 288 255
Miscellaneous 753 600
------- -------
Total operating expense 4,644 4,188
------- -------
Income before provision for income taxes 1,856 1,718
Provision for income taxes 696 667
------- -------
Net income $ 1,160 $ 1,051
======= =======
Primary and fully diluted earnings per share $ 0.23 $ 0.22
======= =======
</TABLE>
See Notes to consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED SEPTEMBER 30, 1996 AND
FOR THE THREE MONTHS ENDED DECEMBER 31, 1996 (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)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - September 30, 1995 $ 5,089 $ 30,182 $ 41,666 $ (2,456) $ (1,162) $ (471) $ 72,848
Net income for year ended
September 30, 1996 -- -- 3,915 -- -- -- 3,915
Stock options exercised 1 12 -- -- -- -- 13
Transfer from securities held to
maturity to securities available
for sale (net of income taxes) -- -- -- -- -- 247 247
Unrealized decrease in market value
of assets available for sale
(net of income taxes) -- -- -- -- -- (974) (974)
Adjustment to deferred compensation
- Recognition and Retention
Plan -- (378) -- -- 378 -- --
Amortization of deferred
compensation - Employee Stock
Ownership Plan and Recognition
and Retention Plan -- 65 -- 491 130 -- 686
Dividends declared -- -- (1,679) -- -- -- (1,679)
---------------------------------------------------------------------------------
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
=================================================================================
</TABLE>
See Notes to consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1996 AND 1995
For the three months ended
December 31,
1996 1995
---- ----
(unaudited)
(In Thousands)
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 1,160 $ 1,051
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 329 364
ESOP and Recognition and Retention Plan compensation expense 228 255
Accretion of discounts, amortization of premiums, and other deferred yield items (396) (371)
Provision for loan losses 243 30
Provision for losses and net losses on sales of real estate owned -- 28
Amortization of discount on mortgage-backed bond 123 124
Net (gain) loss on sale of securities available for sale (50) --
Net loss on sale of loans and other assets (10) --
(Increase) decrease in accrued interest receivable (146) 171
(Increase) decrease in other assets 327 (14)
Decrease (increase) in loans available for sale 137 (210)
(Decrease) increase in other liabilities (3,221) 792
-------- --------
Net cash (used for) provided by operating activities (1,276) 2,220
-------- --------
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
Loan originations and principal payments on loans (11,257) (5,165)
Principal payments received on mortgage-backed and related securities 2,840 2,489
Principal payments on investments 475 596
Purchases of:
Loans (1,998) (104)
Mortgage-backed and related securities -- (6,013)
Securities available for sale -- (4,308)
Office property and equipment (344) (115)
Proceeds from sales of:
Securities available for sale 100 749
Office property and equipment 178 18
Real estate acquired in settlement of loans -- 38
Federal Home Loan Bank stock 2,520 --
Proceeds from maturities of investments -- 8,799
Investment in real estate venture 156 1,201
Other investing (184) (59)
-------- --------
Net cash used for investing activities (7,514) (1,874)
-------- --------
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
Net increase in:
NOW accounts, demand deposits, and savings accounts 3,112 7,541
Certificates of deposit 11,668 16,768
Repayment of advances from Federal Home Loan Bank (1,587) (1,087)
Advances by borrowers for taxes and insurance (5,802) (5,537)
ESOP loan (149) (148)
Sale of common stock-net of issuance costs 4 --
Payments made on mortgage-backed bond (346) (347)
Dividends paid (448) (391)
-------- --------
Net cash provided by (used for) financing activities 6,452 16,799
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,338) 17,145
CASH AND CASH EQUIVALENTS, beginning of period 44,780 42,497
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 42,442 $ 59,642
======== ========
See Notes to consolidated financial statements
</TABLE>
5
<PAGE>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited consolidated interim financial statements for Community
Savings, F. A. and its subsidiaries ("Community Savings" or the
"Association"), the majority-owned subsidiary of ComFed, M. H. C., reflect
all adjustments (consisting only of normal recurring accruals) which, in
the opinion of management, are necessary to present fairly the
Association's 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.
2. REORGANIZATION TO A MUTUAL HOLDING COMPANY AND CONVERSION TO STOCK FORM OF
OWNERSHIP
The Association was reorganized into a federal mutual holding company,
ComFed, M.H.C. (the "Holding Company") on October 24, 1994. In connection
with the reorganization, the Holding Company retained $200,000 for
operating capital. The Holding Company is chartered and regulated by the
Office of Thrift Supervision ("OTS").
Simultaneously with the reorganization into a mutual holding company, the
Association sold shares of common stock which represent a minority
interest in the Association to officers, directors, employees, and certain
depositors and borrowers of the Association, and to certain members of the
general public. The remaining issued and outstanding shares are owned by
the Holding Company. The reorganization and minority stock offering were
completed on October 24, 1994. The Association sold 2,379,856 shares at
$15 per share for total gross proceeds of $35,697,840. The minority stock
offering represented a minority ownership of 47.6% of the Association. The
net proceeds of the stock offering, after reflecting conversion expenses
of approximately $1,712,000, were $33,985,840. The net proceeds, less the
$200,000 retained by the Holding Company, were added to the Association's
general funds to be used for general corporate purposes.
In connection with the reorganization to the stock form of ownership, the
Community Savings, F. A. Employee Stock Ownership Plan ("ESOP") purchased
190,388 shares of the Association common stock at an average price of
$14.45 per share, or $2,752,977 in the aggregate, which was funded by a
loan from an unaffiliated lender. The Association makes scheduled cash
contributions to the ESOP sufficient to service the amount borrowed. For
the quarter ended December 31, 1996, total contributions made to the ESOP,
which are used to fund principal and interest payments on the ESOP debt,
totaled approximately $191,000.
3. CHANGE IN FISCAL YEAR END
During January 1997, the Board of Directors voted to change the
Association's year end from September 30th to December 31st, effective
with the year ending December 31, 1996.
6
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. LOANS RECEIVABLE
Loans receivable consist of the following:
December 31, September 30,
------------ -------------
1996 1996
---- ----
(In Thousands)
<S> <C> <C>
Real estate loans:
Residential 1-4 family $293,296 $284,267
Residential 1-4 family held for sale (at lower of cost or fair value) 70 207
Residential construction loans 33,158 33,520
Non-residential construction loans 2,200 2,200
Land loans 19,426 16,846
Multi-family loans 8,096 8,153
Commercial 37,815 38,433
------ ------
Total real estate loans 394,061 383,626
------- -------
Non-real estate loans:
Consumer loans 16,028 15,606
Commercial business 2,458 1,874
----- -----
Total non-real estate loans 18,486 17,480
------ ------
Total loans receivable 412,547 401,106
Less:
Undisbursed loan proceeds 20,765 22,318
Unearned discount and net deferred loan fees 200 257
Allowance for loan losses 2,542 2,312
----- -----
Total loans receivable, net $389,040 $376,219
======== ========
</TABLE>
The amount of loans on which the Association has ceased accruing interest
aggregated approximately $1,631,000 and $842,000 at December 31, 1996 and
September 30, 1996, respectively. The amount of interest not accrued
related to these loans was approximately $65,000 and $44,000 at December
31, 1996 and September 30, 1996, respectively.
An analysis of the changes in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
For the three months
ended December 31,
1996 1995
---- ----
(In Thousands)
<S> <C> <C>
Balance, beginning of period $2,312 $3,492
Provision charged to income 243 30
Losses charged to allowance (13) (30)
Recoveries - -
- -
------ ------
Balance, end of period $2,542 $3,492
====== ======
</TABLE>
7
<PAGE>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In May 1993, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 114, "Accounting by Creditors for Impairment of a Loan." The Statement
generally requires all creditors to account for impaired loans, except
those loans that are accounted for at fair value or at the lower of cost
or fair value, at the present value of the expected future cash flows
discounted at the loan's effective interest rate. In October 1994, the
FASB issued SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan Income Recognition and Disclosures." This statement amends SFAS No.
114 to allow a creditor to use existing methods for recognizing interest
income on an impaired loan. SFAS No. 118 does not change the provisions in
SFAS No. 114 that require a creditor to measure impairment based on the
present value of expected future cash flows discounted at the loan's
effective interest rate, or at the market price of the loan or the fair
value of the collateral if the loan is collateral dependent. The
Association adopted the provisions of SFAS No. 114 as amended by SFAS No.
118 effective October 1, 1995.
An analysis of the recorded investment in impaired loans owned by the
Association at December 31, 1996 and the related allowance for those loans
is as follows:
<TABLE>
<CAPTION>
December 31, 1996
-----------------------
Loan Related
Balances Allowances
-------- ----------
(In Thousands)
Impaired loan balances and related
<S> <C> <C>
allowances for loan losses $1,071 $252
====== ====
5. REAL ESTATE OWNED
Real estate owned consists of the following:
December 31, September 30,
1996 1996
---- ----
(In Thousands)
Real estate owned $1,547 $1,476
Less allowance for loss 92 92
-- --
Total $1,455 $1,384
====== ======
Changes in reserve for loss are as follows:
For the three months
ended December 31,
---------------------
1996 1995
---- ----
(In Thousands)
Balance, beginning of period $92 $113
Provision charged to income - 40
Losses charged to reserve - (4)
- ---
Balance, end of period $92 $149
=== ====
</TABLE>
8
<PAGE>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. DEPOSITS
The weighted-average interest rates on deposits at December 31, 1996 and
September 30, 1996 were 4.15% and 4.09%, respectively. Deposit accounts,
by type and range of rates at December 31, 1996 and September 30, 1996,
consist of the following:
DECEMBER 31, SEPTEMBER 30,
------------ -------------
1996 1996
---- ----
(In Thousands)
ACCOUNT TYPE AND RATE
Non-interest-bearing NOW accounts $ 18,627 $ 19,532
NOW, Super NOW and funds transfer accounts 67,076 63,098
Passbook and statement accounts 30,821 30,875
Money market accounts 69,514 69,421
-------- --------
Total non-certificate accounts 186,038 182,926
-------- --------
Certificates:
3.00% or less 1,035 1,600
3.01% - 3.99% 598 903
4.00% - 4.99% 51,484 80,831
5.00% - 5.99% 232,313 193,281
6.00% - 6.99% 33,568 29,571
7.00% - 7.99% 8,673 9,817
-------- --------
Total certificates of deposit 327,671 316,003
-------- --------
Total $513,709 $498,929
======== ========
Individual deposits greater than $100,000 at December 31, 1996 and
September 30, 1996 aggregated approximately $72,504,000 and $67,467,000,
respectively. Deposits in excess of $100,000 are not insured.
7. CONTINGENCIES
In connection with its mutual holding company reorganization and stock
offering, the Association's ESOP borrowed funds from Nationar, a New York
trust company which was owned by savings banks in the state of New York,
and used the funds to purchase eight percent of the shares of the
Association's common stock in the open market. All of such shares were
pledged as collateral to support the ESOP loan. In connection with the
ESOP loan, the Association placed $1,200,000 in a non-insured,
interest-earning deposit account with Nationar as collateral to secure the
ESOP loan. On February 6, 1995, Nationar was seized by the New York
Banking Department because of liquidity problems and continuing losses.
During the year ended September 30, 1995, the Association was uncertain as
to the recoverability of the collateral securing the ESOP loan. During
fiscal year 1995, the Superintendent transferred $200,000 of the
Association's collateral to a new interest-earning deposit account with
Northwest Savings Bank, leaving $1,000,000 in the Nationar account. During
the year ended September 30, 1996, the Association received $400,000 as a
partial settlement from the New York Banking Department and established a
specific reserve of $200,000. During the quarter ended December 31, 1996,
the Association received the final payment of $600,000 from the New York
Banking Department. As a result of the recovery of the entire amount due
the Association, the specific reserve of $200,000 was reversed.
In addition, the Association is investigating a possible employee
defalcation which may have been occurring for several years. The
Association maintains insurance to cover possible defalcation losses with
a claim deductible of $200,000. The Association established a liability
for the amount of the deductible during fiscal year 1996. Management
currently estimates that the loss in excess of the deductible will not
involve material amounts and will be covered by the insurance. Although
the Association has notified its insurance company of the potential claim
and the insurance company has acknowledged coverage, the insurance company
has not completed its investigation of the claim.
9
<PAGE>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
8. 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 December 31, 1996, the
primary and fully diluted weighted-average number of shares was 4,983,996
and 5,001,648, respectively. For the quarter ended December 31, 1995, the
primary and fully diluted weighted-average number of shares was 4,928,860.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Community Savings, 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, Community Savings successfully completed a
stock offering by issuing 5,000,000 shares of common stock of which 47.6% or
2,379,856 shares were purchased at $15.00 a share by the public and 2,620,144
shares were issued to the newly formed mutual holding company, ComFed, M. H. C.
During July 1995, 88,900 shares of common stock were issued from authorized but
unissued shares to fund the Association's RRP, and during April 1996, 1,220
shares were issued upon the exercise of stock options, resulting in total shares
of common stock issued and outstanding of 5,090,120.
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"). Community Savings' plan is
to operate as a well-capitalized, profitable and independent institution.
Community Savings 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.
LIQUIDITY AND CAPITAL RESOURCES
The Association is required to maintain minimum levels of liquid assets as
defined by OTS regulations. This requirement, which varies from time to time
depending upon economic conditions and deposit flows, is based upon a percentage
of deposits and short-term borrowings. The required ratio is currently 5.0%. The
Association's liquidity ratio averaged 12.9% during the quarter ended December
31, 1996 while liquidity ratios averaged 14.8% for the year ended September 30,
1996. The Association adjusts its liquidity levels in order to meet funding
needs of deposit outflows, payment of real estate taxes on mortgage loans,
repayment of borrowings, and loan commitments. The Association also adjusts
liquidity as appropriate to meet its asset and liability management objectives.
A major portion of the Association's liquidity consists of cash and cash
equivalents, which are a product of its operating, investing, and financing
activities.
The Association's primary sources of funds are deposits, amortization and
prepayment of loans and mortgage-backed securities, maturities of investment
securities and other short-term investments, and earnings and funds provided
from operations. While scheduled principal repayments on loans and
mortgage-backed 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 to maintain a desired deposit balance. In addition, the Association
invests excess funds in short-term interest-earning and other assets, which
provide liquidity to meet lending requirements. Short-term interest-bearing
deposits with the FHLB of Atlanta amounted to $28.7 million at December 31,
1996. Other assets qualifying for liquidity outstanding at December 31, 1996
amounted to $32.4 million. For additional information about cash flows from the
Association's operating, financing, and investing activities, see the unaudited
consolidated statements of cash flows included in
10
<PAGE>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
the financial statements. The primary sources of cash were net income and
principal repayments on loans and mortgage-backed securities.
Liquidity management is both a daily and long-term function of business
management. If the Association requires funds beyond its ability to generate
them internally, borrowing agreements exist with the FHLB which provide an
additional source of funds. At December 31, 1996, the Association's advances
from the FHLB totaled $34.8 million. The Association has in the past utilized
borrowings from the FHLB principally to reduce interest rate risk, rather than
for liquidity purposes.
At December 31, 1996, the Association had outstanding loan commitments totalling
$5.8 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 $253.6 million at December 31, 1996. Based on prior experience,
management believes that a significant portion of such deposits will remain with
the Association.
FINANCIAL CONDITION
December 31, 1996 compared to September 30, 1996
------------------------------------------------
The following table summarizes certain information relating to the Association's
financial condition at the dates indicated.
<TABLE>
<CAPTION>
December 31, September 30, Increase
1996 1996 (Decrease)
---- ---- ----------
(unaudited)
(In Thousands)
Assets:
<S> <C> <C> <C>
Total assets $655,209 $650,332 $4,877
Cash and cash equivalents 42,442 44,780 (2,338)
Securities portfolio:
Investment securities 22,139 22,293 (154)
Securities available for sale 123,152 124,287 (1,135)
Mortgage-backed and related securities 53,405 54,945 (1,540)
Total securities portfolio 198,696 201,525 (2,829)
Loans receivable, net 389,040 376,219 12,821
Real estate owned, net 1,455 1,384 71
Liabilities:
Total liabilities 579,090 575,276 3,814
Deposits 513,709 498,929 14,780
ESOP borrowings 1,915 2,064 (149)
Advances by borrowers for taxes and insurance 1,059 6,861 (5,802)
Shareholders' equity 76,119 75,056 1,063
</TABLE>
Total assets increased $4.9 million to $655.2 million at December 31, 1996, as
compared to $650.3 million at September 30, 1996 primarily due to a $12.8
million increase in loans receivable to $389.0 million at December 31, 1996 from
$376.2 million at September 30, 1996. The increase in total assets was partially
offset by a $2.3 million decrease in cash and cash equivalents, a $2.8 million
decrease in the securities portfolio and a $2.8 million decrease in other
assets. The increase in total assets was primarily funded by a $14.8 million
increase in deposits to $513.7 at December 31, 1996 from $498.9 million at
September 30, 1996.
The securities portfolio experienced a net decrease of $2.8 million which
primarily reflected scheduled principal reductions and amortization of premiums
and discounts.
Loans receivable increased $12.8 million as a result of the Association's
continued emphasis on its lending activities. Loan originations of $29.6 million
and purchases of $2.0 million, (primarily consisting of one- to four-family
residential properties) were offset by repayments and other adjustments of $18.8
million. Real estate owned
11
<PAGE>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
increased $71,000 to $1.5 million at December 31, 1996, from $1.4 million at
September 30, 1996, primarily due to the addition of new foreclosed real estate.
Total liabilities increased $3.8 million to $579.1 million at December 31, 1996,
from $575.3 million at September 30, 1996. Total deposits increased by $14.8
million to $513.7 million at December 31, 1996 from $498.9 million at September
30, 1996 due primarily to increased retail deposits and public funds. Advances
by borrowers for taxes and insurance decreased $5.8 million to $1.1 million at
December 31, 1996, from $6.9 million at September 30, 1996, due to the payment
of real estate taxes during the three month period. In addition during the
quarter ended December 31, 1996, the Association made its $2.8 million payment
for the SAIF recapitalization premium which had been accrued and included in
other liabilities.
Total equity increased to $76.1 million at December 31, 1996, from $75.1 million
at September 30, 1996, due to net income of $1.2 million, the stock benefit
plans accrual of $228,000, and a net increase in the market value of assets
available for sale of $130,000, offset by the declaration of dividends totalling
$459,000. For further information, see the unaudited consolidated statements of
changes in shareholders' equity in the accompanying consolidated financial
statements.
At December 31, 1996, the Association exceeded all regulatory capital
requirements as follows:
<TABLE>
<CAPTION>
To be Considered
Minimum for Well Capitalized
Capital Adequacy for Prompt Corrective
Actual Purposes Action Provision
-----------------------------------------------------------------------------
Ratio Amount Ratio Amount Ratio Amount
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Shareholders' equity, and ratio
to total assets 11.6% $76,119
=====
Investment in subsidiary --
Intangible assets 1,068
-----
Tangible capital, and ratio to
adjusted total assets 11.8% $77,187 1.5% $9,844
===== ======= ==== ======
Tier 1 (core) capital, and ratio
to adjusted total assets 11.8% $77,187 4.0% $26,251 5.0% $32,814
===== ======= ==== ======= ==== =======
Tier 1 (core) capital, and ratio to
risk-weighted total assets 24.2% $77,187 6.0% $19,119
===== ------- ==== =======
Allowance for loan and lease losses 2,290
Equity investments (632)
-----
Tier 2 capital 1,658
-----
Total risk-based capital, and ratio to
risk-weighted total assets 24.7% $78,845 8.0% $25,492 10.0% $31,865
===== ======= ==== ======= ===== =======
Total assets $655,209
========
Adjusted total assets $656,277
========
Risk-weighted assets $318,650
========
</TABLE>
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 Statement of Financial Accounting Standards No. 15 at
December 31, 1996 or September 30, 1996.
12
<PAGE>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
The following table sets forth information regarding the Association's
delinquent loans and foreclosed real estate at the dates indicated:
<TABLE>
<CAPTION>
December 31, September 30,
1996 1996
---- ----
(unaudited)
(In Thousands)
Residential real estate loans:
<S> <C> <C>
Loans 60 to 89 days delinquent $ 446 $ 209
Loans more than 90 days delinquent 1,524 832
------ ------
Total 1,970 1,041
------ ------
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 72 3
Loans more than 90 days delinquent 107 10
------ ------
Land
Loans 60 to 89 days delinquent -- --
Loans more than 90 days delinquent -- --
------ ------
Total -- --
------ ------
Total non-performing loans 2,149 1,054
------ ------
Real estate owned net of related allowance 1,455 1,384
Loans to facilitate sale of real estate owned 224 226
Other non-performing assets net of related allowance -- 400
------ ------
Total non-performing assets and loans to facilitate sale of real estate owned $3,828 $3,064
====== ======
</TABLE>
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1996 AND 1995
GENERAL
Net income for the quarter ended December 31, 1996 increased 10.5% to $1.2
million, or $.23 per share, compared to $1.1 million, or $.22 per share, for the
quarter ended December 31, 1995. The increase in net income was due to increases
in net interest income of $662,000 and in other income of $145,000 offset in
part by increases of $213,000 in the provision for loan losses, $455,000 in
operating expense, and $29,000 in the provision for income taxes.
NET INTEREST INCOME
Net interest income increased to $5.5 million for the quarter ended December 31,
1996 from $4.9 million for the quarter ended December 31, 1995 primarily as a
result of an $78.0 million increase in average interest-earning assets to $616.6
million for the three months ended December 31, 1996 from $538.6 million for the
same period in 1995. This increase was offset in large part by a $74.8 million
increase in average interest-bearing liabilities to $559.8 million for the three
months ended December 31, 1996 from $485.0 million for the same period in 1995.
13
<PAGE>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
PROVISION FOR LOAN LOSSES
The Association maintains an allowance for loan losses based upon a periodic
evaluation of known and inherent risks in the loan portfolio, the 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 the Association's actual loss experience, as
well as standards applied by the OTS and FDIC. The Association's provision for
loan losses was $243,000 for the quarter ended December 31, 1996, as compared to
$30,000 for the quarter ended December 31, 1995. The increase in the provision
of $213,000 included a $200,000 transfer to the general loan valuation allowance
from a specific reserve which had been maintained with respect to an
interest-earning deposit which was pledged as collateral for the ESOP loan and
which was recovered during the quarter ended December 31, 1996 (see Note 7 to
the Notes to the Consolidated Financial Statements). The Association's allowance
for loan losses as a percentage of net loans receivable was .65% and 1.04% at
December 31, 1996 and 1995, respectively, and 55.9% and 35.6% of classified
assets at December 31, 1996 and 1995, 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 income or loss from the
Association's subsidiary's real estate venture. Other income increased $145,000
to $1.2 million for the quarter ended December 31, 1996 from $1.1 million for
the same period in 1995, due to the reversal of a specific reserve of $200,000
referenced above which had been maintained with respect to an interest-earning
deposit which was pledged as collateral for the ESOP loan and which was
recovered during the quarter (see Note 7 to the Notes to Consolidated Financial
Statements).
OPERATING EXPENSE
Operating expense increased $455,000, or 10.9%, to $4.6 million for the three
month period ended December 31, 1996, from $4.2 million from the same period in
1995, primarily due to increases of $135,000 in advertising and promotion due to
increased advertising designed to increase the Association's market share, and
$122,000 in employee compensation and benefits as a result of increased staffing
due to both a branch office opening and the expanded loan production program.
PROVISION FOR INCOME TAXES
Provision for income taxes increased $29,000 to $696,000 for the three months
ended December 31, 1996 as compared to $667,000 for the same period in 1995 due
to the increase in net income.
14
<PAGE>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
PART II. OTHER INFORMATION
--------------------------
ITEM 1. LEGAL PROCEEDINGS
There are various claims and lawsuits in which the Association is
periodically involved incidental to the Association's 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 its Annual Meeting of Shareholders on January
15, 1997. Of the 5,090,120 shares eligible to vote, 4,799,755
shareholders or 94.3%, including 2,620,144 shares owned by ComFed,
M. H. C., were represented in person or by proxy at the meeting.
The votes cast produced the following results:
<TABLE>
<CAPTION>
Number Of Votes
Election of Directors for ---------------
a three year term expiring in 2000 For Withheld
---------------------------------- --- --------
<S> <C> <C>
Karl D. Griffin 4,744,958 54,797
Harold I. Stevenson 4,745,278 54,477
Election of a Director for a two
year term expiring in 1999
------------------------------------
James B. Pittard, Jr. 4,744,792 54,963
Number of Votes
-----------------------------------------------------------
For Against Abstain
--- ------- -------
Ratification of Deloitte
& Touche LLP as auditors
for fiscal year 1997 4,754,079 25,580 20,096
</TABLE>
15
<PAGE>
COMMUNITY SAVINGS, F. A. AND SUBSIDIARIES
ITEM 5. OTHER INFORMATION.
(a)
On January 16, 1997, the Board of Directors of the Association
adopted a resolution to proceed with filing an application with
the Office of Thrift Supervision ("OTS") to reorganize Community
Savings into a two-tier holding company structure. As a result of
the reorganization, the Association will be a wholly-owned
subsidiary of a Florida-chartered company which will be owned by
the existing shareholders.
ComFed, M. H. C., the Association's mutual holding company, will
hold a majority of the common stock of the new mid-tier stock
holding company, which will own 100% of the common stock of
Community Savings. Under the reorganization, each share of
Association common stock held by existing shareholders of
Community Savings will be exchanged for a share of common stock of
the mid-tier stock holding company. The reorganization of the
Association will be structured as a tax-free reorganization and
will be accounted for in a manner similar to a pooling of
interests. Completion of the reorganization is subject to
regulatory approval by the OTS and to shareholder approval. It is
expected to be completed during the second quarter of 1997.
(b)
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
---------
None.
(b) Current Reports On Form 8-K.
----------------------------
None.
16
<PAGE>
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, F. A.
/s/ JAMES B. PITTARD, JR
-------------------------------------
Date: February 11, 1997 James B. Pittard, Jr.
President and Chief Executive Officer
Date: February 11, 1997 /s/ LARRY J. BAKER
-------------------------------------
Larry J. Baker
Senior Vice President and Treasurer
17
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement of
Community Savings Bankshares, Inc. on Form S-8 of our report dated November 15,
1996, incorporated by reference in the Annual Report on Form 10-K of Community
Savings, F.A.. for year ended September 30, 1996.
/s/ DELOITTE & TOUCHE LLP
- -----------------------------
DELOITTE & TOUCHE LLP
October 27, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JUNE 30,
1997 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS
</LEGEND>
<CIK> 0001045934
<NAME> Community Savings
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 14,524
<INT-BEARING-DEPOSITS> 23,546
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 150,106
<INVESTMENTS-CARRYING> 71,769
<INVESTMENTS-MARKET> 68,126
<LOANS> 409,895
<ALLOWANCE> 2,602
<TOTAL-ASSETS> 699,787
<DEPOSITS> 540,533
<SHORT-TERM> 0
<LIABILITIES-OTHER> 16,023
<LONG-TERM> 64,553
0
0
<COMMON> 5,090
<OTHER-SE> 73,588
<TOTAL-LIABILITIES-AND-EQUITY> 699,787
<INTEREST-LOAN> 16,296
<INTEREST-INVEST> 7,290
<INTEREST-OTHER> 991
<INTEREST-TOTAL> 24,577
<INTEREST-DEPOSIT> 11,031
<INTEREST-EXPENSE> 13,260
<INTEREST-INCOME-NET> 11,317
<LOAN-LOSSES> 83
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 8,805
<INCOME-PRETAX> 4,291
<INCOME-PRE-EXTRAORDINARY> 2,735
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,735
<EPS-PRIMARY> .54
<EPS-DILUTED> .54
<YIELD-ACTUAL> 7.47
<LOANS-NON> 1,466
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,842
<ALLOWANCE-OPEN> 2,542
<CHARGE-OFFS> (23)
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 2,602
<ALLOWANCE-DOMESTIC> 2,602
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
