UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20552
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________to _______________________
Commission File Number 000-29460
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COMMUNITY SAVINGS BANKSHARES, INC.
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(Exact name of registrant as specified in its charter)
UNITED STATES 65-0780334
- ------------------------------------- ------------------------------------
(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
660 US HIGHWAY ONE, NORTH PALM BEACH, FL 33408
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(Address of Principal Executive Offices) (Zip Code)
(561) 881-2212
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(Registrant's Telephone Number including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
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Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $1.00 PER SHARE
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(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 March 17, 1998, there were issued and outstanding 5,100,120
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 March 17,
1998 ($38.50) was $ 82,493,488.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Shareholders for the fiscal year ended
December 31, 1997 (Parts II and IV).
2. Proxy Statement for the Annual Meeting of Shareholders (Portions of Parts II
and III).
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PART I
ITEM 1. BUSINESS
GENERAL
In the following discussion, references to "Bankshares" relate to
Community Savings Bankshares, Inc. together with its wholly-owned subsidiary,
Community Savings, F. A. (the "Association").
COMMUNITY SAVINGS BANKSHARES, INC.
Bankshares is a federally chartered mid-tier stock holding company
organized in August 1997. The only significant asset of Bankshares is its
investment in the Association. Bankshares is majority owned by ComFed, M.H.C.
("ComFed") a federally chartered mutual holding company. Effective September 30,
1997, Bankshares acquired all of the issued and outstanding common stock of the
Association in connection with the Association's reorganization into the
two-tier form of mutual holding company ownership. At that time, each share of
the Association's common stock was converted into one share of Bankshares'
common stock. At December 31, 1997, ComFed owned 2,620,144 shares of Bankshares'
common stock with the remaining 2,474,776 shares being owned by the minority
shareholders. The holding company reorganization was accounted for at historical
cost in a manner similar to a pooling of interests. Therefore, all financial
information has been presented as if Bankshares had been in existence for all
periods included in this report. At December 31, 1997, Bankshares had total
assets of $720.1 million, total loans of $451.7 million, total deposits of
$550.7 million, and total shareholders' equity of $81.3 million.
Bankshares' executive office is located at 660 U.S. Highway One, North
Palm Beach, Florida and its telephone number at that address is (561) 881-2212.
COMMUNITY SAVINGS, F. A.
The Association, founded in 1955, is a federally chartered savings and
loan association headquartered in North Palm Beach, Florida. The Association's
deposits are federally insured by the Federal Deposit Insurance Corporation
("FDIC") through the Savings Association Insurance Fund ("SAIF"). The
Association has been a member of the Federal Home Loan Bank of Atlanta ("FHLB")
since 1955. The Association is regulated by the Office of Thrift Supervision
("OTS"). On October 24, 1994, the Association completed a reorganization into a
federally chartered mutual holding company, ComFed. As part of the
reorganization, the Association organized a new federally chartered stock
savings association and transferred substantially all of its assets and
liabilities to the stock savings association in exchange for a majority of the
common stock of the stock savings association.
The Association is a community-oriented financial institution engaged
primarily in the business of attracting deposits from the general public in the
Association's market area (as described below) and using such funds, together
with other borrowings, to invest in various consumer-based real estate loans,
commercial business loans and mortgage-backed securities ("MBS") as well as
United States government and agency securities, mutual funds, corporate debt
securities, interest-earning deposits in the FHLB and FHLB stock. See "Lending
Activities", "Mortgage-Backed and Related Securities", and "Investment
Activities". The Association's principal source of funds are deposits, principal
and interest payments on loans and securities, and FHLB advances. The principal
source of income is interest received from loans and securities, while principal
expenses are interest paid on deposits and borrowings and employee compensation
and benefits. See "Sources of Funds." The Association'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. 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.
The Association's 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
2
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FORMATION OF THE MID-TIER HOLDING COMPANY
In January 1997, the Board of Directors of the Association adopted a
resolution to proceed with filing an application with the OTS to reorganize the
Association into a two-tier holding company structure. As a result of the
reorganization, the Association became the wholly-owned subsidiary of Bankshares
and shareholders of the Association became the shareholders of Bankshares.
ComFed, the Association's mutual holding company, holds a majority of
the common stock of the new mid-tier stock holding company, Bankshares, which
owns 100% of the common stock of the Association. Under the reorganization, each
share of Association common stock held by existing shareholders of the
Association was converted into one share of common stock of Bankshares. The
reorganization of the Association was structured as a tax-free reorganization
and was accounted for in a manner similar to a pooling of interests. Completion
of the reorganization was subject to regulatory approval by the OTS and to
shareholder approval. On August 4, 1997, the OTS issued its order approving the
application of Bankshares to become the holding company of the Association. The
reorganization was approved by the shareholders at a special meeting held
September 24, 1997. The reorganization was effective on September 30, 1997. The
common stock of Bankshares was substituted for that of the Association on the
Nasdaq National Market under the symbol "CMSV".
CHANGE OF FISCAL YEAR.
In January 1997, the Board of Directors of the Association approved a
change of the Association's fiscal year from September 30 to December 31,
effective December 31, 1996. Bankshares' fiscal year end is December 31 as well.
FORWARD-LOOKING STATEMENTS
Certain information in this Form 10-K may constitute forward-looking
information that involves risks and uncertainties that could cause actual
results to differ materially from those estimated. Persons are cautioned that
such forward-looking statements are not guarantees of future performance and are
subject to various factors which could cause actual results to differ materially
from those estimated. These factors include, but are not limited to, changes in
general economic and market conditions, legislative and regulatory changes,
monetary and fiscal policies of the federal government, demand for loan and
deposit products and the development of an interest rate environment that
adversely affects the interest rate spread or other income from Bankshares'
investments and operations.
MARKET AREA AND COMPETITION
Bankshares and the Association are headquartered in North Palm Beach,
Florida. Because Bankshares' only significant asset is its ownership of all the
issued and outstanding capital stock of the Association, the market area and
competition are identical for both entities. The Association operates 21 offices
in its market area in southeastern Florida, five of which are located in Martin
County, twelve of which are located in Palm Beach County, three of which are
located in St. Lucie County and one of which is located in Indian River County.
The Association operated a loan production office in Indian River County, which
was closed and moved to the new Vero Beach office during July 1997. During the
first quarter of 1998, another loan production office was opened in Vero Beach
to handle the increased loan activity. In addition, the Association also
operated a loan production office in southern Palm Beach County which was closed
during 1997.
According to county projections from the University of Florida,
population in Palm Beach, Martin, St. Lucie, and Indian River counties was
estimated at l.4 million for 1997. This study projects a 6.6% growth rate to 1.5
million by the year 2000 and a 38.6% growth rate from the year 2001 to the year
2020 to 2.l million. This population growth combined with a lower interest rate
environment during early 1998 suggests an increased demand for mortgage loans in
the four county market, as well as the State of Florida. However, such estimates
may not prove representative of trends for the remainder of 1998.
The counties in the Association's market area, have experienced
significant growth since the 1960s. Several of the counties are currently
experiencing major redevelopment projects. In Palm Beach County, the City of
West Palm Beach is implementing a $375 million project called City Place
designed to continue the revitalization of the downtown area. Also in Palm Beach
County, construction has begun on Abacoa, a new subdivision development which
will feature a new baseball stadium, commercial office space and retail space,
as well as single-family and multi-family residential properties which will
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accommodate 10,000 residents. The commuter train service for southern Florida
will be extended northward to service this community.
In Martin County, redevelopment of the City of Stuart's downtown area
has been supplemented by the completion of the new Roosevelt bridge facilitating
access to the city from the north.
In St. Lucie County, the Professional Golfers Association ("PGA") has
planned three new championship golf courses, a golf learning center and a
housing development.
The economy in this market area is service-oriented and is
significantly dependent upon government, foreign trade, tourism, and its
continued attraction as a retirement area. In Palm Beach and Martin counties,
cooperative efforts between the counties 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 Palm Beach County include Pratt and Whitney (United
Technologies), Motorola, Inc., St. Mary's and Good Samaritan Hospitals, Florida
Power and Light Co. and Flo Sun, Inc. Martin County major employers include
Martin Memorial Health System, Staff Leasing, and Publix. St. Lucie County major
employers include Indian River Community College, Columbia Lawnwood Regional
Medical, Publix, and Staff Leasing. Indian River County major employers include
Indian River Memorial Hospital, Publix and New Piper Aircraft Corp.
Bankshares' 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. Continued strong competition
from such financial institutions is expected in the foreseeable future. The
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 as well as
competitive pricing. In recent years many financial institutions have been
aggressively expanding through the acquisition of branch locations or entire
financial institutions, thereby increasing competition.
Based on total assets as of December 31, 1997, the Association was the
third largest savings institution headquartered in Palm Beach County. The
Association held 2.35%, 5.49% 2.73% and 0.06% of all bank and savings
association deposits in Palm Beach, Martin, St. Lucie, and Indian River
counties, respectively, at September 30, 1997.
The competition for real estate and other loans comes principally from
commercial banks, mortgage-banking companies, and other savings associations.
The competition for loans has increased substantially in recent years as a
result of the large number of institutions competing in the market area as well
as the increased efforts by commercial banks to expand mortgage loan
originations. The Association competes for loans primarily through the
competitive 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 the volatility of the mortgage markets.
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
primary market area. It is the Association's intention to offer varied products
in the residential mortgage loan area. The Association currently emphasizes the
origination of adjustable-rate residential mortgage ("ARM") loans and fixed-rate
residential mortgage loans with terms of 15 years or less, as well as 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, the
interest rate of which adjusts annually. At times, it has been the Association's
policy to sell in the secondary market 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 and Board of
Director limits, the Association may periodically decide to retain such loans in
the portfolio. There were no loans held for sale at December 31, 1997. 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
December 31, 1997, the net loan portfolio totaled $451.7 million, of which
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$339.1 million, or 75.1%, consisted of one-to four-family residential mortgage
loans; $34.9 million, or 7.7%, consisted of construction loans; $17.1 million,
or 3.8%, consisted of land loans; $8.8 million, or 2.0%, consisted of
multi-family residential real estate loans; $59.2 million, or 13.1%, consisted
of commercial real estate loans; $15.7 million, or 3.5%, consisted of consumer
loans (primarily home equity lines of credit, automobile loans, and loans
secured by savings deposits); and $3.5 million, or 0.8%, consisted of commercial
business loans. At December 31, 1997, the weighted average remaining term to
maturity of the loan portfolio was approximately 15.6 years. At December 31,
1997, $251.5 million, or 55.7% of the 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. The Association has also purchased either participations in or
whole residential or commercial real estate loans which are serviced by other
institutions. Such loans totaled $19.4 million, net of premiums, at December 31,
1997.
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ANALYSIS OF LOAN PORTFOLIO. Set forth below is selected data relating to the
composition of the loan portfolio by type of loan as of the dates indicated.
At
December 31,
--------------------------------------------
1997 1996
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(Dollars in Thousands)
Real estate loans:
Residential 1-4 family (1) $ 339,117 75.07% $ 293,366 75.41%
Construction loans 34,850 7.72 35,358 9.09
Land loans 17,117 3.79 19,426 4.99
Multi-family (2) 8,800 1.95 8,096 2.08
Commercial (3) 59,220 13.11 37,815 9.72
--------- ------ --------- ------
Total real estate loans 459,104 101.64 394,061 101.29
--------- ------ --------- ------
Non-real estate loans:
Consumer loans (4) 15,694 3.47 16,028 4.12
Commercial business 3,530 0.78 2,458 0.63
--------- ------ --------- ------
Total non-real estate loans 19,224 4.25 18,486 4.75
--------- ------ --------- ------
Total loans receivable 478,328 105.89 412,547 106.04
Less:
Undisbursed loan proceeds 24,163 5.35 20,765 5.34
Unearned discount and net
deferred fees (206) (0.05) 200 0.05
Allowance for loan losses 2,662 0.59 2,542 0.65
--------- ------ --------- ------
Total loans receivable,
net $ 451,709 100.00% $ 389,040 100.00%
========= ====== ========= ======
<TABLE>
<CAPTION>
At
September 30,
---------------------------------------------------------------------------------------------
1996 1995 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential 1-4 family (1) $ 284,474 75.61% $ 248,769 75.51% $ 247,867 78.16% $ 262,480 79.84%
Construction loans 35,720 9.49 27,314 8.29 12,265 3.87 7,965 2.42
Land loans 16,846 4.48 15,601 4.74 20,476 6.46 17,072 5.19
Multi-family (2) 8,153 2.17 7,351 2.23 6,772 2.14 5,952 1.81
Commercial (3) 38,433 10.22 35,402 10.75 32,612 10.28 34,953 10.64
--------- ------ --------- ------ --------- ------ --------- ------
Total real estate loans 383,626 101.97 334,437 101.52 319,992 100.91 328,422 99.90
--------- ------ --------- ------ --------- ------ --------- ------
Non-real estate loans:
Consumer loans (4) 15,606 4.15 12,638 3.84 10,237 3.23 10,844 3.30
Commercial business 1,874 0.50 1,958 0.59 1,058 0.33 929 0.28
--------- ------ --------- ------ --------- ------ --------- ------
Total non-real estate loans 17,480 4.65 14,596 4.43 11,295 3.56 11,773 3.58
--------- ------ --------- ------ --------- ------ --------- ------
Total loans receivable 401,106 106.62 349,033 105.95 331,287 104.47 340,195 103.48
Less:
Undisbursed loan proceeds 22,318 5.94 15,253 4.63 9,872 3.11 6,466 1.96
Unearned discount and net
deferred fees 257 0.07 846 0.26 908 0.29 1,234 0.38
Allowance for loan losses 2,312 0.61 3,492 1.06 3,390 1.07 3,748 1.14
--------- ------ --------- ------ --------- ------ --------- ------
Total loans receivable,
net $ 376,219 100.00% $ 329,442 100.00% $ 317,117 100.00% $ 328,747 100.00%
========= ====== ========= ====== ========= ====== ========= ======
</TABLE>
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(1) Includes participations or whole loans of $19.5 million, $1.7 million, $1.8
million, $2.2 million, $2.6 million, and $3.6 million at December 31, 1997,
1996, September 30, 1996, 1995, 1994, and 1993, respectively.
(2) Includes participations of $0, $505,000, $360,000, $0, $0, and $0, at
December 31, 1997, 1996, September 30, 1996, 1995, 1994, and 1993,
respectively.
(3) Includes participations of $162,000, $190,000, $198,000, $4.9 million, $5.0
million, and $5.5 million at December 31, 1997, 1996, September 30, 1996,
1995, 1994, and 1993, respectively.
(4) Includes primarily home equity lines of credit, automobile loans, and loans
secured by savings deposits. At December 31, 1997 the disbursed portion of
home equity lines of credit totaled $8.8 million.
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LOAN AND MORTGAGE-BACKED AND RELATED SECURITIES MATURITY AND REPRICING
SCHEDULE. The following table sets forth certain information as of December 31,
1997, 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)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family residential $196,202 $ 55,097 $ 42,572 $ 39,610 $ 25,727 $359,208
Commercial, multi-family and land 84,256 6,753 3,522 2,678 2,687 99,896
Consumer loans (excluding lines of credit) 3,491 2,922 500 59 -- 6,972
Equity line of credit loans (1) 8,722 -- -- -- -- 8,722
Commercial business loans 3,530 -- -- -- -- 3,530
-------- -------- -------- -------- -------- --------
Total loans receivable (gross) $296,201 $ 64,772 $ 46,594 $ 42,347 $ 28,414 $478,328
======== ======== ======== ======== ======== ========
Mortgage-backed and related securities $ 26,861 $ 29,465 $ 18,287 $ 13,844 $ 4,308 $ 92,765
======== ======== ======== ======== ======== ========
</TABLE>
- ------------------------
(1) Variable-rate equity lines of credit reprice on a monthly basis.
The following table sets forth at December 31, 1997, the dollar amount
of all fixed-rate and adjustable-rate loans due after December 31, 1998 based on
either the repricing date or the contractual maturity as described above.
<TABLE>
<CAPTION>
FIXED ADJUSTABLE TOTAL
----- ---------- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Real estate loans:
One- to four-family residential $131,300 $ 31,706 $163,006
Commercial, multi-family and land 12,051 3,589 15,640
Consumer and commercial business loans 3,481 -- 3,481
-------- -------- --------
Total $146,832 $ 35,295 $182,127
======== ======== ========
Mortgage-backed and related securities $ 65,904 $ -- $ 65,904
======== ======== ========
</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 its
market area. One- to four-family residential owner-occupied mortgage loans are
generally underwritten in conformity with the criteria established by Fannie Mae
("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 December 31, 1997, $339.1 million, or 75.1%, of the 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 24.0 years. However, it has been the
Association's experience that the average length of time which such loans remain
outstanding is 9.5 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 its
competitors. In a relatively low interest rate environment, which existed
throughout fiscal 1997, borrowers typically prefer fixed-rate loans to ARM
loans. The
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Association has continued to emphasize its ARM loan products. ARM loan
originations totaled $54.6 million, or 73.6%, of all one- to four-family loan
originations during the year ended December 31, 1997. 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 of the term of the loans 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 is generally offered for terms between l5 and 30 years.
The Association currently offers ARM loans with an adjustment of one
year based on changes in a designated market index plus a margin. 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 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. ARM loans are originated with
initial rates which are below the fully indexed rate, the amount of such
discount varying depending upon market conditions, and which provide for an
annual adjustment. Management 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. Negative amortization of the ARM loans is not allowed. One- to
four-family residential ARM loans totaled $192.5 million at December 31, 1997.
The primary purpose of offering ARM loans is to make the 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 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.
Fixed-rate loans generally are originated and underwritten according to
standards that permit sale in the secondary mortgage market. Whether management
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, the Association's current interest rate sensitivity gap position and
Board of Director established limits. During the first three quarters of 1997,
the Association's policy was to retain in its portfolio fixed-rate mortgage
loans 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 except
for loans originated for special financing on low and moderate income housing.
Periodically, management and the Board may decide to retain all loans
originated, including loans with terms greater that 15 years based on conditions
in effect at that time. This policy was in effect for the last quarter of 1997.
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 without prepayment penalities.
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. Although for the fiscal year ended December 31, 1997 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 single-family residential 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 the Association, which
contains an indemnification clause protecting the Association from loss
resulting from misrepresentations in the loan applications or other information
provided to the Association. $24.5 million of such loans were purchased during
fiscal year 1997. It is management's intent, subject to market conditions, to
continue purchasing such loans.
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
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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 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 borrower is generally required to obtain private mortgage insurance. An
origination fee of between 1 % and 2% of the total loan amount on all one- to
four-family loans may be charged depending on the market conditions. 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, are required on
all properties securing real estate loans made by the Association.
The Association may purchase participation or whole loans loans secured
by one- to four-family residences when there are funds available for lending in
excess of the demand for loans in the local market or to facilitate funding of
large projects. At December 31, 1997, the loan portfolio included $19.5 million
of loan participations and whole loans secured by one- to four-family
residences. The Association purchased $18.l million of such loans during 1997.
CONSTRUCTION AND LAND LOANS. At December 31, 1997, $34.9 million, or
7.7%, and $17.1 million, or 3.8%, of the total net loan portfolio consisted of
construction loans and land loans, respectively. Fixed-rate and adjustable-rate
residential construction loans are currently offered 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 to
owners who have a contract for construction. Advances are made as construction
is completed. In addition, construction loans are also made to builders for
single-family homes held for sale. Such loans totaled $4.2 million at December
31, 1997. 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 December 31, 1997, the largest real estate construction loan had an
aggregate principal outstanding balance of $2.5 million, with disbursed funds of
$13,000, which is within the Association's loans-to-one-borrower limit. This
loan is secured by a construction loan to build a single-family home which is
located in the Association's market area. Construction was completed and the
loan was satisfied in full during the March 1998 quarter.
Construction loans are also offered on multi-family and commercial real
estate loans. At December 31, 1997, multi-family and commercial construction
loans totaled $0 and $2.0 million, respectively.
In addition, loans are originated within the market area which are
secured by individual unimproved or improved lots zoned primarily to become
single-family residences, as well as commercial and agricultural properties.
Land loans are currently offered as either one-year ARMs or fixed-rate loans
with terms of up to 15 years. The maximum loan-to-value ratio for such land
loans is 75%.
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.
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,
9
<PAGE>
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.
MULTI-FAMILY RESIDENTIAL REAL ESTATE LOANS. Loans secured by
multi-family real estate constituted approximately $8.8 million, or 2.0%, of the
total net loan portfolio at December 31, 1997. At December 31, 1997, a total of
40 loans were secured by multi-family properties. Multi-family real estate loans
are primarily secured by multi-family residences, such as rental properties with
between five and thirty-six units. At December 31, 1997, substantially all
multi-family loans were secured by properties located within the market area. At
December 31, 1997, multi-family real estate loans had an average principal
balance of approximately $220,000 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 fixed-rate multi-family real estate loans
were originated. 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. Multi-family mortgage loans are generally made 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. 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, the borrower's experience in owning or
managing similar properties, and any financial reserves the borrower may have. A
debt service coverage ratio of at least 125% of the monthly loan payment is
generally required. Personal guarantees from all the principals of the
multi-family real estate borrowers are generally obtained.
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 $59.2 million, or 13.1%, of the total net loan
portfolio at December 31, 1997. 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 December 31, 1997, substantially all of commercial real estate
loans were secured by properties located within the market area. At December 31,
1997, a total of 182 loans were secured by commercial real estate with an
average principal balance of approximately $325,000. 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 Division
staff. Such loans were pursued aggressively with $28.7 million of such loans
originated during fiscal year 1997. The Association intends to continue to
pursue such loans aggressively in the future.
At December 31, 1997, the largest commercial real estate borrower had
an aggregate principal outstanding balance of $9.3 million, with undisbursed
funds of $3.8 million, which is within the Association's loans-to-one-borrower
limit. The $9.3 million principal balance represent's the Association's 50%
share of the funding. The remaining 50% was funded by another local lender. The
loan is for the construction of a 24 unit luxury condominium project located in
the Association's market area, and is currently performing in accordance with
its terms.
10
<PAGE>
In underwriting commercial real estate loans, the same underwriting
standards and procedures are employed 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 December 31, 1997, consumer loans totaled $15.7
million, or 3.5%, of the total net loan portfolio. The principal types of
consumer loans offered are home equity lines of credit, fixed-rate second
mortgage loans, automobile loans, mobile home loans, boat loans, recreational
vehicle 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 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 100%
based on certain credit and occupancy requirements or 80% if such requirements
are not met. Such loans are offered on a monthly adjustable-rate basis with
terms of up to ten years. At December 31, 1997, the disbursed portion of home
equity lines of credit totaled $8.8 million, or 56.1%, of consumer loans. The
undisbursed portion of such loans was $5.6 million at December 31, 1997. The
Association anticipates it will modestly expand its home equity product line in
fiscal 1998.
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, an independent company is engaged 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
fluctuating demand for used automobiles.
COMMERCIAL BUSINESS LOANS. The Association currently offers commercial
business loans to finance small businesses in its market area. Commercial
business loans are offered as a customer service to business account holders.
Such loans may include commercial lines of credit, loans on inventory,
equipment, receivables, or other collateral and unsecured loans. During the last
quarter of the fiscal year ended September 30, 1996, the Association began
expanding its activities in the commercial business lending market. The
Association aggressively pursued such loans during fiscal year 1997 and intends
to continue pursuing such loans aggressively in the future. At December 31,
1997, 53 commercial business loans were outstanding with an aggregate balance of
$3.5 million and an average loan balance of approximately $66,000. Commercial
business loans originated during the year ended December 31, 1997 totaled $2.7
million. 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 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. Personal guarantees from the borrower or a third party are
generally obtained as a condition to originating its commercial business loans.
11
<PAGE>
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 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 loan department
checks the loan application file for accuracy and completeness, and verifies the
information provided. Outside members of the Board of Directors ("Director"),
the Chairman of the Board of Directors ("Chairman"), the President, the Senior
Vice President of the Lending Division (the "SVP") and certain designated Vice
Presidents of the Lending Division ("VP") have been granted the authority to
approve loans. The President, the SVP and certain VPs have individual authority
to approve mortgage loans between $100,000 and $400,000, secured consumer and
commercial loans between $25,000 and $200,000, and unsecured loans between
$10,000 and $100,000. Additionally, these officers may individually approve an
additional 10% of a customer's currently outstanding debt, even though that
exceeds their individual authority limit. Any two of the President, the SVP and
a designated VP may jointly approve all loan types up to $750,000. Any two of
the Chairman, the President, and the SVP may jointly approve all loan types up
to $l.5 million. The Loan Committee consists of any three of any one Director,
the President, the SVP, and one designated VP. The designated Director or his
representative must be present at Loan Committee. Such committee can approve all
loan types up to $2.0 million. The Loan Committee can approve any loans in
excess of $2.0 million by notifying the entire Board of Directors of its
intention to approve a loan in excess of $2.0 million. The Directors who attend
the meeting have a vote along with the other members of the Committee. 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 December 31,
1997, commitments to originate loans, excluding the undisbursed portion of loans
in process, totaled $7.2 million.
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 are more funds available for lending in excess of
the demand for loans in the local market or to facilitate funding of large
projects. Such participation loans, which totaled $19.9 million at December 31,
1997, are secured by one- to four-family, multi-family and commercial real
estate loans.
12
<PAGE>
ORIGINATION, PURCHASE AND SALE OF LOANS. The table below shows the loan
origination, purchase and sales activity for the periods indicated.
<TABLE>
<CAPTION>
For Year For Three
Ended Months Ended For Year Ending
December 31, December 31, September 30,
------------------------------------------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Loans receivable, beginning of period $ 389,040 $ 376,219 $ 329,442 $ 317,117 $ 328,747
Originations:
Real estate:
One- to four-family residential (1) 67,923 20,226 82,596 35,909 49,718
Land loans 14,360 5,498 6,848 18,163 6,418
Multi-family 1,427 -- 1,263 -- 696
Commercial 28,667 1,806 16,102 8,197 2,813
--------- --------- --------- --------- ---------
Total real estate loans 112,377 27,530 106,809 62,269 59,645
Non-real estate loans:
Consumer 4,116 1,525 5,698 4,154 2,425
Commercial business 2,699 515 796 646 718
--------- --------- --------- --------- ---------
Total originations 119,192 29,570 113,303 67,069 62,788
Transfer of mortgage loans to
foreclosed real estate (558) (78) (400) (1,394) (5,528)
Loan and participations purchased 24,455 1,998 16,775 2,728 2,395
Repayments (76,816) (20,042) (72,114) (50,452) (63,471)
Loan sales (631) (283) (5,429) (105) (5,115)
Decrease (increase) in allowance for loan losses (120) (230) 1,180 (102) 358
Decrease in amortization of unearned discount and premiums
and net deferred fees and cost 406 63 589 62 326
Increase (decrease) in loans in process (3,398) 1,553 (7,065) (5,381) (3,406)
Change in other 139 270 (62) (100) 23
--------- --------- --------- --------- ---------
Net loan activity 62,669 12,821 46,777 12,325 (11,630)
--------- --------- --------- --------- ---------
Total loans receivable at end of period $ 451,709 $ 389,040 $ 376,219 $ 329,442 $ 317,117
========= ========= ========= ========= =========
</TABLE>
(l) Includes loans to finance the construction of one- to four-family
residential properties, and loans originated for sale in the secondary
market.
13
<PAGE>
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 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 loan origination fees and costs be
deferred and amortized 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 and costs deferred under SFAS
No. 91 are recognized into income immediately upon prepayment or the sale of the
related loan. At December 31, 1997, unearned discounts and premiums and deferred
loan origination fees and costs totaled $206,000. 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 funds.
In addition to loan origination fees, the Association also receives
servicing income and other fees that consist primarily of servicing fees, late
charges, and other miscellaneous fees which totaled $269,000, $33,000, $148,000,
$184,000 and $163,000 for the year ended December 31, 1997, the three months
ended December 31, 1996 and the years ended September 30, 1996, 1995, and 1994,
respectively.
LOAN SERVICING. While the Association primarily originates loans for
its own portfolio, it also has sold fixed-rate loans to Freddie Mac ("FHLMC")
and to the FNMA. At December 31, 1997, the unpaid balances of loans sold totaled
approximately $19.0 million. Servicing of such loans is retained and a fee is
received of between one-fourth to three-eights of a percent per loan. The
Association does not purchase loan servicing from other sources.
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 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 $12.2 million at December 31, 1997. All of
the Association's loans are in compliance with the loans-to-one borrower limits
at December 31, 1997.
The following table presents the five largest lending relationships at December
31, 1997:
<TABLE>
<CAPTION>
At December 31, 1997
-------------------------------------------------------------
Total of Loans Amount disbursed
-------------------------------------------------------------
Description of collateral: (In Thousands)
<S> <C> <C>
Construction loans to build single-family
homes and line of credit $10,082 $5,204
Construction loans to build a condominium 9,284 5,497
Construction loans to build single-family homes 5,365 3,592
Loans secured by convenience stores and
gas stations 4,785 4,785
Construction loans to build single-family homes 3,897 487
At December 31, 1997 all of the aforementioned loans were performing in
accordance with their terms.
</TABLE>
ASSET QUALITY
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 the 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, a 10-day demand letter is sent and personal contact is attempted.
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
14
<PAGE>
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.
The following table sets forth information with respect to loans past
due 60 to 89 days in the loan portfolio at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31, AT SEPTEMBER 30,
----------------------------- ---------------------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans past due 60-89 days:
One- to four-family residential $469 $446 $209 $493 $193
Commercial and multi-family real estate -- -- -- -- --
Consumer and commercial business loans 54 72 3 24 --
Land loans -- -- -- -- 95
---- ---- ---- ---- ----
Total past due 60-89 days $523 $518 $212 $517 $288
==== ==== ==== ==== ====
</TABLE>
NON-PERFORMING ASSETS. At December 31,1997, non-performing assets
(non-performing loans and real estate owned (" REO")) totaled $2.0 million, and
the ratio of non-performing assets to total assets was 0.47%. Real estate
acquired by the Association as a result of foreclosure or by deed in lieu of
foreclosure is classified as 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 $592,000, $1.5
million, $1.4 million, $1.9 million, $3.7 million and $l.3 million at December
31, 1997, and 1996, and at September 30, 1996, 1995, 1994 and 1993,
respectively.
The following table sets forth information regarding 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,
all accrued interest thereon is fully reserved and the loan ceases to accrue
interest thereafter. For all the dates indicated, there were no material
restructured loans within the meaning of SFAS 15.
<TABLE>
<CAPTION>
AT DECEMBER 31, AT SEPTEMBER 30,
---------------------------------------------------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-performing loans:
One- to four-family residential $1,289 $1,524 $ 832 $ 605 $1,571
Commercial and multi-family real estate -- -- 1,282
Consumer and commercial business loans 55 107 10 39 20
Land 35 -- -- 18 82
------ ------ ------ ------ ------
Total non-performing loans 1,379 1,631 842 662 2,955
REO 592 1,455 1,384 1,910 3,686
Other non-performing assets -- -- 400 (2) -- --
------ ------ ------ ------ ------
Total non-performing assets (1) $1,971 $3,086 $2,626 $2,572 $6,641
====== ====== ====== ====== ======
Total non-performing loans to net loans
receivable 0.31% 0.42% 0.22% 0.20% 0.93%
Total non-performing loans to total assets 0.19 0.25 0.13 0.12 0.53
Total non-performing loans and REO to total 0.27 0.47 0.40 0.45 1.25
assets
</TABLE>
- ------------------------
(1) Net of specific valuation allowances.
(2) The other non-performing asset at September 30, 1996 represented a deposit
account due to the Association whose recovery was in doubt. All funds were
recovered in the subsequent periods.
15
<PAGE>
The largest non-performing asset had a balance of $256,000 at December
31, 1997, with a current appraisal of $340,000. The loan was originated in
fiscal 1989 and was collateralized by a citrus grove located in St. Lucie
County. The borrower, which was an insurance company, went into receivership and
was liquidated in October 1991. The Association subsequently obtained a
Receiver's Deed and the property was classified as REO in February 1993. In June
1995, the Association applied for approval of a site plan to allow for 32 lots
for residential use. The Association applied for extension of the site plan in
February 1997 and 1998. The Association has held the REO for five years and has
applied for an extension with the OTS to hold it for one additional year. The
property has been marketed aggressively, but it is located in an area of limited
growth.
During the year ended December 31, 1997, gross interest income of
$86,000 would have been recorded on non-performing loans accounted for on a
non-accrual basis if the loans had been current throughout the period. No
interest income on non-accrual loans was included in income during such period.
The following table sets forth information regarding delinquent loans,
REO and loans to facilitate the sale of REO at December 31, 1997.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
--------------------------
BALANCE NUMBER
--------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Residential real estate:
Loans 60 to 89 days delinquent $ 469 9
Loans more than 89 days delinquent 1,289 20
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 54 4
Loans more than 89 days delinquent 55 3
Land 35 2
REO 592 8
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 217 4
------ ---
Total $2,711 50
====== ===
</TABLE>
CLASSIFICATION OF ASSETS. Federal regulations provide for the
classification of loans and other assets such as debt and equity securities
considered by 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 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. Problem loans in the portfolio
are regularly reviewed to determine whether any loans require classification in
accordance with applicable regulations.
16
<PAGE>
The following table sets forth the aggregate amount of the
Association's classified assets at the dates indicated.
<TABLE>
<CAPTION>
At December 31 At September,
----------------- -------------------------------------
1997 1996 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Substandard assets $ 3,056 $ 4,205 $ 3,745 $ 8,652 $10,166 $12,447
Doubtful assets -- -- -- -- -- --
Loss assets -- 344 544 1,565 1,520 1,848
- ------------------------ ------- ------- ------- ------- ------- -------
Total classified assets $ 3,056 $ 4,549 $ 4,289 $10,217 $11,686 $14,295
======= ======= ======= ======= ======= =======
</TABLE>
ALLOWANCE FOR LOAN LOSSES. Management's policy is to provide for
estimated losses on the 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 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.
17
<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 DECEMBER 31, AT SEPTEMBER 30,
---------------------------------------------------------------------------------
1997 1996 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total loans outstanding $ 451,709 $ 389,040 $ 376,219 $ 329,442 $ 317,117 $ 328,747
========= ========= ========= ========= ========= =========
Average loans outstanding for the period $ 411,098 $ 383,258 $ 346,880 $ 321,849 $ 321,721 $ 352,173
========= ========= ========= ========= ========= =========
Allowance balance (at beginning of period) $ 2,542 $ 2,312 $ 3,492 $ 3,390 $ 3,748 $ 2,281
Provision for losses:
Real estate loans 264 243 84 234 967 2,395
Consumer and commercial business loans 14 6 22 3
Recoveries -- -- -- -- -- --
Charge-offs:
Real estate loans (143) (13) (1,264)(1) (132) (1,325) (885)
Consumer and commercial business loans (1) -- (14) (6) (22) (46)
--------- --------- --------- --------- --------- ---------
Allowance balance (at end of period) $ 2,662 $ 2,542 $ 2,312 $ 3,492 $ 3,390 $ 3,748
========= ========= ========= ========= ========= =========
Allowance for loan losses as a percent
of net loans receivable at end of period 0.59% 0.65% 0.61% 1.06% 1.07% 1.14%
Net loans charged off as a percent of
average loans outstanding 0.04% --% 0.37% 0.04% 0.41% 0.26%
Ratio of allowance for loan losses to total
non-performing loans at end of period (2) 193.04% 155.8% 274.58% 527.49% 114.72% 55.65%
Ratio of allowance for loan losses to total
non-performing loans and REO
at end of period (2) 135.06% 82.3% 103.86% 135.77% 51.05% 46.51%
</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.
18
<PAGE>
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.
AT DECEMBER 31,
--------------------------------------------
1997 1996
-------------------- -------------------
% OF LOANS % OF LOANS
IN EACH IN EACH
CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS (1) AMOUNT TOTAL LOANS (1)
------ ----------- ------ -----------
Balance at end of period
applicable to:
One- to four-family
residential mortgage $1,042 78.18% $1,037 79.68%
Land 650 3.58 630 4.71
Multi-family residential
mortgage 300 1.84 300 1.96
Commercial real estate 550 12.38 500 9.17
Consumer and commercial
business 120 4.02 75 4.48
------ ------ ------ ------
Total allowance for loan
losses $2,662 100.00% $2,542 100.00%
====== ====== ====== ======
AT SEPTEMBER 30,
-------------------------------------------
1996 1995
-------------------- ------------------
% OF LOANS % OF LOANS
IN EACH IN EACH
CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS (1) AMOUNT TOTAL LOANS (1)
------ ----------- ------ -----------
(DOLLARS IN THOUSANDS)
Balance at end of period
applicable to:
One- to four-family
residential mortgage $ 870 79.83% $ 790 79.10%
Land 630 4.20 630 4.47
Multi-family residential
mortgage 300 2.03 300 2.11
Commercial real estate 452 9.58 1,712 10.14
Consumer and commercial
business 60 4.36 60 4.18
------ ------- ------ ------
Total allowance for loan
losses $2,312 100.00% $3,492 100.00%
====== ====== ====== ======
----------------------------------------------
1994 1993
---------------------- -------------------
% OF LOANS % OF LOANS
IN EACH IN EACH
CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS (1) AMOUNT TOTAL LOANS (1)
------ ----------- ------ -----------
Balance at end of period
applicable to:
One- to four-family
residential mortgage $ 700 78.52% $ 700 79.50%
Land 630 6.18 600 5.02
Multi-family residential
mortgage 300 2.05 453 1.75
Commercial real estate 1,700 9.84 1,935 10.27
Consumer and commercial
business 60 3.41 60 3.46
------ ------ ------ ------
Total allowance for loan
losses $3,390 100.00% $3,748 100.00%
====== ====== ====== ======
- ----------------------------
(1) Percentages do not reflect adjustments for undisbursed loan proceeds,
unearned discount and net deferred fees, and allowance for loan losses.
19
<PAGE>
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 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 management. Securities purchased for the 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 provisions of SFAS
No. 115 "Questions and Answers Guide ("SFAS No. 115 Q & A") were adopted which
allowed between November 15, 1995 and December 31, 1995 a one-time
reclassification of securities from held to maturity to available for sale. 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. Subsequently, $749,000 of the securities were
sold at no gain or loss.
The Association maintains an Investment Committee which meets on a
monthly basis to review the 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 President and Chief Executive Officer, James B. Pittard, Jr.,
Senior Vice President, Chief Financial Officer and Treasurer, Larry J. Baker,
and Senior Vice Presidents, Cecil F. Howard, Jr., Feriel G. Hughes, Mary L.
Kaminske, and Michael E. Reinhardt.
MORTGAGE-BACKED AND RELATED SECURITIES. At December 31, 1997, net
mortgage-backed and related securities totaled $92.8 million, or 12.9%, of total
assets. Of this amount, $46.4 million was classified as held to maturity and
$46.4 million was available for sale. At December 31, 1997, the market value of
the net mortgage-backed and related securities portfolio totaled approximately
$93.3 million. Management primarily invests in fixed-rate mortgage-backed and
related securities with weighted average lives of five to seven years.
Management believes that investing in short-term mortgage-backed and related
securities limits the exposure to higher interest rates. During fiscal years
1997, $679,000 of mortgage-backed and related securities were purchased. These
purchases were funded with public funds deposits, odd-term certificates of
deposit and FHLB advances, instead of excess liquidity as in previous years.
Also included in the mortgage-backed securities portfolio at December 31, 1997,
was $80.0 million of collateralized mortgage obligations ("CMOs"), $7.5 million
of pass-through securities issued by the FHLMC, $3.3 million of pass-through
securities issued by the FNMA and $1.8 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. A limited
amount of mortgage-backed securities issued by the Agency for International
Development ("AID") are also included in the portfolio. The AID mortgage-backed
securities are fixed-rate instruments and are securitized with loans to Korea,
Venezuela, and Israel. At December 31, 1997, AID mortgage-backed securities
totaled $236,000. Such mortgage-backed securities are guaranteed by governmental
agencies or quasi-governmental agencies of the United States Government. By
investing in mortgage-backed and related securities, the Association lowers 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 in order of priority.
Substantially all of the CMOs held in the mortgage-backed and related securities
portfolio consist of senior sequential tranches, primarily investments in one of
the first three tranches of the CMO. By purchasing senior sequential tranches,
management 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 December
31, 1997, the fixed-rate CMOs had coupon rates ranging from 6.0 % to12.0 % with
a weighted average yield of 7.38%. The adjustable-rate CMOs are indexed to the
London InterBank Offered Rate ("LIBOR") or to the Ten Year Treasury Index.
Management's policy is to purchase tranches in CMOs which are deemed to be
investment grade by the Federal Financial Institutions Examination Council
("FFIEC"). In the past, CMO residuals were purchased 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 moresenior 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.
20
<PAGE>
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 December 31, 1997, the carrying value of the
CMO residuals was $7,000. The Association no longer invests in CMO residuals.
OTS regulations require the classification of CMOs as high-risk if they
fail the FFIEC test. No CMOs are purchased 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 1997, one CMO issue totaling $9.3 million failed
the FFIEC test and is classified as high-risk for OTS reporting purposes.
The following tables set forth the carrying value of, and activity in,
the mortgage-backed and related securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31, AT SEPTEMBER 30,
--------------------------------------------
1997 1996 1996 1995
---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Mortgage-backed and related securities:
Held to maturity:
CMOs $ 33,638 $ 37,359 $ 38,308 $ 57,586
CMO residuals 7 15 20 118
FHLMCs 7,465 9,673 9,973 11,943
GNMAs 1,751 2,108 2,233 2,774
FNMAs 3,316 3,933 4,076 4,691
AID loans 236 317 335 387
Total mortgage-backed and related securities held -------- -------- -------- --------
to maturity 46,413 53,405 54,945 77,499
-------- -------- -------- --------
Available for sale: (shown at market value)
CMOs 46,350 51,974 53,318 --
-------- -------- -------- --------
Total mortgage-backed and related securities
available for sale 46,350 51,974 53,318 --
-------- -------- -------- --------
Total mortgage-backed and related securities $ 92,763 $105,379 $108,263 $ 77,499
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
---------------------------------------------
1997 1996 1996 1995
---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Mortgage-backed and related securities at:
Beginning of period $105,379 $108,263 $ 77,499 $ 41,281
Purchases 679 -- 43,703 41,549
Calls -- -- (311) --
Sales -- -- (749) --
Repayments (14,421) (2,840) (11,454) (5,286)
Discount (premium) amortization 216 60 189 (45)
Gain on call -- -- 254 --
(Increase) decrease in market value available
for sale (net) 910 (104) (868) --
-------- ------- -------- --------
Mortgage-backed and related securities at
end of period $ 92,763 $105,379 $108,263 $ 77,499
======== ======== ======== ========
</TABLE>
21
<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 DECEMBER 31, AT SEPTEMBER 30,
----------------------------------------------------------------------------------
1997 1996 1996 1995
----------------- ----------------- ----------------- -----------------
$ % $ % $ % $ %
----------------- ----------------- ----------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed and related securities, net:
Held to maturity:
Adjustable-rate CMOs $ 3,028 3.26% $ 3,027 2.87% $ 3,030 2.80% $ 3,980 5.14%
-------- ------ -------- ------ -------- ------ ------- ------
Fixed-rate:
FHLMCs 7,465 8.05 9,673 9.18 9,973 9.21 11,943 15.41
FNMAs 1,751 1.89 2,108 2.00 4,076 3.76 4,691 6.05
GNMAs 3,316 3.57 3,933 3.73 2,233 2.06 2,774 3.58
CMOs 30,617 33.01 34,347 32.59 35,298 32.60 53,724 69.32
AID loans 236 0.25 317 0.30 335 0.32 387 0.50
-------- ------ -------- ------ -------- ------ ------- ------
Total fixed-rate 43,385 46.77 50,378 47.81 51,915 47.95 73,519 94.86
-------- ------ -------- ------ -------- ------ ------- ------
Total mortgage-backed and
related securities-held to
maturity, net 46,413 50.03 53,405 50.68 54,945 50.75 77,499 100.00
-------- ------ -------- ------ -------- ------ ------- ------
Available for sale: (at market value)
Adjustable-rate CMOs 3,331 3.59 3,594 3.41 3,670 3.39 -- --
Fixed-rate CMOs 43,019 46.38 48,380 45.91 49,648 45.86 -- --
-------- ------ -------- ------ -------- ------ ------- ------
Total mortgage-backed and related
securities available for
sale, net 46,350 49.97 51,974 49.32 53,318 49.25 -- --
-------- ------ -------- ------ -------- ------ ------- ------
Total mortgage-backed and related $ 92,763 100.00% $105,379 100.00% $108,263 100.00% $77,499 100.00%
securities, net ======== ====== ======== ====== ======== ====== ======= ======
</TABLE>
22
<PAGE>
INVESTMENTS. Investments purchased 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 interest-earning deposits, investments and securities
available for sale totaled $134.2 million or18.6% 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
loan origination and other activities. For further information regarding the
investments see Notes 1, 2 and 3 to the Notes to Consolidated Financial
Statements contained in Bankshares' Annual Report to Shareholders for the Year
Ended December 31, 1997 (the "Annual Report") attached hereto as Exhibit 13.
INTEREST-EARNING DEPOSITS. Excess funds are primarily invested on a
daily basis in an interest-earning overnight account at the FHLB of Atlanta. The
balance of this account was $13.6 million at December 31, 1997. Such funds are
available to provide liquidity to meet lending requirements and daily
operations.
INVESTMENT SECURITIES. At December 31, 1997, investment securities
included United States Government and agency obligations totaling $13.0 million,
corporate debt issues totaling $8.3 million, and FHLB stock totaling $3.3
million.
Included in corporate debt issues are asset-backed securities which
include two debt securities secured by automobile loan receivables totaling $1.5
million at December 31, 1997 purchased during fiscal year 1994, the repayment of
which is secured by automobile receivables. These securities are rated BBB or
above by Standard & Poors and provide an effective yield of 6.29%. While these
securities have a stated maturity of six years, it is expected because of
prepayments that the receivables underlying the securities have a weighted
average life of less than the stated maturities. Debt instruments which depend
on the repayment of automobile loans involve a certain degree of risk since in
the event 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 amount of FHLB stock.
During 1996, the FHLB decided to begin redeeming all stock held by members in
excess of the required amount. During October 1996, the Association received
$2.5 million leaving a FHLB stock balance of $2.9 million. Since that time, due
to the growth of the Association's balance sheet, purchases of $400,000 have
occurred. At December 31, 1997, FHLB stock totaled $3.3 million.
SECURITIES AVAILABLE FOR SALE. Securities available for sale are
carried on the books at fair value as required by FASB No. 115 and totaled $95.9
million at December 31, 1997. Included in securities available for sale are
equity securities totaling $23,000, mutual funds totaling $40.7 million, and
United States Government and agency obligations totaling $55.2 million.
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. Mutual fund investments include
approximately $35.7 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 $5.0
million in funds which invest in asset backed, corporate and CMO obligations.
23
<PAGE>
INVESTMENT PORTFOLIO. The following tables set forth the carrying value
of the investment portfolio and securities available for sale at the dates
indicated. At December 31, 1997, the market value of the investments was
approximately $138.4 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 DECEMBER 31, AT SEPTEMBER 30,
------------------------------------- -----------------------------
1997 1996 1996 1995
---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest-earning deposits:
FHLB-Atlanta $ 13,621 $ 28,695 $ 28,580 $ 28,171
Other deposits -- 200 600 1,200
-------- -------- -------- --------
Total interest-earning deposits 13,621 28,895 29,180 29,371
-------- -------- -------- --------
Investment securities:
United States Government and agency obligations 13,039 11,701 11,691 38,987
Corporate debt issues 8,349 10,138 10,602 13,692
Certificates of deposit -- -- -- 7,000
FHLB stock 3,264 2,864 5,384 7,384
-------- -------- -------- --------
Total investment securities 24,652 24,703 27,677 67,063
-------- -------- -------- --------
Securities available for sale:
(shown at fair value)
Equity securities (1) 23 14 115 96
Mutual funds 40,721 43,067 42,912 26,932
United States Government and agency obligations 55,175 28,097 27,942 --
-------- -------- -------- --------
Total securities available for sale 95,919 71,178 70,969 27,028
-------- -------- -------- --------
Total investment portfolio $134,192 $124,776 $127,826 $123,462
======== ======== ======== ========
</TABLE>
(1) Consists of $23,000, $14,000, $14,000, and $10,000 in FNMA stock which was
purchased in order for the Association to qualify as a FNMA sevicer for the
years ended December 31, 1997 and 1996, and September 30, 1996 and 1995,
respectively, and $0, $0, $101,000, and $86,000 in securities issued by the
Financial Institutions Insurance Group Limited for the years ended December
31, 1997 and 1996 and September 30, 1996 and 1995, respectively.
24
<PAGE>
SECURITIES PORTFOLIO MATURITIES. The following table sets forth the
scheduled maturities, carrying values, market values and average yields for the
investment securities and securities available for sale at December 31, 1997.
<TABLE>
<CAPTION>
At December 31, 1997
------------------------------------------
One Year Or Less One To Five Years
---------------- -----------------
Annualized Annualized
Weighted Weighted
Carrying Average Carrying Average
Value Yield Value Yield
-------- ------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Interest-earning deposits:
FHLB of Atlanta $13,621 5.20% $ -- --%
------- ----- ------- -----
Total interest-earning deposits 13,621 5.20 -- --
------- ----- ------- -----
Investment securities:
United States Government
and agency obligations 1,250 10.99 -- --
Corporate debt issues -- -- 1,493 6.32
FHLB stock -- -- -- --
------- ----- ------- -----
Total investment securities 1,250 10.99 1,493 6.32
------- ----- ------- -----
Securities available for sale:
United States Government
and agency obligations 5,000 5.89 44,835 6.40
Equity securities 23 1.33 -- --
Mutual funds: 40,721 5.93 -- --
------- ----- ------- -----
Total securities available
for sale 45,744 5.92 44,835 6.40
------- ----- ------- -----
Total investment securities and
securities available for sale 46,994 6.06 46,328 6.40
------- ----- ------- -----
Total securities portfolio $60,615 5.86% $46,328 6.40%
======= ===== ======= =====
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1997
------------------------------------------
Five To Ten Years More Than Ten Years
----------------- -------------------
Annualized Annualized Total Annualized
Weighted Weighted ------------------ Average Weighted
Carrying Average Carrying Average Carrying Market Life in Average
Value Yield Value Yield Value Value Years (1) Yield
--------- ------- --------- ------- -------- ------ ----- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning deposits:
FHLB of Atlanta $ -- --% $ -- --% $ 13,621 $ 13,621 -- 5.20%
-------- ----- -------- ----- -------- -------- -----
Total interest-earning deposits -- -- -- -- 13,621 13,621 -- 5.20
-------- ----- -------- ----- -------- -------- -----
Investment securities:
United States Government
and agency obligations 11,284 11.33 505 9.36 13,039 17,204 5.44 11.22
Corporate debt issues -- -- 6,856 6.27 8,349 8,655 10.10 6.28
FHLB stock -- -- 3,264 7.25 3,264 3.264 -- 7.25
-------- ----- -------- ----- -------- -------- ----- -----
Total investment securities 11,284 11.33 10,625 6.71 24,652 29,123 7.26 8.16
-------- ----- -------- ----- -------- -------- ----- -----
Securities available for sale:
United States Government
and agency obligations 5,340 6.99 -- -- 55,175 55,175 4.18 6.39
Equity securities -- -- -- -- 23 23 -- 1.33
Mutual funds: -- -- -- -- 40,721 40,721 -- 5.93
-------- ----- -------- ----- -------- -------- ----- -----
Total securities available
for sale 5,340 6.99 -- -- 95,919 95,919 4.18 6.20
-------- ----- -------- ----- -------- -------- ----- -----
Total investment securities and
securities available for sale 16,624 9.94 10,625 6.71 120,571 125,042 5.04 6.61
-------- ----- -------- ----- -------- -------- ----- -----
Total securities portfolio $ 16,624 9,94% $ 10,625 6.71% $134,192 $138,663 5.04 6.48%
======== ===== ======== ===== ======== ======== ===== =====
</TABLE>
- ------------------------
(1) Total weighted average life in years calculated only on United States
Government and agency obligations.
25
<PAGE>
SOURCES OF FUNDS
GENERAL. Deposits are the major source of funds for lending and other
investment purposes. In addition to deposits, funds are derived 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 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 deposits of $100,000 or more are accepted,
premium rates for such deposits are not currently offered. 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. A
management committee meets weekly to evaluate the 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. Funds are not obtained through brokers, nor are funds solicited
outside the Association's market area.
The following table sets forth information regarding interest rates,
terms, minimum amounts and balances of deposits as of December 31, 1997.
<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>
0.00% None Non-interest-bearing account None $ 24,715 4.49%
1.00 None NOW accounts $ 100 69,862 12.69
1.73 None Passbook accounts 100 30,221 5.49
3.40 None Money market deposit accounts 1,000 78,832 14.31
-------- ------
Total checking and savings deposits 203,630 36.98
-------- ------
CERTIFICATES OF DEPOSIT (1)
-----------------------
4.71 1 - 5 months Fixed term, fixed-rate 1,000 12,531 2.28
5.04 6-11 months Fixed term, fixed-rate 1,000 54,099 9.82
5.60 12-17 months Fixed term, fixed-rate 1,000 165,026 29.97
5.68 24-30 months Fixed term, fixed-rate 1,000 36,654 6.65
5.96 36-47 months Fixed term, fixed-rate 1,000 15,358 2.79
5.93 48-59 months Fixed term, fixed-rate 1,000 2,335 0.42
6.11 Over 60 months Fixed term, fixed-rate 1,000 58,342 10.59
1.73 Various Fixed term, fixed-rate 1,000 1,436 0.26
5.03 Various Negotiated Jumbo 100,000 1,297 0.24
-------- ------
Total certificates of deposit 347,078 63.02
-------- ------
Total deposits $550,708 100.00%
======== ======
</TABLE>
- ---------------------------------------------------------------------
(1) IRA and KEOGH accounts are generally offered throughout all terms stated
above with balances of $45.0 million and $1.4 million, respectively.
26
<PAGE>
The following tables sets forth the change in dollar amount in the
various types of savings accounts offered between the dates indicated:
<TABLE>
<CAPTION>
Balance Percent Balance Percent
at of Incr. at of Incr.
12/31/97 Deposits (Decr.) 12/31/96 Deposits (Decr.)
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Non-interest-bearing demand
accounts $ 24,715 4.49% 6,088 $ 18,627 3.63% $ (905)
NOW accounts 69,862 12.69 2,786 67,076 13.06 3,978
Passbooks 30,221 5.49 (600) 30,821 6.00 (54)
Money market deposit
accounts 78,832 14.31 9,318 69,514 13.53 93
Time deposits which mature:
Within 12 months 260,772 47.35 6,975 253,797 49.40 13,557
Within 12-36 months 58,794 10.67 17,590 41,204 8.02 (1,510)
Beyond 36 months 27,512 5.00 (5,158) 32,670 6.36 (379)
-------- ------ -------- -------- ------ --------
Total $550,708 100.00% $ 36,999 $513,709 100.00% $ 14,780
======== ====== ======== ======== ====== ========
</TABLE>
<TABLE>
<CAPTION>
Balance Percent Balance Percent
at of Incr. at of
9/30/96 Deposits (Decr.) 9/30/95 Deposits
--------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-interest-bearing demand
accounts $ 19,532 3.91% $ 4,688 $ 14,844 3.39%
NOW accounts 63,098 12.65 (763) 63,861 14.60
Passbooks 30,875 6.19 1,174 29,701 6.79
Money market deposit
accounts 69,421 13.91 (6,299) 75,720 17.32
Time deposits which mature:
Within 12 months 240,240 48.15 46,740 193,500 44.24
Within 12-36 months 42,714 8.56 10,290 32,424 7.41
Beyond 36 months 33,049 6.63 5,723 27,326 6.25
-------- ------ -------- -------- ------
Total $498,929 100.00% $ 61,553 $437,376 100.00%
======== ====== ======== ======== ======
</TABLE>
27
<PAGE>
The following table sets forth the certificates of deposit classified
by rates as of the dates indicated.
AT DECEMBER 31, AT SEPTEMBER 30,
-----------------------------------------
1997 1996 1996 1995
---- ---- ---- ----
Rate (IN THOUSANDS)
3.00% or less $ 1,436 $ 1,035 $ 1,600 $ 930
3.01 - 3.99% 11 598 903 5,257
4.00 - 4.99% 35,699 51,484 80,831 55,583
5.00 - 5.99% 262,029 232,313 193,281 108,608
6.00 - 6.99% 39,186 33,568 29,571 70,456
7.00 - 7.99% 8,717 8,673 9,817 12,416
-------- -------- -------- --------
$347,078 $327,671 $316,003 $253,250
======== ======== ======== ========
The following table sets forth the amount and maturities of
certificates of deposit at December 31, 1997.
<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 $ 25 $ 38 $ 2 $ 30 $ 114 $ 1,227 $ 1,436
3.01 - 3.99% -- -- 11 -- -- -- 11
4.00 - 4.99% 34,693 1,006 -- -- -- -- 35,699
5.00 - 5.99% 219,566 21,680 10,841 3,096 6,846 -- 262,029
6.00 - 6.99% 6,488 7,860 8,639 8,094 8,105 -- 39,186
7.00 - 7.99% -- 378 8,339 -- -- -- 8,717
-------- -------- -------- -------- -------- -------- --------
$260,772 $ 30,962 $ 27,832 $ 11,220 $ 15,065 $ 1,227 $347,078
======== ======== ======== ======== ======== ======== ========
</TABLE>
The following table indicates the amount of negotiable certificates of
deposit of $100,000 or more by time remaining until maturity as of December 31,
1997.
CERTIFICATES
OF DEPOSIT
OF $100,000
REMAINING MATURITY OR MORE
------------------ ------------------
(IN THOUSANDS)
Three months or less $16,919
Three through six months 13,460
Six through twelve months 10,491
Over twelve months 14,188
-------
Total $55,058
=======
Deposits are used to fund loan originations, the purchase of securities
and for general business purposes. The deposit growth in fiscal year 1997 of
$37.0 million reflected the use of odd-term and promotional certificate of
deposit products, the opening of three new branch offices, as well as increased
retail deposits generated by aggressive, competitive pricing of such products in
the market area.
28
<PAGE>
The following table sets forth the net changes in the deposit
activities for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED YEARS ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
-----------------------------------------------------
1997 1996 1996 1995
---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Deposits $ 2,433,375 $ 554,294 $ 2,158,898 $ 1,952,009
Withdrawals 2,416,860 549,264 2,114,903 1,988,577
----------- ----------- ----------- -----------
Net increase (decrease) before
interest credited 16,515 5,030 43,995 (36,568)
Interest credited 20,484 9,750 17,558 13,965
----------- ----------- ----------- -----------
Net increase (decrease) in deposits $ 36,999 $ 14,780 $ 61,553 $ (22,603)
=========== =========== =========== ===========
</TABLE>
BORROWINGS. Savings deposits are the primary source of funds for
lending and investment activities and for general business purposes. If the need
arises, advances from the FHLB may be used to supplement the 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 December 31, 1997, $57.3 million of FHLB advances were outstanding
with a weighted average interest rate of 6.25%.
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, a discount was recorded 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 December 31, 1997, the outstanding balance of
the Bond was $16.3 million with a rate of 10.49%. For further information on the
Bond, see Note 15 to the Notes to the Consolidated Financial Statements in the
Annual Report attached hereto as 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. The ESOP
purchase of 190,388 shares of common stock in the common market is funded by a
loan currently held by an unaffliated financial institution. The loan is being
repaid from the Association's contributions to the ESOP over a period of up to
seven years and had an outstanding balance of $1.4 million at December 31, 1997.
The loan bears interest at a monthly average of the Federal Funds high and low
rate plus 2.35%, which was 9.60% at December 31, 1997. Subsequent to December
31, 1997, Bankshares loaned sufficient funds to the ESOP to permit the ESOP to
repay the loan to the unaffiliated lender. The terms of the loan to the ESOP
from Bankshares are substantially identical to those of the loan from the
unaffiliated lender, however, the interest rate used will be the New York prime
rate. The Association may, in any plan year, make additional discretionary
contributions for the benefit of plan participants in either cash or shares of
Common Stock, which may be acquired through the purchase of outstanding shares
in the market or from individual shareholders, upon the original issuance of
additional shares by the Association or upon the sale of treasury shares by the
Association. Such purchases, if made, would be funded through additional
borrowings by the ESOP or additional contributions from the Association. The
timing, amount and manner of future contributions to the ESOP will be affected
by various factors, including prevailing
29
<PAGE>
regulatory policies, the requirements of applicable laws and regulations and
market conditions. For further information, see Note 14 to the Notes to the
Consolidated Financial Statements in the Annual Report, attached hereto as
Exhibit 13.
The following table sets forth the source, balance, and rate of
borrowings for the year ended December 31, 1997, for the three months ended
December 31, 1996, and for the years September 30, 1996, and 1995.
DURING THE DURING THE
YEAR THREE MONTHS DURING THE
ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
----------------------------------------------
1997 1996 1996 1995
---- ---- ---- ----
(DOLLARS IN THOUSANDS)
FHLB advances:
Maximum month-end balance $57,341 $36,350 $36,350 $18,679
Balance at end of period 57,341 34,763 36,350 18,200
Average balance (1) 42,952 35,657 22,110 3,846
Weighted average interest rate
during the period 6.38% 6.72% 6.36% 10.80%
Weighted average interest rate
at end of period 6.25% 6.69% 6.70% 6.86%
Mortgage-backed bond:
Maximum month-end balance $17,312 $18,204 $18,660 $19,618
Balance at end of period 16,333 17,230 17,454 18,344
Average balance (1) 16,888 17,428 18,033 19,030
Weighted average interest rate
during the period 10.94% 11.17% 10.41% 11.72%
Weighted average interest
rate at end of period 10.49% 11.19% 10.52% 11.65%
ESOP loan:
Maximum month-end balance $ 1,817 $ 1,966 $ 2,409 $ 2,776
Balance at end of period 1,424 1,915 2,114 2,557
Average balance (1) 1,681 1,978 2,273 2,257
Weighted average interest during
the period 7.85% 8.72% 7.98% 8.83%
Weighted average interest rate
at end of period 9.60% 7.76% 7.77% 8.20%
- -------------------------------------------------------------
(1) Computed on the basis of month-end balances.
SUBSIDIARY ACTIVITIES
The Association currently has one active subsidiary. 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
December 31, 1997, ComFed, Inc. reported net income of $35,000. At December 31,
1997, the Association had an equity investment in ComFed, Inc. of $73,000.
Under the Financial Institutions Reform, Recovery, and Enforcement Act
of 1989 ("FIRREA"), 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.
30
<PAGE>
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
The Association has completed its investigation of a possible former
employee defalcation which may have occurred for several years. The Association
maintains insurance to cover possible defalcation losses with a claim deductible
of $200,000. A liability for the amount of the deductible was established during
the year ended September 30, 1996. The Association notified its insurance
company of the potential claim and the insurance company acknowledged coverage.
The insurance company has completed its due diligence related to the claim. The
Association and insurance company are currently negotiating the final
settlement. Management does not believe that the claim will have any material
effect on its financial position or results of its operations.
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. Bankshares and
ComFed are 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 Bankshares 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
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 then existing 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 paid significantly lower
premiums than SAIF-insured institutions. 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 (the "DIF") which mandated that all
institutions which have deposits are insured by SAIF were 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 increased the SAIF's reserve ratio to a comparable level to that 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.
31
<PAGE>
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
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 December 31, 1997, the Association was in the "well capitalized" category.
32
<PAGE>
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 December 31, 1997, the Association's
ratio of core capital to total adjusted assets was 9.8%.
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 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 December 31, 1997, represented 72.2%
of the 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
33
<PAGE>
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. At December 31, 1997 the Association had no investments
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 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 stockholders 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, with the remaining $2.5 million being redeemed by the FHLB
during fiscal year 1997. During 1997, due to increases in the loan portfolio and
FHLB advances, the Association was required to purchase an additional $400,000
in FHLB stock, resulting in FHLB stock totaling $3.3 million at December 31,
1997. In past years, the Association has received dividends on its FHLB stock.
Such dividends were 7.25% for the fiscal years ended December 31, 1997 and 1996.
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 Home Owners' 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"). The Association is a domestic building and loan association as defined
in the 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.
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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 December 31, 1997, the Association was in compliance with the QTL
requirement with approximately 80.0% 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%.
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 December 1997 was
14.2% 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 0.27% while an institution assigned to the
lowest risk classification will pay a premium of 0.00%.
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,
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<PAGE>
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 December 31, 1997, the Association is required to pay a
semi-annual assessment of approximately $76,000.
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 December 31, 1997, the Association was a Tier 1 Association.
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, Bankshares became a savings and
loan holding company within the meaning of Section 10(o) of the HOLA. Under the
terms of the OTS approval of the Reorganization, Bankshares was limited to the
powers permitted to mutual holding companies. As such, Bankshares is registered
with and is subject to OTS examination and supervision as well as certain
reporting requirements. In addition, the operations of Bankshares are subject to
the 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 Bankshares and with other persons
affiliated with Bankshares, 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
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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.
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.
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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, 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 of Bankshares 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 December 31, 1997, 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.
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FEDERAL AND STATE TAXATION
FEDERAL TAXATION
For federal income tax purposes, Bankshares files a consolidated
federal income tax return with the Association on a fiscal year basis. Since
ComFed owns less than 80% of the outstanding Common Stock of Bankshares, ComFed
is not permitted to file a consolidated federal income tax return with
Bankshares. Because ComFed has nominal assets other than the stock of
Bankshares, it has no material federal income tax liability.
On May 13, 1997, permission was received from the Internal Revenue
Service ("IRS") to change the accounting period, for federal income tax
purposes, from September 30th to December 31st, effective December 31, 1996.
Bankshares, ComFed 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").
Bankshares 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 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.
During 1996 legislation was passed that repealed section 593 of the
Internal Revenue Code for taxable years beginning after December 31, 1995.
Section 593 allowed thrift institutions, including the Association, to use the
percentage-of-taxable income bad debt accounting method, if more favorable than
the specific charge-off method, for federal income tax purposes. The excess
reserves (deduction based on the percentage-of-taxable income less the deduction
based on the specific charge-off method) accumulated post-1987 are required to
be recaptured ratably over a six year period beginning in 1996. There were no
excess reserves as of December 31, 1996 and the recapture had no effect on
Bankshares' statement of operations as taxes were provided for in prior years in
accordance with SFAS 109, "Accounting for Income Taxes" ("SFAS 109"). The same
legislation forgave the tax liability on pre-1987 accumulated bad debt reserves
which would have penalized any thrift choosing to adopt a bank charter because
the tax would have become due and payable. The unrecorded potential liability
that was forgiven approximated $4.3 million. See Note 12 to the Notes to the
Consolidated Financial Statements in the Annual Report, attached hereto as
Exhibit 13.
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. SFAS 109 was implemented by Bankshares 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.
Bankshares is subject to the corporate alternative minimum tax which is
imposed to the extent it exceeds Bankshares' 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
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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.
Bankshares was audited by IRS for the tax year 1990 during fiscal year 1994.
Based upon the audit, Bankshares received a "no-change" letter from the IRS. See
Notes 1 and 12 to the Notes to the Consolidated Financial Statements in the
Annual Report, attached hereto as exhibit 13.
STATE TAXATION
Under the laws of the State of Florida, Bankshares and its subsidiary
are generally subject to 5.5% tax on net income. The tax may be reduced by a
credit of up to 65% of the tax due as a result of certain intangible taxes. The
tax is deductible by Bankshares in determining its federal income tax liability.
Bankshares has not been audited by the State of Florida.
PERSONNEL
As of December 31, 1997, Bankshares had no compensated employees.
Officers of Bankshares are employees of the Association and receive all
compensation from the Association. Because Bankshares' only activity is holding
the stock of the Association, employees of the Association perform limited
duties for Bankshares.
As of December 31, 1997, the Association had 247 full-time and 62
part-time employees. None of such employees is represented by a collective
bargaining group. The Association believes its relationship with its employees
to be good.
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ITEM 2. PROPERTIES
===============================================================================
Bankshares owns no property independently from the Association. The
Association conducts its business through its home office located in North Palm
Beach, Florida, and 21 full service branch offices, located in Palm Beach,
Martin, St. Lucie and Indian River Counties. The following table sets forth
certain information concerning the home office and each branch office of the
Association at December 31, 1997. The aggregate net book value of the
Association's premises and equipment was $20.2 million at December 31, 1997. For
additional information regarding the Association's properties, see Note 8 to the
Notes to the Consolidated Financial Statements in the Annual Report, attached
hereto as Exhibit 13.
<TABLE>
<CAPTION>
LOCATION ADDRESS OPENING DATE OWNED/LEASE
- -------- ------- ------------ -----------
<S> <C> <C> <C>
Home Office 660 U.S. Highway l, North Palm Beach, 02/19/88 Owned
Florida
BRANCH OFFICES
Riviera Beach 2600 Broadway, Riviera Beach, Florida 08/19/55 Owned
Tequesta 101 N. U.S. Highway 1, Tequesta, Florida 07/19/59 Owned
Port Salerno 5545 SE Federal Highway, Port Salerno, 11/05/74 Owned
Florida
Palm Beach Gardens 9600 N. Alternate AlA, Palm Beach 12/19/74 Owned
Gardens, Florida
Jensen Beach 1170 NE Jensen Beach Boulevard, 01/28/75 Owned
Jensen Beach, Florida
Singer Island 1100 East Blue Heron Boulevard, 04/01/75 Owned
Riviera Beach, Florida
Gallery Square 389 Tequesta Drive, Tequesta, Florida 01/30/76 Lease (1)
Ft. Pierce 1050 Virginia Avenue, Ft. Pierce, Florida 07/23/85 Owned
Port St. Lucie 1540 SE Floresta Drive, Port St. Lucie, 07/30/84 Lease (2)
Florida
Martin Downs 3102 Martin Downs Boulevard, 07/24/85 Lease (3)
Palm City, Florida
Chasewood 6350 Indiantown Road., Suite 1, 02/26/86 Lease (4)
Jupiter, Florida
Bluffs 3950 U.S. Highway 1, Jupiter, Florida 09/18/86 Lease (5)
Village Commons 971 Village Boulevard, West Palm Beach, 06/26/89 Lease (6)
Florida
Hobe Sound 11400 SE Federal Highway, Hobe Sound, 02/05/90 Owned
Florida
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
LOCATION ADDRESS OPENING DATE OWNED/LEASE
- -------- ------- ------------ -----------
<S> <C> <C> <C>
St. Lucie West 1549 St. Lucie West Boulevard, 06/06/94 Owned
Port St. Lucie, Florida
Jupiter 520 Toney Penna Drive, Jupiter, Florida 07/10/95 Owned
PGA PGA Shoppes on the Green, 7102 Fairway 04/22/96 Lease (7)
Drive, Palm Beach Gardens, Florida
Vero Beach 6030 20th Street, Vero Beach, Florida 07/21/97 Lease (8)
Hutchinson Island 4417 NE Ocean Boulevard, Jensen Beach, 01/21/97 Lease (9)
Florida
Lake Worth 5702 Lake Worth Road, Suite # 3, 10/20/97 Lease (10)
Lake Worth, Florida
</TABLE>
(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, 1999 and provides for a renewal option
which runs through January 31, 2004.
(3) This lease expires on August 8, 1998 and provides for a renewal option
which runs through August 8, 2004. (4)
(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 October 31, 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. There is an option to purchase the
land which is exerciseable through June 30, 1999.
(8) This lease expires on July 1, 2002 and provides for a renewal option which
runs through July 1, 2017. There is an option to purchase the land
exerciseable on July 1, 2002.
(9) This lease expires on June 30, 1999 and provides for a renewal option
which runs through December 31, 2002.
(10) This lease expires on March 1, 2000 and provides for a renewal option
which runs through August 1, 2002.
42
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
===============================================================================
There are various claims and lawsuits in which Bankshares is
periodically involved incident to its business. In the opinion of management, no
material loss is expected from any of such pending claims or lawsuits. See Note
13 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
===============================================================================
The Association held a Special Meeting of Shareholders on September 24,
1997 to vote on the proposal to adopt the Agreement and Plan of Reorganization
pursuant to which the Association reorganized into a two-tier holding company
structure. Of the 5,090,120 shares eligible to vote, holders of 4,153,712 shares
or 81.6%, including 2,620,144 shares owned by ComFed, were represented in person
or by proxy at the meeting.
The votes cast produced the following result:
Number of Votes
- -------------------------------------------------------------------------------
FOR AGAINST ABSTAIN
--- ------- -------
4,119,753 13,056 20,903
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
===============================================================================
Bankshares had 5,094,920 issued and outstanding shares at December 31,
1997. For information concerning the market for Bankshares' common stock, see
the section captioned "Corporate Information" in Bankshares' Annual Report which
is incorporated herein by reference.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
===============================================================================
The "Financial Highlights" section of Bankshares' 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 Bankshares' Annual Report is incorporated
herein by reference.
ITEM 7-A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
===============================================================================
Information with respect to quantitative and qualitative disclosures
about market risk are incorporated by reference to the section captioned
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - " Market Risk Analysis", "Market Value of Portfolio Equity" and
"GAP Table" in the Annual Report.
ITEM 8. FINANCIAL STATEMENTS
===============================================================================
The financial statements identified in Item 14(a)(1) hereof are
incorporated by reference to Bankshares' Annual Report.
43
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
===============================================================================
Information required by this section is incorporated herein by
reference from Bankshares' definitive Proxy Statement for the Annual Meeting of
Shareholders dated March 20, 1998 (the "Proxy Statement"), specifically the
section captioned "Ratification of Appointment of Auditors".
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
===============================================================================
Information concerning Directors and Executive Officers of Bankshares
is incorporated herein by reference from the Proxy Statement, specifically the
section captioned "Information with Respect to Nominees for Directors, Directors
Whose Term Continues and Executive Officers".
ITEM 11. EXECUTIVE COMPENSATION
===============================================================================
Information concerning executive compensation is incorporated herein by
reference from the Proxy Statement, specifically the section 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 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 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,
December 31, 1997, 1996 and September 30, 1996
Consolidated Statements of Operations,
Year Ended December 31, 1997, Three Months Ended
December 1996, Years Ended September 30, 1996, 1995
and 1994.
Consolidated Statements of Shareholders' Equity,
Year Ended December 31, 1997, Three Months Ended
December 31, 1996, Years Ended September 30, 1996,
1995 and 1994.
Consolidated Statements of Cash Flows,
Year Ended December 31, 1997, Three Months Ended
December 31, 1996, Years Ended September 30, 1996,
1995 and 1994,
Notes to Consolidated Financial Statements.
(a)(2) Financial Statement Schedules
-----------------------------
44
<PAGE>
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 Bankshares (Incorporated by
reference to Exhibit 3.1 of Bankshares Form 8-K filed
October 1, 1997 ("Form 8-K").
*3.2 Bylaws of Bankshares (Incorporated by reference to
Exhibit 3.2 of the Form 8-K).
*4 Common Stock Certificate of Bankshares (Incorporated by
reference to Exhibit 4.0 of the Form 8-K).
*10.1 1995 Stock Option Plan (Incorporated by reference to
Exhibit 10.1 of Bankshares' Registration Statement on
Form S-8 (file No. 333-38971) filed October 29, 1997).
10.2 1995 Recognition and Retention Plan for Employees and
Outside Directors.
11.0 Statement of Computation of Earnings.
13 1997 Annual Report to Shareholders.
21 Subsidiaries of the Registrant - Reference is made to
Item 1 "Business" for the required information.
23 Consent of Deloitte & Touche LLP.
27 Financial Data Schedule.
(b) Reports on Form 8-K:
--------------------
(1) Form 8-K Current Report filed October 1, 1997. "Changes in
Control of Registrant".
(2) Form 8-K Current Report filed October 30, 1997. "Other
Events".
(3) Form 8-K Current Report filed November 6, 1997. "Changes in
Registrant's Certifying Accountant".
(c) The exhibits listed under (a)(3) above are filed herewith.
(d) Not applicable.
------------------------
* Previously filed.
45
<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 BANKSHARES, INC.
Date: March 26, 1998 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.
By:/s/ James B. Pittard, Jr. By: /s/ Larry J. Baker, CPA
------------------------------------ ----------------------------------
James B. Pittard, Jr., President Larry J. Baker, CPA, Senior
and Chief Executive Officer Vice president, Chief
(Principal Executive Officer) Financial Officer and
Treasurer
(Principal Financial and
Accounting Officer)
Date: March 26, 1998 Date: March 26, 1998
By: /s/ Frederick A. Teed By: /s/ Forest C. Beaty
----------------------------------- -----------------------------------
Frederick A. Teed, Chairman Forest C. Beaty, Jr., Director
the Board
Date: March 26, 1998 Date: March 26, 1998
By: /s/ Robert F. Cromwell By: /s/ Karl D. Griffin
---------------------------------- ----------------------------------
Robert F. Cromwell, Director Karl D. Griffin, Director
Date: March 26, 1998 Date: March 26, 1998
By: /s/ Harold I. Stevenson
---------------------------------
Harold I. Stevenson, CPA,
Director
Date: March 26, 1998
46
Exhibit 10.2
COMMUNITY SAVINGS, F. A.
1995 RECOGNITION AND RETENTION PLAN
FOR EMPLOYEES AND OUTSIDE DIRECTORS
1. ESTABLISHMENT OF THE PLAN
Community Savings, F. A. hereby establishes the Association 1995
Recognition and Retention Plan (the "Plan") upon the terms and conditions
hereinafter stated in this Recognition Plan.
2. PURPOSE OF THE PLAN
The purpose of the Plan is to retain Employees and Outside Directors of
experience and ability by providing such persons with a proprietary interest in
the Association as compensation for their contributions to the Association and
its Affiliates and as an incentive to make such contributions and to promote the
Association's growth and profitability in the future.
3. DEFINITIONS
The following words and phrases when used in this Plan with an initial
capital letter, unless the context clearly indicates otherwise, shall have the
meanings set forth below. Wherever appropriate, the masculine pronoun shall
include the feminine pronoun and the singular shall include the plural:
"AFFILIATE" means any "parent corporation" or "subsidiary corporation"
of the Association, as such terms are defined in Section 424(e) and (f),
respectively, of the Code.
"ASSOCIATION" means Community Savings, F. A.
"AWARD" means the grant by the Committee of Restricted Stock, as
provided in 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" means the Board of Directors of the Association.
"CAUSE" shall mean personal dishonesty, willful misconduct, any breach
of fiduciary
<PAGE>
duty involving personal profit, intentional failure to perform stated duties, or
the willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) or a final cease-and-desist order, any of which
results in a material loss to the Association or an Affiliate.
"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 la of the current report on Form
8-K, as in effect on the date hereof, pursuant to Section 13 or l5(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 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
2
<PAGE>
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 which shall
consist of at least three Outside Directors of the Association, all of whom are
and must be "disinterested directors," as that term is defined under Rule 16b-3
of the Securities Exchange Act of 1934.
"COMPANY" means ComFed, M. H. C., the mutual holding company of the
Association.
"COMMON STOCK" means shares of the common stock, par value of $1.00 per
share, of the Association.
"CONTINUOUS SERVICE" means the absence of any interruption or
termination of service as an Employee of the Association. Service shall not be
considered interrupted in the case of sick leave, military leave or any other
leave of absence approved by the Association or in the case of transfers between
payroll locations of the Association or between the Association, its parent, its
subsidiaries or its successor.
"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 provided by regulations of the Office of
Thrift Supervision ("OTS").
"DIRECTOR" means any director of the Association or an Affiliate.
"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 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 said Participant's
lifetime.
"EFFECTIVE DATE" shall be the date of execution of this Plan.
"EMPLOYEE" means any person who is employed by the Association or its
Affiliates,
3
<PAGE>
including officers.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"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.
"OFFERING" means the initial public offering by the Association of up
to 49.9% of the number of shares of Common Stock that will be outstanding after
such Offering.
"OUTSIDE DIRECTOR" means any nonemployee director of the Association or
an Affiliate.
"PLAN" means the Community Savings, F. A. 1995 Recognition and
Retention Plan of the Association.
"RECIPIENT" means an Employee or Director of the Association who
receives a Restricted Stock Award under this 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.
"RESTRICTED PERIOD" means the period of time selected by the Committee
for the purpose of determining when restrictions are in effect under Section 6
hereof with respect to Restricted Stock awarded under the Plan.
"RESTRICTED STOCK" means shares which have been contingently awarded to
a Recipient by the Committee subject to the restrictions referred to in Section
6 hereof, so long as such restrictions are in effect.
"STOCK HOLDING COMPANY" means the holding company resulting from a
stock conversion of the Company in a Conversion Transaction.
4. ADMINISTRATION OF THE PLAN.
4.01 ROLE OF THE COMMITTEE. The Plan shall be administered and
interpreted by the Committee, which shall have all of the powers allocated to it
in this and other Sections of
4
<PAGE>
the Plan. The interpretation and construction by the Committee of any provisions
of the Plan or of any Restricted Stock Award granted hereunder shall be final
and binding. The Committee shall act by vote or written consent of a majority of
its members. Subject to the express provisions and limitations of the Plan, the
Committee may adopt such rules, regulations and procedures as it deems
appropriate for the conduct of its affairs. The Committee shall report its
actions and decisions with respect to the Plan to the Board at appropriate
times, but in no event less than one time per calendar year.
4.02 ROLE OF THE BOARD. The members of the Committee shall be
appointed or approved by, and will serve at the pleasure of, the Board. The
Board may in its discretion from time to time remove members from, or add
members to, the Committee. The Board shall have all of the powers allocated to
it in this and other Sections of the Plan, may take any action under or with
respect to the Plan which the Committee is authorized to take, and may reverse
or override any action taken or decision made by the Committee under or with
respect to the Plan, PROVIDED, HOWEVER, that except as provided in Section 6.05,
the Board may not revoke any Restricted Stock Award except in the event of
Revocation for Cause, or with respect to unearned Restricted Stock Awards in the
event a Recipient of a Restricted Stock Award voluntarily terminates employment
with the Association.
4.03 PLAN ADMINISTRATION RESTRICTIONS. This Plan is intended to
comply with Rule 16b-3 under the Securities Exchange Act of 1934.
Notwithstanding any term to the contrary appearing in this Plan, unless
permitted by Rule 16b-3(c)(2)(ii), subsequent to the establishment of the Plan,
the Committee, and the Board of Directors shall not have the authority to
determine the amount and price of securities to be awarded and/or timing of
awards to Outside Directors which terms shall be set forth in the Plan. To the
extent any provision of the Plan or action by Plan administrators fails to
comply with this Section, such provision or action shall be deemed null and void
to the extent permitted by law and deemed advisable by the Board of Directors.
4.04 LIMITATION ON LIABILITY. No member of the Board or the
Committee shall be liable for any determination made in good faith with respect
to the Plan or any Restricted Stock Awards granted under it. If a member of the
Board or the Committee is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of anything done or not
done by him in such capacity under or with respect to the Plan, the Association
shall indemnify such member against expense (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding if he acted in good
faith and in a manner he reasonably believed to be in the best interests of the
Association and its Affiliates and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful,
provided, however, that the provisions of 12 C.F.R. Section 545.121 shall apply
to any indemnification made pursuant to this Section and any such
indemnification shall be consistent therewith.
5
<PAGE>
5. ELIGIBILITY; Awards
5.01 ELIGIBILITY. Employees and Outside Directors of the
Association and its Affiliates are eligible to receive Restricted Stock Awards.
5.02 AWARDS TO EMPLOYEES. The Committee may determine which of the
Employees referenced in Section 5.01 will be granted Restricted Stock Awards and
the number of Shares covered by each Award; PROVIDED, HOWEVER, that in no event
shall any Awards be made that will violate the Plan, the Charter, Bylaws or Plan
of Reorganization from Mutual Savings Association to Mutual Holding Company and
Stock Issuance Plan of the Association or any applicable federal or state law or
regulation. Shares of Restricted Stock which are awarded by the Committee shall,
on the date of the Award, be registered in the name of the Recipient and
transferred to the Recipient, in accordance with the terms and conditions
established under this Plan. The total number of shares that will be awarded or
reserved for Employees under this Plan shall be three percent (3 %) of the
shares issued in the Offering. In the event Restricted Stock is forfeited for
any reason, the Committee, from time to time, may determine which of the
Employees referenced in Section 5.01 will be granted additional Restricted Stock
Awards to be awarded from forfeited Restricted Stock. In selecting those
Employees to whom Restricted Stock Awards will be granted and the number of
Restricted Stock covered by such Awards, the Committee shall consider the
position and responsibilities of the eligible Employees, the length and value of
their services to the Association and its Affiliates, the compensation paid to
the Employees and any other factors the Committee may deem relevant, and the
Committee may request the written recommendation of the Chief Executive Officer
and other senior executive officers of the Association and its Affiliates. All
allocations by the Committee shall be subject to review, and approval or
rejection, by the Board.
No Restricted Stock shall be earned unless the Employee maintains
Continuous Service with the Association or any Affiliate until the restrictions
lapse.
5.03 AWARDS TO OUTSIDE DIRECTORS. Each Outside Director serving on
the Board of Directors of the Association or its Affiliate on the Effective Date
shall be issued a Restricted Stock Award equal to 4,750 shares of Restricted
Stock. The total number of shares that will be awarded or reserved for Outside
Directors under this Plan shall be one percent (1%) of the shares issued in the
Offering.
Any person who becomes an Outside Director of the Association
subsequent to the date of approval of this Plan by stockholders shall receive an
Award of Restricted Stock equal to 100 shares, subject to availability.
No Restricted Stock shall be earned by an Outside Director unless the
Outside Director maintains continuous service with the Association or Affiliates
until the restrictions lapse.
6
<PAGE>
5.04 MANNER OF AWARD. As promptly as practicable after a
determination is made pursuant to Section 5.02 that a Restricted Stock Award has
been granted, the Committee shall notify the Recipient in writing of the grant
of the Award, the number of shares of Restricted Stock covered by the Award, and
the terms upon which the Restricted Stock subject to the Award may be earned.
Upon notification of an Award of Restricted Stock, the Recipient shall execute
and return to the Association a restricted stock agreement setting forth the
terms and conditions under which the Recipient shall earn the Restricted Stock
(the "Restricted Stock Agreement"), together with a stock power endorsed in
blank. Thereafter, the Recipient's Restricted Stock and stock power shall be
deposited with an escrow agent specified by the Association (the "Escrow
Agents") who shall hold such Restricted Stock under the terms and conditions set
forth in the Restricted Stock Agreement. Each certificate in respect of shares
of Restricted Stock Awarded under the Plan shall be registered in the name of
the Recipient.
5.05 TREATMENT OF FORFEITED SHARES. In the event shares of
Restricted Stock are forfeited by a Recipient hereunder, such shares shall be
returned to the Association and shall be held and accounted for by the
Association pursuant to the terms of the Plan until such time as the Committee
re-awards such shares to another Recipient, in accordance with the terms of the
Plan and the applicable state and federal laws, rules and regulations.
6. TERMS AND CONDITIONS OF RESTRICTED STOCK
The Committee shall have full and complete authority, subject to the
limitations of the Plan, to grant awards of Restricted Stock and, in addition to
the terms and conditions contained in paragraphs 6.01 through 6.09 of this
Section 6, to provide such other terms and conditions (which need not be
identical among Recipients) in respect of such Awards, and the vesting thereof,
as the Committee shall determine.
6.01 GENERAL RULES. Unless the Committee shall specifically state
to the contrary at the time a Restricted Stock Award is granted, Restricted
Stock shall be earned by an Employee at the rate of twenty percent (20%) of the
aggregate number of shares covered by the Award at the end of each full twelve
months of consecutive employment with the Association or an Affiliate after the
date of grant of the Award; PROVIDED, HOWEVER, that the Committee may provide
for a less or more rapid earnings rate than set forth herein for any or all
Awards awarded subsequent to the date of this Plan, subject to the prior written
approval of the OTS, and provided further, that no shares shall be earned for
any year in which the Association is not meeting all of its fully phased-in
capital requirements. Restricted Stock Awards granted to Outside Directors shall
be earned by an Outside Director at the rate of twenty percent (20%) of the
aggregate number of shares covered by the Award at the end of each full twelve
months of consecutive employment with the Association or an Affiliate after the
date of grant of the Award. Subject to any such other terms and conditions as
the Committee shall provide, shares of Restricted Stock may not be sold,
assigned, transferred, pledged or otherwise encumbered by the Recipient, except
as hereinafter provided, during the Restricted Period. The Committee shall have
the
7
<PAGE>
authority, in its discretion, to accelerate the time at which any or all of the
restrictions shall lapse with respect to shares issued to Employees, or to
remove any or all of such restrictions, whenever it may determine that such
action is appropriate by reason of changes in applicable tax or other laws or
other changes in circumstances occurring after the commencement of such
Restricted Period.
6.02 CONTINUOUS SERVICE; FORFEITURE. Except as provided in Section
6.04 hereof, if a Recipient ceases to maintain Continuous Service for any reason
(other than death or Disability as provided in Section 6.03), unless the
Committee shall otherwise determine, all shares of Restricted Stock theretofore
awarded to such Recipient and which at the time of such termination of
Continuous Service are subject to the restrictions imposed by Section 6.01 shall
upon such termination of Continuous Service be forfeited and returned to Trust.
6.03 EXCEPTION FOR TERMINATION DUE TO DEATH OR DISABILITY.
Notwithstanding the general rule contained in Section 6.01, Restricted Stock
awarded to a Recipient whose employment with the Association or an Affiliate
terminates due to death or Disability, or any part thereof that has not
theretofore been earned, shall be deemed earned as of the Recipient's last day
of employment with the Association or an Affiliate.
6.04 EXCEPTION FOR TERMINATIONS AFTER A CHANGE IN CONTROL.
Notwithstanding the general rule contained in Section 6.01, all Restricted Stock
subject to a Restricted Stock Award held by a Recipient whose employment as an
Employee or service as an Outside Director of the Association or an Affiliate
terminates following a Change in Control of the Association or the Company shall
be deemed earned as of the Recipient's last day of employment or service with
the Association or an Affiliate.
6.05 REVOCATION FOR CAUSE. Notwithstanding anything hereinafter to
the contrary, the Board may by resolution immediately revoke, rescind and
terminate any Restricted Stock Award, or portion thereof, previously awarded
under this Plan, to the extent Restricted Stock has not been redelivered by the
Escrow Agent to the Recipient, whether or not yet earned, in the case of an
Employee whose employment is terminated by the Association or an Affiliate for
Cause, or who is discovered after termination of employment to have engaged in
conduct that would have justified termination for Cause.
6.06 RESTRICTED STOCK LEGEND. Each certificate in respect of shares
of Restricted Stock awarded under the Plan shall be registered in the name of
the Recipient and deposited by the Recipient, together with a stock power
endorsed in blank, with the Escrow Agent and shall bear the following (or a
similar) legend:
"The transferability of this certificate and the shares of stock
represented hereby are subject to the terms and conditions (including
forfeiture) contained in the Community Savings, F. A. 1995 Recognition
and Retention Plan. Copies of such Plan are on file in the offices of
the Secretary of Community Savings, F. A., 660 North U.S. Highway One,
North Palm Beach, Florida 33408-1808. "
8
<PAGE>
6.07 PAYMENT OF DIVIDENDS. After a Restricted Stock Award has been
granted but before such Award has been earned, the Recipient shall receive any
cash dividends or stock dividend paid with respect to such shares. Unless the
Recipient has made an election under Section 83(b) of the Code, any dividends so
paid on shares which have not yet been earned by the Recipient shall be treated
as compensation income to the Recipient when paid.
6.08 VOTING OF RESTRICTED SHARES. After a Restricted Stock Award
has been granted, the Recipient as owner of such shares shall have the right to
vote such shares.
6.09 DELIVERY OF EARNED SHARES. At the expiration of the
restrictions imposed by Section 6.01, the Escrow Agent shall redeliver to the
Recipient (or where the relevant provision of Section 6.02 applies in the case
of a deceased Recipient, to his Beneficiary, the certificate(s) and stock power
deposited with it pursuant to Section 6.04 and the shares represented by such
certificate(s) shall be free of the restrictions referred to Section 6.01.
7. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION
In the event of any change in the outstanding shares subsequent to the
effective date of the Plan by reason of any reorganization (other than the
Reorganization), recapitalization, stock split, stock dividend, combination or
exchange of shares, merger, consolidation or any change in the corporate
structure or shares of the Association, the maximum aggregate number and class
of shares as to which Awards may be granted under the Plan shall be
appropriately adjusted by the Committee, whose determination shall be
conclusive. Any shares of stock or other securities received, as a result of any
of the foregoing, by a Recipient with respect to Restricted Stock shall be
subject to the same restrictions and the certificate(s) or other instruments
representing or evidencing such shares or securities shall be legended and
deposited with the Association in the manner provided in Section 6.06 hereof.
8. ASSIGNMENTS AND TRANSFERS
No Award nor any right or interest of a Recipient under the Plan in any
instrument evidencing any Award under the Plan may be assigned, encumbered or
transferred except, in the event of the death of a Recipient, by will or the
laws of descent and distribution.
9. EMPLOYEE RIGHTS UNDER THE PLAN
No Employee shall have a right to be selected as a Recipient nor,
having been so selected, to be selected again as a Recipient and no Employee or
other person shall have any claim or right to be granted an Award under the Plan
or under any other incentive or similar plan of the Association or any
Affiliate. Neither the Plan nor any action taken thereunder shall be construed
as giving any Employee any right to be retained in the employ of the Association
or any Affiliate.
9
<PAGE>
10. WITHHOLDING TAX
Upon the termination of the Restricted Period with respect to any
shares of Restricted Stock (or at any such earlier time, if any, that an
election is made by the Employee under Section 83(b) of the Code, or any
successor provision thereto, to include the value of such shares in taxable
income), the Association shall have the right to require the Employee or other
person receiving such shares to pay the Association the amount of any taxes
which the Association is required to withhold with respect to such shares, or,
in lieu thereof, to retain or sell without notice, a sufficient number of shares
held by it to cover the amount required to be withheld. The Association shall
have the right to deduct from all dividends paid with respect to shares of
Restricted Stock the amount of any taxes which the Association is required to
withhold with respect to such dividend payments.
11. TREATMENT OF RESTRICTED STOCK IN THE EVENT OF CONVERSION
TRANSACTION
In the event that the Company converts to stock form in a Conversion
Transaction, any Restricted Stock shall be exchanged into shares of Common Stock
of the Stock Holding Company, PROVIDED, HOWEVER, that if for any reason such
shares are not to be exchanged, the Stock Holding Company shall, simultaneously
with the closing of the Conversion Transaction, purchase Restricted Stock for
cash equal to the fair market value of such Restricted Stock or Shares. Any
exchange of shares 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.
12. AMENDMENT OR TERMINATION
The Board of Directors of the Association may amend, suspend or
terminate the Plan or any portion thereof at any time, but (except as provided
in Section 6 hereof) no amendment shall be made without approval of the
stockholders of the Association which shall (i) materially increase the
aggregate number of shares with respect to which Awards may be made under the
plan, (ii) materially increase the aggregate number of shares which may be
subject to Awards to Recipients who are not Employees or (iii) change the class
of persons eligible to participate in the Plan; PROVIDED, HOWEVER, that no such
amendment, suspension or termination shall impair the rights of any Recipient,
without his consent, in any Award theretofore made pursuant to the Plan.
13. GOVERNING LAW
The Plan shall be governed by the laws of the State of Florida.
14. TERM OF PLAN
The Plan shall become effective upon its adoption by the Board of
Directors of the Association, following the approval of the Plan by
stockholders. It shall continue in effect for a term of fifteen years unless
sooner terminated under Section 12 hereof.
10
EXHIBIT 11.0
STATEMENT OF COMPUTATIONS OF EARNINGS
Statement re: Computation of Earnings Per Share
Earnings per share for the year ended December 31, 1997, the three months ended
December 31, 1996, and the years ended September 30, 1996, and 1995 is based on
net income of $5,356,000; $1,160,000; $3,915,000; and $4,574,000, respectively,
divided by the weighted average number of shares and equivalent shares
outstanding during the periods of 4,929,989; 4,902,479; 4,869,238; 4,845,384,
respectively.
EXHIBIT 13
1997 ANNUAL REPORT TO SHAREHOLDERS
[GRAPHICS/PHOTOS OMITTED FROM PAGE 1 THRU 9]
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
Community Savings Bankshares, Inc. common stock trades on the Nasdaq National
Market under the symbol "CMSV".
12/31/97 12/31/96 9/30/96 9/30/95 9/30/94 9/30/93
FOR THE YEAR ENDED (In Thousands)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income $50,316 $45,580 $43,889 $37,720 $34,130 $39,747
Interest expense 27,390 23,888 22,859 18,634 15,525 17,639
Net interest income 22,926 21,692 21,030 19,086 18,605 22,108
Net income 5,356 4,024 3,915 4,574 3,737 5,401
AVERAGE FOR THE YEAR ENDED (In Thousands)
- --------------------------------------------------------------------------------------------------------------------------
Assets $693,175 $631,038 $612,004 $544,555 $528,286 $532,222
Loans receivable, net 411,098 359,414 346,880 321,849 321,721 352,173
Cash and cash equivalents 42,029 47,532 48,367 53,736 40,946 36,356
Mortgage-backed securities - held to maturity 99,884 106,387 99,959 53,349 28,843 15,428
Investments - held to maturity and securities
available for sale 110,986 89,378 87,280 130,094 106,031 92,897
Deposits 537,965 494,034 478,955 429,893 452,070 455,816
Borrowed funds 61,551 46,076 42,416 29,086 23,657 27,040
Shareholders' equity 78,822 75,323 74,638 69,263 36,376 31,734
AT YEAR END (In Thousands)
- --------------------------------------------------------------------------------------------------------------------------
Assets $720,133 $655,209 $650,332 $567,006 $560,268 $523,248
Loans receivable, net 451,709 389,040 376,219 329,442 317,117 328,747
Cash and cash equivalents 25,954 42,442 44,780 42,497 89,843 35,188
Mortgage-backed securities - held to maturity 46,413 53,405 54,945 77,499 41,281 14,290
Investments - held to maturity 21,388 22,139 22,293 59,679 52,204 43,789
Securities available for sale 142,269 123,152 124,287 27,028 26,729 69,459
Real estate owned 592 1,455 1,384 1,910 3,686 1,324
Deposits 550,708 513,709 498,929 437,376 459,979 450,356
Borrowed funds 75,098 53,908 55,867 39,101 19,233 20,113
Shareholders' equity 81,259 76,119 75,056 72,848 38,110 34,846
SIGNIFICANT PERFORMANCE RATIOS
- ----------------------------------------------------------------------------------------------------------------------------
Return on average assets 0.77% 0.64% 0.64% 0.84% 0.71% 1.01%
Return on average equity 6.80 5.34 5.25 6.60 10.27 17.02
Interest rate spread 3.13 3.24 3.24 3.40 3.69 4.43
Equity to assets 11.28 11.62 11.54 12.85 6.80 6.65
Non-interest income to average assets 0.60 0.58 0.55 0.62 0.63 0.96
Non-interest expense to average assets 2.68 3.18 3.20 2.74 2.82 2.93
Non-performing loans to total loans 0.31 0.42 0.22 0.20 0.93 2.05
Non-performing assets to total assets 0.47 0.47 0.40 0.45 1.25 1.54
Allowance for loan losses to non-performing loans 193.04 155.86 274.58 527.49 114.72 55.65
Allowance for loan losses to net loans receivable 0.59 0.65 0.61 1.06 1.07 1.14
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
In the following discussion, references to "Bankshares" relate to Community
Savings Bankshares, Inc. together with its subsidiary, Community Savings, F. A.
(the "Association"). During January 1997, the Board of Directors voted to change
the fiscal year end for all related entities from September 30th to December
31st, effective with the year and the three months ended December 31, 1996.
COMMUNITY SAVINGS BANKSHARES, INC.
Bankshares is a federally chartered mid-tier stock holding company organized in
August 1997. The only significant asset of Bankshares is its investment in its
wholly-owned subsidiary, the Association. Bankshares is majority owned by
ComFed, M.H.C. ("ComFed") a federally chartered mutual holding company. After
the close of business on September 30, 1997, Bankshares acquired all of the
issued and outstanding common stock of the Association in connection with the
Association's reorganization into the two-tier form of mutual holding company
ownership. At that time, each share of the Association's common stock was
converted into one share of Bankshares' common stock. At December 31, 1997,
ComFed owned 2,620,144 shares of Bankshares' common stock with the remaining
2,474,776 shares owned by the minority shareholders. The holding company
reorganization was accounted for at historical cost in a manner similar to a
pooling of interests.
COMMUNITY SAVINGS, F. A.
The Association, founded in 1955, is a federally chartered savings and loan
association headquartered in North Palm Beach, Florida. The Association's
deposits are federally insured by the Federal Deposit Insurance Corporation
("FDIC") through the Savings Association Insurance Fund ("SAIF"). The
Association has been a member of the Federal Home Loan Bank of Atlanta ("FHLB")
since 1955. The Association is regulated by the Office of Thrift Supervision
("OTS"). On October 24, 1994, the Association completed a reorganization into a
federally chartered mutual holding company, ComFed. As part of the
reorganization, the Association organized a new federally chartered stock
savings association and transferred substantially all of its assets and
liabilities to the stock savings association in exchange for a majority of the
common stock of the stock savings association.
The Association is a community-oriented financial institution engaged primarily
in the business of attracting deposits from the general public and using such
funds, together with other borrowings, to invest in various consumer-based real
estate loans, mortgage-backed securities ("MBS"), and investment securities. The
Association's plan is to operate as a well-capitalized, profitable and
independent institution. The Association currently exceeds all regulatory
capital requirements. The Association's profitability is highly dependent on its
net interest income. The components that determine net interest income are the
amount of interest-earning assets and interest-bearing liabilities, 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 adjusts its liquidity levels in order to meet funding needs of
deposit outflows, payment of real estate taxes on mortgage loans, repayment of
borrowings and loan commitments. The Association also adjusts liquidity as
appropriate to meet its asset and liability management objectives. A major
portion of the Association's liquidity consists of cash and cash equivalents,
which are a product of its operating, investing and financing activities. The
Association is required to maintain minimum levels of liquid assets as defined
by OTS regulations. This requirement, which varies from time to time depending
upon economic conditions and deposit flows, is based upon a percentage of
deposits and short-term borrowings. The required ratio currently is 5.0%. The
Association's liquidity ratio averaged 15.0% during the month of December 31,
1997 and 14.2% for fiscal 1997.
The Association's primary sources of funds are deposits, amortization and
prepayment of loans and MBS, maturities of investment securities and other
short-term investments, FHLB advances, and earnings and funds provided from
operations. While scheduled principal repayments on loans and MBS, and
maturities of securities are a relatively predictable source of funds, deposit
flows and loan prepayments are greatly influenced by general interest rates,
economic conditions, and competition. The Association manages the pricing of its
deposits 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 $13.6
million at December 31, 1997. Other assets qualifying for liquidity outstanding
at December 31, 1997 amounted to $56.4 million. For additional information about
cash flows from the
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<PAGE>
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 funds are required beyond the ability to generate them
internally, borrowing agreements exist with the FHLB of Atlanta which provide an
additional source of funds. FHLB advances totaled $57.3 million at December 31,
1997. At December 31, 1997, loan commitments totaled $4.7 million and the
unfunded portion of loans in process totaled $24.2 million. There were no
commitments outstanding to purchase loans. Certificates of deposit scheduled to
mature in less than one year totaled $260.8 million at December 31, 1997. 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. The 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 then existing 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 paid
significantly lower premiums than SAIF-insured institutions. 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 (the "DIF"), which mandated that all institutions
which have deposits insured by SAIF were 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 increased
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 operating results for the year
ended September 30, 1996.
In August 1996, Congress passed legislation which repealed Bankshares' present
method of accounting for bad debts for federal income tax purposes. As discussed
in Note 12 to the consolidated financial statements, Bankshares previously used
the percentage of taxable income method to determine its bad debt deduction in
the computation of its taxable income. Under the new legislation, Bankshares is
required to use the specific charge-off method, which may result in a different
deduction for bad debts in determining taxable income than as computed under the
previous method. Additionally, Bankshares is required to recapture its post-1987
additions to its bad debt reserves. Since Bankshares had previously provided
deferred taxes for the income tax bad debt reserves established after 1987, no
additional income tax liability related to the recapture occurred. The new
legislation was effective for taxable years beginning after December 31, 1995.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements of Bankshares and the 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 Bankshares
operations. Unlike most industrial companies, nearly all the assets and
liabilities of Bankshares are monetary. As a result, interest rates have a
greater impact on Bankshares' 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
DECEMBER 31, 1997 COMPARED TO DECEMBER 31, 1996
Total assets increased $64.9 million to $720.1 million at December 31, 1997 from
$655.2 million at December 31, 1996. The increase in total assets was primarily
due to a $62.7 million increase in the loan portfolio and an $11.4 million
increase in the securities portfolio (which includes securities available for
sale, investment securities, and mortgage-backed and related securities). In
addition, office properties and equipment increased $3.8 million primarily
related to the opening of three new branches and the purchase of new computer
software and hardware. Other assets increased by $3.2 million due to an
investment in an affordable housing tax credit partnership. These increases
resulted from the implementation of the Association's growth strategy for fiscal
year 1997. 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 advances. To increase the
loan portfolio, the Association
12
<PAGE>
continued to emphasize an incentive-based loan origination program which
resulted in new loan originations and purchases of $143.7 million, of which
$92.4 million were one-to four-family residential loans, $31.4 million were
commercial business and real estate loans, $14.4 million were land loans and
$5.5 million were other loans. These originations and purchases were offset in
part by repayments, sales, and other adjustments totaling $81.0 million.
The securities portfolio had a net increase for the year of $11.4 million.
Investment securities held to maturity decreased $751,000 to $21.4 million at
December 31, 1997 from $22.1 million at December 31, 1996, as did
mortgage-backed and related securities which decreased $7.0 million to $46.4
million at December 31, 1997 from $53.4 million at December 31, 1996. These
decreases were due primarily to normal amortization and calls. However,
securities available for sale increased $19.1 million to $142.3 million at
December 31, 1997 from $123.2 million at December 31, 1996 due to the purchases
of $46.5 million of securities, which included $45.8 million in U. S. Government
and agency securities and $687,000 in mortgage-backed and related securities.
These purchases were partially offset by sales, calls, repayments, and other
adjustments of $27.4 million.
Office properties and equipment increased by $3.8 million for the year primarily
due to the expansion of branch operations as well as the purchase of new
computer hardware and software. Three new branches were opened during the year
ended December 31, 1997. A new building was constructed on an outparcel in the
Indian River Mall in Vero Beach, and two leaseholds were assumed from other
financial institutions in Hutchinson Island and Lake Worth. Other assets
increased $3.2 million to $5.2 million at December 31, 1997 from $2.0 million at
December 31, 1996, due to the investment in an affordable housing tax credit
partnership. The Association's approximately 4% limited partnership interest
results in tax benefits in the form of tax deductions from operating losses and
tax credits. The investment in the partnership is being amortized over the
estimated life of the partnership.
The increase in total assets was funded primarily by a $37.0 million increase in
deposits to $550.7 million at December 31, 1997 as compared to $513.7 million at
December 31, 1996. The deposit growth reflected increased retail deposits
resulting from special promotions of odd-term certificates combined with
competitive pricing intended to maintain the existing deposit customers as well
as to attract new customers in the Association's market area. The increase in
assets also reflected the purchase of securities in leveraged transactions
intended to enhance net interest income which were funded by a $22.5 million net
increase in advances from the FHLB to $57.3 million at December 31, 1997 from
$34.8 million at December 31, 1996.
Shareholders' equity increased to $81.3 million or $16.39 per share at December
31, 1997 from $76.1 million or $15.50 per share at December 31, 1996, reflecting
net income for the year of $5.4 million offset primarily by dividends totaling
$0.90 per share declared on the common stock held by minority shareholders. As a
result of the exercise of stock options granted pursuant to the stock option
plan, 4,800 shares of common stock were issued from authorized but unissued
shares during the year ended December 31, 1997, resulting in 5,094,920
outstanding shares as of December 31, 1997.
RESULTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND SEPTEMBER 30, 1996
GENERAL
Net income for the year ended December 31, 1997 increased 38.5 % to $5.4
million, or $1.09 per share, compared to $3.9 million, or $0.80 per share for
the year ended September 30, 1996. This increase in net income was primarily due
to the special one time SAIF special pretax assessment of $2.8 million which was
recorded during September 1996 and which did not reoccur during the year ended
December 31, 1997. Net interest income increased $1.9 million to $22.9 million
for the year ended December 31, 1997 from $21.0 million for the year ended
September 30, 1996. Other income and the provision for income taxes increased
$641,000 and $2.2 million, respectively, while operating expense decreased $1.2
million during these time periods.
INTEREST INCOME
Interest income for the year ended December 31, 1997 totaled $50.3 million, an
increase of $6.4 million, or 14.6%, from $43.9 million for the year ended
September 30, 1996 reflecting, in part, the implementation of the Association's
growth strategy to increase the loan portfolio and securities held for sale. The
increase was due primarily to an increase in average interest-earning assets of
$77.9 million to $653.8 million for the year ended December 31, 1997 from $575.9
million for the year ended September 30, 1996, enhanced by an increase in the
average yield on average interest-earning assets to 7.70% for the year ended
December 31, 1997 from 7.62% for the year ended September 30, 1996. Interest
income on loans increased $5.2 million, or 18.5%, to $33.5 million for the year
ended December 31, 1997 compared to $28.3 million for the year ended September
30, 1996. Interest income on real estate loans increased by $5.0 million, or
19.0%, to $31.8 million for the year ended December 31, 1997 from $26.8 million
for the year ended September 30, 1996, primarily because of an increase in the
average balance of real estate loans of $61.6 million, or 18.6%, and an increase
in the average yield on real estate loans to 8.11% from 8.09%. Interest income
from investment securities and securities available for sale increased by $1.7
million, or 19.5%, to $10.4 million for the year ended December 31, 1997 from
$8.7 million for the year ended September 30, 1996. The increase in income from
investment securities and securities available for sale was primarily caused by
an increase in the average balance of $23.7 million to $111.0 million for the
year ended December 31, 1997 from $87.3
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million for the year ended September 30, 1996 as well as an increase in the
average yield to 6.79% for the year ended December 31, 1997 from 6.53% for the
year ended September 30, 1996. Interest income from other investments, which
includes interest-earning deposits and FHLB stock, decreased $537,000, or 21.5%,
to $2.0 million for the year ended December 31, 1997 from $2.5 million for the
year ended September 30, 1996. The decrease in interest from other investments
is primarily attributable to a $10.0 million, or 23.9%, decrease in the average
balance of other investments to $31.8 million during 1997 from $41.8 million
during 1996, partially offset by an increase in the average yield on other
investments to 6.14% for the year ended December 31, 1997 from 5.96% for the
year ended September 30, 1996.
INTEREST EXPENSE
Interest expense increased $4.5 million, or 19.8%, to $27.4 million for the year
ended December 31, 1997 from $22.9 million for the year ended September 30,
1996. Interest on deposits increased $3.4 million, or 17.7%, to $22.6 million
for the year ended December 31, 1997 from $19.2 million for the year ended
September 30, 1996. The increase was due primarily to the increase in average
cost of deposits to 4.21% from 4.02%, as well as an increase in the average
balance of deposits of $59.0 million, or 12.3%, to $538.0 million during 1997
from $479.0 million during 1996. In order to increase its market share of total
deposits during 1997 as well as to maintain its existing deposit customers, the
Association placed an increased emphasis on competitively pricing its deposit
products, including odd-term certificate of deposit products, 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. Certificates of deposits and transaction
accounts increased $19.4 million and $17.6 million, respectively, at December
31, 1997 as compared to September 30, 1996. Interest expense attributable to
borrowed funds increased $1.1 million, or 31.2%, to $4.7 million for the year
ended December 31, 1997 from $3.6 million for the year ended September 30, 1996.
The increase in interest expense attributable to borrowed funds is due to an
increase in the average balance of borrowed funds to $61.6 million during 1997
from $42.4 million during the 1996 period, partially offset by a decrease in the
average cost of borrowed funds to 7.70% for the year ended December 31, 1997
from 8.52% for the 1996 period. During 1997, additional advances from the FHLB
were used 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 actual loss experience, as well as
guidelines applied by the OTS and the FDIC. The provision for loan losses was
$264,000 for the year ended December 31, 1997 as compared to $98,000 for the
year ended September 30, 1996. The increase in the provision for loan losses for
1997 was attributable to management's assessment that the allowance for loan
losses needed to be increased to absorb the risk inherent in the loan portfolio
as the loan portfolio was increased by $62.7 million during this period.
Management reviews the adequacy of its allowances for loan losses monthly
through asset classification review. The allowance for loan losses as a
percentage of net loans receivable at December 31, 1997 and September 30, 1996
was 0.59% and 0.61%, respectively.
OTHER INCOME
Other income consists of servicing income and fee income, service charges, gain
or loss on the sale or early maturity of securities available for sale, loans,
and other assets as well as income or loss from a real estate venture in which a
subsidiary of the Association was involved. Other income increased $641,000, or
18.1%, to $4.2 million for the year ended December 31, 1997 from $3.5 million
for the year ended September 30, 1996. Net gain on sale of other assets of
$617,000 in the year ended December 31, 1997 represented the sale of stock of
the Association's data service bureau which did not occur during 1996. In
addition, the year ended December 31, 1997 reflected a $3,000 net gain on the
sale of loans as compared to a $225,000 net loss for the 1996 period. Fee income
(which includes servicing income and other loan fees, and NOW account and other
customer fees) increased $310,000 to $3.6 million for the 1997 year from $3.3
million for the 1996 period as a result of fee structure changes put in place
during 1997. These increases were partially offset by a decrease in
miscellaneous income of $252,000. This decrease reflected the amortization of
the affordable housing tax credit partnership of $147,000 during the year ended
December 31, 1997.
OPERATING EXPENSE
Total operating expense decreased $1.2 million to $18.6 million for the year
ended December 31, 1997 from $19.8 million for the year ended September 30,
1996. Operating expense was higher in the 1996 period primarily due to the
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 DIF. Due to new reduced deposit
insurance premium levels during 1997, the 1997 regular premium was $270,000 as
compared to $1.1 million for the 1996 period. Employee compensation and benefits
increased by $1.2 million to $9.0 million during the year ended December 31,
1997 from $7.8 million during the year ended September 30, 1996 and occupancy
and equipment expense increased $478,000 to $5.1 million for the year ended
December 31, 1997, from $4.6 million for the 1996 period. These increases are
primarily the result of the opening of three new branch offices, the
implementation of a new
14
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company wide computer network, and additional costs related to the
incentive-based loan originators. These events involved construction costs,
increases in staffing, and depreciation increases related to new hardware and
software for the network.
PROVISION FOR INCOME TAXES
Provision for income taxes increased $2.2 million to $2.9 million for the year
ended December 31, 1997 from $761,000 for the 1996 period. This increase was the
result of higher taxable income during the year ended December 31, 1997. In
addition, the 1996 period included 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.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1996 AND 1995
GENERAL
Net income for the three months ended December 31, 1996 increased 10.5% to $1.2
million, or $0.23 per share, compared to $1.1 million, or $0.22 per share, for
the three months 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 three months 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.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $243,000 for the three months ended December
31, 1996 as compared to $30,000 for the same period in 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 loan made to
the Association's Employee Stock Ownership Plan (the "ESOP") and which was
recovered during the three months ended December 31, 1996. The allowance for
loan losses as a percentage of net loans receivable was 0.65% and 1.04% 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 three months 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 1996 period.
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 as
previously discussed.
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.
15
<PAGE>
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 $0.80 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 13.1%, 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
the 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 was 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 $3.5 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 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'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 and 1995 was 0.61% and
1.06%, respectively.
16
<PAGE>
OTHER INCOME
Other income consisted 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 increased $150,000, or 4.4%, to $3.5 million
for the year ended September 30, 1996 from $3.4 million for the year ended
September 30, 1995. The increase in other income was primarily due 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) and a
$254,000 gain on the early maturity of an investment. These increases were
partially offset by a decrease in miscellaneous income of $226,000 primarily as
a result of a $279,000 decrease in the Association's income from its
subsidiary's real estate venture which reflected the smaller number of closings
on sales of units during fiscal 1996 as the real estate venture has sold the
majority of the units. In addition, the Association recorded a net loss on the
sale of loans of $225,000 during fiscal 1996 which did not occur in fiscal 1995.
OPERATING EXPENSE
Total operating expense increased $4.7 million to $19.8 million for the year
ended September 30, 1996 from $14.9 million for the year ended September 30,
1995. The increase in operating expense was primarily attributable to a one-time
$2.8 million special assessment for recapitalization of the SAIF as discussed
previously. 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 $836,000 to $3.2 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.
IMPACT OF NEW ACCOUNTING STANDARDS
ACCOUNTING FOR COMPREHENSIVE INCOME AND ENTERPRISE SEGMENTS - In June 1997, the
Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No. 130 ("SFAS 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 non-owner sources;
and SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information", which establishes annual and interim reporting standards for an
enterprise's operating segments and related disclosures about its products,
services, geographic areas, and major customers. Adoption of these statements
will not impact Bankshares' consolidated financial position, results of
operations, or cash flows, and any effect will be limited to the form and
content of its disclosures. Both statements are effective for fiscal years
beginning after December 15, 1997, with earlier application permitted.
YEAR 2000 CONSIDERATIONS
In order to be ready for the year 2000 (the "Year 2000 Issue"), the Association
has developed a Year 2000 Action Plan (the "Action Plan") which was presented to
the Board of Directors during July 1997. The Action Plan was developed using the
guidelines outlined in the Federal Financial Institutions Examination's
Council's "The Effect of 2000 on Computer Systems". The Association's Strategic
Planning Committee assigned responsibility for the Action Plan to the Efficiency
Committee which reports to the Strategic Planning Committee and the Audit
Committee of the Board of Directors on a monthly and quarterly basis,
respectively. The Action Plan recognizes that the Association's operating,
processing and accounting operations are computer reliant and could be affected
by the Year 2000 Issue. The Association is primarily reliant on third party
vendors for its computer output and processing, as well as other significant
functions and services (i.e. securities safekeeping services, securities pricing
information, et cetera). The Efficiency Committee is currently working with
these third party vendors to assess their year 2000 readiness. Based upon the
initial assessment, management presently believes that with planned
modifications to existing software and hardware and planned conversions to new
software and hardware, the Association's third party vendors are taking the
appropriate steps to ensure critical systems will function properly. The
Association currently expects such modifications and conversions and related
testing to be completed by December 31, 1998. However, if such modifications and
conversions are not made, or are not completed on a timely basis, the Year 2000
Issue could have a material impact on the operations of the Association.
17
<PAGE>
The costs of modifications to the existing software is being primarily absorbed
by the third party vendors, however the Association recognized that the need
exists to purchase new hardware and software. Based upon current estimates, the
Association has identified $1,800,000 in total costs, including hardware,
software, and other issues, for completing the Year 2000 project. Of that
amount, approximately $1,226,000 and $39,000 was purchased during the twelve
months ended December 31, 1997 and 1996, respectively, with the remaining
$535,000 budgeted for the year ended December 31, 1998.
FORWARD-LOOKING STATEMENTS
Certain information in this annual report may constitute forward-looking
information that involves risks and uncertainties that could cause actual
results to differ materially from those estimated. Persons are cautioned that
such forward-looking statements are not guarantees of future performance and are
subject to various factors which could cause actual results to differ materially
from those estimated. These factors include, but are not limited to, changes in
general economic and market conditions, legislative and regulatory changes,
monetary and fiscal policies of the federal government, demand for loan and
deposit products and the development of an interest rate environment that
adversely affects the interest rate spread or other income from Bankshares'
investments and operations.
AVERAGE BALANCE SHEET
The following tables set forth certain information relating to Bankshares'
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 Year Ended For the Three Months Ended
December 31, 1997 December 31, 1996
- ---------------------------------------------------------------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Real estate loans $392,782 $31,846 8.11% $365,269 $ 7,427 8.13%
Consumer and other loans 18,316 1,644 8.98 17,989 408 9.07
Mortgage-backed securities 99,884 7,330 7.34 107,190 1,992 7.43
Investment securities 110,986 7,540 6.79 93,399 1,578 6.76
Other investments (1) 31,851 1,956 6.14 32,764 491 5.99
-------- ------- -------- -------
Total interest-earning assets 653,819 50,316 7.70 616,611 11,896 7.72
------- -------
Non-interest-earning assets 39,356 35,425
-------- --------
Total assets $693,175 $652,036
======== ========
Interest-bearing liabilities:
Deposits $537,965 22,648 4.21% $504,738 5,251 4.16%
Borrowed funds 61,551 4,742 7.70 55,063 1,127 8.19
-------- ------- -------- -------
Total interest-bearing liabilities 599,516 27,390 4.57 559,801 6,378 4.56
------- -------
Non-interest-bearing liabilities 14,837 16,294
-------- --------
Total liabilities 614,353 576,095
Shareholders' equity 78,822 75,941
-------- --------
Total liabilities and shareholders' equity $693,175 $652,036
======== ========
Net interest income $22,926 $ 5,518
======= =======
Net interest rate spread (2) 3.13% 3.16%
====== ======
Net yield on interest-earning assets (3) 3.51% 3.58%
====== ======
Ratio of average interest- earning
assets to average interest-bearing
liabilities 109.06% 110.15%
====== ======
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes interest-earning deposits and FHLB stock.
(2) 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.
(3) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
18
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
For the Years Ended September 30,
- ---------------------------------------------------------------------------------------------------------------------------
1996 1995
--------------------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Real estate loans $331,134 $26,765 8.09% $308,793 $23,661 7.66%
Consumer and other loans 15,746 1,508 9.48 13,056 1,197 9.17
Mortgage-backed securities 99,959 7,423 7.43 53,349 4,198 7.87
Investment securities 87,280 5,700 6.53 83,650 5,945 7.11
Other investments (1) 41,817 2,493 5.96 46,444 2,719 5.85
-------- ------- -------- -------
Total interest-earning assets 575,936 43,889 7.62 505,292 37,720 7.46
------- -------
Non-interest-earning assets 36,068 39,263
-------- --------
Total assets $612,004 $544,555
======== ========
Interest-bearing liabilities:
Deposits $478,955 19,247 4.02% $429,893 15,679 3.65%
Borrowed funds 42,416 3,612 8.52 29,086 2,955 10.16
-------- ------- -------- -------
Total interest-bearing liabilities 521,371 22,859 4.38 458,979 18,634 4.06
------- -------
Non-interest-bearing liabilities 15,995 16,313
-------- --------
Total liabilities 537,366 475,292
Shareholders' equity 74,638 69,263
-------- --------
Total liabilities and shareholders' equity $612,004 $544,555
======== ========
Net interest income $21,030 $19,086
======= =======
Net interest rate spread (2) 3.24% 3.40%
====== ======
Net yield on interest-earning assets (3) 3.65% 3.78%
====== ======
Ratio of average interest- earning assets to
average interest-bearing liabilities 110.47% 110.09%
====== ======
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes interest-earning deposits and FHLB stock.
(2) 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.
(3) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
19
<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 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 December 31, 1997 Three Months Ended December 31, Year Ended September 30,
vs. Year Ended September 30, 1996 1996 vs. 1995 1996 vs. 1995
--------------------------------------------------------------------------------------------------
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)
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
First mortgage
loans $4,981 $ 99 $ 1 $5,081 $ 947 $175 $ 27 $1,149 $1,711 $1,297 $ 96 $ 3,104
Consumer and other loans 246 (94) (16) 136 74 (9) (2) 63 247 54 10 311
Mortgage-backed
securities (6) (90) 3 (93) 523 (72) (23) 428 3,668 (235) (208) 3,225
Investment securities 1,548 227 65 1,840 171 42 4 217 258 (485) (18) (245)
Interest-earning
deposits (594) 75 (18) (537) (157) (12) 3 (166) (271) 51 (6) (226)
------ ---- ----- ------ ------ ---- ---- ------ ------ ------ ----- -------
Total interest-
earning assets 6,175 217 35 6,427 1,558 124 9 1,691 5,613 682 (126) 6,169
------ ---- ----- ------ ------ ---- ---- ------ ------ ------ ----- -------
INTEREST EXPENSE
Deposits 2,372 910 119 3,401 588 145 19 752 1,791 1,591 186 3,568
Borrowed funds 1,630 (348) (152) 1,130 363 (60) (26) 277 1,354 (477) (220) 657
------ ---- ----- ------ ------ ---- ---- ------ ------ ------ ----- -------
Total interest-
bearing liabilities 4,002 562 (33) 4,531 951 85 (7) 1,029 3,145 1,114 (34) 4,225
------ ---- ----- ------ ------ ---- ---- ------ ------ ------ ----- -------
Net change in net
interest income $2,173 $(345) $ 68 $1,896 $ 607 $ 39 $ 16 $ 662 $2,468 $ (432) $ (92) $1,944
====== ===== ===== ====== ====== ==== ==== ====== ====== ====== ===== ======
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
MARKET RISK ANALYSIS
As a holding company for a financial institution, Bankshares' primary component
of market risk is interest rate volatility. Fluctuations in interest rates will
ultimately impact both the level of income and expense recorded on a large
portion of the Association's assets and liabilities, and the market value of all
interest-earning assets, other than those which have a short term to maturity.
Since Bankshares' interest-earning assets and interest-bearing liabilities are
held by the Association, all of Bankshares' interest rate risk exposure lies at
the Association level. As a result, all significant interest rate risk
management procedures are performed by management of the Association. Based upon
the nature of the Association's operations, the Association is not subject to
foreign currency exchange or commodity price risk. The Association's loan
portfolio is concentrated primarily in Palm Beach, Martin, St. Lucie, and Indian
River counties in Florida and is therefore subject to risks associated with the
local economy. As of December 31, 1997, the Association did not own any trading
assets, and does not have any hedging transactions in place such as interest
rate swaps and caps.
The Association's interest rate risk management is the responsibility of the
Asset/Liability Management Committee ("ALCO"), which makes quarterly reports to
the Board of Directors. ALCO establishes policies to monitor and coordinate the
Association's sources, uses, and pricing of funds.
The Association's interest rate management strategy is designed to manage the
volatility of its net interest income by managing the relationship of
interest-rate sensitive assets to interest-rate sensitive liabilities. The
Association monitors interest rate risk through the use of a simulation model
which measures the sensitivity of future net interest income and the net
portfolio value to changes in interest rates. In addition, the Association
monitors interest rate sensitivity through analysis by measuring the terms to
maturity or next repricing date of interest-earning assets and interest-bearing
liabilities 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 GAP table on page 22, during a
20
<PAGE>
period of rising interest rates, a negative gap would tend to result in a
decrease in net interest income while a positive gap would tend to result in an
increase in 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. At December
31, 1997, total interest-earning liabilities maturing or repricing within one
year exceeded total interest-bearing assets maturing or repricing in the same
period by $23.0 million, representing a cumulative one-year gap ratio of a
negative 3.2% (See GAP table on page 22).
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 addition,
in recent years, the Association has de-emphasized the origination of fixed-rate
residential loans and has used hybrid loan products which has a fixed-interest
rate for a stated period of either five or seven years. At the end of the
fixed-interest rate period, the loan converts to a one year ARM. The Association
retains ARM loans and fixed-rate loans with maturities of 15 years or less in
its portfolio. Based on management's assessment of the current portfolio mix and
Board of Director established limits, fixed rate loans with maturities greater
than 15 years are either held in the portfolio or sold when originated in the
secondary market, except those originated for special financing on low income
housing. 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 December 31,
1997, $334.3 million, or 50%, had adjustable interest rates. In addition, the
Association does not solicit high-rate certificates of deposit in excess of
$100,000 or brokered funds.
MARKET VALUE PORTFOLIO EQUITY
Although interest rate sensitivity gap is a useful measurement and contributes
toward effective asset and liability management, it is difficult to predict the
effect of changing interest rates based solely on that measure. An alternative
methodology is to estimate the change in the market value of portfolio equity
("MVPE"). The assumptions used by management to evaluate the vulnerability of
Bankshares' operations to changes in interest rates in the table below are based
on assumptions provided by the FHLB of Atlanta and utilized in the GAP table on
page 22. Although management finds these assumptions reasonable, the interest
rate sensitivity the assets and liabilities and the estimated effects of changes
in interest rates on the net interest income and MVPE indicated in the following
table could vary substantially if different assumptions were used or actual
experience differs from such assumptions.
The following table presents Bankshares' internal calculations of MVPE at
December 31, 1997.
<TABLE>
<CAPTION>
Actual Net Market Value of Portfolio Equity
Change in Interest Rates in Basis Points --------------------------------------------
(Rate Shock) Amount $ Change % Change
- ----------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
400 $ 64,668 $(33,378) (34.0)%
300 72,109 (25,937) (26.5)%
200 80,111 (17,935) (18.3)%
100 88,734 (9,312) (9.5)%
Static 98,046 - -
(100) 108,125 10,079 10.3%
(200) 119,058 21,012 21.4%
(300) 130,947 32,901 33.6%
(400) 143,905 45,859 46.8%
</TABLE>
21
<PAGE>
GAP TABLE
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1997, 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 $ 69,492 $ 13,876 $ 77,462 $ 16,608 $ 15,098 $ -- $ -- $ 192,536
Fixed-rate 6,227 7,225 14,149 38,489 27,474 39,610 25,727 158,901
Commercial and multi-family:
ARMs 44,902 1,574 18,478 3,589 -- -- -- 68,543
Fixed-rate 206 1,714 984 3,164 3,522 2,678 2,687 14,955
Valuation allowances -- -- -- -- -- -- (2,662) (2,662)
Yield adjustments -- -- -- -- 66 140 -- 206
Consumer loans 971 1,047 1,476 2,922 500 59 -- 6,975
Equity line of credit loans 7,392 1 1,332 -- -- -- -- 8,725
Commercial business loans 3,376 60 94 -- -- -- -- 3,530
Collateralized mortgage
obligations 9,711 3,340 9,810 24,094 15,903 12,832 4,308 79,998
Other mortgage-backed
securities 1,093 1,027 1,880 5,371 2,384 1,012 -- 12,767
Investment securities 61,553 289 6,712 19,265 25,981 17,126 -- 130,926
FHLB stock 3,264 -- -- -- -- -- -- 3,264
-------------------------------------------------------------------------------------------------
Total interest-earning
assets 208,187 30,153 132,377 113,502 90,928 73,457 30,060 678,664
-------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Passbook accounts 1,284 1,284 2,568 6,480 3,128 6,243 9,234 30,221
NOW accounts 6,462 6,462 12,924 14,904 2,640 5,314 21,156 69,862
Money market accounts 15,570 15,570 31,140 1,824 776 664 13,288 78,832
Certificate accounts 76,537 117,585 66,819 58,626 26,285 1,226 -- 347,078
ESOP borrowings 1,424 -- -- -- -- -- -- 1,424
FHLB advances 17,124 1,588 3,024 10,896 23,644 1,065 -- 57,341
Other borrowed funds 16,333 -- -- -- -- -- -- 16,333
-------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 134,734 142,489 116,475 92,730 56,473 14,512 43,678 601,091
-------------------------------------------------------------------------------------------------
Interest-earning assets less
interest-bearing liabilities
("interest rate
sensitivity gap") $ 73,453 $(112,336) $ 15,902 $ 20,772 $ 34,455 $ 58,945 $ (13,618) $ 77,573
=================================================================================================
Cumulative excess (deficiency)
of interest-sensitive assets
over interest-sensitive
liabilities $ 73,453 $ (38,883) $ (22,981) $ (2,209) $ 32,246 $ 91,191 $ 77,573
===================================================================================
Interest sensitivity gap to
total assets 10.20% (15.60)% 2.21% 2.88% 4.78% 8.19% (1.89)%
Cumulative interest
sensitivity gap to total assets 10.20% (5.40)% (3.19)% (0.31)% 4.48% 12.66% 10.77%
Ratio of interest-earning
assets to interest-bearing
liabilities 154.52% 21.16% 113.65% 122.40% 161.01% 506.18% 68.82%
Cumulative ratio of
interest-earning assets to
interest bearing liabilities 154.52% 85.97% 94.16% 99.55% 105.94% 116.36% 112.91%
Cumulative interest-sensitive
assets $ 208,187 $ 238,340 $ 370,717 $ 484,219 $ 575,147 $ 648,604 $ 678,664
Cumulative interest-bearing
liabilities $ 134,734 $ 277,223 $ 393,698 $ 486,428 $ 542,901 $ 557,413 $ 601,091
</TABLE>
22
<PAGE>
In preparing the table above, it has been assumed, consistent with the
assumptions used by the FHLB of Atlanta, as of September 1997, in assessing the
interest rate sensitivity of savings associations, that: (i) adjustable-rate
first mortgage loans will prepay at a rate of 19% 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 11% per year; (iii) second mortgage loans
on one- to four-family residences will prepay at a rate of 15% 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% 11%
8 to 8.99% 13%
9 to 9.99% 18%
10 to 10.99% 25%
11 to 11.99% 25%
12 to 13.99% 25%
14% and over 25%
(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 Bankshares.
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 loan, securities, and deposit portfolios, see
Notes to Consolidated Financial Statements.
23
<PAGE>
INDEPENDENT AUDITORS' REPORT
Community Savings Bankshares, Inc.:
We have audited the accompanying consolidated statements of financial condition
of Community Savings Bankshares, Inc. ("Bankshares") and its subsidiary as of
December 31, 1997 and 1996, and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for the year ended
December 31, 1997, for the three months ended December 31, 1996 and for each of
the two years in the period ended September 30, 1996. These consolidated
financial statements are the responsibility of Bankshares' 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 Bankshares and its subsidiary as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for the year ended December 31, 1997, for the three months ended December 31,
1996 and for each of the two years in the period ended September 30, 1996, in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Certified Public Accountants
West Palm Beach, Florida
February 20, 1998
24
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- ---------------------------------------------------------------------------------------------------------------------
December 31,
1997 1996
- ---------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and amounts due from depository institutions $ 12,333 $ 13,547
Interest-bearing deposits (Note 1) 13,621 28,895
-------- --------
Total cash and cash equivalents 25,954 42,442
Securities available for sale (Approximate cost -
1997, $142,357; 1996, $124,643)(Notes 1,2,6) 142,269 123,152
Investments - held to maturity (Approximate fair value - 1997,
$25,585; 1996, $26,266) (Notes 1,3,6,15) 21,388 22,139
Mortgage-backed and related securities - held to maturity
(Approximate fair value - 1997, $46,938; 1996, $53,880) (Notes 1,4,6) 46,413 53,405
Loans receivable, net of allowance for loan losses (1997, $2,662; 1996, $2,542)
(Notes 1,5,6) 451,709 389,040
Accrued interest receivable (Notes 1,7) 3,162 2,354
Office properties and equipment, net (Notes 1,8) 20,206 16,368
Real estate owned, net (Notes 1,9) 592 1,455
Federal Home Loan Bank stock - at cost (Notes 3,6) 3,264 2,864
Other assets (Note 1) 5,176 1,990
-------- --------
Total assets $720,133 $655,209
======== ========
LIABILITIES
Deposits (Notes 6,10) $550,708 $513,709
Mortgage-backed bond, net (Notes 6,15) 16,333 17,230
Advances from Federal Home Loan Bank (Notes 6, 11) 57,341 34,763
Employee Stock Ownership Plan borrowings (Note 14 ) 1,424 1,915
Advances by borrowers for taxes and insurance 931 1,059
Other liabilities (Note 14) 9,101 7,753
Deferred income taxes, net (Notes 1,12) 3,036 2,661
-------- --------
Total liabilities 638,874 579,090
-------- --------
Commitments and contingencies (Note 13)
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, 1997, 5,094,920;
1996, 5,090,120 shares issued and outstanding 5,095 5,090
Additional paid-in capital 30,278 29,920
Retained income - substantially restricted (Notes 13,16) 47,887 44,603
Common stock purchased by Employee Stock Ownership Plan (1,424) (1,818)
Common stock issued to Recognition and Retention Plan (423) (608)
Unrealized decrease in market value of securities available for sale, net of income taxes (154) (1,068)
-------- --------
Total shareholders' equity 81,259 76,119
-------- --------
Total liabilities and shareholders' equity $720,133 $655,209
======== ========
</TABLE>
See notes to consolidated financial statements.
25
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------------------------------------------------------
For the For the Three For the Years
Year Ended Months Ended Ended
December 31, December 31, September 30,
1997 1996 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Interest income:
Real estate loans (Note 1) $ 31,846 $ 7,427 $ 26,765 $ 23,661
Consumer and commercial business loans 1,644 408 1,508 1,197
Investment securities and securities
available for sale (Notes 2,3) 10,422 2,566 8,720 5,945
Mortgage-backed and related securities (Note 4) 4,448 1,004 4,403 4,198
Interest-earning deposits 1,956 491 2,493 2,719
----------- ----------- ----------- -----------
Total interest income 50,316 11,896 43,889 37,720
----------- ----------- ----------- -----------
Interest expense:
Deposits (Note 10) 22,648 5,251 19,247 15,679
Advances from Federal Home Loan Bank
and other borrowings (Notes 11, 15) 4,742 1,127 3,612 2,955
----------- ----------- ----------- -----------
Total interest expense 27,390 6,378 22,859 18,634
----------- ----------- ----------- -----------
Net interest income 22,926 5,518 21,030 19,086
Provision for loan losses (Notes 1,5) 264 243 98 240
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 22,662 5,275 20,932 18,846
----------- ----------- ----------- -----------
Other income:
Servicing income and other fees 269 33 148 184
NOW account and other customer fees 3,339 820 3,150 2,767
Net gain (loss) on sale and early maturities of securities
available for sale (8) 51 -- --
Gain on early maturity of investment -- -- 254 --
Gain on sale of other assets 617 -- -- --
Net gain (loss) on sale of loans receivable 3 3 (225) --
Miscellaneous (35) 318 217 443
----------- ----------- ----------- -----------
Total other income 4,185 1,225 3,544 3,394
----------- ----------- ----------- -----------
Operating expense:
Employee compensation and benefits (Note 14) 8,989 2,125 7,785 7,293
Occupancy and equipment (Notes 8, 13) 5,059 1,201 4,581 4,506
Net (gain) loss on real estate owned (112) 37 (243) (812)
Advertising and promotion 734 240 616 545
Federal deposit insurance premium 270 288 3,883 1,029
Miscellaneous 3,621 753 3,178 2,342
----------- ----------- ----------- -----------
Total operating expense 18,561 4,644 19,800 14,903
----------- ----------- ----------- -----------
Income before provision for income taxes 8,286 1,856 4,676 7,337
----------- ----------- ----------- -----------
Provision (benefit) for income taxes: (Notes 1,12)
Current 3,042 65 1,817 3,126
Deferred (112) 631 (1,056) (363)
----------- ----------- ----------- -----------
Total provision for income taxes 2,930 696 761 2,763
----------- ----------- ----------- -----------
Net income $ 5,356 $ 1,160 $ 3,915 $ 4,574
=========== =========== =========== ===========
Earnings per share - basic $ 1.09 $ 0.24 $ 0.80 $ 0.94
=========== =========== =========== ===========
Earnings per share - diluted $ 1.06 $ 0.23 $ 0.79 $ 0.94
=========== =========== =========== ===========
Weighted average common shares outstanding - basic 4,929,989 4,902,479 4,869,238 4,845,384
=========== =========== =========== ===========
Weighted average common shares outstanding - diluted 5,054,853 4,951,820 4,936,763 4,882,658
=========== =========== =========== ===========
See notes to consolidated financial statements.
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997, THREE MONTHS ENDED DECEMBER 31, 1996 AND
THE YEARS ENDED SEPTEMBER 30, 1996, AND 1995
--------------------------------------------------------------------------------------
Unrealized
Increase
(Decrease) in
Retained Employee Recognition Market Value
Additional Income- Stock and of Securities
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, 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
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 -- 35 -- 147 46 -- 228
Dividends declared -- -- (459) -- -- -- (459)
--------------------------------------------------------------------------------------
Balance - December 31, 1996 5,090 29,920 44,603 (1,818) (608) (1,068) 76,119
Net income for the year ended
December 31, 1997 -- -- 5,356 -- -- -- 5,356
Stock options exercised 5 45 -- -- -- -- 50
Unrealized increase in market value
of assets available for sale
(net of income taxes) -- -- -- -- -- 914 914
Amortization of deferred compensation -
Employee Stock Ownership Plan and
Recognition and Retention Plan -- 313 -- 394 185 -- 892
Dividends declared -- -- (2,072) -- -- -- (2,072)
--------------------------------------------------------------------------------------
Balance - December 31, 1997 $5,095 $30,278 $47,887 $ (1,424) $ (423) $ (154) $81,259
--------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
27
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------------------------
For the Year For the Three For the Years Ended
Ended Months Ended September 30,
December 31, 1997 December 31, 1996 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Cash flows from (for) operating activities:
Net income $ 5,356 $ 1,160 $ 3,915 $ 4,574
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation 1,503 329 1,304 1,353
Employee Stock Ownership Plan and Recognition
and Retention Plan compensation expense 892 228 686 422
Deferred income tax provision (112) 631 (1,056) (363)
Accretion of discounts, amortization of premiums,
and other deferred yield items (1,915) (396) (1,494) (1,497)
Provision for losses on other assets -- -- 200 --
Provision for loan losses 264 243 98 240
Provision for losses and net (gains) losses on
sales of real estate owned (173) -- (67) (102)
Amortization of discount on mortgage-backed bond 490 123 496 498
Net (gain) loss on sale and early maturities of:
Securities available for sale 8 (51) -- --
Loans and other assets (16) (10) 208 4
Gain on early maturity of investment -- -- (254) --
Increase in accrued interest receivable (808) (146) (65) (1,181)
(Increase) decrease in other assets (3,186) 327 (609) 473
Decrease (increase) in loans available for sale 70 137 109 (316)
Increase (decrease) in other liabilities 1,347 (3,851) 4,424 85
-------- -------- -------- --------
Net cash provided by (used for) operating activities 3,720 (1,276) 7,895 4,190
-------- -------- -------- --------
Cash flows from (for) investing activities:
Loan originations and principal payments on loans - net (38,694) (11,257) (34,182) (10,825)
Principal payments received on mortgage-backed and
related securities and securities available for sale 14,422 2,840 11,454 5,286
Principal payments received on investments - held to maturity 1,825 475 2,671 2,694
Purchases of: Loans (24,455) (1,998) (16,775) (2,728)
Mortgage-backed and related securities -- -- (6,013) (41,549)
Investments - held to maturity -- -- -- (30,085)
Federal Home Loan Bank stock (400) -- -- --
Securities available for sale (46,311) -- (67,641) --
Office property and equipment (5,300) (344) (1,481) (1,805)
Proceeds from sales of: Securities available for sale 2,435 100 749 --
Federal Home Loan Bank stock -- 2,520 2,000 --
Office property and equipment 128 178 443 25
Real estate acquired in settlement of loans 1,551 -- 767 3,130
Loans purchased -- -- 3,452 --
Proceeds from calls or maturities of investments-held
to maturity and securities available for sale 19,300 -- 22,012 21,000
Investment in real estate venture -- 156 1,305 1,588
Other investing (351) (184) (455) 148
-------- -------- -------- --------
Net cash used for investing activities (75,850) (7,514) (81,694) (53,121)
-------- -------- -------- --------
Cash flows from (for) financing activities:
Net increase (decrease) in: NOW accounts, demand deposits,
and savings accounts Certificates
of deposit 17,591 3,112 (1,200) (34,139)
19,408 11,668 62,753 41,868
Stock subscriptions applied or returned -- -- -- (55,716)
Advances from Federal Home Loan Bank 30,000 -- 22,500 19,000
Repayment of advances from Federal Home Loan Bank (7,425) (1,587) (4,350) (800)
Advances by borrowers for taxes and insurance (128) (5,802) (136) 99
Employee Stock Ownership Plan loan (491) (149) (493) 2,557
Purchases of Employee Stock Ownership Plan shares -- -- -- (2,753)
Sale of common stock-net of issuance costs -- -- 13 33,758
Proceeds from exercise of stock options 50 4 -- --
Payments made on mortgage-backed bond (1,387) (346) (1,387) (1,387)
Dividends paid (1,976) (448) (1,618) (902)
-------- -------- -------- --------
Net cash provided by financing activities 55,642 6,452 76,082 1,585
-------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents (16,488) (2,338) 2,283 (47,346)
Cash and cash equivalents, beginning of period 42,442 44,780 42,497 89,843
-------- -------- -------- --------
Cash and cash equivalents, end of period $ 25,954 $ 42,442 $ 44,780 $ 42,497
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
28
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1997, THE THREE MONTHS
ENDED DECEMBER 31, 1996, AND THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995
1. SIGNIFICANT ACCOUNTING POLICIES
On September 30, 1997, Community Savings, F. A. (the "Association")
completed its reorganization into the two-tier form of mutual holding
company ownership. Pursuant to the reorganization, the Association is now
the wholly owned subsidiary of the newly-formed, federally chartered
mid-tier stock holding company, Community Savings Bankshares, Inc.
("Bankshares"). Bankshares is the majority owned subsidiary of ComFed,
M.H.C. ("ComFed"). ComFed, Bankshares, and the Association are chartered
and regulated by the Office of Thrift Supervision ("OTS").
The reorganization was accounted for in a manner similar to a pooling of
interests and did not result in any significant accounting adjustments.
Bankshares' only significant asset is the common stock of the Association.
Consequently, the majority of its net income is derived from the
Association.
The accounting and reporting policies of Bankshares, the Association, and
the Association's wholly-owned subsidiary 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 Bankshares, the Association and the Association's
wholly-owned subsidiary, ComFed, Inc. ComFed, Inc. was formed for the
purpose of owning and operating an insurance agency, Community Insurance
Agency. Prior to December 31, 1996, the Association had three other
wholly-owned subsidiaries, ComFed Development Co., which was engaged in
real estate development activities under joint venture arrangements with
local developers, 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, Inc. All significant intercompany balances and transactions
have been eliminated.
CHANGE IN YEAR END - During January 1997, the Board of Directors voted to
change the fiscal year end for all related entities from September 30th to
December 31st, effective with the year and three months ending December
31, 1996.
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 "Accounting for Certain Investments in Debt and Equity
Securities", ("SFAS No.115") 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 shareholders' equity. 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 (adjustable-rate, fixed-rate and hybrid-rate) to
individuals and commercial enterprises. At December 31, 1997 and 1996, 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.
29
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 owned
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.
On October 1, 1995, Bankshares adopted SFAS No. 114 "Accounting by
Creditors for Impairment of a Loan", ("SFAS No. 114") and SFAS No. 118
"Accounting by Creditors for Impairment of a Loan - Recognition and
Disclosures", ("SFAS No. 118") an amendment of SFAS No. 114. These
standards address the accounting for impairment of certain loans when it
is probable that all amounts due pursuant to the contractual terms of the
loan will not be collected. Adoption of these standards included the
identification of commercial business and commercial real estate loans
which are considered impaired under the provisions of SFAS No. 114. Groups
of smaller-balance homogeneous loans (generally residential mortgage and
consumer installment and other loans) are collectively evaluated for
impairment. Adoption of these statements did not have a material impact on
Bankshares' financial position or results of operations.
Under the provisions of these standards, 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. Individually identified impaired loans are measured
based on the present value of payments expected to be received, using the
historical effective loan rates as the discount rate. Alternatively,
measurement may also be based on observable market prices, or for loans
that are solely dependent on the collateral for repayment, measurement may
be based on the fair value of the collateral. Loans that are to be
foreclosed are measured based on the fair value of the collateral. If the
recorded investment in the impaired loan exceeds the measure of fair
value, a valuation allowance is required as a component of the allowance
for loan losses. Changes to the valuation allowance are recorded as a
component of the provision for loan losses.
UNCOLLECTED INTEREST - The Association reverses accrued interest on
mortgage loans which are more than ninety days past due or if management
determines at an earlier date that the loan is not performing and ceases
accruing interest on such loans thereafter. Any such interest ultimately
collected is credited to income in the period of recovery.
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 9.
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 its
control or changes in its strategy for recovering its investment.
LIMITED PARTNERSHIP INVESTMENT IN QUALIFIED AFFORDABLE HOUSING PROJECT-
The Association has an approximate 4% limited partner interest in a real
estate partnership that operates qualified affordable housing projects.
The Association receives tax benefits from the partnership in the form of
tax deductions from operating losses and tax credits. The Association
accounts for its investment in the partnership on the effective yield
method and is amortizing the cost over the estimated life of the
partnership (15 years). The amortized cost of the investment at December
31, 1997 is $ 3.0 million and is included in other assets. Amortization
for the year ended December 31, 1997 was $147,000 and is included in
miscellaneous income. In addition to the tax benefit related to the
amortization, tax credits of $197,000 were recognized during the year
ended December 31, 1997 as a reduction of the provision for income taxes.
30
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 - Bankshares, the Association and ComFed Inc. file
consolidated federal and state income tax returns. Income taxes are
allocated proportionately to each entity 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 - Earnings per share are determined in accordance with
the provisions of SFAS No. 128 "Earnings per Share" ("SFAS No. 128")
issued in February 1997. The weighted average number of shares of common
stock used in calculating basic earnings per share was determined by
reducing outstanding shares by unallocated Employee Stock Ownership
("ESOP") shares and unvested Recognition and Retention Plan ("RRP")
shares. Diluted earnings per share includes the maximum dilutive effect of
stock issuable upon exercise of common stock options and unallocated ESOP
and RRP shares of common stock. The effect of stock options on weighted
average shares outstanding are calculated using the treasury stock method.
All prior period earnings per share data has been restated in accordance
with SFAS No. 128.
IMPACT OF NEW ACCOUNTING ISSUES - In June 1997, the FASB issued SFAS No.
130 "Reporting Comprehensive Income" ("SFAS No. 130"), which requires that
an enterprise report, by major components and as a single total, the
change in its net assets during the period from non-owner sources; and
SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131"), which establishes annual and interim
reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas, and major
customers. Adoption of these statements will not impact Bankshares'
consolidated financial position, results of operations, or cash flows, and
any effect will be limited to the form and content of its disclosures.
Both statements are effective for fiscal years beginning after December
15, 1997, with earlier application permitted.
RECLASSIFICATIONS - Certain amounts in the 1996 and 1995 consolidated
financial statements have been reclassified to conform to the presentation
for 1997.
31
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
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 from held to
maturity to available for sale between November 15, 1995 and December 31,
1995. Securities totaling $49.5 million were reclassified 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 December 31, 1997 and 1996 are summarized
as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
December 31, 1997:
Equity securities $ 7 $ 16 $ -- $ 23
United States Government and agency obligations 54,937 258 (20) 55,175
Mutual funds 41,000 58 (337) 40,721
Collateralized mortgage obligations:
Government backed 3,300 30 -- 3,330
Private issue 43,113 245 (338) 43,020
-------- -------- -------- --------
Total collateralized mortgage obligations 46,413 275 (338) 46,350
-------- -------- -------- --------
Total securities available for sale $142,357 $ 607 $ (695) $142,269
======== ======== ======== ========
Weighted average interest rate 6.52%
====
December 31, 1996:
Equity securities $ 7 $ 7 $ -- $ 14
United States Government and agency obligations 28,247 55 (205) 28,097
Mutual funds 43,443 29 (405) 43,067
Collateralized mortgage obligations:
Government backed 3,601 -- (7) 3,594
Private issue 49,345 147 (1,112) 48,380
-------- -------- -------- --------
Total collateralized mortgage obligations 52,946 147 (1,119) 51,974
-------- -------- -------- --------
Total securities available for sale $124,643 $ 238 $ (1,729) $123,152
======== ======== ======== ========
Weighted average interest rate 6.60%
====
</TABLE>
Proceeds from the sale of securities available for sale were $2,435,000,
$100,000 ,$749,000 and $0 during the fiscal year ended December 31, 1997,
the three months ended December 31, 1996, and the years ended September
30, 1996 and 1995, respectively. For the year ended December 31, 1997,
sales resulted in gross losses of $ 8,000. For the three months ended
December 31, 1996, sales resulted in gross gains of $51,000. There were no
gross realized gains or losses during the fiscal years ended September 30,
1996 and 1995.
The fair value of securities available for sale is based on quoted market
prices.
32
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS - HELD TO MATURITY
Investments - held to maturity at December 31, 1997 and 1996 are
summarized as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
December 31, 1997:
United States Government and agency obligations $13,039 $ 3,891 $ -- $16,930
Corporate debt issues:
Chase Federal mortgage-backed bond 6,856 311 -- 7,167
Auto Bond Receivables Corp. 1,493 -- (5) 1,488
------- ------- ------- -------
Total corporate debt issues 8,349 311 (5) 8,655
------- ------- ------- -------
Total investment securities $21,388 $ 4,202 $ (5) $25,585
======= ======= ======= =======
Weighted average interest rate 9.29%
====
December 31, 1996:
United States Government and agency obligations $11,701 $ 3,807 $ -- $15,508
Municipal obligations 300 1 -- 301
Corporate debt issues:
Chase Federal mortgage-backed bond 7,236 347 -- 7,583
Auto Bond Receivables Corp. 2,902 8 (36) 2,874
------- ------- ------- -------
Total corporate debt issues 10,138 355 (36) 10,457
------- ------- ------- -------
Total investment securities $22,139 $ 4,163 $ (36) $26,266
======= ======= ======= =======
Weighted average interest rate 8.63%
====
</TABLE>
The table below sets forth the contractual maturity distribution of the
investments - held to maturity at December 31, 1997 and 1996.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
December 31, 1997 December 31, 1996
Carrying Fair Carrying Fair
Value Value Value Value
- ---------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Due in one year or less $ 1,251 $ 1,334 $ 300 $ 301
Due after one year through five years 1,493 1,488 4,030 4,131
Due after five years through ten years 11,283 14,945 10,111 13,675
Due after ten years 7,361 7,818 7,698 8,159
------- ------- ------- -------
Total $21,388 $25,585 $22,139 $26,266
======= ======= ======= =======
</TABLE>
There were no sales of investment securities during the year ended
December 31, 1997, the three months ended December 31, 1996, or the years
ended September 30, 1996 and 1995. The fair value of investment securities
is based on quoted market prices.
FEDERAL HOME LOAN BANK STOCK - At December 31, 1997 and 1996, the
Association held $3,264,000 and $2,864,000, respectively, of FHLB Stock,
which approximates fair value. FHLB Stock is not readily marketable as it
is not traded on a registered security exchange.
33
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. MORTGAGE-BACKED AND RELATED SECURITIES - HELD TO MATURITY
Mortgage-backed and related securities - held to maturity at December 31,
1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
December 31, 1997:
FHLMC $ 7,465 $ 62 $ (85) $ 7,442
GNMA - pass throughs 1,751 63 -- 1,814
FNMA - pass throughs 3,316 11 (10) 3,317
--------------------------------------------------------------------------------------------------------------------
Agency for International
--------------------------------------------------------------------------------------------------------------------
Development - pass throughs 236 -- -- 236
--------------------------------------------------------------------------------------------------------------------
Collateralized mortgage obligations:
--------------------------------------------------------------------------------------------------------------------
Government-backed 10,872 344 -- 11,216
Private issue 22,766 273 (133) 22,906
------- ---- ----- -------
Total collateralized mortgage obligations 33,638 617 (133) 34,122
CMO residual interest bonds 7 -- -- 7
------- ---- ----- -
Total mortgage-backed and related securities $46,413 $753 $(228) $46,938
======= ==== ===== =======
December 31, 1996:
FHLMC $ 9,673 $ 79 $(143) $ 9,609
GNMA - pass throughs 2,108 74 -- 2,182
FNMA - pass throughs 3,933 -- (13) 3,920
Agency for International
Development - pass throughs 317 -- -- 317
Collateralized mortgage obligations:
Government-backed 12,229 526 (8) 12,747
Private issue 25,130 300 (340) 25,090
------- ---- ----
Total collateralized mortgage obligations 37,359 826 (348) 37,837
CMO residual interest bonds 15 -- -- 15
------- ---- ----- -------
Total mortgage-backed and related securities $53,405 $979 $(504) $53,880
======= ==== ===== =======
</TABLE>
There were no sales of mortgage-backed and related securities during the
year ended December 31, 1997, the three months ended December 31, 1996,
and the years ended September 30, 1996 and 1995. 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 CMOs. 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 December 31, 1997, the Association had
$33,638,000 in such mortgage-related securities, which were held for
investment and had a market value of $34,122,000. The fixed-rate CMOs have
coupon rates ranging from 6.0% to 12.0%.
34
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The 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 CMO securities was
7.64% at December 31, 1997. 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 December 31,
1997, the Association's interest in CMO residual bonds was $6,500 with a
market value of $6,500.
5. LOANS RECEIVABLE
<TABLE>
<CAPTION>
Loans receivable consisted of the following:
-------------------------------------------------------------------------------------------------------------------
December 31, December 31,
1997 1996
-------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
Real estate loans:
Residential 1-4 family $339,117 $293,296
Residential 1-4 family held for sale
(at lower of cost or estimated fair value) - 70
Residential construction loans 32,828 33,158
Nonresidential construction loans 2,022 2,200
Land loans 17,117 19,426
Multi-family loans 8,800 8,096
Commercial 59,220 37,815
-------- --------
Total real estate loans 459,104 394,061
-------- --------
Non-real estate loans:
Consumer loans 15,694 16,028
Commercial business 3,530 2,458
-------- --------
Total non-real estate loans 19,224 18,486
-------- --------
Total loans receivable 478,328 412,547
Less:
Undisbursed loan proceeds 24,163 20,765
Unearned discount (premium) and net deferred loan fees (costs) (206) 200
Allowance for loan losses 2,662 2,542
-------- --------
Total loans receivable, net $451,709 $389,040
======== ========
</TABLE>
The Association's lending market is concentrated in Palm Beach, Martin,
St. Lucie, and Indian River Counties in Florida.
<TABLE>
<CAPTION>
Non accrual loans consisted of the following:
-------------------------------------------------------------------------------------------------------------------
At or for the
At or for the Three Months At or for the
Year Ended Ended Years Ended
December 31, December 31, September 30, September 30,
1997 1996 1996 1995
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In Thousands)
Principal balance of loans not accruing interest $1,379 $1,631 $842 $662
Interest not accrued related to above loans 86 65 44 49
</TABLE>
35
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
An analysis of the changes in the allowance for loan losses for the year
ended December 31, 1997, the three months ended December 31, 1996 and the
years ended September 30, 1996, and 1995 is as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
For the Year For the Three For the Years Ended
Ended Months Ended September 30,
December 31, 1997 December 31, 1996 1996 1995
---------------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Balance, beginning of period $2,542 $2,312 $3,492 $3,390
Provision charged to income 264 243 98 240
Losses charged to allowance (144) (13) (1,278) (138)
Recoveries - - - -
------ ------ ------- ------
Balance, end of year $2,662 $2,542 $ 2,312 $3,492
====== ====== ======= ======
</TABLE>
During the year ended September 30, 1996, the Association sold its
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 interest. In connection with
the sale, the Association recorded an additional loss of $217,000.
LOANS HELD FOR SALE - The Association originates both adjustable- and
fixed-rate loans. The adjustable- and fixed-rate loans with original
maturities of 15 years or less are held in the Association's portfolio.
Based on management's assessment of current portfolio mix and Board of
Director established limits, fixed-rate loans with maturities greater
than 15 years are either held in the portfolio or sold when originated,
except those originated for special financing on low income housing.
Included in loans receivable at December 31, 1997 and 1996 are $0 and
$70,000, 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 December 31, 1997 and
1996 were $18,967,000 and $21,761,000, respectively. Custodial escrow
balances maintained in connection with the foregoing loan servicing were
$47,000 and $57,000, respectively.
RATE COMPOSITION OF LOANS - The Association originates and purchases both
adjustable- and fixed-rate loans. At December 31, 1997, fixed-rate loans
totaled $178,630,000 and adjustable-rate loans totaled $273,079,000. The
adjustable-rate loans have interest rate adjustment limitations and are
indexed to the OTS National Monthly Median Cost of Funds, the U. S.
Treasury Weekly Average Yield index, or the prime rate. 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 $61,242,000
and $40,015,000 at December 31, 1997 and 1996, 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, the Association's 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
December 31, 1997 and 1996 are approximately as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
December 31, December 31,
1997 1996
---------------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
Commercial land $ 6,037 $ 451
Office buildings 4,614 4,598
Hotel property 210 2,439
Shopping centers 3,124 3,262
Light industrial and warehouses 9,243 7,265
Churches 5,733 5,468
Other commercial 30,259 14,332
------- -------
Total commercial real estate 59,220 37,815
Commercial construction projects 2,022 2,200
------- -------
Total commercial real estate and construction loans $61,242 $40,015
======= =======
</TABLE>
36
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
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 December 31, 1997, management estimates that, while
remaining in compliance with this limitation, the Association could have
originated an additional $218,950,000 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 $10,507,000 at December 31, 1997. At December 31, 1997,
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. For adjustable-rate loans, employees are offered a
50 basis point reduction from the margin. 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 December 31, 1997. At December 31, 1997, the
total of loans to directors, executive officers, and associates of such
persons was $433,000.
TROUBLED DEBT RESTRUCTURING - Included in loans receivable at December
31, 1997 and 1996 are loans considered to be troubled debt restructured
with an aggregate recorded investment of $1,044,000 and $1,071,000,
respectively. Included in interest income is interest on these loans
which totaled $91,000, $24,000, $94,000, and $69,000 for the year ended
December 31, 1997, the three months ended December 31, 1996, and the
years ended September 30, 1996 and 1995, 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. A
loan is not impaired during an insignificant delay or insignificant
shortfall in the amount of payments.
An analysis of the recorded investment in impaired loans is as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
At or for the At or for the At or for the
Year Ended Three Months Ended Years Ended
December 31, December 31, September 30,
1997 1996 1996 1995
-------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Impaired loan balance $1,044 $1,071 $1,081 $6,244
Related allowance 252 252 252 1,452
Average impaired loan balance 1,057 1,076 4,046 5,597
Interest income recognized 91 24 94 69
</TABLE>
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 or if management determines at an earlier
date that the loan is not performing and ceases accruing interest
thereafter. Such interest ultimately collected is credited to income in
the period of recovery. Cash receipts for impaired loans are used first
to satisfy any outstanding interest due, and any amounts remaining are
applied to the outstanding principal balance.
37
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. PLEDGED ASSETS
In the normal course of doing business the Association is required to
comply with certain collateral requirements.
The following tables set forth amounts of various asset components, as of
December 31, 1997 and 1996 which were pledged as collateral.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
December 31, December 31,
1997 1996
----------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
Real estate loans (unpaid principal balance) $54,018 $31,847
FHLB Stock and accrued interest 3,323 2,916
------- -------
Total pledged to the FHLB $57,341 $34,763
======= =======
Other pledged assets:
Deposits of public funds - State of Florida
Mortgage-backed and related securities $31,681 $21,681
Line of credit - Federal Reserve Bank of Atlanta
United States Government and agency obligations 1,800 1,800
Treasury tax and loan deposits
United States Government and agency obligations 200 200
Mortgage-backed bond
Unpaid principal balance of loans 31,738 37,395
------- -------
Total for other pledged assets $65,419 $61,076
======= =======
</TABLE>
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 December 31, 1997 and 1996 consisted of
the following:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
December 31, December 31,
1997 1996
-----------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
Loans $1,404 $ 711
Investments 106 141
Securities available for sale 1,372 1,169
Mortgage-backed and related securities 280 333
------ ------
Total accrued interest receivable $3,162 $2,354
====== ======
</TABLE>
38
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment at December 31, 1997 and 1996 are
summarized as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
December 31, December 31,
1997 1996
---------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
Land $ 5,571 $ 3,347
Buildings and improvements 16,431 15,623
Furniture and equipment 15,268 13,052
-------- --------
Total 37,270 32,022
Less accumulated depreciation (17,064) (15,654)
-------- --------
Total office properties and equipment - net $ 20,206 $ 16,368
======== ========
</TABLE>
9. REAL ESTATE OWNED
Real estate owned at December 31, 1997 and 1996 consisted of the
following:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
December 31, December 31,
1997 1996
---------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
Real estate owned $633 $1,547
Less allowance for loss 41 92
---- ------
Total real estate owned $592 $1,455
==== ======
</TABLE>
Changes in allowance for losses on real estate owned were as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
For the Year For the Three
Ended Months Ended For the Years Ended
December 31, December 31, September 30,
1997 1996 1996 1995
--------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Balance, beginning of period $ 92 $ 92 $113 $ 80
Provision charged to income 4 - 8 141
Losses charged to allowance (55) - (29) (108)
---- ---- ---- -----
Balance, end of period $ 41 $ 92 $ 92 $ 113
==== ==== ==== =====
</TABLE>
39
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. DEPOSITS
The weighted-average interest rates on deposits at December 31, 1997 and
1996 were 4.21% and 4.05%, respectively. Deposit accounts, by type and
range of rates at December 31, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
December 31, December 31,
1997 1996
---------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
Account type and rate:
Non-interest-earning checking accounts $ 24,715 $ 18,627
NOW, Super NOW and funds transfer accounts 1997, 1996, and
1995, 1.00% through 1.98% 69,862 67,076
Passbook and statement accounts 1997, 1996, and 1995, 1.73%
through 1.98% 30,221 30,821
Money market accounts 1997, 1996, and 1995, 2.27% through 3.40% 78,832 69,514
-------- --------
Total non-certificate accounts 203,630 186,038
-------- --------
Certificates:
3.00% or less 1,436 1,035
3.01% - 3.99% 11 598
4.00% - 4.99% 35,699 51,484
5.00% - 5.99% 262,029 232,313
6.00% - 6.99% 39,186 33,568
7.00% - 7.99% 8,717 8,673
-------- --------
Total certificates of deposit 347,078 327,671
-------- --------
Total deposits $550,708 $513,709
======== ========
</TABLE>
Individual deposits greater than $100,000 at December 31, 1997 and 1996
aggregated approximately $87,257,000, and $72,504,000, respectively.
Deposits in excess of $100,000 are not insured.
Scheduled maturities of certificate accounts at December 31, 1997 and
1996 were as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
December 31, December 31,
1997 1996
---------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
Maturity
Less than 1 year $260,941 $253,587
1 year - 2 years 30,794 29,270
2 years - 3 years 27,832 12,146
3 years - 4 years 11,220 20,167
4 years - 5 years 15,065 11,694
Thereafter 1,226 807
-------- --------
Total certificates of deposit $347,078 $327,671
======== ========
</TABLE>
40
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Interest expense on deposits consisted of the following during the year
ended December 31, 1997, the three months ended December 31, 1996 and the
years ended September 30, 1996 and 1995:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
For the For the Three
Year Ended Months Ended For the Years Ended
December 31, December 31, September 30,
1997 1996 1996 1995
---------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Passbook accounts $ 522 $ 133 $ 560 $ 625
NOW accounts 701 201 930 1,002
Money market accounts 2,377 552 2,023 2,143
Certificate accounts 19,048 4,365 15,734 11,909
------- ------ ------- -------
Total interest expense $22,648 $5,251 $19,247 $15,679
======= ====== ======= =======
</TABLE>
11. ADVANCES FROM FEDERAL HOME LOAN BANK
At December 31, 1997 and 1996, outstanding advances from the FHLB totaled
$ 57,341,00 and $ 34,763,000 respectively.
Scheduled maturities of FHLB advances at December 31, 1997 were as
follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
Years Ending Average Interest $
December 31, Rate Maturing
---------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
1998 6.80% $ 7,421
1999 6.83 6,734
2000 6.35 8,471
2001 6.36 7,572
2002 5.93 26,071
2003 6.69 1,072
-----
Total FHLB advances 6.28% $57,341
==== =======
</TABLE>
12. INCOME TAXES
In accordance with SFAS No. 109, deferred income tax assets and
liabilities are computed annually for differences between financial
statement and tax basis of assets and liabilities that will result in
taxable or deductible amounts in the future based on enacted tax laws and
rates applicable to periods in which the differences are expected to
affect taxable income. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be
realized. Income tax expense is the tax payable or refundable for the
period adjusted for the change during the period in deferred tax assets
and liabilities.
On May 13, 1997, the Association received permission from the Internal
Revenue Service ("IRS") to change its accounting period, for federal
income tax purposes, from September 30th to December 31st, effective
December 31, 1996. In order to comply with IRS requirements, the
Association filed a consolidated tax return for the short period October
1, 1996 through December 31, 1996.
41
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income tax provision consists of the following components for the year
ended December 31, 1997, the three months ended December 31, 1996, and the
years ended September 30, 1996 and 1995:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
For the Year For the Three
Ended Months Ended For the Years Ended
December 31, December 31, September 30,
1997 1996 1996 1995
--------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Current - federal $ 2,745 $ 49 $ 1,592 $ 2,789
Current - state 297 16 225 337
------- ------- ------- -------
Total current 3,042 65 1,817 3,126
Deferred - federal and state (112) 631 (1,056) (363)
------- ------- ------- -------
Total provision for income taxes $ 2,930 $ 696 $ 761 $ 2,763
======= ======= ======= =======
</TABLE>
Bankshares' 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 Year For the Three
Ended Months Ended For the Years Ended
December 31, December 31, September 30,
1997 1996 1996 1995
Amount % Amount % Amount % Amount %
------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tax at federal tax rate $ 2,900 35.0% $ 650 35.0% $ 1,637 35.0% $ 2,568 35.0%
State income taxes, net of
federal income tax 281 3.3 70 3.8 139 3.0 186 2.5
benefits
Reversal of prior year -- -- -- -- (1,140) (24.4) -- --
liability
Other (168) (2.0) (6) (0.3) 172 3.7 82 1.1
Benefit of graduated tax rate (83) (1.0) (18) (1.0) (47) (1.0) (73) (1.0)
------- ---- ------ ---- ------- ---- ------- ----
Total provision for income taxes $ 2,930 35.3% $ 696 37.5% $ 761 16.3% $ 2,763 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.
42
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
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>
-------------------------------------------------------------------------------------------------------------------
For the
Year For the Three
Ended Months Ended For the Years Ended
December 31, December 31, September 30,
1997 1996 1996 1995
-------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Deferred tax liabilities:
Depreciation $ 582 $ 627 $ 639 $ 551
Loan fee income 170 167 188 319
FHLB stock dividends 457 454 868 1,172
Deferred loan costs 467 412 392 208
Unamortized discount on mortgage-backed bond 2,112 2,302 2,350 2,526
Book over tax on investments in partnerships 1,003 1,003 937 882
Other - - - 17
Gross deferred tax liabilities 4,791 4,965 5,374 5,675
----- ----- ------ -----
Deferred tax assets:
Excess of book bad debt reserve over tax reserve 1,043 918 907 1,298
Retirement plans 586 802 686 586
Unrealized loss on decrease in fair value
of securities available for sale 33 561 615 182
Deferred loss on loans held for sale 43 46 48 60
Deferred compensation 130 115 109 105
SAIF recapitalization - - 1,088 -
Other 19 - 83 117
------ ----- ------ -----
Gross deferred tax assets 1,854 2,442 3,536 2,348
------ ----- ------ -----
Valuation allowance on unrealized loss on decrease
in fair value of securities available for sale (99) (138) (182) (182)
------
Gross deferred tax assets - net of valuation
allowance 1,755 2,304 3,354 2,166
------
Net deferred tax liability $3,036 $2,661 $2,020 $3,509
====== ====== ====== ======
</TABLE>
During 1996, legislation was passed that repealed Section 593 of the
Internal Revenue Code for taxable years beginning after December 31,
1995. Section 593 allowed thrift institutions, including the Association,
to use the percentage-of-taxable income bad debt accounting method, if
more favorable than the specific charge-off method, for federal income
tax purposes. The excess reserves (deduction based on the
percentage-of-taxable income less the deduction based on the specific
charge-off method) accumulated post- 987 are required to be recaptured
ratably over a six year period beginning in 1996. The Association had no
excess reserves as of December 31, 1996 and the recapture has no effect
on Bankshares' statement of operations as taxes were provided for in
prior years in accordance with SFAS 109, "Accounting for Income Taxes."
The same legislation forgave the tax liability on pre-1987 accumulated
bad debt reserves which would have penalized any thrift choosing to adopt
a bank charter because the tax would have become due and payable. The
unrecorded potential liability that was forgiven approximated $4.3
million.
13. 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.
43
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Each customer's
creditworthiness is evaluated 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. Commitments to extend credit for mortgage loans, excluding
undisbursed portions of loans in process, were approximately $4,733,000
and $5,732,000 at December 31, 1997 and December 31, 1996, respectively.
At December 31, 1997, the $4,733,000 of loan commitments were comprised of
approximately $3,593,000 of fixed-rate commitments and $1,140.000 of
variable-rate commitments. These commitments are at prevailing market
rates and terms. Interest rates on fixed-rate loan commitments were from
6.125% to 9.0% and 6.0% to 9.125% at December 31, 1997 and December 31,
1996, respectively. No value is placed 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.
Unused consumer lines of credit were $8,948,000 and $8,219,000 at December
31, 1997 and 1996, respectively.
Commercial lines and letters of credit and other loan commitments were
$7,369,000 and $3,172,000 at December 31, 1997 and 1996, respectively.
Commitments to sell loans to FNMA were $0 and $70,000 at December 31, 1997
and 1996, respectively. Commitments to purchase loans were $0 and $171,000
at December 31, 1997 and 1996, respectively.
LEASE COMMITMENTS - The Association leases various properties for original
periods ranging from 2 to 25 years. Rent expense for the year ended
December 31, 1997, the three months ended December 31, 1996, and the years
ended September 30, 1996 and 1995, was approximately $626,000, $141,000,
$545,000, and $535,000, respectively. At December 31, 1997, future minimum
lease payments under these operating leases are as follows:
--------------------------------------------------------------------------
Years Ending
December 31, Amount
--------------------------------------------------------------------------
(In Thousands)
1998 $ 576
1999 514
2000 475
2001 340
2002 208
Thereafter 1,163
---------- -------
Total $ 3,276
=======
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 December 31, 1997 and
1996, the Association had no outstanding advances.
CONTINGENCIES - The Association has completed its investigation of a
previously reported possible employee defalcation which had been occurring
for several years. The Association maintains insurance to cover possible
defalcation losses with a claim deductible of $200,000. A liability for
the amount of the deductible was established during the year ended
September 30, 1996. The Association notified its insurance company of the
potential claim and the insurance company acknowledged coverage. The
insurance company has completed its due diligence related to the claim.
The Association and the insurance company are currently negotiating the
final settlement of the claim. Management does not believe that the claim
will have any material adverse effect on its financial position or results
of its operations.
44
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. 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.
Pension expense for the plan amounted to $251,000, $63,000, $403,000, and
$578,000 for the year ended December 31, 1997, the three months ended
December 31, 1996, and the years ended September 30, 1996 and 1995,
respectively, and included the following components:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
For the Year For the Three
Ended Months Ended For the Years ended September 30,
December 31, 1997 December 31, 1996 1996 1995
---------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Service cost $ 550 $ 137 $ 551 $ 603
Interest cost 447 112 453 460
Actual return on assets (626) (156) (533) (417)
Net amortization and deferral (120) (30) (68) (68)
------ ------ ------ ------
Net periodic pension cost $ 251 $ 63 $ 403 $ 578
====== ====== ====== ======
</TABLE>
For the year ended December 31, 1997, the three months ended December 31,
1996, and the years ended September 30, 1996 and 1995, pension expense
amounts were based upon actuarial computations.
The following sets forth the funded status of the qualified plan at
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
December 31, December 31,
1997 1996
-----------------------------------------------------------------------------------------------------------------
(In Thousands)
Actuarial present value of benefit obligations:
<S> <C> <C>
Vested benefits $ 3,903 $ 3,641
Nonvested benefits 472 465
------- --------
Accumulated benefit obligation 4,375 4,106
Effect of anticipated future compensation levels and other events 2,702 2,755
------- --------
Projected benefit obligation 7,077 6,861
Fair value of assets held in the plan (estimated) 9,644 7,350
------- --------
Plan assets over projected benefit obligation $ 2,567 $ 489
======= ========
The excess plan assets consist of the following:
Unamortized net transition asset $ 339 $ 411
Accrued pension cost (962) (1,335)
Unrecognized net gain due to changes in assumptions 3,218 1,444
Prior service cost (28) (31)
------- --------
Total $ 2,567 $ 489
======= ========
</TABLE>
SUPPLEMENTAL RETIREMENT INCOME PLAN - During 1989, the Association's Board
of Directors established a nonqualified unfunded defined benefit plan for
certain officers. For the year ended December 31, 1997, the three months
ended December 31, 1996, and the years ended September 30, 1996 and 1995,
the net periodic expense for the officers' plan totaled $54,000, $13,000,
$60,000, and $65,000, respectively. The projected benefit obligation as of
December 31, 1997 and 1996 was estimated at $480,000 and $388,000,
respectively.
45
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The actuarial present value of benefit obligations at December 31, 1997
and 1996 was as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
December 31, December 31,
1997 1996
-----------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
Projected benefit obligation $ 480 $ 388
Prior service cost 33 41
Unrecognized net gains 40 86
Accrued retirement plan cost 553 515
Prior years accrual (515) (506)
Employer contributions 16 4
------ ------
Net periodic retirement plan expense $ 54 $ 13
====== ======
</TABLE>
ACTUARIAL ASSUMPTIONS - Actuarial assumptions represent estimates of
future experience based on the characteristics of the particular plan and
its covered employees. The actuarial assumptions used in the pension plan
and retirement plan valuations were as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
Year Ended Three Months Ended Years Ended
December 31, December 31, September 30,
1997 1996 1996 1995
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Discount rate 7.00% 6.75% 6.50% 6.50%
Asset rate 8.50% 8.50% 8.00% 8.00%
Salary scale 5.00% 5.00% 5.00% 6.00%
</TABLE>
Bankshares and the Association do not provide any material postretirement
or postemployment benefits.
EMPLOYEE STOCK OWNERSHIP PLAN - As of December 31, 1997, the Employee
Stock Ownership Plan ("ESOP") has an outstanding loan balance of
$1,424,000 related to the purchase of 190,388 shares of common stock in
the open market. Collateral for the loan is the common stock purchased by
the ESOP. Payment of the loan is 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 7.96% at December 31, 1997.
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 year ended December 31, 1997, the
three months ended December 31, 1996, and the years ended September 30,
1996 and 1995, compensation expense related to the ESOP was $707,000,
$183,000, $556,000, and $272,000, respectively.
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.
46
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
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 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, 88,900 shares were issued from authorized but
unissued shares of 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
$423,000 at December 31, 1997 is reflected as a reduction of shareholders'
equity. Compensation expense related to the Recognition Plan was $185,000,
$46,000, $130,000 and $148,000 for the year ended December 31, 1997, the
three months ended December 31, 1996, and the years ended September 30,
1996 and 1995, respectively.
STOCK OPTION PLAN - The Association has a stock option plan for the
benefit of its directors, officers, and other key employees. The number of
shares of Bankshares' 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:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
Option Price
----------------------------------
Number of Average
Options Price Per Aggregate
Outstanding Share Price
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Options Outstanding:
Balance - September 30, 1995 222,950 $ 11.125 $ 2,480,319
Granted - - -
Exercised (1,220) $ 11.125 (13,573)
Canceled (4,880) $ 11.125 (54,290)
------- -----------
Balance - September 30, 1996 216,850 2,412,456
Granted - - -
Exercised - - -
Canceled - -
------- -----------
Balance - December 31, 1996 216,850 2,412,456
Granted 7,500 $ 19.016 142,617
Exercised (4,800) $ 11.125 (53,400)
Canceled - - -
------- -----------
Balance - December 31, 1997 219,550 $ 2,501,673
======= ===========
</TABLE>
Options exercisable at December 31, 1997 and 1996, and September 30, 1996
and 1995 were 84,820, 43,370, 43,370, and 0, respectively. Bankshares
adopted the disclosure-only option under SFAS No. 123, "Accounting for
Stock-based Compensation" as of January 1, 1997. The fair value of options
granted under the stock option plan during the fiscal year ended December
31, 1997 was estimated using the Binary Option Pricing Model with the
following assumptions used:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
Number of Exercise Fair Value Risk Free Expected Expected Dividend
Grant date Options Price of Options Interest Rate Life (Years) Volatility Yield
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
01/18/97 7,500 $19.016 $5.25 6.37% 5 15.36% $2.67
</TABLE>
47
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Had compensation cost for the stock options been determined based on the
fair value at the grant date for awards under those plans consistent with
the method of SFAS No. 123, Bankshares' net income and earnings per share
for the year ended December 31, 1997 would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
For the Year Ended
December 31, 1997
-----------------------------------------------------------------------------------------------------------------
<S> <C>
Net income
As reported $ 5,356,000
Pro forma $ 5,332,000
Basic earnings per share
As reported $ 1.09
Pro forma $ 1.08
</TABLE>
15. 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"), predecessor to the OTS. 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
December 31, 1997 and 1996 was 5.62% and 6.20%, respectively. The
unamortized discount at December 31, 1997 and 1996 was $5,439,000 and
$5,929,000, respectively. Principal and interest payments are due
quarterly. During the year ended December 31, 1997, the three months ended
December 31, 1996, and the years ended September 30, 1996 and 1995,
approximately $490,000, $123,000, $496,000, and $498,000, respectively, of
the discount was accreted.
At December 31, 1997 and 1996, the Association held $13,039,000 and
$11,701,000 (net of discounts of $10,161,000 and $11,499,000),
respectively, of Salomon Brothers Certificates of Accrual on Treasury
Securities ("CATS") which were purchased at the time of issuing the Bond.
The accrual of interest on the CATS offsets the discount amortization of
the Bond. The CATS are included in United States Government and agency
obligations described in Note 3 to the consolidated financial statements.
The Bond at December 31, 1997 was repayable as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
Years Ending Amount
December 31, (In Thousands)
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
1998 $ 1,387
1999 1,387
2000 1,387
2001 1,387
2002 1,387
2003 and after 14,837
-------
Total 21,772
Less unamortized discount 5,439
-------
Total mortgage-backed bond $16,333
=======
</TABLE>
48
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. REGULATORY RESTRICTIONS ON RETAINED INCOME AND REGULATORY CAPITAL
REQUIREMENT
The Association is subject to various regulatory capital requirements
administered by the 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 Bankshares' 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
December 31, 1997, that the Association meets all capital adequacy
requirements to which it is subject.
As of December 31, 1997, 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.
The Association is required to report capital ratios unconsolidated with
Bankshares. The Association's actual capital amounts and ratios are
presented in the following tables:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
To be Considered
For Well Capitalized
Capital Adequacy for Prompt
Actual Purposes Action Provisions
--------------------------------------------------------------
Ratio Amount Ratio Amount Ratio Amount
------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
As of December 31, 1997:
<S> <C> <C> <C> <C> <C> <C>
Total capital ( to Risk-weighted Assets) 18.4% $70,048 8.0% $30,416 10.0% $38,020
Core (Tier 1) Capital (to Adjusted Tangible Assets) 9.8 70,681 3.0 21,609 5.0 36,014
Tangible Capital (to Tangible Assets) 9.8 70,681 1.5 10,804 N/A N/A
Core (Tier 1) Capital (to Risk-weighted Assets) 18.6 70,681 4.0 15,208 6.0 22,812
As of December 31, 1997, tangible assets, adjusted tangible assets, and
risk-weighted assets were $720,284,000, $720,284,000, and $380,197,000,
respectively $720,284,000, and $380,197,000, respectively.
As of December 31, 1996:
Total capital ( to Risk-weighted Assets) 24.7% $78,845 8.0% $25,492 10.0% $31,865
Core (Tier 1) Capital (to Adjusted Tangible Assets) 11.8 77,187 3.0 19,688 5.0 32,814
Tangible Capital (to Tangible Assets) 11.8 77,187 1.5 9,844 N/A N/A
Core (Tier 1) Capital (to Risk-weighted Assets) 24.2 77,187 4.0 12,746 6.0 19,119
As of December 31, 1996, tangible assets, adjusted tangible assets, and
risk-weighted assets were $656,277,000, $656,277,000, and $318,649,000,
respectively.
</TABLE>
49
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
For the Year For the Three For the Years
Ended Months Ended Ended
December 31, December 31, September 30,
1997 1996 1996 1995
-------------------------------------------------------------------------------------------------------------------
(In Thousands)
Supplemental disclosure of cash flow information:
<S> <C> <C> <C> <C>
Cash paid for income taxes $ 2,836 $ 220 $ 1,877 $ 3,200
========= ======== ======== ========
Cash paid for interest on deposits and other
borrowings $ 27,959 $ 6,255 $ 22,146 $ 17,949
========= ======== ======== ========
Supplemental schedule of noncash investing :
and financing activities:
Real estate acquired in settlement of loans $ 558 $ 78 $ 400 $ 1,394
========= ======== ======== ========
Distribution of Common Stock to fund the Recognition
and Retention Plan $ - $ - $ - $ 989
========= ======== ======== =========
</TABLE>
18. 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 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 could be realized in a
current transaction.
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 checking accounts,
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 December 31, 1997
and 1996:
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.
50
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 December 31, 1997 and 1996, 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 financial instruments were as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
December 31, 1997 December 31, 1996
Carrying Fair Carrying Fair
Value Value Value Value
----------------------------------------------------------------------------------------------------------------------
(In Thousands)
Financial assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 25,954 $ 25,954 $ 42,442 $ 42,442
Investments - held to maturity 21,388 25,901 22,139 26,266
Securities available for sale 142,269 142,269 123,152 123,152
Mortgage-backed and related securities 46,413 46,938 53,405 53,880
Loans receivable - net 451,709 461,650 389,040 397,627
Financial liabilities:
Deposits $550,708 $548,321 $513,709 $511,327
Mortgage-backed bond 16,333 16,333 17,230 17,230
Advances from FHLB 57,341 57,246 34,763 34,875
ESOP borrowings 1,424 1,424 1,915 1,915
</TABLE>
19. CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following condensed statements of financial condition as of December
31, 1997 and 1996, and the condensed statements of operations and
statements of cash flows for the year ended December 31, 1997, the three
months ended December 31, 1996, and the years ended September 30, 1996 and
1995 should be read in conjunction with the consolidated financial
statements and the related notes. Since the organization of Bankshares was
accounted for in a manner similar to a pooling of interests, these
statements have been presented as if Bankshares was in existence for all
periods covered by the consolidated financial statements.
51
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
STATEMENTS OF FINANCIAL CONDITION
---------------------------------------------------------------------------------------------------------------------
At December 31,
1997 1996
---------------------------------------------------------------------------------------------------------------------
(In Thousands)
Assets:
<S> <C> <C>
Cash and cash equivalents $11,243 $ -
Investment in Association 70,527 76,578
------- -------
Total assets $81,770 $76,578
======= =======
Liabilities $ 511 $ 459
Shareholders' equity 81,259 76,119
------- -------
Total liabilities and shareholders' equity $81,770 $76,578
======= =======
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
---------------------------------------------------------------------------------------------------------------------
For the For the Three
Year Ended Months Ended For the Years Ended
December 31, December 31, September 30,
1997 1996 1996 1995
--------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Income $ - $ - $ - $ -
Expenses 41 - - -
------- ------- ------- -------
Income before income taxes and equity in earnings - - -
of Association (41) - - -
Income tax benefit 15 - - -
------- ------- ------- -------
Income before equity in earnings of Association (26) - - -
Equity in earnings of Association 5,382 1,160 3,915 4,574
------- ------- ------- -------
Net income $ 5,356 $ 1,160 $ 3,915 $ 4,574
======= ======= ======= =======
STATEMENTS OF CASH FLOWS
---------------------------------------------------------------------------------------------------------------------
For the For the Three
Year Ended Months Ended For the Years Ended
December 31, December 31, September 30,
1997 1996 1996 1995
---------------------------------------------------------------------------------------------------------------------
(In Thousands)
Cash flows from operating activities:
Net income $ 5,356 $ 1,160 $ 3,915 $ 4,574
Adjustments to reconcile net income to net cash
used for operating activities:
Equity in earnings of Association (5,382) (1,160) (3,915) (4,574)
Other (15) - - -
-------- ------- ------- -------
Net cash used for operating activities (41) - - -
-------- ------- ------- -------
Cash flows from investing activities:
Dividends received from Association 13,260 448 1,618 902
-------- ------- ------- -------
Net cash provided by investing activities 13,260 448 1,618 902
-------- ------- ------- -------
Cash flows from financing activities:
Dividends paid (1,976) (448) (1,618) (902)
-------- ------- ------- -------
Net cash used for financing activities (1,976) (448) (1,618) (902)
-------- ------- ------- -------
Cash and cash equivalents, beginning of period - - - -
Cash and cash equivalents, end of period $ 11,243 $ - $ - $ -
======== ======= ======= =======
</TABLE>
Payment of dividends to Bankshares by the Association is subject to
various limitations by bank regulatory agencies. Undistributed earnings of
the Association available for distribution as dividends under these
limitations were $30,773,000 and $27,203,000 as of December 31, 1997 and
1996, respectively.
52
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
--------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
Year ended December 31, 1997:
<S> <C> <C> <C> <C>
Interest income $ 12,020 $ 12,557 $ 12,894 $ 12,845
Interest expense 6,448 6,813 7,036 7,093
--------- -------- -------- --------
Net interest income 5,572 5,744 5,858 5,752
Provision for loan losses 30 53 138 43
Other income 891 971 1,522 801
Operating expense 4,293 4,512 4,973 4,783
Provision for income taxes 789 767 720 654
--------- -------- -------- --------
Net income $ 1,351 $ 1,383 $ 1,549 $ 1,073
========= ======== ======== ========
Basic earnings per share $ 0.27 $ 0.28 $ 0.31 $ 0.22
========= ======== ======== ========
Diluted earnings per share $ 0.27 $ 0.27 $ 0.31 $ 0.21
========= ======== ======== ========
Quarter Ended
-------------------------------------------------------------------------------------------------------------------
December 31, 1995 March 31, June 30, September 30 December 31,
-------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
Year ended December 31, 1996
and three months ended
December 31, 1995
Interest income $ 10,205 $ 10,748 $ 11,091 $ 11,845 $ 11,896
Interest expense 5,349 5,834 5,724 5,952 6,378
Net interest income 4,856 4,914 5,367 5,893 5,518
Provision for loan losses 30 2 38 28 243
Other income 1,080 967 370 927 1,225
Operating expense 4,189 3,992 4,277 7,142 4,644
Provision (benefit) for
income taxes 667 619 (361) (164) 696
-------- --------- -------- -------- --------
Net income (loss) $ 1,050 $ 1,268 $ 1,783 $ (186) $ 1,160
======== ========= ======== ======== ========
Basic earnings (loss) per share $ 0.22 $ 0.26 $ 0.37 $ (0.04) $ 0.24
======== ========= ======== ======== ========
Diluted earnings (loss) per share $ 0.22 $ 0.26 $ 0.36 $ (0.04) $ 0.23
======== ========= ======== ======== ========
</TABLE>
The quarter ended June 30, 1996 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 quarter ended September 30, 1996 results of operations include a
one-time special assessment of $2,800,000 for the recapitalization of the
SAIF administered by the FDIC.
53
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY SAVINGS BANKSHARES, INC.
CORPORATE INFORMATION
<S> <C> <C>
CORPORATE HEADQUARTERS AUDITORS
660 U.S. Highway One Deloitte & Touche LLP
North Palm Beach, FL 33408 1645 Palm Beach Lakes Boulevard, Suite 900
www.communitysavings.com West Palm Beach, FL 33401
SPECIAL COUNSEL
ANNUAL MEETING Elias, Matz, Tiernan & Herrick L.L.P.
April 22, 1998, 1:30 p.m. 734 15th Street, NW, 12th Floor
Embassy Suites PGA, 4350 PGA Boulevard Washington, DC 20005
Palm Beach Gardens, FL 33410
FORM 10-K
REGISTRAR & TRANSFER AGENT A copy of the Company's Annual Report on
ChaseMellon Shareholder Services, L.L.C. Form 10-K, as filed with the Securities and Exchange
Overpeck Centre, 85 Challenger Road Commission, is available without charge.
Ridgefield Park, NJ 07660
(800) 526-0801 www.chasemellon.com STOCK LISTING
The Common Stock of Community Savings Bankshares, Inc.
DIVIDEND SERVICES is traded on the Nasdaq National Market
Dividend Reinvestment and Optional under the symbol CMSV.
Cash Investment Plan - provides shareholders
a regular way of investing cash dividends in SHAREHOLDER RELATIONS
additional shares and investing optional cash payments Deborah M. Rousseau, Corporate Secretary
without payment of brokerage commissions. Shana P. Robinson, Assistant Corporate Secretary
.
SHAREHOLDER ACCOUNT ASSISTANCE INVESTOR RELATIONS
Shareholders who wish to change the name James B. Pittard, Jr., Chief Executive Officer
address or ownership of stock or report lost Larry J. Baker, CPA, Chief Financial Officer
certificates should contact the Registrar
and Transfer Agent at the address (561) 881-2212
or phone number above. (800) 879-0112 (Florida)
</TABLE>
The Association's Common Stock began trading on October 24, 1994. On October 1,
1997 as a result of the reorganization, Bankshares' common stock was substituted
for that of the Association. As of December 31, 1997, there were 5,094,920
shares of Common Stock outstanding and 931 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 table sets forth
quarter ending book value, high, low, and closing trade prices, and dividend per
share information.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Book Stock Prices Dividend
------------------------------------------------------------
Value High Low Close Per Share
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
December 31, 1997 $16.39 $39.75 $32.25 $35.38 $.2250
September 30, 1997 $16.26 $37.25 $21.75 $36.25 $.2250
June 30, 1997 $15.95 $22.50 $19.63 $22.00 $.2250
March 31, 1997 $15.57 $20.63 $18.50 $19.63 $.2250
December 31, 1996 $15.50 $20.75 $16.25 $20.50 $.2000
September 30, 1996 $15.33 $17.00 $15.75 $16.75 $.2000
June 30, 1996 $15.38 $16.00 $14.25 $16.00 $.2000
March 31, 1996 $15.35 $17.00 $15.50 $15.50 $.1750
December 31, 1995 $15.35 $18.38 $16.75 $17.00 $.1750
</TABLE>
54
EXHIBIT 23
CONSENT OF DELOITTE & TOUCHE LLP
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration No. 333-38971 of
Community Savings Bankshares, Inc. on Form S-8 of our report dated February 20,
1998, appearing in this Annual Report on Form-10K of Community Savings
Bankshares, Inc. for the year ended December 31, 1997.
/s/ DELOITTE & TOUCHE LLP
Certified Public Accountants
West Palm Beach, Florida
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
Exhibit 27
</LEGEND>
<CIK> 0001045934
<NAME> COMMUNITY SAVINGS BANKSHARES, INC.
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 12,333
<INT-BEARING-DEPOSITS> 13,621
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 142,269
<INVESTMENTS-CARRYING> 21,388
<INVESTMENTS-MARKET> 25,585
<LOANS> 451,709
<ALLOWANCE> 2,662
<TOTAL-ASSETS> 720,133
<DEPOSITS> 550,708
<SHORT-TERM> 0
<LIABILITIES-OTHER> 13,068
<LONG-TERM> 75,098
0
0
<COMMON> 5,095
<OTHER-SE> 76,164
<TOTAL-LIABILITIES-AND-EQUITY> 720,133
<INTEREST-LOAN> 33,490
<INTEREST-INVEST> 14,870
<INTEREST-OTHER> 1,956
<INTEREST-TOTAL> 50,316
<INTEREST-DEPOSIT> 22,648
<INTEREST-EXPENSE> 27,390
<INTEREST-INCOME-NET> 22,926
<LOAN-LOSSES> 264
<SECURITIES-GAINS> (8)
<EXPENSE-OTHER> 18,561
<INCOME-PRETAX> 8,286
<INCOME-PRE-EXTRAORDINARY> 5,356
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,356
<EPS-PRIMARY> 1.09
<EPS-DILUTED> 1.06
<YIELD-ACTUAL> 7.41
<LOANS-NON> 1,379
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,902
<ALLOWANCE-OPEN> 2,542
<CHARGE-OFFS> (144)
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 2,662
<ALLOWANCE-DOMESTIC> 2,662
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
