UNITED STATES
SECURITIES & EXCHANGE COMMISSION
WASHINGTON, DC 20552
---------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: JUNE 30, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to ______________________
Commission File Number 000-29460
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COMMUNITY SAVINGS BANKSHARES, INC.
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
UNITED STATES 65-0780334
- ---------------------------------------- --------------------------------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
660 US Highway One
North Palm Beach, FL 33408
- ---------------------------------------- --------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (561) 881-2212
--------------
Indicate by check whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of August 11, 1998, there were 5,103,960 shares of the Registrant's
common stock outstanding.
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----------------------------- ----
<S> <C> <C>
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
June 30, 1998 (Unaudited) and December 31, 1997 2
Consolidated Statements of Operations (Unaudited) for the three and six months
ended June 30, 1998 and 1997 3
Consolidated Statements of Comprehensive Income (Unaudited) for the three and six
months ended June 30, 1998 and 1997 4
Consolidated Statements of Changes in Shareholders' Equity
for the six months ended June 30, 1998 (Unaudited) and
for the year ended December 31, 1997 5
Consolidated Statements of Cash Flows (Unaudited) for the six months
ended June 30, 1998 and 1997 6
Notes to Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
PART II. OTHER INFORMATION
- --------------------------
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Default Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 22
Signature Page 23
</TABLE>
1
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AT JUNE 30, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
--------- ---------
(Unaudited)
(In thousands)
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and amounts due from depository institutions $ 16,477 $ 12,333
Interest-bearing deposits 30,948 13,621
--------- ---------
Total cash and cash equivalents 47,425 25,954
Securities available for sale 91,316 142,269
Investments - held to maturity 21,443 21,388
Mortgage-backed and related securities - held to maturity 41,884 46,413
Loans receivable, net of allowance for loan losses 527,375 451,709
Accrued interest receivable 2,725 3,162
Office properties and equipment, net 22,157 20,206
Real estate owned, net 711 592
Federal Home Loan Bank stock - at cost 3,782 3,264
Other assets 6,670 5,176
--------- ---------
Total assets $ 765,488 $ 720,133
========= =========
LIABILITIES
Deposits $ 574,383 $ 550,708
Mortgage-backed bond - net 15,883 16,333
Advances from Federal Home Loan Bank 75,630 57,341
Employee Stock Ownership Plan borrowing -- 1,424
Advances by borrowers for taxes and insurance 5,467 931
Other liabilities 8,077 9,101
Deferred income taxes 2,970 3,036
--------- ---------
Total liabilities 682,410 638,874
--------- ---------
SHAREHOLDERS' EQUITY
Preferred stock ($1 par value): 10,000,000 authorized shares, no shares issued -- --
Common stock ($1 par value): 20,000,000 authorized shares; 5,100,120 and
5,094,920 shares outstanding at June 30, 1998 and December 31, 1997,
respectively 5,100 5,095
Additional paid in capital 30,621 30,278
Retained income - substantially restricted 49,347 47,887
Common stock purchased by Employee Stock Ownership Plan (1,227) (1,424)
Common stock issued to Recognition and Retention Plan (330) (423)
Unrealized decrease in market value of assets available for sale, net of
income taxes (433) (154)
--------- ---------
Total shareholders' equity 83,078 81,259
--------- ---------
Total liabilities and shareholders' equity $ 765,488 $ 720,133
========= =========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
For the three months For the six months
ended June 30, ended June 30,
1998 1997 1998 1997
-------- -------- -------- --------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C>
Interest income:
Real estate loans $ 9,453 $ 7,791 $ 18,377 $ 15,479
Consumer and commercial business loans 467 410 913 817
Investment securities and securities available for sale 2,111 2,909 4,754 5,280
Mortgage-backed and related securities 794 1,021 1,637 2,010
Interest-earning deposits 644 426 1,146 991
-------- -------- -------- --------
Total interest income 13,469 12,557 26,827 24,577
-------- -------- -------- --------
Interest expense:
Deposits 6,051 5,661 11,976 11,031
Advances from Federal Home Loan Bank and borrowings
other borrowings 1,305 1,152 2,679 2,229
-------- -------- -------- --------
Total interest expense 7,356 6,813 14,655 13,260
-------- -------- -------- --------
Net interest income 6,113 5,744 12,172 11,317
Provision for loan losses 96 53 213 83
-------- -------- -------- --------
Net interest income after provision for loan losses 6,017 5,691 11,959 11,234
-------- -------- -------- --------
Other income:
Servicing income and other fees 47 104 104 158
NOW account and other customer fees 855 829 1,677 1,608
Miscellaneous (81) 38 (25) 96
-------- -------- -------- --------
Total other income 821 971 1,756 1,862
-------- -------- -------- --------
Operating expense:
Employee compensation and benefits 2,633 2,122 4,994 4,253
Occupancy and equipment 1,243 1,226 2,527 2,420
Net (gain) loss on real estate owned 1 (9) 20 (3)
Advertising and promotion 296 238 467 432
Federal deposit insurance premium 86 83 171 99
Miscellaneous 623 852 1,667 1,604
-------- -------- -------- --------
Total operating expense 4,882 4,512 9,846 8,805
-------- -------- -------- --------
Income before provision for income taxes 1,956 2,150 3,869 4,291
Provision for income taxes 677 767 1,358 1,556
-------- -------- -------- --------
Net income $ 1,279 $ 1,383 $ 2,511 $ 2,735
======== ======== ======== ========
Basic earnings per share $ 0.26 $ 0.28 $ 0.51 $ 0.55
======== ======== ======== ========
Diluted earnings per share $ 0.25 $ 0.27 $ 0.49 $ 0.54
======== ======== ======== ========
</TABLE>
3
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
For the three months For the six months
ended June 30, ended June 30,
1998 1997 1998 1997
------- ------- ------- -------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C>
Net income $ 1,279 $ 1,383 $ 2,511 $ 2,735
Other comprehensive income, net of tax:
Change in unrealized increase (decrease) in market
value of assets available for sale (133) 1,015 (279) 483
------- ------- ------- -------
Comprehensive income $ 1,146 $ 2,398 $ 2,232 $ 3,218
======= ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
Unrealized
Increase
(Decrease) in
Retained Employee Recognition Market Value
Additional Income- Stock and of Assets
Common Paid In Substantially Ownership Retention Available for
Stock Capital Restricted Plan Plan Sale Total
====================================================================================
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - 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
Net income for the six months ended
June 30, 1998 -- -- 2,511 -- -- -- 2,511
Stock options exercised 5 45 -- -- -- -- 50
Unrealized decrease in market value
of assets available for sale
(net of income taxes) -- -- -- -- -- (279) (279)
Amortization of deferred
compensation - Employee Stock
Ownership Plan and Recognition
and Retention Plan -- 298 -- 197 93 -- 588
Dividends declared -- -- (1,051) -- -- -- (1,051)
------------------------------------------------------------------------------------
Balance-June 30, 1998 (unaudited) $ 5,100 $ 30,621 $ 49,347 $ (1,227) $ (330) $ (433) $ 83,078
====================================================================================
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
For the six months
ended June 30,
1998 1997
-------- --------
(Unaudited)
(In thousands)
<S> <C> <C>
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Net income $ 2,511 $ 2,735
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 720 677
ESOP and Recognition and Retention Plan compensation expense 588 371
Accretion of discounts, amortization of premiums, and other deferred yield items (1,531) (766)
Provision for loan losses 213 83
Provision for net gains on sales of real estate owned (15) (2)
Amortization of discount on mortgage-backed bond 243 246
Net loss (gain) on sale of loans and other assets 1 (14)
Decrease (increase) in accrued interest receivable 437 (526)
Increase in other assets (1,494) (1,967)
Increase in loans available for sale -- (10)
(Decrease) increase in other liabilities (1,024) 526
-------- --------
Net cash provided by operating activities 649 1,353
-------- --------
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
Loan originations and principal payments on loans-net (37,633) (18,406)
Principal payments received on mortgage-backed and related securities
and securities available for sale 17,004 6,389
Principal payments received on investments-held to maturity 743 939
Purchases of
Loans (38,307) (2,590)
Securities available for sale -- (41,309)
Federal Home Loan Bank stock (518) (399)
Office property and equipment (2,674) (2,756)
Proceeds from sales of:
Office properties and equipment 1 78
Real estate acquired in settlement of loans 522 189
Proceeds from calls of securities available for sale 38,381 12,000
Proceeds from maturities of investments-held to maturity -- 300
-------- --------
Other investing (79) (186)
-------- --------
Net cash used for investing activities (22,560) (45,751)
-------- --------
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
Net increase (decrease) in:
NOW accounts, demand deposits, and savings accounts 17,571 3,445
Certificates of deposit 6,104 23,379
Advances from Federal Home Loan Bank 22,000 15,000
Repayment of advances from Federal Home Loan Bank (3,711) (3,711)
Advances by borrowers for taxes and insurance 4,536 3,776
ESOP loan (1,424) (196)
Proceeds from exercise of stock options 50 --
Payments made on mortgage-backed bond (693) (694)
Dividends paid (1,051) (973)
-------- --------
Net cash provided by financing activities 43,382 40,026
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 21,471 (4,372)
CASH AND CASH EQUIVALENTS, beginning of period 25,954 42,442
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 47,425 $ 38,070
======== ========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited consolidated interim financial statements for Community
Savings Bankshares, Inc. ("Bankshares") and its wholly-owned subsidiary
Community Savings, F. A. (the "Association"), reflect all adjustments
(consisting only of normal recurring accruals) which, in the opinion of
management, are necessary to present fairly Bankshares' consolidated
financial condition and the consolidated results of operations and cash
flows for interim periods. The results for interim periods are not
necessarily indicative of trends or results to be expected for the full
year. All weighted interest rates are presented on an annualized basis.
The unaudited consolidated interim financial statements and notes should
be read in conjunction with the audited consolidated financial statements
and the notes thereto included in Bankshares' Annual Report to
Shareholders for the year ended December 31, 1997. As the common stock of
the Association represents Bankshares' sole investment on a consolidated
basis, the interim periods presented herein are comparable to prior year
financial data.
2. REORGANIZATION TO A MID-TIER HOLDING COMPANY AND CONVERSION TO STOCK FORM
OF OWNERSHIP
On September 30, 1997, the Association completed its reorganization into
the two-tier form of mutual holding company ownership. Pursuant to the
reorganization, the Association is now the wholly owned subsidiary of the
federally chartered mid-tier stock holding company, Bankshares. Bankshares
is the majority owned subsidiary of ComFed, M.H.C. ("ComFed"), a federally
chartered mutual holding company. 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, substantially all of its net income is derived from the
Association.
3. NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"), issued by FASB in June 1998, must be adopted
by Bankshares as of January 1, 2000. This Statement establishes accounting
and reporting standards for derivative financial instruments and for
hedging activities. Upon adoption of the Statement, all derivatives must
be recognized at fair value as either assets or liabilities in the
statement of financial position. Changes in the fair value of derivatives
not designated as hedging instruments are to be recognized currently in
earnings. Gains or losses on derivatives designated as hedging instruments
are either to be recognized currently in earnings or are to be recognized
as a component of other comprehensive income, depending on the intended
use of the derivatives and the resulting designations. Upon adoption,
retroactive application of this Statement to financial statements of prior
periods is not permitted. Bankshares is currently in the process of
evaluating the impact of SFAS No. 133 on its consolidated financial
position and results of operations.
7
<PAGE>
4. LOANS RECEIVABLE
Loans receivable consists of the following:
June 30, December 31,
1998 1997
--------- ---------
(Unaudited)
(In thousands)
Real estate loans:
Residential 1-4 family $ 419,069 $ 339,117
Residential 1-4 family held for sale
(at lower of cost or fair value) -- --
Residential construction 42,807 32,828
Non-residential construction 4,217 2,022
Land 12,409 17,117
Multi-family 8,739 8,800
Commercial 46,147 59,220
--------- ---------
Total real estate loans 533,388 459,104
--------- ---------
Non-real estate loans:
Consumer 15,191 15,694
Commercial business 5,508 3,530
--------- ---------
Total non-real estate loans 20,699 19,224
--------- ---------
Total loans receivable 554,087 478,328
Less:
Undisbursed loan proceeds 25,134 24,163
Unearned discount (premium) and
net deferred loan fees (costs) (1,189) (206)
Allowance for loan losses 2,767 2,662
--------- ---------
Total loans receivable, net $ 527,375 $ 451,709
========= =========
The amount of loans which had ceased accruing interest aggregated
approximately $1,366,000 and $1,379,000 at June 30, 1998 and December 31,
1997, respectively. The amount of interest not accrued related to these
loans was approximately $63,000 and $86,000 at June 30, 1998 and December
31, 1997, respectively.
8
<PAGE>
An analysis of the changes in the allowance for loan losses is as follows:
For the six months
ended June 30,
1998 1997
------ ------
(Unaudited)
(In thousands)
Balance, beginning of period $2,662 $2,542
Provision charged to income 213 83
Losses charged to allowance (108) (23)
Recoveries -- --
------ ------
Balance, end of period $2,767 $2,602
====== ======
The Association accounts for impaired loans in accordance with SFAS No.
114 "Accounting by Creditors for Impairment of a Loan" as amended by SFAS
No. 118 "Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosures". There were no impaired loans at June 30,
1998. Impaired loans totaled $1,044,000 with a related allowance of
$252,000 at December 31, 1997.
5. REAL ESTATE OWNED
Real estate owned consists of the following:
June 30, December 31,
1998 1997
---- ----
(Unaudited)
(In thousands)
Real estate owned $752 $633
Less allowance for loss 41 41
---- ----
Total real estate owned $711 $592
==== ====
Changes in allowance for loss on real estate owned are as follows:
For the six months
ended June 30,
1998 1997
---- ----
(Unaudited)
(In thousands)
Balance, beginning of period $41 $92
Provision charged to income -- --
Losses charged to allowance -- (43)
--- ---
Balance, end of period $41 $49
=== ===
9
<PAGE>
6. CONTINGENCIES
There are various claims and lawsuits in which Bankshares or the
Association are periodically involved incidental to its business. In the
opinion of management, no material loss is expected from any of such
pending claims or lawsuits. Reference is made to Note 13 in the Notes to
Consolidated Financial Statements included in Bankshares' 1997 Annual
Report.
7. SUBSEQUENT EVENTS
On July 29, 1998, the Boards of Directors of ComFed, Bankshares and the
Association unanimously adopted a plan of conversion and agreement and
plan of reorganization (the "Plan of Conversion"), pursuant to which the
Association will reorganize from the two-tier mutual holding company
structure to the stock holding company structure. The Association amended
the Plan of Conversion on August 13, 1998. Pursuant to the Plan of
Conversion, (i) ComFed and Bankshares will be merged with and into the
Association, with the Association as survivor, (ii) the Association will
become a wholly owned subsidiary of a to-be-formed Delaware corporation
("New Holding Company"), (iii) the shares of common stock of Bankshares
held by persons other than ComFed (whose shares will be cancelled) will be
converted into shares of common stock of the New Holding Company pursuant
to an exchange ratio designed to preserve the percentage ownership
interests of such persons, and (iv) the New Holding Company will offer and
sell shares of its common stock to members of ComFed, shareholders of the
Association and others in the manner and subject to the priorities set
forth in the Plan of Conversion.
The transactions contemplated by the Plan of Conversion are subject to
approval of Bankshares' shareholders, the members of ComFed, and various
regulatory agencies.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
In the following discussion, references to "Bankshares" relate to Community
Savings Bankshares, Inc. together with its subsidiary, Community Savings, F. A.(
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 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 June 30, 1998, ComFed
owned 2,620,144 shares of Bankshares' common stock with the remaining 2,479,976
shares owned by 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, commercial loans, mortgage-backed and related securities ("MBS"),
and investment securities. The Association's plan is to operate as a
well-capitalized, profitable and independent institution. The Association
currently exceeds all regulatory capital requirements. The Association's
profitability is highly dependent on its net interest income. The components
that determine net interest income are the amount of interest-earning assets and
interest-bearing liabilities, together with the rates earned or paid on such
interest rate-sensitive instruments. The Association is sensitive to managing
interest rate risk exposure by better matching asset and liability maturities
and rates. This is accomplished while considering the credit risk of certain
assets. The Association maintains asset quality by utilizing comprehensive loan
underwriting standards and collection efforts as well as by primarily
originating or purchasing secured or guaranteed assets.
11
<PAGE>
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 and
interest-bearing deposits, which are a product of its operating, investing, and
financing activities.
The Association is required to maintain minimum levels of liquid assets as
defined by OTS regulations. This requirement, which varies from time to time
depending upon economic conditions and deposit flows, is based upon a percentage
of deposits and short-term borrowings. The required ratio currently is 4.0%. The
Association's liquidity ratio averaged 12.2% during the six months ended June
30, 1998 while liquidity ratios averaged 14.2% for the year ended December 31,
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 $30.6
million at June 30, 1998. Other assets qualifying for liquidity outstanding at
June 30, 1998 amounted to $14.8 million. For additional information about cash
flows from the operating, financing, and investing activities, see the unaudited
consolidated statements of cash flows included in the financial statements.
Liquidity management is both a daily and long-term function of business
management. If funds are required beyond the ability to generate them
internally, borrowing agreements exist with the FHLB which provide an additional
source of funds. FHLB advances totaled $75.6 million at June 30, 1998.
At June 30, 1998, outstanding loan commitments totaled $22.1 million, which
amount does not include the unfunded portion of loans in process. Certificates
of deposit scheduled to mature in less than one year totaled $241.2 million at
June 30, 1998. Based on prior experience, management believes that a significant
portion of such deposits will remain with the Association.
12
<PAGE>
FINANCIAL CONDITION
JUNE 30, 1998 COMPARED TO DECEMBER 31, 1997
The following table summarizes certain information relating to Bankshares'
financial condition at the dates indicated.
<TABLE>
<CAPTION>
June 30, December 31, Increase
1998 1997 (Decrease)
-------- -------- --------
(Unaudited)
(In thousands)
<S> <C> <C> <C>
Assets:
Total assets $765,488 $720,133 $ 45,355
Cash and cash equivalents 47,425 25,954 21,471
Securities portfolio:
Investments-held to maturity 21,443 21,388 55
Securities available for sale 91,316 142,269 (50,953)
Mortgage-backed and related securities-
held to maturity 41,884 46,413 (4,529)
-------- -------- --------
Total securities portfolio 154,643 210,070 (55,427)
======== ======== ========
Loans receivable, net 527,375 451,709 75,666
Real estate owned, net 711 592 119
Liabilities and Shareholders' Equity:
Total liabilities 682,410 638,874 43,536
Deposits 574,383 550,708 23,675
Federal Home Loan Bank advances 75,630 57,341 18,289
Shareholders' equity 83,078 81,259 1,819
</TABLE>
Total assets increased $45.4 million to $765.5 million at June 30, 1998, as
compared to $720.1 million at December 31, 1997 primarily due to an increase of
$75.7 million in the net loan portfolio to $527.4 million at June 30, 1998 from
$451.7 million at December 31, 1997, as a result of the Association's continued
emphasis on expanding its lending activities. The securities portfolio (which
includes securities available for sale, investment securities, and MBS)
decreased $55.4 million to $154.7 million at June 30, 1998 from $210.1 million
at December 31, 1997. The increase in total assets was funded primarily by a
$23.7 million net increase in deposits to $574.4 million at June 30, 1998 from
$550.7 million at December 31, 1997. In addition, FHLB advances increased $18.3
million, totaling $75.6 million and $57.3 million at June 30, 1998 and December
31, 1997, respectively.
The securities portfolio's net decrease of $55.4 million primarily reflects
calls of $38.4 million of securities available for sale combined with scheduled
principal reductions and amortization of premiums and discounts amounting to
$17.0 million. As a result, cash and cash equivalents increased $21.5 million as
of June 30, 1998 as compared to December 31, 1997. Such funds will be utilized
to fund existing loan commitments and to support the Association's lending
activities.
13
<PAGE>
Loans receivable increased $75.7 million as a result of continued emphasis on
expanded lending activities. Loan originations of $110.2 million and purchases
of $38.3 million (consisting of whole loans secured by one- to four-family
residential properties) were offset in part by repayments and other adjustments
of $72.8 million.
Real estate owned increased $119,000 to $711,000 at June 30, 1998, from $592,000
at December 31, 1997, primarily due to foreclosures on 8 residential properties
during the period, partially offset by the sale of 9 foreclosed residential
properties.
Total liabilities increased $43.5 million to $682.4 million at June 30, 1998,
from $638.9 million at December 31, 1997. Total deposits increased by $23.7
million to $574.4 million at June 30, 1998 from $550.7 million at December 31,
1997. The increase in deposits primarily reflected increased retail deposits
resulting from special promotions of odd-term certificates as well as deposit
growth experienced at newer branch offices. Such increase also reflected the
Association's continued efforts to competitively price deposit accounts to
enhance its market share during the period. In addition, a net $18.3 million
increase in FHLB advances was used to partially fund the increase in the loan
portfolio.
Shareholders' equity increased to $83.1 million or $16.66 per share at June 30,
1998, from $81.3 million or $16.39 per share at December 31, 1997, reflecting
net income for the six months of $2.5 million, the receipt of proceeds totaling
$50,000 from the exercise of stock options, and the stock benefit plans accrual
totaling $588,000. Such increase was offset in part by the declaration during
the period of dividends totaling $1.1 million and a net decrease in the market
value of assets available for sale of $279,000. For further information, see the
unaudited consolidated statements of changes in shareholders' equity in the
accompanying consolidated financial statements.
The Association is required to report regulatory capital ratios unconsolidated
with Bankshares. The Association's actual regulatory capital amounts and ratios
at June 30, 1998 are as follows:
<TABLE>
<CAPTION>
To be Considered
Well
For Capitalized
Capital for Prompt
Adequacy Action
Actual Purposes Provisions
------ -------- ----------
Ratio Amount Ratio Amount Ratio Amount
----- ------ ----- ------ ----- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1998:
Total Risk-based Capital (to
Risk-weighted Assets) 18.1% $76,509 8.0% $33,913 10.0% $42,391
Core (Tier 1) Capital
(to Adjusted Tangible Assets) 9.6 73,742 4.0 22,972 5.0 32,287
Tangible Capital (to Tangible Assets) 9.6 73,742 1.5 11,486 N/A N/A
Core (Tier 1) Capital
(to Risk-weighted Assets) 17.4 73,742 4.0 16,956 6.0 25,434
</TABLE>
As of June 30, 1998, tangible assets, adjusted tangible assets, and
risk-weighted assets were $765.7 million, $765.7 million, and $423.9 million,
respectively.
14
<PAGE>
ASSET QUALITY
Loans 90 days past due are generally placed on non-accrual status. The
Association ceases to accrue interest on a loan once it is placed on non-accrual
status and interest accrued but unpaid at such time is charged against interest
income. Additionally, any loan for which it appears evident prior to being past
due 90 days that the collection of interest is in doubt is also placed on
non-accrual status. Real estate owned is carried at the lower of cost or fair
value, less cost to dispose. Management regularly reviews assets to determine
proper valuation. There were no restructured loans within the meaning of SFAS
No. 15 at June 30, 1998 or December 31, 1997.
The following table sets forth information regarding the delinquent loans and
foreclosed real estate at the dates indicated:
June 30, December 31,
1998 1997
------ ------
(In thousands)
Non-performing loans:
Residential real estate loans:
Loans 60 to 89 days delinquent $ 440 $ 492
Loans more than 90 days delinquent 1,201 1,344
------ ------
Total 1,641 1,836
------ ------
Commercial and multi-family real estate loans:
Loans 60 to 89 days delinquent 23 --
Loans more than 90 days delinquent 51 --
------ ------
Total 74 --
------ ------
Consumer and commercial business loans:
Loans 60 to 89 days delinquent 7 31
Loans more than 90 days delinquent 50 --
------ ------
Total 57 31
------ ------
Land
Loans 60 to 89 days delinquent -- 35
Loans more than 90 days delinquent 64 --
------ ------
Total 64 35
------ ------
Total non-performing loans 1,836 1,902
Real estate owned net of related allowance 711 592
Loans to facilitate sale of real estate owned 153 217
------ ------
Total non-performing assets and
loans to facilitate sale of real estate owned $2,700 $2,711
====== ======
15
<PAGE>
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 Audit Committee of 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 Year 2000 Committee which reports to the Strategic Planning
Committee and the Board of Directors on a monthly basis. 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
Year 2000 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.
As of June 30, 1998, the Association had contacted all of its commercial credit
customers regarding the customers' awareness of the Year 2000 issue. While no
assurance can be given that the customers will be Year 2000 compliant,
management believes that the customers are either addressing the appropriate
issues to insure compliance or that they are not faced with material Year 2000
issues.
The Association has completed its company-wide Year 2000 contingency plan.
Individual contingency plans concerning specific software and hardware issues
are currently being formulated.
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.
16
<PAGE>
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997
GENERAL
Net income for the quarter ended June 30, 1998 was $1.3 million, or $0.26 per
share, a $104,000 decrease from $1.4 million, or $0.28 per share, for the
quarter ended June 30, 1997. The decrease in net income was primarily the result
of an increase in operating expense of $370,000 as well as a decrease in other
income of $150,000, offset in part by a $369,000 increase in net interest
income.
NET INTEREST INCOME
Net interest income increased to $6.1 million for the quarter ended June 30,
1998 from $5.7 million for the same period in 1997 primarily as a result of a
$58.8 million increase in average interest-earning assets to $711.9 million for
the three months ended June 30, 1998 from $653.1 million for the same period in
the prior year, reflecting the increase in the loan portfolio, partially offset
by the decrease in the securities portfolio. The average yield on
interest-earning assets decreased to 7.57% for the three months ended June 30,
1998 from 7.69% for the 1997 period, primarily as a result of decreased average
yield earned on real estate loans. The increase in interest income was partially
offset by a $61.6 million increase in average interest-bearing liabilities to
$660.3 million for the three months ended June 30, 1998 from $598.7 million for
the same period in 1997, equally reflecting the growth of the Association's
deposit portfolio and additional FHLB advances. The average cost on
interest-bearing liabilities decreased to 4.46% for the three months ended June
30, 1998 from 4.55% for the 1997 period, primarily as a result of the decreased
weighted average cost of borrowed funds to 6.48% for the quarter ended June 30,
1998 from 7.75% for the same period in 1997.
PROVISION FOR LOAN LOSSES
The Association maintains an allowance for loan losses based upon a periodic
evaluation of, among other things, known and inherent risks in the loan
portfolio, past loan loss experience, adverse situations that may affect
borrowers' ability to repay loans, the estimated value of the underlying loan
collateral, volume and type of lending conducted by the Association and current
economic conditions in its market area. 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. Management
reviews the adequacy of its allowance for loan losses monthly through its asset
classification review. The provision for loan losses was $96,000 for the quarter
ended June 30, 1998, as compared to $53,000 for the quarter ended June 30, 1997
primarily due to management's decision to increase reserves due to the growth in
the loan portfolio during the period. The allowance for loan losses as a
percentage of net loans receivable was 0.52% and 0.63% at June 30, 1998 and
1997, respectively.
17
<PAGE>
OTHER INCOME
Other income consists of servicing income and fee income, service charges, gain
or loss on the sale of securities available for sale and other assets. Other
income decreased $150,000 to $821,000 for the quarter ended June 30, 1998, from
$971,000 for the same period in 1997, primarily as a result of $108,000
amortization of an affordable housing tax credit partnership during the quarter
ended June 30, 1998 which did not occur in the same period 1997.
OPERATING EXPENSE
Operating expense increased $370,000 to $4.9 million for the three month period
ended June 30, 1998 from $4.5 million for the same period in 1997. Employee
compensation and benefits increased $511,000 during the quarter ended June 30,
1998 as a result of increased staffing due to branch office openings, the
continued expansion of the Association's lending activities and the increased
cost of stock benefit programs reflecting the increase in the market value of
Bankshares' common stock. This increase was offset in part by a $229,000
decrease in miscellaneous expense during the quarter ended June 30, 1998 as a
result of the reversal of $267,000 in brokers fees which were expensed during
fiscal 1998 instead of capitalized according to FAS 91.
PROVISION FOR INCOME TAXES
The provision for income taxes was $677,000 for the three months ended June 30,
1998 as compared to $767,000 for the same period in 1997 reflecting the decrease
in net income as well as the $129,000 tax benefit recognized for the affordable
housing tax credit partnership.
RESULTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
GENERAL
Net income for the six months ended June 30, 1998 was $2.5 million, or $0.51 per
share, a $224,000 decrease from $2.7 million, or $0.55 per share, for the six
months ended June 30, 1997. The decrease in net income was primarily the result
of increases in operating expense and the provision for loan losses of $1.0
million and $130,000, respectively, and a decrease in other income of $106,000,
partially offset by the combination of an $855,000 increase in net interest
income and a $198,000 decrease in the provision for income taxes.
NET INTEREST INCOME
Net interest income increased to $12.2 million for the six months ended June 30,
1998 from $11.3 million for the same period in 1997 primarily as a result of a
$59.9 million increase in average interest-earning assets to $701.6 million for
the six months ended June 30, 1998 from $641.7 million for the same period in
the prior year. Such increase reflected an $87.4 million increase in the net
loan portfolio, offset in part by a $30.6 million decrease in the Association's
aggregate securities portfolio. The average yield on interest-earning assets
decreased to 7.65% for the six months ended June 30, 1998 from 7.66% for the
1997 period, primarily as a result of decreased average yields on real estate
loans and MBS, which was offset in part by increased
18
<PAGE>
average yields earned on investment securities and consumer and other loans. The
increase in interest income was partially offset by a $60.8 million increase in
average interest-bearing liabilities to $649.2 million for the six months ended
June 30, 1998 from $588.4 million for the same period in 1997, primarily
reflecting the growth of the Association's deposit portfolio and additional FHLB
advances. The average yield on interest-bearing liabilities was unchanged at
4.51% for the six months ended June 30, 1998 from the 1997 period. The weighted
average cost of deposits increased to 4.19 % for the six months ended June 30,
1998 from 4.15% for the same period in 1997. This increase in the cost of
deposits was offset by a decrease in the cost of borrowed funds to 6.87% for the
six months ended June 30, 1998 from 7.84% for the same period in 1997.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $213,000 for the six months ended June 30,
1998, as compared to $83,000 for the six months ended June 30, 1997. The
allowance for loan losses as a percentage of net loans receivable was 0.52% and
0.63% at June 30, 1998 and 1997, respectively. In management's judgement it was
prudent to increase the allowance for loan losses based upon, among other
factors, the overall growth in its loan portfolio.
OTHER INCOME
Other income consists of servicing income and fee income, service charges, gain
or loss on the sale of securities available for sale and other assets. Other
income decreased $106,000 to $1.8 million for the six months ended June 30,
1998, from $1.9 million for the same period in 1997. This decrease reflected the
amortization of an affordable housing tax credit partnership of $140,000 during
the six months ended June 30, 1998. The partnership did not begin amortizing
until the second half of 1997.
OPERATING EXPENSE
Operating expense increased $1.0 million to $9.8 million for the six month
period ended June 30, 1998 from $8.8 million for the same period in 1997.
Increased employee compensation and benefits and occupancy and equipment costs
accounted for the majority of such increase, increasing $741,000 and $107,000,
respectively, during the six months ended June 30, 1998, as compared to the 1997
period. Additional costs related to the incentive-based loan originators were
incurred during the 1998 period as a result of increased loan originations. In
addition, increases in staffing and occupancy costs resulted from two additional
branch offices operating in the six months ended June 30, 1998 that were not
open during the same period in 1997, the requirements of the new company wide
computer network, which involved new hardware and software depreciation expense
and additional personnel for implementation and training, as well as the
increased cost of benefit programs reflecting the increase in the market value
of Bankshares' common stock.
19
<PAGE>
PROVISION FOR INCOME TAXES
The provision for income taxes was $1.4 million for the six months ended June
30, 1998 as compared to $1.6 million for the same period in 1997 reflecting the
$174,000 tax benefit received from the affordable housing tax credit partnership
during the six months ended June 30, 1998 which did not occur during 1997 as
well as the decrease in net income.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of Bankshares' asset and liability management policies as well
as the potential impact of interest rate changes upon the market value of
Bankshares' portfolio equity, see "Management's Discussion and Analysis - Market
Risk Analysis" and -"Market Value of Portfolio Equity" in Bankshares' Annual
Report to Shareholders. There has been no material change in Bankshares' asset
and liability position or the market value of Bankshares' portfolio equity since
December 31, 1997.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are various claims and lawsuits in which Bankshares or the
Association are periodically involved incidental to its business. In
the opinion of management, no material loss is expected from any of
such pending claims or lawsuits. Reference is made to Note 13 in the
Notes to Consolidated Financial Statements included in Bankshares'
1997 Annual Report.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
20
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Bankshares held its Annual Meeting of Shareholders on April 22, 1998.
Of the 5,100,120 shares eligible to vote, 4,741,340 shareholders or
93.0%, including 2,620,144 shares owned by ComFed, M. H. C., were
represented in person or by proxy at the meeting.
The votes cast produced the following results:
<TABLE>
<CAPTION>
Election of Directors for Number of Votes
a three year term expiring ---------------
in 2000 For Withheld
-------------------------- --- --------
<S> <C> <C>
Forest C. Beaty, Jr. 4,698,690 42,650
Frederick A. Teed 4,695,982 45,358
<CAPTION>
Number of Votes
-------------------------------------------
For Withheld Abstain
--- -------- -------
<S> <C> <C> <C>
Ratification of Crowe Chizek
and Company LLP as
independent auditors for
fiscal year 1998 4,717,229 8,478 15,633
</TABLE>
ITEM 5. OTHER INFORMATION.
On July 29, 1998, the Boards of Directors of ComFed, Bankshares and the
Association unanimously adopted a plan of conversion and agreement and plan of
reorganization (the "Plan of Conversion"), pursuant to which the Association
will reorganize from the two-tier mutual holding company structure to the stock
holding company structure. The Association amended the Plan of Conversion on
August 13, 1998. Pursuant to the Plan of Conversion, (i) ComFed and Bankshares
will be merged with and into the Association, with the Association as survivor,
(ii) the Association will become a wholly owned subsidiary of a to-be-formed
Delaware corporation ("New Holding Company"), (iii) the shares of common stock
of Bankshares held by persons other than ComFed (whose shares will be cancelled)
will be converted into shares of common stock of the New Holding Company
pursuant to an exchange ratio designed to preserve the percentage ownership
interests of such persons, and (iv) the New Holding Company will offer and sell
shares of its common stock to members of ComFed, shareholders of the Association
and others in the manner and subject to the priorities set forth in the Plan of
Conversion.
The transactions contemplated by the Plan of Conversion are subject to approval
of Bankshares' shareholders, the members of ComFed, and various regulatory
agencies.
21
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
None.
(b) CURRENT REPORTS ON FORM 8-K.
None.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMUNITY SAVINGS BANKSHARES, INC.
Date: August 13, 1998 /s/ James B. Pittard, Jr.
-----------------------------------------
James B. Pittard, Jr.
President and Chief Executive Officer
Date: August 13, 1998 /s/ Larry J. Baker
-----------------------------------------
Larry J. Baker
Senior Vice President and Treasurer
23
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
</LEGEND>
<CIK> 0001045934
<NAME> COMMUNITY SAVINGS BANKSHARES, INC.
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 16,477
<INT-BEARING-DEPOSITS> 30,948
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 91,316
<INVESTMENTS-CARRYING> 63,327
<INVESTMENTS-MARKET> 67,899
<LOANS> 527,375
<ALLOWANCE> 2,767
<TOTAL-ASSETS> 765,488
<DEPOSITS> 574,383
<SHORT-TERM> 0
<LIABILITIES-OTHER> 16,514
<LONG-TERM> 91,513
0
0
<COMMON> 5,100
<OTHER-SE> 77,978
<TOTAL-LIABILITIES-AND-EQUITY> 765,488
<INTEREST-LOAN> 19,290
<INTEREST-INVEST> 6,391
<INTEREST-OTHER> 1,146
<INTEREST-TOTAL> 26,827
<INTEREST-DEPOSIT> 11,976
<INTEREST-EXPENSE> 14,655
<INTEREST-INCOME-NET> 12,172
<LOAN-LOSSES> 213
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 9,846
<INCOME-PRETAX> 3,869
<INCOME-PRE-EXTRAORDINARY> 2,511
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,511
<EPS-PRIMARY> .51
<EPS-DILUTED> .49
<YIELD-ACTUAL> 7.55
<LOANS-NON> 1,366
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,700
<ALLOWANCE-OPEN> 2,662
<CHARGE-OFFS> (108)
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 2,767
<ALLOWANCE-DOMESTIC> 2,767
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
