<PAGE> 1
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: MARCH 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ___________________
Commission File Number 000-29460
COMMUNITY SAVINGS BANKSHARES, INC.
- - -------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 65-0870004
------------------------------- ------------------
(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 May 10, 1999, there were 10,548,884 shares of the Registrant's common
stock outstanding.
<PAGE> 2
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
March 31, 1999 (Unaudited) and December 31, 1998 2
Consolidated Statements of Operations (Unaudited) for the three months
ended March 31, 1999 and 1998 3
Consolidated Statements of Comprehensive Income (Unaudited) for the
three months ended March 31, 1999 and 1998 3
Consolidated Statements of Changes in Shareholders' Equity
for the year ended December 31, 1998 and for the
three months ended March 31, 1999 (Unaudited) 4
Consolidated Statements of Cash Flows (Unaudited) for the three months
ended March 31, 1999 and 1998 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Default Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signature Page 17
</TABLE>
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AT MARCH 31, 1999 (UNAUDITED) AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- -------------
(Unaudited)
(In thousands)
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and amounts due from depository institutions $ 15,376 $ 15,305
Interest-bearing deposits 57,247 101,710
-------- --------
Total cash and cash equivalents 72,623 117,015
Securities available for sale 107,214 95,151
Securities held to maturity 47,814 52,619
Loans receivable, net of allowance for loan losses 566,928 538,204
Accrued interest receivable 2,861 2,782
Office properties and equipment, net 25,950 26,016
Real estate owned, net 741 522
Federal Home Loan Bank stock - at cost 4,722 4,722
Other assets 6,856 7,010
-------- --------
Total assets $835,709 $844,041
======== ========
LIABILITIES
Deposits:
Demand deposits $34,354 $31,769
NOW and funds transfer deposits 78,247 82,628
Savings deposits 34,870 32,919
Money market deposits 97,929 89,895
Time deposits 338,612 357,189
-------- --------
Total deposits 584,012 594,400
Mortgage-backed bond - net 15,192 15,430
Advances from Federal Home Loan Bank 89,796 91,920
Advances by borrowers for taxes and insurance 3,310 1,208
Other liabilities 9,846 7,797
-------- --------
Total liabilities 702,156 710,755
-------- --------
SHAREHOLDERS' EQUITY
Preferred stock ($1 par value): 10,000,000 authorized shares, no shares issued -- --
Common stock ($1 par value): 60,000,000 authorized shares; 10,548,884
shares outstanding at March 31, 1999 and December 31, 1998 10,549 10,549
Additional paid-in capital 93,304 93,268
Retained income - substantially restricted 35,775 35,545
Common stock purchased by Employee Stock Ownership Plan (5,236) (5,407)
Common stock issued to Recognition and Retention Plan (191) (237)
Unrealized decrease in market value of assets available
for sale, net of income taxes (648) (432)
-------- --------
Total shareholders' equity 133,553 133,286
-------- --------
Total liabilities and shareholders' equity $835,709 $844,041
======== ========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 4
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
For the three months
ended March 31,
-----------------------
1999 1998
------ ------
(Unaudited)
(In thousands)
<S> <C> <C>
Interest income:
Real estate loans $ 9,971 $ 8,924
Consumer and commercial business loans 453 446
Investment securities and securities available for sale 1,663 2,644
Mortgage-backed and related securities 820 842
Interest-earning deposits 1,095 502
------- -------
Total interest income 14,002 13,358
-------- -------
Interest expense:
Deposits 5,525 5,925
Advances from Federal Home Loan Bank and other borrowings 1,621 1,374
------- -------
Total interest expense 7,146 7,299
------- -------
Net interest income 6,856 6,059
Provision for loan losses 322 117
------- -------
Net interest income after provision for loan losses 6,534 5,942
------- -------
Other income:
Servicing income and other fees 80 56
NOW account and other customer fees 851 822
Net loss on real estate owned (12) (19)
Miscellaneous 59 88
------- -------
Total other income 978 947
------- -------
Operating expense:
Employee compensation and benefits 2,881 2,361
Occupancy and equipment 1,534 1,284
Advertising and promotion 288 171
Federal deposit insurance premium 88 85
Miscellaneous 810 1,075
------- -------
Total operating expense 5,601 4,976
------- -------
Income before provision for income taxes 1,911 1,913
Provision for income taxes 526 681
------- -------
Net income $ 1,385 $ 1,232
======= =======
Basic earnings per share $ 0.14 $ 0.12
======= =======
Diluted earnings per share $ 0.14 $ 0.12
======= =======
</TABLE>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
UNAUDITED FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
For the three months
ended March 31,
-----------------------
1999 1998
------ ------
(Unaudited)
(In thousands)
<S> <C> <C>
Net income $ 1,385 $ 1,232
Other comprehensive income, net of tax:
Change in unrealized decrease in market value of assets available for sale (216) (146)
------- -------
Comprehensive income $ 1,169 $ 1,086
======= =======
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 5
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1998 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
Unrealized
Increase
(Decrease)
in
Market
Retained Employee Recognition Value
Additional Income- Stock and Available
Common Paid In Substantially Ownership Retention for
Stock Capital Restricted Plan Plan Sale Total
=================================================================================
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1997 $ 5,095 $ 30,278 $ 47,887 $(1,424) $(423) $(154) $ 81,259
Net income for the year ended
December 31, 1998 -- -- 4,994 - -- -- 4,994
Stock options exercised 9 92 -- - -- -- 101
Unrealized decrease in market
value of assets available for
sale (net of income taxes) -- -- -- - -- (278) (278)
Shares committed to be
released - Employee Stock
Ownership Plan and Recognition
and Retention Plan -- 445 -- 394 186 -- 1,025
Dividends declared -- -- (2,674) -- -- -- (2,674)
Merger of Mutual Holding Company
pursuant to Reorganization -- -- 201 -- -- -- 201
Exchange due to Reorganization (5,104) (30,815) (14,863) -- -- -- (50,782)
Issuance of common stock
pursuant to Reorganization, net
of costs of issuance of $1,672 10,549 93,268 -- -- -- -- 103,817
Purchase of common stock by
Employee Stock Ownership Plan -- -- -- (4,377) -- -- (4,377)
---------------------------------------------------------------------------------
Balance - December 31, 1998 10,549 93,268 35,545 (5,407) (237) (432) 133,286
Net income for the three months
ended March 31, 1999 -- -- 1,385 -- -- -- 1,385
Unrealized decrease in market
value of assets available for
sale (net of income taxes) -- -- -- -- -- (216) (216)
Amortization of deferred
compensation - Employee
Stock Ownership Plan and
Recognition and Retention Plan -- 36 -- 171 46 -- 253
Dividends declared -- -- (1,155) -- -- -- (1,155)
---------------------------------------------------------------------------------
Balance - March 31, 1999 $10,549 $ 93,304 $ 35,775 $(5,236) $(191) $(648) $133,553
(unaudited)
==================================================================================
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 6
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
For the three months
ended March 31,
-------------------------
1998 1999
------- --------
(Unaudited)
(In thousands)
<S> <C> <C>
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Net income $ 1,385 $ 1,232
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 515 369
ESOP and Recognition and Retention Plan compensation expense 253 288
Accretion of discounts, amortization of premiums, and other deferred yield items (298) (856)
Provision for loan losses 322 117
Provision for losses and net losses (gains) on sales of real estate owned (44) 3
Amortization of discount on mortgage-backed bond 108 121
Net gain on sale of loans and other assets (10) --
(Increase) decrease in accrued interest receivable (79) 426
Decrease in other assets 154 85
Increase (decrease) in other liabilities 2,191 (400)
-------- --------
Net cash provided by operating activities 4,497 1,385
-------- --------
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
Loan originations and principal payments on loans-net (23,354) (20,420)
Principal payments received on securities 11,149 6,374
Purchases of:
Loans and participations (6,000) (18,227)
Securities available for sale (23,367) --
Federal Home Loan Bank stock -- (424)
Office property and equipment (463) (756)
Proceeds from sales of:
Office properties and equipment 25 --
Real estate acquired in settlement of loans 59 111
Proceeds from calls or maturities of securities 5,000 26,461
Other investing (27) (58)
-------- --------
Net cash used for investing activities (36,978) (6,939)
-------- --------
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
Net increase (decrease) in:
NOW accounts, demand deposits, and savings accounts 8,189 16,354
Certificates of deposit (18,577) 19,411
Advances from Federal Home Loan Bank -- 6,000
Repayment of advances from Federal Home Loan Bank (2,124) (2,123)
Net increase in advances by borrowers for taxes and insurance 2,102 2,020
Repayment of Employee Stock Ownership Plan loan -- (1,424)
Proceeds from exercise of stock options -- 58
Payments made on mortgage-backed bond (346) (346)
Dividends paid (1,155) (526)
-------- --------
Net cash (used for) provided by financing activities (11,911) 39,424
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (44,392) 33,870
CASH AND CASH EQUIVALENTS, beginning of period 117,015 25,954
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 72,623 $ 59,824
======== ========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited consolidated interim financial statements for Community
Savings Bankshares, Inc. ("Bankshares") and its subsidiary Community
Savings, F. A. (the "Association"), reflect all adjustments (consisting
only of normal recurring accruals) which, in the opinion of management,
are necessary to present fairly Bankshares' consolidated financial
condition and the consolidated results of operations and cash flows for
interim periods. The results for interim periods are not necessarily
indicative of trends or results to be expected for the full year. All
weighted interest rates are presented on an annualized basis. The
unaudited consolidated interim financial statements and notes should be
read in conjunction with the audited consolidated financial statements and
the notes thereto included in Bankshares' Annual Report to Shareholders
for the year ended December 31, 1998.
2. CONVERSION AND REORGANIZATION OF BANKSHARES
On December 15, 1998, Bankshares, a Delaware corporation, became the
holding company for the Association as a result of the completion of the
conversion and reorganization of the Association from the two-tier mutual
holding company structure to the stock holding company structure and the
related stock offering of Bankshares. In the course of this
reorganization, ComFed, M.H.C. ("ComFed") and Community Savings
Bankshares, Inc. (the "Mid-Tier Holding Company"), the mutual holding
company and mid-tier holding company, respectively, of the Association
were merged with and into the Association. Such mergers were accounted for
in a manner similar to a pooling of interests and did not result in any
significant accounting adjustments. The Association is chartered and
regulated by the Office of Thrift Supervision (the "OTS"). Bankshares'
only significant asset is the common stock of the Association.
Consequently, the majority of its income is derived from the Association.
3. NEW ACCOUNTING PRONOUNCEMENTS
Beginning January 1, 2000, a new accounting standard will require all
derivatives to be recorded at fair value. Unless designated as hedges,
changes in these fair values will be recorded in the income statement.
Fair value changes involving hedges will generally be recorded by
offsetting gains and losses on the hedge and on the hedged item, even if
the fair value of the hedged item is not otherwise recorded. This is not
expected to have a material effect but the effect will depend on
derivative holdings when this standard applies.
Mortgage loans originated in mortgage banking are converted into
securities on occasion. A new accounting standard for 1999 will allow
these securities to be classified as available for sale, held to maturity,
or trading, instead of the current requirement to classify them as
trading. This is not expected to have a material effect but the effect
will vary depending on the level and designation of securitizations as
well as on market price movements.
6
<PAGE> 8
4. LOANS RECEIVABLE
Loans receivable consists of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
Real estate loans:
Residential 1-4 family $422,166 $421,766
Residential construction loans 79,320 54,391
Non-residential construction loans 7,687 6,292
Land loans 14,973 14,624
Multi-family loans 7,771 8,392
Commercial 68,421 46,118
-------- --------
Total real estate loans 600,338 551,583
-------- --------
Non-real estate loans:
Consumer loans 13,930 15,015
Commercial business 6,404 6,635
-------- --------
Total non-real estate loans 20,334 21,650
-------- --------
Total loans receivable 620,672 573,233
-------- --------
Less:
Undisbursed loan proceeds 51,460 33,202
Unearned discount and premium and
net deferred loan fees and costs (1,154) (1,333)
Allowance for loan losses 3,438 3,160
-------- --------
Total loans receivable, net $566,928 $538,204
======== ========
</TABLE>
The amount of loans which had ceased accruing interest aggregated approximately
$1.0 million and $1.7 million at March 31, 1999 and December 31, 1998,
respectively. The amount of interest not accrued related to these loans was
approximately $84,000 and $110,000 at March 31, 1999 and December 31, 1998
respectively.
An analysis of the changes in the allowance for loan losses is as follows:
1999 1998
-------- --------
(In thousands)
Balance, beginning of period $3,160 $2,662
Provision charged to income 322 117
Losses charged to allowance (44) (87)
Recoveries -- --
------ ------
Balance, end of period $3,438 $2,692
====== ======
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 March 31, 1999. At December 31,
1998, impaired loans totaled $25,000.
7
<PAGE> 9
6. REAL ESTATE OWNED
Real estate owned consists of the following:
March 31, December 31,
1999 1998
--------- -----------
(In thousands)
Real estate owned $773 $558
Less allowance for loss 32 36
---- ----
Total real estate owned $741 $522
==== ====
Changes in allowance for loss on real estate owned are as follows:
For the three months
ended March 31,
--------------------
1999 1998
------- ------
(In thousands)
Balance, beginning of period $36 $ 41
Provision charged to income 5 --
Losses charged to allowance (9) --
--- ----
Balance, end of period $32 $ 41
=== ====
8
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
In the following discussion, references to "Bankshares" relate to Community
Savings Bankshares, Inc. together with its subsidiary, Community Savings, F. A.
(the "Association").
COMMUNITY SAVINGS BANKSHARES, INC.
Bankshares is a Delaware-chartered stock holding company organized in August
1998. The only significant asset of Bankshares is its investment in its
wholly-owned subsidiary, the Association. On December 15, 1998, Bankshares
completed its reorganization and stock offering in connection with the
conversion and reorganization of ComFed, M.H.C. ("ComFed") and its mid-tier
holding company. 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 presented in this report. The common stock of Bankshares trades
on The Nasdaq Stock Market under the symbol "CMSV".
COMMUNITY SAVINGS, F. A.
The Association, founded in 1955, is a federally chartered savings and loan
association headquartered in North Palm Beach, Florida. The Association's
deposits are federally insured by the Federal Deposit Insurance Corporation
("FDIC") through the Savings Association Insurance Fund ("SAIF"). The
Association has been a member of the Federal Home Loan Bank of Atlanta ("FHLB")
since 1955. The Association is regulated by the Office of Thrift Supervision
("OTS"). On December 15, 1998, Bankshares became the holding company for the
Association as a result of the completion of the conversion and reorganization
of the Association from the two-tier mutual holding company structure to the
stock holding company structure and the related stock offering of Bankshares. In
the course of this reorganization, ComFed, the mutual holding company and its
mid-tier holding company of the Association were merged with and into the
Association. Such mergers were accounted for in a manner similar to a pooling of
interests and did not result in any significant accounting adjustments.
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 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
yields earned or rates 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 4.0%. The
Association's liquidity ratio averaged 18.8% during the three months ended March
31, 1999 while liquidity ratios averaged 12.0% for the year ended December 31,
1998.
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
9
<PAGE> 11
operations. While scheduled principal repayments on loans and securitiesMBS, 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 totaled $56.0
million at March 31, 1999. Other assets qualifying for liquidity outstanding at
March 31, 1999 amounted to $35.3 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 of Atlanta which provide an
additional source of funds. FHLB advances totaled $89.8 million at March 31,
1999.
At March 31, 1999, outstanding loan commitments totaled $13.2 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 $254.9 million at
March 31, 1999. Based on prior experience, management believes that a
significant portion of such deposits will remain with the Association.
FINANCIAL CONDITION
MARCH 31, 1999 COMPARED TO DECEMBER 31, 1998
The following table summarizes certain information relating to Bankshares'
financial condition at the dates indicated.
<TABLE>
<CAPTION>
March 31, December 31, Increase
1999 1998 (Decrease)
--------- ------------ ----------
(Unaudited)
(In thousands)
<S> <C> <C> <C>
Assets:
Total assets $835,709 $844,041 $ (8,332)
Cash and cash equivalents 72,623 117,015 (44,392)
Securities portfolio:
Securities held to maturity 47,814 52,619 (4,805)
Securities available for sale 107,214 95,151 12,063
-------- -------- --------
Total securities portfolio 155,028 147,770 7,258
Loans receivable, net 566,928 538,204 28,724
Real estate owned, net 741 522 219
Liabilities and Shareholders' Equity:
Total liabilities 702,156 710,755 (8,599)
Deposits 584,012 594,400 (10,388)
Federal Home Loan Bank advances 89,796 91,920 (2,124)
Shareholders' equity 133,553 133,286 267
</TABLE>
Total assets decreased $8.3 million to $835.7 million at March 31, 1999, as
compared to $844.0 million at December 31, 1998 primarily due to a $44.4 million
decrease in cash and cash equivalents to $72.6 million at March 31, 1999 from
$117.0 million at December 31, 1998, partially offset by a $7.2 million net
increase in the securities portfolio (which includes securities available for
sale and investments held to maturity) to $155.0 million at March 31, 1999 from
$147.8 million at December 31, 1998, and a $28.7 million increase in loans
receivable to $566.9 million at March 31, 1999 from $538.2 million at December
31, 1998. The shift in Bankshares' assets reflected the continued investment of
the proceeds of Bankshares' offering in December 1998. The decrease in cash and
cash equivalents also funded a $10.4 million net decrease in deposits to $584.0
million at March 31, 1999 from $594.4 million at December 31, 1998. In addition,
FHLB advances decreased $2.1 million due to normal amortization, totaling $89.8
million and $91.9 million at March 31, 1999 and December 31, 1998, respectively.
10
<PAGE> 12
The securities portfolio net increase of $7.2 million primarily reflects $23.4
million in purchases of new securities available for sale offset by calls of
$5.0 million and scheduled principal reductions and amortization of premiums and
discounts amounting to $11.2 million.
Loans receivable increased $28.7 million as a result of continued emphasis on
expanded lending activities. Loan originations of $87.2 million and purchases of
$6.0 million included a $15.0 million residential construction loan and a $21.0
million commercial real estate loan. The originations and purchases were
partially offset by sales and repayments of $6.0 million and $58.5 million,
respectively.
Real estate owned increased $219,000 to $741,000 at March 31, 1999, from
$522,000 at December 31, 1998, primarily due to two residential foreclosed
properties offset by the sale of one residential property.
Total liabilities decreased $8.6 million to $702.2 million at March 31, 1999,
from $710.8 million at December 31, 1998. Total deposits decreased by $10.4
million to $584.0 million at March 31, 1999 from $594.4 million at December 31,
1998. The decrease in deposits primarily reflected increased competition for
retail deposits in the Association's market area as odd-term certificates
matured and were not renewed. This reduction in certificates also caused a
decrease in the weighted average cost of deposits to 3.73% at March 31, 1999
from 3.91% at December 31, 1998.
Total equity increased to $133.6 million at March 31, 1999, from $133.3 million
at December 31, 1998, reflecting net income for the three months of $1.4
million, and amortization of deferred compensation represented by stock benefit
plans totaling $253,000, offset in part by the declaration of dividends totaling
$1.2 million and a net decrease in the market value of assets available for sale
of $216,000. 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 capital ratios unconsolidated with
Bankshares. The Association's actual capital amounts and ratios at March 31,
1999 are as follows:
<TABLE>
<CAPTION>
To be Considered
Well
For Capitalized
Capital for Prompt
Adequacy Corrective Action
Actual Purposes Provisions
-------------------- ------------------ ------------------
Ratio Amount Ratio Amount Ratio Amount
----- ------ ----- ------ ----- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of March 31, 1999:
Total Risk-Based Capital
(to Risk-weighted Assets) 25.13% $113,153 8.0% $36,023 10.0% $45,028
Core (Tier 1) Capital
(to Adjusted Tangible Assets) 13.21 109,715 3.0 24,910 5.0 41,516
Tangible Capital
(to Tangible Assets) 13.21 109,715 1.5 12,455 N/A N/A
Core (Tier 1) Capital
(to Risk-weighted Assets) 24.37 109,715 N/A N/A 6.0 27,018
</TABLE>
As of March 31, 1999, tangible assets, adjusted tangible assets, and
risk-weighted assets were $830.3 million, $830.3 million, and $450.3 million,
respectively.
11
<PAGE> 13
ASSET QUALITY
Loans 90 days past due are generally placed on non-accrual status. The
Association ceases to accrue interest on a loan once it is placed on non-accrual
status and interest accrued but unpaid at such time is charged against interest
income. Additionally, any loan where it appears evident prior to being past due
90 days that the collection of interest is in doubt is also placed on
non-accrual status. 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 March 31, 1999 or December 31, 1998.
The following table sets forth information regarding the delinquent loans and
foreclosed real estate at the dates indicated:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
(In thousands)
<S> <C> <C>
Non-performing loans:
Residential real estate:
Loans 60 to 89 days delinquent $ 466 $ 695
Loans more than 89 days delinquent 988 1,537
Commercial and multi-family real estate:
Loans 60 to 89 days delinquent -- --
Loans more than 89 days delinquent -- 52
Consumer and commercial business:
Loans 60 to 89 days delinquent -- 100
Loans more than 89 days delinquent 42 67
Land:
Loans 60 to 89 days delinquent -- --
Loans more than 89 days delinquent -- 12
REO, net of related allowance 741 522
Other repossessed assets -- 22
Loans to facilitate sale of REO 150 151
------ ------
Total $2,387 $3,158
====== ======
</TABLE>
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 initially
presented to the audit committee of the Board of Directors during July 1997 and
is periodically updated. 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 that critical systems will continue to function properly.
The Association has identified 40 mission critical applications (without which
the Association cannot operate) and critical applications (necessary
applications but the Association can function for a moderate amount of time
without such applications being Year 2000 compliant) operated by third party
vendors. Of such mission critical and critical applications, the Association has
been informed that a majority are already Year 2000 compliant. Of such 40
12
<PAGE> 14
mission critical and critical applications, approximately 25% are provided by
the Association's data service processor which had informed the Association that
it had substantially completed testing of its updated systems (in which testing
the Association was involved) by December 31, 1998 with substantially all such
systems evidencing Year 2000 compliance. The remaining approximately 10% of its
systems which are still being revised and tested are expected to be completed by
June 30, 1999.
While the Association has received assurances from its vendors as to compliance,
such assurances are not guarantees and may not be enforceable. The Association's
existing older contracts with such vendors do not include Year 2000
certification or warranties. Thus, in the event such vendors' products and/or
services are not Year 2000 compliant, the Association's recourse in the event of
such failure may be limited. If the required modifications and conversions are
not made, or are not completed on a timely basis, then the Year 2000 Issue could
have a material impact on the operations of the Association. There can be no
assurance that potential systems interruptions or unanticipated additional
expense incurred to obtain Year 2000 compliance would not have a material
adverse effect on the Association's business, financial condition, results of
operations and business prospects. Nevertheless, the Association does not
believe that the cost of addressing the Year 2000 issues will be a material
event or uncertainty that would cause reported financial information not to be
necessarily indicative of future operating results or financial conditions, nor
does it believe that the costs or the consequences of incomplete or untimely
resolution of its Year 2000 issues represent a known material event or
uncertainty that is reasonably likely to affect its future financial results, or
cause its reported financial information not to be necessarily indicative of
future operating results or future financial condition.
The Year 2000 issues also affect certain of the Association's customers,
particularly in the areas of access to funds and additional expenditures to
achieve compliance. As of December 31, 1998, the Association had contacted all
of its commercial credit customers (87 borrowers with outstanding loans
aggregating $56.l million) regarding such customers' awareness of the Year 2000
Issue. While no assurance can be given that its customers will be Year 2000
compliant, management believes, based on representations of such customers and
reviews of their operations (including assessments of the borrowers' level of
sophistication and data and record keeping requirements), that the customers are
either addressing the appropriate issues to insure compliance or that they are
not faced with material Year 2000 issues. None of such borrowers use networked
computer systems or data centers to conduct their operations. In addition, in
substantially all cases the credit extended to such borrowers is collateralized
by real estate which inherently minimizes the Association's loss exposure in the
event that such borrowers do experience problems or delays becoming Year 2000
compliant. The Association has an ongoing policy to perform a Year 2000
assessment of all new commercial credit customers before originating a loan.
The Association has completed its own company-wide Year 2000 contingency plan.
Individual contingency plans concerning specific software and hardware issues
and operational plans for continuing operations were completed for all of its
mission critical hardware and software applications as of December 31, 1998. The
Year 2000 Committee has reviewed all mission critical test plans and contingency
plans to ensure the reasonableness of the plans. Testing of the majority of the
mission critical systems was completed by December 1998 with the remaining two
systems expected to be completed by May 31, 1999. The Association has developed
contingency plans which address operational policies and procedures in
connection with data processing, electric power supply and/or telephone service
failures associated with the Year 2000 issue. Such contingency plans provide
documented actions to allow the Association to maintain and/or resume normal
operations in the event of the failure of mission critical and critical
applications. Such plans identify participants, processes and equipment that
will be necessary to permit the Association to continue operations. Such plans
may include providing off-line system processing, limited back-up electrical and
telephone systems and other methods to ensure the Association's ability to
continue to operate.
The cost of modifications to the existing software is being primarily absorbed
by the third party vendors. However the Association recognized a need to
purchase new hardware and software. The Association identified approximately
$1.8 million in total costs, including hardware, software, and other issues, for
completing the Year 2000 project. Of that amount, approximately $500,000, $1.2
million and $39,000 was purchased during the twelve months ended December 31,
1998, 1997 and 1996, respectively.
13
<PAGE> 15
FORWARD-LOOKING STATEMENTS
Certain information in this Form 10-Q 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.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
GENERAL
Net income for the quarter ended March 31, 1999 was $1.4 million, or $0.14 basic
earnings per share, a $153,000 increase from $1.2 million, or $0.12 basic
earnings per share, for the quarter ended March 31, 1998. The increase in net
income was primarily the result of a $797,000 increase in net interest income
combined with a $155,000 decrease in the provision for income taxes, offset in
part by the combination of a $205,000 increase in the provision for loan losses
with a $625,000 increase in operating expense.
NET INTEREST INCOME
Net interest income increased to $6.9 million for the quarter ended March 31,
1999 from $6.1 million for the same period in 1998 primarily as a result of a
$93.1 million increase in average interest-earning assets to $787.7 million for
the three months ended March 31, 1999 from $694.6 million for the same period in
the prior year, reflecting the increase in the loan portfolio and
interest-earning deposits. The increase in interest income also reflected the
effects of a decrease in the average cost of interest-bearing liabilities to
4.11% for the three months ended March 31, 1999 from 4.55% for the 1998 period,
primarily as a result of the decreased weighted average cost of deposits to
3.75% for the quarter ended March 31, 1999 from 4.18% for the same period in
1998. The decreased cost of deposits reflects a change in the composition of the
deposit portfolio. The dollar balance of total certificates of deposit which
have a higher cost to the Association, declined by 5.20%, while the dollar
balance of lower costing core deposits (consisting of checking, NOW, statement,
passbook, and money market deposit accounts) increased by 3.45% as the
Association emphasizes such products to its customers. The increase in net
interest income was partially offset by a decrease in the average yield on
interest-earning assets to 7.11% for the quarter ended March 31, 1999 from 7.69%
for the same period in 1998 combined with a $54.5 million increase in average
interest-bearing liabilities to $696.3 million from $641.8 million for the same
period in 1998. The increase in average interest-bearing liabilities reflected
$23.4 million and $31.1 million higher average balances for the Association's
deposit portfolio and borrowed funds, respectively, for the quarter ended March
31, 1999 as the Association used such funds to support its expanding lending
program.
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, its past loan loss
experience, adverse situations that may affect borrowers' ability to repay
loans, the estimated value of the underlying loan collateral, the nature and
volume of its loan activities, and current 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 applied
by the OTS. The provision for loan losses was $322,000 for the quarter ended
March 31, 1999, as compared to $117,000 for the quarter ended March 31, 1998
primarily due to management's assessment that the allowance for loan losses
needed to be increased to protect against the inherent risk in the loan
portfolio due to the $28.7 million increase in the loan portfolio during this
period. The allowance for loan losses as a percentage of net loans receivable
was 0.61% and 0.55% at March 31, 1999 and 1998, respectively.
14
<PAGE> 16
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 increased $31,000 to $978,000 for the quarter ended March 31, 1999, from
$947,000 for the same period in 1998, primarily due to $53,000 increase in
customer fees to $931,000 for the three months ended March 31, 1999 from
$878,000 for the same period in 1998.
OPERATING EXPENSE
Operating expense increased $625,000 to $5.6 million for the three month period
ended March 31, 1999 from $5.0 million for the same period in 1998. Employee
compensation and benefits increased $520,000 during the quarter ended March 31,
1999 as compared to the same period in 1998. The increase primarily reflected
increased compensation resulting from merit increases implemented in connection
with the Association's annual review of its compensation structure for all
employees and officers. As a result of such review, it was determined to
increase salaries at a greater level than prior periods to improve the
Association's ability to compete for, and retain high quality employees. A
$250,000 increase in occupancy and equipment costs for the three months ended
March 31, 1999 as compared to the same period in 1998 primarily reflected
increased depreciation expense, repairs and maintenance costs and real estate
taxes, offset in part by a decrease in lease expense. The increase in
depreciation expense and the decrease in lease expense are related to the
relocation of two offices from leased facilities to new buildings built by the
Association during the latter part of 1998. In addition, advertising and
marketing expense increased $117,000 during the quarter ended March 31, 1999 as
compared to the same quarter in 1998. These increases were offset in part by a
$265,000 decrease in miscellaneous expense for the quarter ended March 31, 1999
which reflected a reversal of a $127,000 loss reserve previously recorded which
was recovered from an insurance company as a result of the settlement of an
employee defalcation claim, as well as a reduction in loan expense of $228,000.
PROVISION FOR INCOME TAXES
The provision for income taxes was $526,000 for the three months ended March 31,
1999 as compared to $681,000 for the same period in 1998 reflecting primarily
the increased benefit from tax credits totaling $124,000 resulting from the
Association's investment in the affordable housing partnership during the
quarter ended March 31, 1999 as compared to $32,000 for the same period in 1998.
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, 1998.
15
<PAGE> 17
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.
The Association reached a final settlement with its insurance
company on a claim previously disclosed related to a defalcation
by a former employee during the three months ended March 31, 1999.
The Association recorded a partial recovery amounting to $127,000
of a previously recorded allowance for loss.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
Exhibit 27, Financial Data Schedule.
(b) CURRENT REPORTS ON FORM 8-K.
None during the reporting period.
16
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this Report to be signed on its behalf by
the undersigned thereunto duly authorized.
COMMUNITY SAVINGS BANKSHARES, INC.
/s/ James B. Pittard, Jr.
-------------------------------------
Date: May 11, 1999 James B. Pittard, Jr.
President and Chief Executive Officer
Date: May 11, 1999 /s/ Larry J. Baker
-------------------------------------
Larry J. Baker
Senior Vice President and Treasurer
17
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 15,376
<INT-BEARING-DEPOSITS> 57,247
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 107,214
<INVESTMENTS-CARRYING> 47,814
<INVESTMENTS-MARKET> 52,086
<LOANS> 566,928
<ALLOWANCE> 3,438
<TOTAL-ASSETS> 835,709
<DEPOSITS> 584,012
<SHORT-TERM> 0
<LIABILITIES-OTHER> 13,156
<LONG-TERM> 104,988
0
0
<COMMON> 10,549
<OTHER-SE> 123,004
<TOTAL-LIABILITIES-AND-EQUITY> 835,709
<INTEREST-LOAN> 10,424
<INTEREST-INVEST> 2,483
<INTEREST-OTHER> 1,095
<INTEREST-TOTAL> 14,002
<INTEREST-DEPOSIT> 5,525
<INTEREST-EXPENSE> 7,146
<INTEREST-INCOME-NET> 6,856
<LOAN-LOSSES> 322
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,601
<INCOME-PRETAX> 1,911
<INCOME-PRE-EXTRAORDINARY> 1,385
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,385
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.14
<YIELD-ACTUAL> 3.52
<LOANS-NON> 1,030
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,496
<ALLOWANCE-OPEN> 3,160
<CHARGE-OFFS> (44)
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 3,438
<ALLOWANCE-DOMESTIC> 3,438
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
