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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20552
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
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 000-25089
COMMUNITY SAVINGS BANKSHARES, INC.
-------------------------------------------
(Exact name of registrant as specified in its charter)
UNITED STATES 65-0870004
- - ---------------------------------------- -------------------------------------
(State or Other Jurisdiction (IRS Employer Identification Number)
of Incorporation or Organization)
660 US HIGHWAY ONE, NORTH PALM BEACH, FL 33408
- - ---------------------------------------- -------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(561) 881-2212
-------------------------------------------------------------
(Registrant's Telephone Number including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $1.00 PER SHARE
(Title of Class)
Indicate by check mark whether the Registrant (1) his filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding twelve months (or for such shorter period that
the Registrant was required to file reports) and (2) has been subject to such
requirements for the past 90 days. YES X NO
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [ X ]
As of March 18, 1999, there were issued and outstanding 10,548,884
shares of the Registrant's Common Stock. The aggregate value of the voting
stock held by non-affiliates (persons other than the employee stock ownership
plan, directors and officers) of the Registrant, computed by reference to the
closing price of the Common Stock as of March 18, 1999 ($12.375) was
$130,542,440.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Shareholders for the fiscal year ended
December 31, 1998 (Parts II and IV).
2. Proxy Statement for the Annual Meeting of Shareholders (Portions of Parts II
and III).
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PART I
ITEM 1. BUSINESS
GENERAL
In the following discussion, references to "Bankshares" relate to
Community Savings Bankshares, Inc. together with its wholly-owned subsidiary,
Community Savings, F. A. (the "Association").
COMMUNITY SAVINGS BANKSHARES, INC.
Bankshares is a Delaware-chartered stock holding company organized in
August 1998. The only significant asset of Bankshares is its investment in 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, Community Savings
Bankshares, Inc., a federal mid-tier stock holding company (the "Mid-Tier
Holding Company"). Bankshares sold 5,470,651 shares of common stock at $10.00
per share in a subscription and community offering (the "Offering") resulting
in net proceeds of approximately $53.2 million. Bankshares also issued
5,078,233 exchange shares to existing minority shareholders (the "Exchange") at
the exchange ratio of 2.0445 shares for each share of Mid-Tier Holding Company
common stock. The aggregate number of shares of common stock outstanding
following the offering and exchange totals 10,548,884. 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
and the exchange ratio of 2.0445 was applied to all stock related data for
comparability purposes. At December 31, 1998, Bankshares had total assets of
$844.0 million, total loans of $538.2 million, total deposits of $594.4
million, and total shareholders' equity of $133.3 million. The common stock of
Bankshares trades on The Nasdaq Stock Market under the symbol "CMSV".
Bankshares' executive office is located at 660 U.S. Highway One, North
Palm Beach, Florida and its telephone number at that address is (561) 881-2212.
COMMUNITY SAVINGS, F. A.
The Association, founded in 1955, is a federally chartered savings and
loan association headquartered in North Palm Beach, Florida. The Association's
deposits are federally insured by the Federal Deposit Insurance Corporation
("FDIC") through the Savings Association Insurance Fund ("SAIF"). The
Association has been a member of the Federal Home Loan Bank of Atlanta ("FHLB")
since 1955. The Association is regulated by the Office of Thrift Supervision
("OTS"). The Association is the wholly-owned subsidiary of Bankshares.
The Association is a community-oriented financial institution engaged
primarily in the business of attracting deposits from the general public in the
Association's market area (as described below) and using such funds, together
with other borrowings, to invest in various consumer-based real estate loans,
commercial business loans and mortgage-backed securities ("MBS") as well as
United States government and agency securities, mutual funds, corporate debt
securities, interest-earning deposits in the FHLB and FHLB stock. See "Lending
Activities", "Mortgage-Backed and Related Securities", and "Investment
Activities". The Association's principal sources of funds are deposits,
principal and interest payments on loans and securities, and FHLB advances. The
principal source of income is interest received from loans and securities,
while principal expenses are interest paid on deposits and borrowings and
employee compensation and benefits. See "Sources of Funds." The Association's
plan is to operate as a well-capitalized, profitable and independent
community-oriented savings and loan association. The Association has
implemented this strategy by emphasizing retail deposits as its primary source
of funds and investing a substantial part of such funds in locally originated
residential first mortgage loans, in mortgage-backed and related securities and
in other liquid investment securities. 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 inherent credit risk of assets. The
Association maintains asset quality by utilizing comprehensive loan
underwriting standards, effective collection efforts as well as by primarily
originating or purchasing secured or guaranteed assets.
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The Association's executive office is located at 660 U.S. Highway One,
North Palm Beach, Florida, and its telephone number at that address is (561)
881-4800.
FORMATION OF THE HOLDING COMPANY
On July 29, 1998, the Board of Directors of the Association, the
Mid-Tier Holding Company and ComFed adopted a Plan of Conversion and a Plan of
Reorganization ("the Plan"), and on August 6, 1998, the Association
incorporated Bankshares under Delaware law as a first-tier wholly-owned
subsidiary of the Association. Pursuant to the Plan, (i) the Mid-Tier Holding
Company converted to an interim federal savings association and simultaneously
merged with and into the Association, (ii) ComFed converted to an interim
federal stock savings association and simultaneously merged with and into the
Association, after which ComFed ceased to exist and the 2,620,144 shares of
Mid-Tier Holding Company common stock held by ComFed were cancelled, and (iii)
an interim savings institution ("Interim") was formed as a wholly-owned
subsidiary of Bankshares solely for such purpose which then merged with and
into the Association. As a result of the merger of Interim with and into the
Association, the Association became the wholly-owned subsidiary of Bankshares
and the 2,483,816 outstanding public Mid-Tier Holding Company common shares
were converted into exchange shares; (the "Exchange") pursuant to the exchange
ratio of 2.0445 shares of common stock for each share of Mid-Tier Holding
Company common stock resulting in 5,078,233 exchange shares. Bankshares sold
5,470,651 shares of common stock at $10.00 per share in a public offering (the
"Offering"). The aggregate number of shares of common stock outstanding
following the Offering and Exchange totals 10,548,884.
CHANGE OF FISCAL YEAR
In January 1997, the Board of Directors of the Association approved a
change of the Association's fiscal year from September 30 to December 31,
effective December 31, 1996. Bankshares' fiscal year end is also December 31.
FORWARD-LOOKING STATEMENTS
Certain information in this Form 10-K may constitute forward-looking
information that involves risks and uncertainties that could cause actual
results to differ materially from those estimated. Persons are cautioned that
such forward-looking statements are not guarantees of future performance and
are subject to various factors which could cause actual results to differ
materially from those estimated. These factors include, but are not limited to,
changes in general economic and market conditions, legislative and regulatory
changes, monetary and fiscal policies of the federal government, demand for
loan and deposit products and the development of an interest rate environment
that adversely affects the interest rate spread or other income from
Bankshares' investments and operations.
MARKET AREA AND COMPETITION
Bankshares and the Association are headquartered in North Palm Beach,
Florida. Because Bankshares' only significant asset is its ownership of all the
issued and outstanding capital stock of the Association, the market area and
competition are identical for both entities. The Association operates 21
offices in its market area in southeastern Florida, five of which are located
in Martin County, twelve of which are located in Palm Beach County, three of
which are located in St. Lucie County and one of which is located in Indian
River County. The Association operates a loan production office located in Vero
Beach in Indian River County.
According to county projections from the University of Florida, the
population of Palm Beach, Martin, St. Lucie, and Indian River counties was
estimated to aggregate l.4 million for 1998. This study projects a 3.5% growth
rate to 1.5 million by the year 2000. This population growth combined with a
lower interest rate environment during the first quarter of 1999 suggests
increased demand for mortgage loans in the four county market, as well as in
the State of Florida. However, such estimates may not prove representative of
actual experience for the remainder of 1999.
The counties in the Association's market area have experienced
significant growth since the 1960s. Several of the counties are currently
experiencing major redevelopment projects. In Palm Beach County, the City of
West Palm Beach is implementing a $375 million project called City Place
designed to continue the revitalization of the downtown area with the addition
of 600,000 square feet of leaseable retail space organized around cultural and
entertainment activities. Also in Palm Beach County, construction has begun on
Abacoa, a new subdivision development which features a baseball stadium,
commercial office space and retail space, as well as single-family and
multi-family residential properties designed to
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accommodate up to 10,000 residents. TriRail, the commuter train service for
southern Florida, will be extended northward to service this community.
A $500,000 Main Street grant was obtained to redevelop downtown Stuart
in Martin County in 1993. Designed to stimulate business growth in the downtown
area, the improvements included renovations to the Martin County Courthouse, a
riverwalk on the St. Lucie River, new construction and facade renovations. The
redevelopment has been supplemented by the completion of the new Roosevelt
bridge facilitating access to the city from the north.
In St. Lucie County, the Professional Golfers Association ("PGA")
completed three new championship golf courses, a golf learning center and a
housing development.
The economy in this market area is service-oriented and is
significantly dependent upon government, foreign trade, tourism, and its
continued attraction as a retirement area. In Palm Beach and Martin counties,
cooperative efforts between the counties and local municipalities are producing
business growth and expansion in the county. A variety of county supported
programs have been instituted to create new jobs and to encourage relocation or
expansion of companies with an emphasis placed on high-technology and service
industries. Consequently, commercial building vacancies are at a low level.
Major employers in Palm Beach County include Pratt and Whitney (United
Technologies), Columbia Palm Beach Healthcare System, Inc., Motorola, Inc.,
Inracoastal Health Systems, Inc., Florida Power and Light Co. and Flo Sun, Inc.
Martin County major employers include Martin Memorial Medical Center, Northrop
Grumman Aircraft Systems, Inc., and Publix supermarkets. St. Lucie County major
employers include Indian River Community College, Columbia Lawnwood Regional
Medical, Publix supermarkets, and Staff Leasing. Indian River County major
employers include Indian River Memorial Hospital, Publix supermarkets and New
Piper Aircraft Corp.
Bankshares' market area in Southeast Florida has a large concentration
of financial institutions, many of which are significantly larger and have
greater financial resources than the Association, and all of which are
competitors of the Association to varying degrees. As a result, the Association
encounters strong competition both in attracting deposits and in originating
real estate and other loans. Its most direct competition for deposits has come
historically from commercial banks, securities broker-dealers, other savings
associations, and credit unions in its market area. Continued strong
competition from such financial institutions is expected in the foreseeable
future. The market area includes branches of several commercial banks that are
substantially larger than the Association in terms of state-wide deposits. The
Association competes for savings by offering depositors a high level of
personal service and expertise together with a wide range of financial services
as well as competitive pricing. In recent years many financial institutions
have been aggressively expanding through the acquisition of branch locations or
entire financial institutions, thereby increasing competition.
Based on total assets as of December 31, 1998, the Association was the
third largest financial institution headquartered in Palm Beach County. The
Association held 2.13%, 8.57%, 3.40% and 1.20% of all bank and savings
association deposits in Palm Beach, Martin, St. Lucie, and Indian River
counties, respectively, at September 30, 1998.
The competition for real estate and other loans comes principally
from commercial banks, mortgage-banking companies, and other savings
associations. The competition for loans has increased substantially in recent
years as a result of the large number of institutions competing in the market
area as well as the increased efforts by commercial banks to expand mortgage
loan originations. The Association competes for loans primarily through the
competitive interest rates and loan fees it charges and the efficiency and
quality of services it provides borrowers, real estate brokers, and builders.
Factors that affect competition include general and local economic conditions,
current interest rate levels, and the volatility of the mortgage markets.
LENDING ACTIVITIES
GENERAL. Historically, the principal lending activity of the
Association has been the origination of fixed- and adjustable-rate mortgage
loans collateralized by one- to four-family residential properties located in
its primary market area. It is the Association's intention to offer varied
products in the residential mortgage loan area. The Association currently
emphasizes the origination of adjustable-rate residential mortgage ("ARM")
loans and fixed-rate residential mortgage loans with terms of 15 years or less,
as well as a residential mortgage loan which provides for a fixed-rate of
interest during the first five or seven years and which thereafter converts to
an ARM loan, the interest rate of which adjusts annually. At times, it has been
the Association's policy to sell in the secondary market on a servicing
retained basis all fixed-rate mortgage loan originations with terms greater
than 15 years. However, based on management's assessment of the market at a
particular
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time and Board of Director limits, the Association may periodically decide to
retain such loans in the portfolio. There were no loans held for sale at
December 31, 1998. Loans serviced for other institutions totaled $14.2 million
at such date.
While the Association's primary emphasis is on residential real estate
lending, the Association's policy is to meet demand for other types of loans by
offering a wide variety of loan programs designed to meet the customers' needs.
In response to customer demand, the Association began expanding its commercial
lending programs in fiscal year 1996. Although demand for commercial real
estate loans declined during fiscal year 1998, the Association intends to
continue to pursue such loans during 1999 in connection with providing services
to its small business customers. At December 31, 1998, the gross loan portfolio
totaled $573.2 million. At such date, the weighted average remaining term to
maturity of the loan portfolio was approximately 17.0 years. At December 31,
1998, $248.8 million, or 43.4% of the total gross loan portfolio consisted of
loans with adjustable interest rates. To supplement local loan originations,
the Association also invests in mortgage-backed and related securities that
directly or indirectly provide funds principally for residential home buyers in
the United States. The Association has also purchased either participations in
or whole residential real estate loans which are serviced by other
institutions. Such loans totaled $45.4 million, net of premiums, at December
31, 1998. The Association also participates with other financial institutions
in programs which provide residential mortgage loans to low-and moderate-income
borrowers. During 1999, the Association intends to use its loan solicitors to
continue the expansion of its lending activities, particularly one- to
four-family residential loans and commercial real estate and business loans.
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ANALYSIS OF LOAN PORTFOLIO. Set forth below is selected data relating
to the composition of the loan portfolio by type of loan.
<TABLE>
<CAPTION>
At
December 31,
------------------------------------------------------
1998 1997 1996
----------------- ------------------ -----------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential 1-4 family(1) $421,766 73.58% $339,117 70.90% $293,366 71.11%
Residential construction 54,391 9.49 32,828 6.86 33,158 8.04
Land 14,624 2.55 17,117 3.58 19,426 4.71
Multi-family(2) 8,392 1.46 8,800 1.84 8,096 1.96
Commercial(3) 46,118 8.04 59,220 12.38 37,815 9.17
Non-residential construction 6,292 1.10 2,022 0.42 2,200 0.53
--------- -------- --------- -------- --------- -------
Total real estate loans 551,583 96.22 459,104 95.98 394,061 95.52
--------- -------- --------- -------- --------- -------
Non-real estate loans:
Consumer loans(4) 15,015 2.62 15,694 3.28 16,028 3.88
Commercial business 6,635 1.16 3,530 0.74 2,458 0.60
--------- -------- --------- -------- --------- -------
Total non-real estate
loans 21,650 3.78 19,224 4.02 18,486 4.48
--------- -------- --------- -------- --------- -------
Total loans receivable 573,233 100.00% 478,328 100.00% 412,547 100.00%
====== ====== ======
Less:
Undisbursed loan proceeds 33,202 24,163 20,765
Unearned discount and
premium and net deferred
fees and costs (1,333) (206) 200
Allowance for loan losses 3,160 2,662 2,542
-------- -------- --------
Total loans receivable, net $538,204 $451,709 $389,040
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
At
September 30,
-------------------------------------------------------------------------------
1996 1995 1994
------------------- ------------------------ -----------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential 1-4 family(1) $284,474 70.92% $248,769 71.27% $247,867 74.82%
Residential construction 35,720 8.91 27,314 7.83 12,265 3.70
Land 16,846 4.20 15,601 4.47 20,476 6.18
Multi-family(2) 8,153 2.03 7,351 2.11 6,772 2.05
Commercial(3) 38,433 9.58 35,402 10.14 32,612 9.84
Non-residential construction -- -- -- -- -- --
--------- ------- -------- ------ -------- ------
Total real estate loans 383,626 95.64 334,437 95.82 319,992 96.59
--------- ------- -------- ------ -------- ------
Non-real estate loans:
Consumer loans(4) 15,606 3.89 12,638 3.62 10,237 3.09
Commercial business 1,874 0.47 1,958 0.56 1,058 0.32
--------- ------- -------- ------ -------- ------
Total non-real estate
loans 17,480 4.36 14,596 4.18 11,295 3.41
--------- ------- -------- ------ -------- ------
Total loans receivable 401,106 100.00% 349,033 100.00% 331,287 100.00%
====== ====== ======
Less:
Undisbursed loan proceeds 22,318 15,253 9,872
Unearned discount and
premium and net deferred
fees and costs 257 846 908
Allowance for loan losses 2,312 3,492 3,390
--------- -------- --------
Total loans receivable, net $376,219 $329,442 $317,117
========= ======== ========
</TABLE>
- - --------------------------------
(1) Includes participations or whole loans purchased of $44.7 million, $19.5
million, $1.7 million, $1.8 million, $2.2 million, and $2.6 million, at
December 31, 1998, 1997, 1996, September 30, 1996, 1995, and 1994,
respectively.
(2) Includes participations of $0, $0, $505,000, $360,000, $0, $0, at December
31, 1998, 1997, 1996, September 30, 1996, 1995, and 1994, respectively.
(3) Includes participations of $146,000, $162,000, $190,000, $198,000, $4.9
million, and $5.0 million, at December 31, 1998, 1997, 1996, September 30,
1996, 1995, and 1994, respectively.
(4) Includes primarily home equity lines of credit, automobile loans, and
loans secured by savings deposits. At December 31, 1998, the disbursed
portion of home equity lines of credit totaled $7.8 million.
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LOAN AND MORTGAGE-BACKED AND RELATED SECURITIES MATURITY AND REPRICING
SCHEDULE. The following table sets forth certain information as of December 31,
1998, regarding the dollar amount of loans, net of loans in process ("LIP") and
mortgage-backed and related securities maturing in the Association's portfolio
based on their contractual terms to maturity. Demand loans, loans having no
stated schedule of repayments and no stated maturity, and overdrafts are
reported as due in one year or less. Adjustable- and floating-rate loans are
included in the period in which interest rates are next scheduled to adjust
rather than in which they contractually mature, and fixed-rate loans are
included in the period in which the final contractual repayment is due.
Fixed-rate mortgage-backed and related securities are assumed to mature in the
period in which the final contractual payment is due on the underlying
mortgage.
<TABLE>
<CAPTION>
Within 1 1-3 3-5 5-10 More Than
Year Years Years Years 10 Years Total
-------- ----- ----- ----- --------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family residential(1) $180,547 $ 97,377 $ 52,444 $ 67,275 $ 42,344 $439,987
Commercial, multi-family and land(1) 60,874 7,780 3,445 3,884 2,411 78,394
Consumer (excluding lines of credit) 3,704 2,911 496 46 -- 7,157
Equity line of credit(2) 7,858 -- -- -- -- 7,858
Commercial business 6,332 -- 249 -- -- 6,635
-------- -------- ------- -------- -------- --------
Total loans receivable (net of LIP) $259,315 $108,122 $56,634 $ 71,205 $ 44,755 $540,031
======== ======== ======= ======== ======== ========
Mortgage-backed and related securities $ 29,017 $18,650 $4,714 $ 8,122 $ 16,555 $77,058
======== ======= ====== ======= ========= ========
</TABLE>
- - ----------------------------------------------
(1) Includes construction loans.
(2) Variable-rate equity lines of credit reprice on a monthly basis.
The following table sets forth at December 31, 1998, the dollar
amount of all fixed-rate and adjustable-rate loans due after December 31, 1999
based on either the repricing date or the contractual maturity as described
above.
<TABLE>
<CAPTION>
Fixed Adjustable Total
----- ---------- -----
(In Thousands)
<S> <C> <C> <C>
Real estate loans:
One- to four-family residential $223,123 $ 36,317 $259,440
Commercial, multi-family and land 13,575 3,945 17,520
Consumer and commercial business 3,756 -- 3,756
-------- -------- --------
Total (net of LIP) $240,454 $ 40,262 $280,716
======== ======== ========
Percentage of total loans (net of LIP) 44.53% 7.45% 51.98%
======== ======== ========
Mortgage-backed and related securities $ 48,041 $ -- $ 48,041
======== ======== ========
</TABLE>
ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LOANS. The Association's
primary lending activity consists of the origination of one- to four-family,
owner-occupied, residential mortgage loans secured by properties located in its
market area. Such loans are generally underwritten in conformity with the
criteria established by Fannie Mae ("FNMA"), with the exception of loans
exceeding applicable agency dollar limits and loans purchased through the
Association's affiliation with a consortium of financial institutions which
provides loans to low and moderate income borrowers (discussed below). The
Association generally does not originate one- to four-family residential loans
secured by properties outside of its market area although in recent periods it
has purchased a modest amount of single-family loans secured by properties in
the southeast United States. At December 31, 1998, $421.8 million, or 73.6%, of
the gross loan portfolio consisted of one- to four-family residential mortgage
loans. The weighted average contractual maturity of one- to four-family
residential mortgage loans at the time they are originated is approximately
22.8 years. However, it has been the Association's experience that the average
length of time which such loans remain outstanding is approximately 6.0 years.
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The Association currently offers one- to four-family residential
mortgage loans with terms typically ranging from 15 to 30 years, and with
adjustable or fixed interest rates. Originations of fixed-rate mortgage loans
and ARM loans are monitored on an ongoing basis and are affected significantly
by the level of market interest rates, customer preference, the Association's
asset/liability management gap position, and loan products offered by its
competitors. In a relatively low interest rate environment, which existed
throughout fiscal 1998, borrowers typically prefer fixed-rate loans to ARM
loans. Nonetheless, the Association has continued to emphasize the origination
of ARM loan products. ARM loan originations totaled $34.7 million, or 17.7%, of
all one- to four-family loan originations during the year ended December 31,
1998. In connection with the Association's effort to increase mortgage lending,
the Association offers residential mortgage loans which provide for a
fixed-rate of interest during the first five or seven years of the term of the
loans and which thereafter convert to ARM loans on which the interest rate
adjusts annually . This loan product allows the Association to offer a loan
with a relatively short period during which the interest rate is fixed but
which typically provides for an initial interest rate which is greater than
could be obtained from ARM loans originated in the local market. This loan
product is generally offered with a term between l5 and 30 years.
The Association currently offers ARM loans with an annual adjustment
based on changes in the weekly average yield on U.S. Treasury securities
adjusted to a constant maturity of one year plus a margin. Previously, the
Association's ARM loans were indexed to the National Monthly Median Cost of
Funds plus a margin. Each ARM loan has an annual interest rate adjustment
limitation of 200 basis points and a maximum lifetime adjustment of 600 basis
points above the initial rate. ARM loans are originated with initial rates
which are below the fully indexed rate, the amount of such discount varying
depending upon market conditions. Management determines whether a borrower
qualifies for an ARM loan based on the fully indexed rate of the ARM loan at
the time the loan is originated. Negative amortization of the ARM loans is not
allowed. One- to four-family residential ARM loans totaled $175.0 million at
December 31, 1998.
The primary purpose of offering ARM loans is to make the loan
portfolio more interest rate sensitive. However, as the interest income earned
on ARM loans varies with prevailing interest rates, such loans do not offer as
consistently predictable interest income as long-term, fixed-rate loans. ARM
loans carry increased credit risk associated with potentially higher monthly
payments by borrowers as general market interest rates increase. It is
possible, therefore, that during periods of rising interest rates, the risk of
default on ARM loans may increase due to the upward adjustment of interest
costs to the borrower. To offset this risk, loans are underwritten as if the
highest market rate which the borrower would be capable of paying under the
terms of the loan was in effect.
Fixed-rate loans generally are originated and underwritten according
to standards that permit sale in the secondary mortgage market. Whether
management can or will sell fixed-rate loans into the secondary market,
however, depends on a number of factors including the yields and the terms of
the loans, market conditions, the Association's current interest rate
sensitivity gap position and Board of Director established limits. The
Association has followed varying policies with respect to retention in the
portfolio of fixed-rate loans with contractual terms in excess of 15 years. Its
current policy is to limit fixed-rate loans, including loans with 30 year
terms, to a specified percentage of total assets. The Association's fixed-rate
mortgage loans are amortized on a monthly basis with principal and interest due
each month. One- to four-family residential real estate loans often remain
outstanding for significantly shorter periods than their contractual terms
because borrowers may refinance or prepay loans at their option without
prepayment penalties.
In prior years, the Association has participated with other financial
institutions in local consortiums which are committed to provide financing of
one- to four-family mortgage loans for low and moderate income borrowers. The
consortiums underwrite and package the loans which are either sold to the
member institutions on a whole loan basis or closed and funded directly by the
member institution. These loans are originated to borrowers within the
Association's market area and provide for either fixed- or adjustable-rates of
interest. The Association determines which loans it will purchase or fund
directly after conducting its own due diligence review of the loan package
offered. The Association closed approximately $1.9 million in consortium loans
during 1998. It is the Association's intent, subject to market conditions, to
continue to participate in consortiums of this nature in the future.
The Association also purchases single-family residential loans from
other sources, such as mortgage origination companies, or brokers, under the
same guidelines as described above. In addition, such loan purchases include a
contract between the mortgage origination company and the Association, which
contains an indemnification clause protecting the Association from loss
resulting from misrepresentations in the loan applications or other information
provided to the Association. During fiscal year 1998, $3.0 million of such
loans were purchased. It is management's intent, subject to market conditions,
to continue purchasing such loans.
8
<PAGE> 9
The Association may purchase participation interests or whole loans
secured by one- to four-family residences when funds available for lending
exceed the demand for residential loans in the local market or to facilitate
funding of large projects. At December 31, 1998, the loan portfolio included
$45.3 million of loan participations and whole loans secured by one- to
four-family residences. The Association purchased $35.4 million of such loans
during fiscal year 1998.
The Association's one- to four-family residential first mortgage loans
customarily include due-on-sale clauses, which are provisions giving the
Association the right to declare a loan immediately due and payable in the
event, among other things, that the borrower sells or otherwise disposes of the
underlying real property serving as security for the loan. Due-on-sale clauses
are an important means of adjusting the rates on the fixed-rate mortgage loan
portfolio (and to a lesser extent ARM loans), and the Association has generally
exercised its rights under these clauses.
Regulations limit the amount that a savings association may lend
relative to the appraised value of the real estate securing the loan, as
determined by an appraisal at the time of loan origination. Appraisals are
generally performed by an independent outside appraiser. Such regulations
permit a maximum loan-to-value ratio of 95% for residential property and 80%
for all other real estate loans. The Association's lending policies generally
limit the maximum loan-to-value ratio on both fixed-rate and ARM loans without
private mortgage insurance to 80% of the lesser of the appraised value or the
purchase price of the property to serve as collateral for the loan. For one- to
four-family real estate loans with loan-to-value ratios of between 80% and 95%,
the borrower is generally required to obtain private mortgage insurance. An
origination fee of between 1 % and 2% of the total loan amount on all one- to
four-family loans may be charged depending on the market conditions. Fire and
casualty insurance (and flood insurance if the property is within a designated
flood plain), as well as a title guaranty regarding good title, are required on
all properties securing real estate loans made by the Association.
CONSTRUCTION AND LAND LOANS. At December 31, 1998, $54.4 million, or
9.5%, $6.3 million or l.1% and $14.6 million, or 2.6%, of the gross loan
portfolio consisted of residential construction loans, nonresidential
construction loans and land loans, respectively. Fixed-rate and adjustable-rate
residential construction loans are currently offered primarily for the
construction of owner-occupied single-family residences in the Association's
market area to builders who have a contract for sale of the property or to
owners who have a contract for construction. Advances are made as construction
is completed. In addition, construction loans are also made to builders for
single-family homes held for sale. Such loans totaled $12.7 million at December
31, 1998. Construction loans for owner-occupied single-family residences are
generally structured to become permanent loans upon completion of construction,
and are originated with terms of up to 30 years with an allowance of up to six
months for construction during which period the borrower makes interest-only
payments. Construction loans to builders for homes held for sale are generally
originated for a term of up to one year and provide for interest-only payments.
Disbursements are made as evidence of progress is presented to and verified by
the Association.
At December 31, 1998, the Association's largest real estate
construction loan had an aggregate principal outstanding balance of $3.2
million, with disbursed funds of $2.8 million, which is within the
Association's loans-to-one-borrower limit. This loan is secured by a
construction loan to build 134 single-family homes located in the Association's
market area.
Construction loans are also offered on multi-family and commercial
real estate loans. At December 31, 1998, multi-family and commercial
construction loans totaled $0 and $6.3 million, respectively.
In addition, loans are originated within the market area which are
secured by individual unimproved or improved lots zoned primarily to become
single-family residences, as well as commercial and agricultural properties.
Land loans are currently offered as either one-year ARM loans or fixed-rate
loans with terms of up to 15 years. The maximum loan-to-value ratio for such
land loans is 75%.
Adjustable-rate single-family construction and land loans are
currently offered at the weekly average yield on United States Treasury
securities adjusted to a constant maturity of one year plus a margin.
Adjustable-rate construction loans and land loans have an annual interest rate
cap of 200 basis points and a lifetime interest rate cap of 600 basis points
over the initial interest rate. Initial interest rates may be below the fully
indexed rate but the loan is underwritten at the fully indexed rate.
Construction lending generally involves a greater degree of credit
risk than one- to four-family residential mortgage lending. Risk of loss on a
construction loan is dependent largely upon the accuracy of the initial
estimate of the property's value at completion of construction or development
and the estimated cost (including interest) of construction.
9
<PAGE> 10
During the construction phase, a number of factors could result in delays and
cost overruns. If the estimate of value proves to be inaccurate, the
Association may be confronted with a completed project which has a value which
is insufficient to assure full repayment. Loans made on lots carry the risk of
adverse zoning changes, environmental, or other restrictions on future use.
MULTI-FAMILY RESIDENTIAL REAL ESTATE LOANS. Loans secured by
multi-family real estate constituted approximately $8.4 million, or 1.5%, of
the gross loan portfolio at December 31, 1998. At December 31, 1998, a total of
43 loans were secured by multi-family properties. Multi-family real estate
loans are primarily secured by rental properties with between five and
thirty-six units. At December 31, 1998, substantially all multi-family loans
were secured by properties located within the Association's market area. At
December 31, 1998, multi-family real estate loans had an average principal
balance of approximately $195,000. At such date, the largest multi-family real
estate loan had a principal balance of $1.4 million, and was performing in
accordance with its terms. Multi-family real estate loans are currently only
offered with adjustable interest rates, although in the past, fixed-rate
multi-family real estate loans also were originated. Multi-family loans
typically have adjustable interest rates tied to a market index and amortize
over 20 to 25 years. An origination fee of between 1.5% to 2.0% is usually
charged on multi-family loans. Multi-family mortgage loans are generally
originated for amounts up to 75% of the appraised value of the property
securing the loan. The initial interest rate on multi-family real estate loans
is currently priced at the weekly average yield on United States Treasury
securities adjusted to a constant maturity of one year plus a margin, depending
on the nature and size of the project. Originations of multi-family loans have
been limited in recent years due to the limited demand for such projects in the
Association's market area.
In its underwriting, the Association reviews the expected net
operating income generated by the real estate to support the debt service, the
age and condition of the collateral, the financial resources and income level
of the borrower, the borrower's experience in owning or managing similar
properties, and any financial reserves the borrower may have.
Loans secured by multi-family real estate generally involve a greater
degree of credit risk than one- to four-family residential mortgage loans and
carry larger loan balances. This increased credit risk is a result of several
factors, including the concentration of principal in a limited number of loans
and borrowers, the effects of general economic conditions on income producing
properties, and the increased difficulty of evaluating and monitoring these
types of loans. Furthermore, the repayment of loans secured by multi-family
property is typically dependent upon the successful operation of the related
real estate property.
COMMERCIAL REAL ESTATE LOANS. Loans secured by commercial real estate
constituted approximately $46.1 million, or 8.1%, of the gross loan portfolio
at December 31, 1998. Commercial real estate loans are secured by improved
property such as offices, hotels, small business facilities, strip shopping
centers, warehouses, commercial land and other non-residential buildings. At
December 31, 1998, substantially all of the commercial real estate loans were
secured by properties located within the Association's market area. At December
31, 1998, a total of 193 loans were secured by commercial real estate with an
average principal balance of approximately $239,000. Commercial real estate
loans are currently only offered with adjustable interest rates, although in
the past the Association originated fixed-rate commercial real estate loans.
The terms of each commercial real estate loan are negotiated on a case-by-case
basis, although such loans typically have adjustable interest rates tied to a
market index. An origination fee of up to 2% of the principal balance of the
loan is typically charged on commercial real estate loans. Commercial real
estate loans originated by the Association generally amortize over 15 to 20
years and have a maximum loan-to-value ratio of 75%.
The Association expanded both its commercial real estate and business
lending activities in late fiscal 1996. An experienced commercial loan officer
and a credit analyst were added to the Lending Division staff. Although during
the year ended December 31, 1998, $11.3 million of commercial real estate loans
were originated the aggregate total of such loans decreased $13.1 million from
December 31, 1997. The Association intends to continue to emphasize the
origination of commercial real estate and business loans in the future.
At December 31, 1998, the largest commercial real estate borrower had
an outstanding principal balance of $2.0 million, which is within the
Association's loans-to-one-borrower limit. Collateral for the loan is an orange
grove located in the Association's market area, and the loan is currently
performing in accordance with its terms.
In underwriting commercial real estate loans, the same underwriting
standards and procedures are employed as are employed in underwriting
multi-family real estate loans. Loans secured by commercial real estate
generally involve a higher degree of risk than one- to four-family residential
mortgage loans and carry larger loan balances. This increased credit risk is a
result of several factors, including the concentration of principal in a
limited number of loans and borrowers,
10
<PAGE> 11
the effects of general economic conditions on income producing properties, and
the difficulty of evaluating and monitoring these types of loans. Furthermore,
the repayment of loans secured by commercial real estate is typically dependent
upon the successful operation of the related real estate project. If the cash
flow from the project is reduced, the borrower's ability to repay the loan may
be impaired.
CONSUMER LOANS. As of December 31, 1998, consumer loans totaled $15.0
million, or 2.6%, of the gross loan portfolio. The principal types of consumer
loans offered are home equity lines of credit, fixed-rate second mortgage
loans, automobile loans, mobile home loans, boat loans, recreational vehicle
loans, unsecured personal loans, and loans secured by deposit accounts.
Consumer loans are offered primarily on a fixed-rate basis with maturities
generally of five years or less. Home equity lines of credit are secured by the
borrower's principal residence. Consumer loans are underwritten using the
Association's customary lending standards. The Association anticipates that its
involvement in such lending will continue.
Consumer loans generally have shorter terms and higher interest rates
than traditional mortgage loans, but generally entail greater credit risk than
do residential mortgage loans, particularly in the case of consumer loans that
are unsecured or secured by assets that depreciate rapidly, such as
automobiles, mobile homes, boats, and recreational vehicles. In such cases,
repossessed collateral for a defaulted consumer loan may not provide an
adequate source of repayment for the outstanding loan and the remaining
deficiency often does not warrant further substantial collection efforts
against the borrower. In particular, amounts realizable on the sale of
repossessed automobiles may be significantly reduced based upon the condition
of the automobiles and the fluctuating demand for used automobiles.
COMMERCIAL BUSINESS LOANS. The Association currently offers commercial
business loans to finance small businesses in its market area. Commercial
business loans are primarily offered as a customer service to business account
holders. Such loans may include commercial lines of credit, loans on inventory,
equipment, receivables, or other collateral and unsecured loans. During the
quarter ended September 30, 1996, the Association began expanding its
activities in the commercial business lending market as part of its overall
increased commercial lending activity. At December 31, 1998, the 54 commercial
business loans outstanding had an aggregate balance of $6.6 million and an
average loan balance of approximately $122,000. Commercial business loans
originated during the year ended December 31, 1998 totaled $6.2 million.
Commercial business loans are offered with both fixed- and adjustable-interest
rates. Adjustable-rates on commercial business loans are priced against the
Citibank, N.A. or WALL STREET JOURNAL prime rate, plus a margin. The loans are
offered with terms of up to five years and are underwritten using the
Association's customary underwriting standards.
At December 31, 1998, the largest commercial business loan was secured
by accounts receivable, contract rights, inventory, equipment, furniture and
personal property and had an outstanding principal balance of $2.5 million. It
is currently performing in accordance with its terms.
Commercial business loans generally bear higher interest rates than
residential loans, but they also may involve a higher risk of default since
their repayment is generally dependent on the successful operation of the
borrower's business. Personal guarantees from the borrower or a third party are
generally obtained as a condition to originating its commercial business loans.
LOAN ORIGINATIONS, SOLICITATION, PROCESSING, COMMITMENTS, AND
PURCHASES. Loan originations are derived from a number of sources such as real
estate broker referrals, existing customers, developers and walk-in customers.
In the case of a real estate loan, an independent appraiser approved by the
Association appraises the real estate intended to secure the proposed loan.
Outside members of the Board of Directors, the Chairman of the Board of
Directors, the President, and certain other officers have been granted the
authority to approve loans in various amounts depending on the types of loans
involved. The Association has also established a Loan Committee which consists
of at least one outside director and certain officers. Larger loans must be
approved by one or more of such authorized officers or directors or by the Loan
Committee depending on the size of the loan. Loans in excess of $2.0 million
may only be approved by the Loan Committee after the entire Board of Directors
is informed. At December 31, 1998, commitments to originate loans, excluding
the undisbursed portion of loans in process, totaled $ 14.1 million.
If the loan is approved, the commitment letter specifies the terms and
conditions of the proposed loan including the amount of the loan, interest
rate, amortization term, a brief description of the required collateral, and
required insurance coverage. Fire and casualty insurance is required at the
time the loan is made and throughout the term of the loan, and upon request of
the Association, flood insurance may be required. Title insurance is required
on all loans secured by real property.
11
<PAGE> 12
In addition to originations, the Association also purchases loans
secured by one- to four-family residences from consortiums, mortgage
origination companies, or brokers, as previously discussed in "One- to
Four-Family Residential Real Estate Loans." In addition, the Association may
purchase participation loans when funds available for lending exceed the demand
for loans in the local market or to facilitate funding of larger projects. Such
loans, which totaled $45.3 million at December 31, 1998, are secured by
residential real estate loans. Substantially all of such loans are whole loans;
however, participation interests account for approximately $1.1 million of the
$45.3 million.
12
<PAGE> 13
ORIGINATION, PURCHASE AND SALE OF LOANS. The table below shows the loan
origination, purchase and sales activity for the periods indicated.
<TABLE>
<CAPTION>
For Year For Three
Ended Months Ended For Year Ended
December 31, December 31, September 30,
---------------------------------------------------------------------------------------
1998 1997 1996 1996 1995
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Loans receivable, beginning of period $451,709 $389,040 $376,219 $329,442 $317,117
Originations:
Real estate:
One- to four-family residential(1) 169,636 67,923 20,226 82,596 35,909
Land 3,996 14,360 5,498 6,848 18,163
Multi-family(1) 283 1,427 -- 1,263 --
Commercial(1) 11,347 28,667 1,806 16,102 8,197
-------- -------- ------- -------- --------
Total real estate loans 185,262 112,377 27,530 106,809 62,269
Non-real estate loans:
Consumer 4,760 4,116 1,525 5,698 4,154
Commercial business 6,220 2,699 515 796 646
-------- -------- ------- -------- --------
Total originations 196,242 119,192 29,570 113,303 67,069
Transfer of mortgage loans to
foreclosed real estate (713) (558) (78) (400) (1,394)
Loans and participations purchased 38,354 24,455 1,998 16,775 2,728
Repayments (139,635) (76,816) (20,042) (72,114) (50,452)
Loan sales -- (631) (283) (5,429) (105)
Decrease (increase) in allowance for
loan losses (498) (120) (230) 1,180 (102)
Decrease in amortization of unearned discount
and premiums and net deferred fees and costs 1,127 406 63 589 62
Increase (decrease) in loans in process (9,038) (3,398) 1,553 (7,065) (5,381)
Change in other 656 139 270 (62) (100)
-------- -------- ------- -------- -------
Net loan activity 86,495 62,669 12,821 46,777 12,325
-------- -------- ------- -------- -------
Total loans receivable at end of period $538,204 $451,709 $389,040 $376,219 $329,442
======== ======== ======== ======== =======
</TABLE>
- - ----------------------------------------------------------------------------
(l) Includes loans to finance the construction of one- to four-family
residential properties, and loans originated for sale in the secondary
market.
13
<PAGE> 14
LOAN ORIGINATION FEES AND OTHER INCOME. In addition to interest
earned on loans, the Association may receive loan origination fees. To the
extent that loans are originated or acquired for the portfolio, Statement of
Financial Accounting Standards No. 91, "Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct Costs
of Leases" ("SFAS No. 91") requires that loan origination fees and costs be
deferred and amortized as an adjustment of yield over the life of the loan by
use of the level yield method. ARM loans originated below the fully-indexed
interest rate will have a substantial portion of the deferred amount recognized
as income in the initial adjustment period. Fees and costs deferred under SFAS
No. 91 are recognized into income immediately upon prepayment or the sale of
the related loan. At December 31, 1998, unearned discounts and premiums and
deferred loan origination fees and costs totaled $1.3 million. Loan origination
fees vary with the volume and type of loans and commitments made and purchased,
principal repayments, and competitive conditions in the mortgage markets which,
in turn, respond to the demand and availability of funds.
In addition to loan origination fees, the Association also receives
servicing income and other fees that consist primarily of servicing fees, late
charges, and other miscellaneous fees. Such fees totaled $198,000, $269,000,
$33,000, $148,000, and $184,000 for the years ended December 31, 1998 and 1997,
the three months ended December 31, 1996 and the years ended September 30,
1996, and 1995, respectively.
LOAN SERVICING. While the Association primarily originates loans for
its own portfolio, it also has sold fixed-rate loans to Freddie Mac ("FHLMC")
and to FNMA. At December 31, 1998, the unpaid balances of loans sold totaled
approximately $14.2 million. The Association services such loans receiving a
fee of between 0.25% and 0.375% per loan. The Association does not purchase
loan servicing from other sources.
LOANS-TO-ONE BORROWER. Savings and loan associations are subject to
the same loans-to-one borrower limits as those applicable to national banks.
Under current regulations, loans to one borrower are restricted to an amount
equal to 15% of unimpaired capital and unimpaired surplus on an unsecured
basis, and an additional amount equal to 10% of unimpaired capital and
unimpaired surplus if the loan is secured by readily marketable collateral
(generally, financial instruments and bullion, but not real estate). The 15%
limitation resulted in a dollar limitation of approximately $16.1 million at
December 31, 1998. All of the Association's loans are in compliance with the
loans-to-one borrower limits at December 31, 1998.
The following table presents the five largest lending relationships at December
31, 1998:
<TABLE>
<CAPTION>
At December 31, 1998
-----------------------------------------------------------------------
Total of Loans Amount disbursed
----------------------------------- -----------------------------------
(In Thousands)
<S> <C> <C>
Description of collateral:
Construction loans to build single-family
homes and line of credit $9,834 $6,432
Construction loans to build single-family homes 8,163 5,740
Construction loans to build single-family homes 7,325 3,250
Loans secured by convenience stores, gas stations
and business assets 5,950 4,586
Construction loans to build single-family homes 4,576 3,374
</TABLE>
At December 31, 1998 all of the aforementioned loans were performing in
accordance with their terms.
ASSET QUALITY
DELINQUENCIES. The Association's collection procedures provide that when
a loan is 15 days past due, a computer-generated late charge notice is sent to
the borrower requesting payment. If the delinquency continues at 30 days, a
delinquent notice is sent and personal contact efforts are attempted, either in
person or by telephone. Also, plans to arrange a repayment plan are made at
this point. If a loan becomes 60 days past due and no progress has been made in
resolving the delinquency, a 10-day demand letter is sent and personal contact
is attempted. The loan also becomes subject to possible legal action if
suitable arrangements to repay have not been made. In addition, the borrower is
advised that he or she may obtain access to consumer counseling services, to
the extent required by regulations of the Department of Housing and Urban
Development ("HUD"). When a loan continues in a delinquent status for 90 days
or more, and a repayment schedule has not been made or kept by the borrower,
generally a notice of intent to foreclose is sent to the borrower, giving the
14
<PAGE> 15
borrower 10 days to repay all outstanding interest and principal. If the
delinquency is not cured, foreclosure proceedings are initiated.
DELINQUENT LOANS. Loans are reviewed on a regular basis and are placed
on a non-accrual status when, in the opinion of management, the collection of
additional interest is doubtful. In addition, loans are placed on non-accrual
status when either principal or interest is 90 days or more past due, or less
than 90 days, in the event the loan has been referred to the Association's
legal counsel for foreclosure. Interest accrued and unpaid at the time a loan
is placed on a non-accrual status is charged against interest income.
The following table sets forth information with respect to loans past
due 60 to 89 days in the loan portfolio at the dates indicated.
<TABLE>
<CAPTION>
At December 31, At September 30,
-------------------------------------- --------------------------
1998 1997 1996 1996 1995
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Loans past due 60-89 days:
One- to four-family residential $695 $469 $446 $209 $493
Commercial and multi-family real estate -- -- -- -- --
Consumer and commercial business 100 54 72 3 24
Land -- -- -- -- --
---- ---- ---- ---- ----
Total past due 60-89 days $795 $523 $518 $212 $517
==== ==== ==== ==== ====
</TABLE>
NON-PERFORMING ASSETS. At December 31,1998, non-performing assets
(non-performing loans and real estate owned ("REO")) totaled $2.2 million, and
the ratio of non-performing assets to total assets was 0.26%. Real estate
acquired by the Association as a result of foreclosure or by deed in lieu of
foreclosure is classified as substandard until such time as it is sold. REO is
recorded at cost which is the estimated fair value of the property at the time
the loan is foreclosed. Subsequent to foreclosure, these properties are carried
at lower of cost or fair value less estimated costs to sell.
The following table sets forth information regarding non-accrual loans
delinquent 90 days or more, and real estate acquired or deemed acquired by
foreclosure at the dates indicated. When a loan is delinquent 90 days or more,
all accrued interest thereon is fully reserved and the loan ceases to accrue
interest thereafter. For all the dates indicated, there were no material
restructured loans within the meaning of SFAS 15 (as amended by SFAS No. 121).
<TABLE>
<CAPTION>
At December 31, At September 30,
-------------------------------------- -------------------------------
1998 1997 1996 1996 1995
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-performing loans:
One- to four-family residential $1,537 $1,289 $1,524 $832 $605
Commercial and multi-family real estate 52 -- -- -- --
Consumer and commercial business loans 67 55 107 10 39
Land 12 35 -- -- 18
------ ------ ------ ------ ------
Total non-performing loans 1,668 1,379 1,631 842 662
REO 522 592 1,455 1,384 1,910
Other repossessed assets 22 -- -- -- --
Other non-performing assets(1) -- 400 --
------ ------ ------ ------ ------
Total non-performing assets(2) $2,212 $1,971 $3,086 $2,626 $2,572
====== ====== ====== ====== ======
Total non-performing loans to net loans
receivable 0.31% 0.31% 0.42% 0.22% 0.20%
Total non-performing loans to total assets 0.20 0.19 0.25 0.13 0.12
Total non-performing assets to total assets 0.26 0.27 0.47 0.40 0.45
</TABLE>
- - ----------------------------------------------
(1) The other non-performing asset at September 30, 1996 represented a deposit
account due to the Association whose recovery was in doubt. All funds were
recovered in the subsequent periods.
(2) Net of specific valuation allowances.
15
<PAGE> 16
The largest non-performing asset was REO with a recorded balance of
$257,000 at December 31, 1998, and an appraised value of $340,000. The loan was
originated in fiscal 1989 and is collateralized by a citrus grove located in
St. Lucie County. There are currently no immediate prospects for the sale of
the property.
During the year ended December 31, 1998, gross interest income of
$110,000 would have been recorded on non-performing loans accounted for on a
non-accrual basis if the loans had been current throughout the period. No
interest income on non-accrual loans was included in income during such period.
The following table sets forth information regarding delinquent loans,
REO and loans to facilitate the sale of REO at December 31, 1998.
<TABLE>
<CAPTION>
At December 31, 1998
-----------------------------
Balance Number
-------------- --------------
(Dollars In Thousands)
<S> <C> <C>
Residential real estate:
Loans 60 to 89 days delinquent $695 12
Loans more than 89 days delinquent 1,537 23
Commercial and multi-family real estate:
Loans 60 to 89 days delinquent -- --
Loans more than 89 days delinquent 52 1
Consumer and commercial business:
Loans 60 to 89 days delinquent 100 2
Loans more than 89 days delinquent 67 4
Land:
Loans 60 to 89 days delinquent -- --
Loans more than 89 days delinquent 12 1
REO 522 9
Other repossessed assets 22 2
Loans to facilitate sale of REO 151 3
------ ----
Total $3,158 57
====== ====
</TABLE>
CLASSIFICATION OF ASSETS. Federal regulations provide for the
classification of loans and other assets such as debt and equity securities
considered by OTS to be of lesser quality as substandard, doubtful, or loss
assets. An asset is considered substandard if it is inadequately protected by
the current net worth and paying capacity of the obligor or of the collateral
pledged, if any. Substandard assets include those characterized by the distinct
possibility that the savings institution will sustain some loss if the
deficiencies are not corrected. Assets classified as doubtful have all of the
weaknesses inherent in those classified substandard, with the added
characteristic that the weaknesses present make collection or liquidation in
full, on the basis of currently existing facts, conditions, and values, highly
questionable and improbable. Assets classified as loss are those considered
uncollectible and of such little value that their continuance as assets without
the establishment of a specific loss reserve is not warranted. Assets that do
not expose the savings institution to risk sufficient to warrant classification
in one of the aforementioned categories, but which possess some weaknesses, are
required to be designated special mention by management.
When a savings institution classifies problem assets as either
substandard or doubtful, it is required to establish general allowances for
loan losses in an amount deemed prudent by management. General allowances
represent loss allowances that have been established to recognize the inherent
risk associated with lending activities, but which, unlike specific allowances,
have not been allocated to particular problem assets. When a savings
institution classifies problem assets as loss, it is required either to
establish a specific allowance for losses equal to 100% of the amount of the
assets so classified, or to charge off such amount. A savings institution's
determination as to the classification of its assets and the amount of its
valuation allowances is subject to review by the OTS, which can order the
establishment of additional general or specific loss allowances. Problem loans
in the portfolio are regularly reviewed to determine whether any loans require
classification in accordance with applicable regulations.
16
<PAGE> 17
The following table sets forth the aggregate amount of the
Association's classified assets at the dates indicated.
<TABLE>
<CAPTION>
At December 31, At September,
------------------------------------------- -----------------------------------------
1998 1997 1996 1996 1995 1994
---- ---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Substandard assets $3,056 $3,056 $4,205 $3,745 $8,652 $10,166
Doubtful assets -- -- -- -- -- --
Loss assets 291 547 344 544 1,565 1,520
------ ------ ------ ------ ------ -------
Total classified
assets $3,347 $3,603 $4,549 $4,289 $10,217 $11,686
====== ====== ====== ====== ====== =======
</TABLE>
ALLOWANCE FOR LOAN LOSSES. Management's policy is to provide for
estimated losses on the loan portfolio based on management's evaluation of the
potential losses that may be incurred. Provisions for losses, which increase
the allowances for loan losses, are established by charges to income. Such
allowances represent the amounts which, in management's judgment, are adequate
to absorb charge-offs of existing loans which may become uncollectible. The
adequacy of the allowance is determined by management's monthly evaluation of
the loan portfolio and related collateral, in light of past loss experience,
the volume and type of lending engaged in by the Association, present economic
conditions and other factors considered relevant by management. Anticipated
changes in economic factors which may influence the level of the allowances are
considered in the evaluation by management if the changes can be readily
determined.
Management continues to review the entire loan portfolio to determine
the extent, if any, to which further additional loan loss provisions may be
deemed necessary. Management believes that the current allowance for loan
losses is adequate, however, there can be no assurance that the allowance for
loan losses will be adequate to cover losses that may in fact be realized in
the future or that additional provisions for loan losses will not be required.
17
<PAGE> 18
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES. The following table sets
forth the analysis of the allowance for loan losses for the periods indicated.
<TABLE>
<CAPTION>
At December 31, At September 30,
---------------------------------------- ----------------------------------
1998 1997 1996 1996 1995 1994
---- ---- ---- ---- ---- ----
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Total loans outstanding $538,204 $451,709 $389,040 $376,219 $329,442 $317,117
======== ======== ======== ======== ======== ========
Average loans outstanding for the period $510,491 $411,098 $383,258 $346,880 $321,849 $321,721
======== ======== ======== ======== ======== ========
Allowance balance (at beginning of period) $ 2,662 $ 2,542 $ 2,312 $ 3,492 $ 3,390 $ 3,748
Provision for losses(1) 622 264 243 98 240 989
Recoveries 252 -- -- -- -- --
Charge-offs:
Real estate loans(1) (376) (143) (13) (1,264) (132) (1,325)
Consumer and commercial business loans -- (1) -- (14) (6) (22)
-------- -------- -------- -------- -------- --------
Allowance balance (at end of period) $ 3,160 $ 2,662 $ 2,542 $ 2,312 $ 3,492 $ 3,390
======== ======== ======== ======== ======== ========
Allowance for loan losses as a percent
of net loans receivable at end of period 0.59% 0.59% 0.65% 0.61% 1.06% 1.07%
Net loans charged off as a percent of
average loans outstanding 0.02% 0.04% -- 0.37% 0.04% 0.41%
Ratio of allowance for loan losses to
non-performing loans at end of period(2) 189.45% 193.04% 155.86% 274.58% 527.49% 114.72%
Ratio of allowance for loan losses to
non-performing assets at end of period(2) 142.86% 135.06% 82.37% 103.86% 135.77% 51.05%
</TABLE>
- - -----------------------------------------------------
(1) The provision in 1994 primarily related to four non-performing loans,
including a commercial real estate loan with a principal balance in excess
of $1.2 million. The Association charged off substantially all of the
principal balance of such loans during fiscal years 1994 and 1996 as a
result of the disposition of such loans.
(2) Net of specific reserves.
18
<PAGE> 19
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES. The following table sets
forth the allocation of allowance for loan losses by loan category for the
periods indicated. Management believes that the allowance can be allocated by
category only on an approximate basis. The allocation of the allowance by
category is not necessarily indicative of future losses and does not restrict
the use of the allowance to absorb losses in any category.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------------
1998 1997 1996
---------------------- ----------------------- --------------------
% of Loans % of Loans % of Loans
In Each In Each In Each
Category Category To Category
Amount Total Loans(1) Amount Total Loans(1) Amount Total Loans(1)
------ ----------- ------ ----------- ------ -----------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at end of period
applicable to:
One- to four-family
residential $1,540 84.16% $1,042 78.18% $1,037 79.68%
Land 650 2.55 650 3.58 630 4.71
Multi-family residential 300 1.46 300 1.84
Commercial real estate 550 8.05 550 12.38 300 1.96
Consumer and commercial 500 9.17
business 120 3.78 120 4.02 75 4.48
------ ---- ------ ----- ------ -----
Total allowance for loan
losses $3,160 100.00% $2,662 100.00% $2,542 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------------------------------------
1996 1995 1995
---------------------- ----------------------- --------------------
% of Loans % of Loans % of Loans
In Each In Each In Each
Category Category To Category
Amount Total Loans(1) Amount Total Loans(1) Amount Total Loans(1)
------ ----------- ------ ----------- ------ -----------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at end of period
applicable to:
One- to four-family
residential $ 870 79.83% $ 790 79.10% $ 700 78.52%
Land 630 4.20 630 4.47 630 6.18
Multi-family residential 300 2.03 300 2.11 300 2.05
Commercial real estate 452 9.58 1,712 10.14 1,700 9.84
Consumer and commercial
business 60 4.36 60 4.18 60 3.41
---- ----- ------ ------ ------ ------
Total allowance for loan
losses $2,312 100.00% $3,492 100.00% $3,390 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
- - -----------------------------
(1) Percentages do not reflect adjustments for undisbursed loan proceeds,
unearned discount and net deferred fees, and allowance for loan losses.
19
<PAGE> 20
SECURITIES PORTFOLIO.
The Association's primary focus is the origination of loans. However,
during past periods when mortgage loan demand was moderate and the Association
had de-emphasized the origination of fixed-rate loans, management invested
excess liquidity in investment securities, including mutual funds, and in
mortgage-backed and related securities rather than purchasing whole loans or
loan participations. At December 31, 1998, the Association's securities
portfolio totaled $147.8 million. Such securities are subject to classification
based on the intentions of management. Securities purchased for the portfolio
are classified as either held to maturity or as available for sale. The
Association has no securities classified as trading. During December 1995, the
provisions of SFAS No. 115 "Questions and Answers Guide" were adopted which
allowed between November 15, 1995 and December 31, 1995 a one-time
reclassification of securities from held to maturity to available for sale. The
Association reclassified $49.5 million of securities from investments-held to
maturity and mortgage-backed and related securities-held to maturity to
securities available for sale. Such reclassification resulted in a credit of
$247,000 to shareholders' equity. Subsequently, $749,000 of the securities were
sold at no gain or loss.
The Association maintains an Investment Committee which meets on a
monthly basis to review the securities portfolio and make recommendations to be
carried out by management. All investments must be rated BBB or higher by a
recognized rating service. The Investment Committee consists of the
Association's President and Chief Executive Officer, Senior Vice President,
Chief Financial Officer and Treasurer, and Senior Vice President of Lending.
Investments purchased are comprised primarily of United States
Government and agency obligations, mutual funds that invest in mortgage-backed
securities and government and agency obligations, mortgage-backed and related
securities, corporate debt securities, interest-earning deposits at the FHLB
and FHLB stock. Some of such investments allow the issuer to call the
securities at predetermined times during the life of the security. Such calls
totaled $41.8 million for fiscal 1998. Principal repayments on amortizing
securities totaled $44.0 million in fiscal 1998. The repayments are a general
reflection of lower interest rates which cause certain securities to pay off
more rapidly.
The Association is required under federal regulations to maintain a
minimum amount of liquid assets that may be invested in specified short-term
securities and certain other investments. The Association generally has
maintained a portfolio of liquid assets that exceeds regulatory requirements.
Liquidity levels may be increased or decreased depending upon the yields on
investment alternatives and upon management's judgment as to the attractiveness
of the yields then available in relation to other opportunities and its
expectation of the level of yield that will be available in the future, as well
as management's projections as to the short term demand for funds to be used in
loan origination and other activities. For further information regarding the
securities portfolio see Notes 1, 2 and 3 to the Notes to Consolidated
Financial Statements contained in Bankshares' Annual Report to Shareholders for
the Year Ended December 31, 1998 (the "Annual Report") attached hereto as
Exhibit 13.
MORTGAGE-BACKED AND RELATED SECURITIES. The Association invests in
mortgage-backed and related securities which are included in the securities
portfolio and are classified as either available for sale or held to maturity.
At December 31, 1998, net mortgage-backed and related securities totaled $76.9
million, or 10.0%, of total assets. Of this amount, $32.4 million was
classified as held to maturity and $44.7 million was available for sale. At
December 31, 1998, the market value of the net mortgage-backed and related
securities portfolio totaled approximately $77.0 million. Management primarily
invests in fixed-rate mortgage-backed and related securities with weighted
average lives of five to seven years. Management believes that investing in
short-term mortgage-backed and related securities limits the Association's
exposure to higher interest rates. During fiscal year 1998, $20.1 million of
mortgage-backed and related securities were purchased. Using funds provided by
public funds deposits, odd-term certificates of deposit and FHLB advances
instead of excess liquidity as in previous years.
CMOs are typically issued by a special-purpose entity (in the
Association's case, private issuers), which may be organized in a variety of
legal forms, such as a trust, a corporation, or a partnership. The entity
aggregates pools of pass-through securities, which are used to collateralize
the CMO. Once combined, the cash flows are divided into "tranches" or "classes"
of individual bonds, thereby creating more predictable average durations for
each bond than the underlying pass-through pools. Accordingly, under the CMO
structure, all principal paydowns from the various mortgage pools are allocated
to a CMO's first class until it has been paid off, then to a second class until
such class has been paid off, and then to the next classes in order of
priority. Substantially all of the CMOs held in the securities portfolio
consist of senior sequential tranches, primarily investments in one of the
first three tranches of the CMO. By purchasing senior sequential tranches,
management is attempting to ensure the cash flow associated with such an
investment. Generally, such tranches have stated maturities ranging from 6.5
years to 30 years; however, because of prepayments, the expected weighted
average
20
<PAGE> 21
life of these securities is less than the stated maturities. While non-agency
private issues are somewhat less liquid than CMOs issued or guaranteed by GNMA,
FNMA or FHLMC, they generally have a higher yield than agency insured or
guaranteed CMOs, such higher yield reflecting in part the lack of such
guarantee or protection.
SECURITIES HELD TO MATURITY. At December 31, 1998, investment
securities held to maturity totaled $157.7 million and included United States
Government and agency obligations totaling $13.1 million, mortgage-backed and
related totaling $32.4 million, corporate debt issues totaling $7.1 million,
and FHLB stock totaling $4.7 million.
Included in corporate debt issues are asset-backed securities which
include two debt securities, purchased during fiscal year 1994, which totaled
$715,000 at December 31, 1998 secured by automobile loan receivables. These
securities are rated BBB or above by Standard & Poors and provide an effective
yield of 6.3%. While these securities have a stated maturity of six years, it
is expected that because of prepayments that the receivables underlying the
securities will have a weighted average life of less than the stated
maturities. Debt instruments which depend on the repayment of automobile loans
involve a certain degree of risk since in the event that borrowers of the
automobile loan default, the issuer of the security may have insufficient funds
to repay the principal or interest of the security in accordance with its
terms.
The following tables set forth the carrying value of the securities
held to maturity at the dates indicated. At December 31, 1998, the market value
of the investments was approximately $57.3 million. The market value of
investments includes interest-earning deposits and FHLB stock at book value,
which approximates market value.
<TABLE>
<CAPTION>
At December 31, At September 30,
--------------------------------------------------------------- ----------------
1998 1997 1996 1996
-------------------- ------------------- ------------------ ---------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities:
US Government and agency obligations $13,088 24.87% $13,039 19.23% $12,001 15.89% $11,691 15.14%
Corporate debt issues 7,135 13.56 8,349 12.31 10,138 13.42 10,602 13.73
Mortgage-backed and related securities:
FHLMCs 5,245 9.97 7,465 11.01 9,673 12.80 9,973 12.91
FHMAs 2,504 4.76 3,316 4.89 3,933 5.21 4,076 5.28
GNMAs 1,269 2.41 1,751 2.58 2,108 2.79 2,233 2.89
CMOs 23,190 44.07 33,645 49.63 37,373 49.47 38,328 49.62
AID loans 188 0.36 236 0.35 317 0.42 335 0.43
------ ----- ------ ----- ------- ------ ------ ------
Total mortgage-backed and
related securities 32,396 61.57 46,413 68.45 53,405 70.69 54,945 71.13
------ ----- ------ ----- ------- ------ ------ ------
Total securities held to maturity $52,619 100.00% $67,801 100.00% $75,544 100.00% $77,238 100.00%
======= ====== ======= ====== ======= ====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
Three Months
Year Ended Ended Year Ended
December 31, December 31, September 30,
---------------------- ------------- -------------
1998 1997 1996 1996
------- ------ -------- --------
<S> <C> <C> <C> <C>
Securities held to maturity
Balance, beginning of period $ 67,801 $75,544 $77,238 $137,178
Reclassification from held to maturity
to available for sale -- -- -- (49,521)
Purchases -- -- -- 5,867
Calls (1,427) -- -- (400)
Sales -- -- -- --
Maturities (3,386) (300) -- (7,600)
Repayments (12,067) (8,956) (2,044) (9,611)
Discount and premium amortization 1,523 1,513 350 1,325
Gain on calls 175 -- -- --
-------- ------- ------- -------
Balance, end of period $ 52,619 $67,801 $75,544 $77,238
======== ======= ======= =======
</TABLE>
21
<PAGE> 22
SECURITIES PORTFOLIO MATURITIES. The following table sets forth the
scheduled maturities, carrying values, market values and average yields for the
securities portfolio at December 31, 1998.
<TABLE>
<CAPTION>
At December 31, 1998
-------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years
-------------------- --------------------- ----------------------
Annualized Annualized Annualized
Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
-------- ------- --------- ------- --------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities held to maturity:
United States Government
and agency obligations $ -- --% $10,406 11.75% $2,682 9.43%
Corporate debt issues -- -- 715 6.32 -- --
Mortgage-backed and
related securities -- -- 3,928 6.35 -- --
------- ---- ------ ----- ------ ----
Total securities held to
maturity and FHLB stock -- -- 15,049 10.08 2,682 9.43
------- ---- ------ ----- ------ ----
Securities available for
sale:
United States Government
and agency obligations -- -- 10,072 5.71 -- --
Equity securities 30 1.31 -- -- -- --
Mutual funds 40,387 5.60 -- -- -- --
Mortgage-backed and
related securities -- -- 31 15.81 -- --
------- ---- ------ ----- ------ ----
Total securities
available for sale 40,417 5.59 10,103 5.74 -- --
------- ---- ------ ----- ------ ----
Total securities
portfolio $40,417 5.59% $25,152 8.34% $2,682 9.43%
======= ==== ======= ===== ====== ====
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1998
-------------------------------------------------------------------------
More Than Ten Years
--------------------
Annualized Total Annualized
Weighted ---------------------------- Average Weighted
Carrying Average Carrying Market Life in Average
Value Yield Value Value Years Yield
--------- ------- ------------ ------------ -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities held to maturity:
United States Government
and agency obligations $ -- --% $ 13,088 $ 17,635 4.92% 11.28%
Corporate debt issues 6,420 5.34 7,135 7,410 9.83 5.44
Mortgage-backed and
related securities 28,468 7.05 32,396 32,258 19.05 6.97
------- ---- -------- -------- -----
Total securities held to
maturity and FHLB stock 34,888 6.74 52,619 57,303 7.83
------- ---- -------- -------- -----
Securities available for
sale:
United States Government
and agency obligations -- -- 10,072 10,072 3.12 5.71
Equity securities -- -- 30 30 1.30
Mutual funds -- -- 40,387 40,387 5.60
Mortgage-backed and
related securities 44,631 6.97 44,662 44,662 27.78 6.98
------- ---- -------- -------- ----- -----
Total securities
available for sale 44,631 6.97 95,151 95,151 6.26
------- ---- -------- -------- -----
Total securities
portfolio $ 79,519 6.87% $147,770 $152,454 6.82%
======== ==== ======== ======== =====
</TABLE>
22
<PAGE> 23
SECURITIES AVAILABLE FOR SALE. Securities available for sale are
carried on the books at fair value as required by FASB No. 115 and totaled $95.2
million at December 31, 1998. Included in securities available for sale are
equity securities totaling $30,000, mutual funds totaling $40.4 million, United
States Government and agency obligations totaling $10.1 million and
mortgage-backed and related securities totaling $44.7 million.
Mutual fund investments include mutual funds that invest primarily in
mortgage-backed securities and government and agency securities, and are
classified as available for sale for accounting purposes. The mutual funds which
invest in mortgage-backed securities have characteristics similar to the
mortgage-backed securities in which they invest. Mutual fund investments include
approximately $35.4 million in funds which invest in adjustable-rate
mortgage-backed securities issued by FNMA, FHLMC and Government National
Mortgage Association ("GNMA"), as well as CMOs and real estate mortgage
investment conduits and other securities collateralized by or representing
interests in real estate mortgages, and approximately $5.0 million in funds
which invest in asset-backed, corporate and CMO obligations.
The following tables set forth the carrying value of, and activity in,
the securities available for sale at the dates indicated.
<TABLE>
<CAPTION>
At At
December 31, September 30,
----------------------------------------------------------------- ------------------
1998 1997 1996 1996
----------------- ----------------- ----------------- ------------------
$ % $ % $ % $ %
------- ------- -------- ------ ------- ------ -------- ------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Equity securities(1) $ 30 0.03% $ 23 0.02% $ 14 0.01% $ 115 0.09%
U. S. Government and Agency
obligations 10,072 10.59 55,175 38.78 28,097 22.82 27,942 22.48
Mutual funds 40,387 42.44 40,721 28.62 43,067 34.97 42,912 34.53
Mortgage-backed and
related securities:
GNMAs 19,790 20.80 -- -- -- -- --
CMOs 24,872 26.14 46,350 32.58 51,974 42.20 53,318 42.90
------- ------ -------- ------ -------- ------ -------- ------
Total securities available for sale $95,151 100.00% $142,269 100.00% $123,152 100.00% $124,287 100.00%
======= ====== ======== ====== ======== ====== ======== ======
</TABLE>
- - --------------------------------------
(1) Consists of $30,000, $23,000, $14,000 and $14,000 in FNMA stock which was
purchased in order for the Association to qualify as a FNMA servicer and
at September 30, 1996, $101,000 in securities issued by the Financial
Institutions Insurance Group Limited.
<TABLE>
<CAPTION>
Three Months
Year Ended Ended Year Ended
December 31, December 31, September 30,
-------------------------- ------------ -------------
1998 1997 1996 1996
-------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C>
Securities available for sale:
Balance, beginning of period $142,269 $123,151 $124,287 $ 27,028
Securities reclassified from held to maturity
to available for sale -- -- -- 49,521
Purchases 25,086 46,311 -- 67,787
Calls (40,323) (16,000) -- (12,012)
Sales -- (2,435) (100) (749)
Maturities -- (3,000) -- (2,000)
Repayments (31,955) (7,291) (1,271) (4,514)
Discount and premium amortization 323 137 38 138
(Gain) loss on sales and calls -- (8) 51 254
Increase (decrease) in market value (249) 1,404 146 (1,166)
-------- -------- -------- --------
Balance, end of period $ 95,151 $142,269 $123,151 $124,287
======== ======== ======== ========
</TABLE>
23
<PAGE> 24
INTEREST -EARNING DEPOSITS AND FHLB OF ATLANTA STOCK. Excess funds are
primarily invested on a daily basis in an interest-earning overnight account at
the FHLB of Atlanta. The balance of this account was $100.3 million at December
31, 1998. In addition, interest-earning deposits totaling $1.4 million were held
in other financial institutions at December 31, 1998. Such funds are available
to provide liquidity to meet lending requirements and daily operations.
The Association is required to purchase and maintain FHLB of Atlanta
stock based on the Association's asset size and outstanding total of FHLB
advances. FHLB of Atlanta stock is not readily marketable as it is not traded on
a registered security exchange.
The following table sets forth the carrying value of interest-earning
deposits and FHLB of Atlanta stock at the dates indicated.
<TABLE>
<CAPTION>
At December 31, At September 30,
---------------------------------------------- ---------------
1998 1997 1996 1996
--------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest earning deposits:
FHLB-Atlanta $100,332 $13,621 $28,895 $29,380
Other deposits 1,378 -- -- --
-------- ------- ------- -------
Total interest-earning deposits $101,710 $13,621 $28,895 $29,380
======== ======= ======= =======
FHLB Stock $ 4,722 $ 3,264 $ 2,864 $ 5,384
======== ======= ======= =======
</TABLE>
24
<PAGE> 25
SOURCES OF FUNDS
GENERAL. Deposits are the major source of funds for lending and other
investment purposes. In addition to deposits, funds are derived from the
amortization and prepayment of loans and mortgage-backed and related securities,
the maturity of investment securities, operations and, if needed, advances from
the FHLB. Scheduled loan principal repayments are a relatively stable source of
funds, while deposit inflows and outflows and loan prepayments are influenced
significantly by general interest rates and market conditions. Borrowings may be
used on a short-term basis to compensate for reductions in the availability of
funds from other sources or on a longer term basis for general business
purposes. Although the Association periodically reviews the features and terms
of its deposit products, the Association currently does not intend to materially
change any of the deposit products or services it currently offers.
DEPOSITS. Consumer and commercial deposits are attracted principally
from within the market area through the offering of a broad selection of deposit
instruments including non-interest-bearing demand accounts, NOW accounts,
passbook savings, money market deposit accounts, term certificate accounts and
individual retirement accounts. While deposits of $100,000 or more are accepted,
premium rates for such deposits are not currently offered. Deposit account terms
vary according to the minimum balance required, the period of time during which
the funds must remain on deposit, and the interest rate, among other factors. A
management committee meets weekly to evaluate the internal cost of funds, survey
rates offered by competing institutions, review the Association's cash flow
requirements for lending and liquidity and the amount of certificates of deposit
maturing in the upcoming weeks. This committee executes rate changes when deemed
appropriate. Funds are not obtained through brokers, nor are funds solicited
outside the Association's market area.
The following table sets forth information regarding interest rates,
terms, minimum amounts and balances of deposits as of December 31, 1998.
<TABLE>
<CAPTION>
Percentage
Weighted of
Average Minimum Minimum Total
Interest Rate Term Checking and Savings Deposits(1) Amount Balances Deposits
------------- ---- ------------------------------ ------- -------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C>
0.00% None Non-interest-bearing accounts None $ 31,769 5.34 %
1.00 None NOW accounts $ 100 82,628 13.91
1.73 None Passbook accounts 100 32,919 5.54
None Money market deposit accounts 1,000 89,895 15.12
-------- ------
Total checking and savings deposits 237,211 39.91
-------- ------
CERTIFICATES OF DEPOSIT(1)
4.39 1- 5 months Fixed term, fixed-rate 1,000 15,385 2.59
4.77 6-11 months Fixed term, fixed-rate 1,000 51,765 8.71
5.44 12-17 months Fixed term, fixed-rate 1,000 188,952 31.79
5.61 24-30 months Fixed term, fixed-rate 1,000 23,061 3.88
5.73 36-47 months Fixed term, fixed-rate 1,000 12,513 2.10
5.94 48-59 months Fixed term, fixed-rate 1,000 2,401 0.40
6.16 Over 60 months Fixed term, fixed-rate 1,000 58,920 9.91
1.74 Various Fixed term, fixed-rate 1,000 940 0.16
4.62 Various Negotiated Jumbo 100,000 3,252 0.55
-------- ------
Total certificates of deposit 357,189 60.09
-------- ------
Total deposits $594,400 100.00%
======== ======
</TABLE>
- - --------------------------------
(1) IRA and KEOGH accounts are generally offered throughout all terms stated
above with balances of $47.9 million and $1.3 million, respectively at
December 31, 1998.
25
<PAGE> 26
The following tables sets forth the change in dollar amount in the
various types of savings accounts offered between the dates indicated:
<TABLE>
<CAPTION>
Balance Percent Balance Percent
at of Incr. at of Incr.
12/31/98 Deposits (Decr.) 12/31/97 Deposits (Decr.)
------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-interest-bearing demand
accounts $ 31,769 5.34% $ 7,054 $ 24,715 4.49% $ 6,088
NOW accounts 82,628 13.91 12,766 69,862 12.69 2,786
Passbooks 32,919 5.54 2,698 30,221 5.49 (600)
Money market deposit
accounts 89,895 15.12 11,063 78,832 14.31 9,318
Time deposits which mature:
Within 12 months 277,254 46.64 16,482 260,772 47.35 6,975
Within 12-36 months 53,733 9.04 (5,061) 58,794 10.67 17,590
Beyond 36 months 26,202 4.41 (1,310) 27,512 5.00 (5,158)
-------- ------ ------- -------- ------ -------
Total deposits $594,400 100.00% $43,692 $550,708 100.00% $36,999
======== ====== ======= ======== ====== =======
</TABLE>
<TABLE>
<CAPTION>
Balance Percent Balance Percent
at of Incr. at of
12/31/96 Deposits (Decr.) 9/30/96 Deposits
-------------------------------- -------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-interest-bearing demand
accounts $ 18,627 3.63% $ (905) $ 19,532 3.91%
NOW accounts 67,076 13.06 3,978 63,098 12.65
Passbooks 30,821 6.00 (54) 30,875 6.19
Money market deposit
accounts 69,514 13.53 93 69,421 13.91
Time deposits which mature:
Within 12 months 253,797 49.40 13,557 240,240 48.15
Within 12-36 months 41,204 8.02 (1,510) 42,714 8.56
Beyond 36 months 32,670 6.36 (379) 33,049 6.63
-------- ------- ------- -------- ------
Total deposits $513,709 100.00% $14,780 $498,929 100.00%
======== ======= ======= ======== ======
</TABLE>
26
<PAGE> 27
The following table sets forth the certificates of deposit classified
by rates as of the dates indicated.
<TABLE>
<CAPTION>
At December 31, At September 30,
--------------------------------------- ----------------
1998 1997 1996 1996
-------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C>
Rate
3.00% or less $ 940 $ 1,436 $ 1,035 $ 1,600
3.01 - 3.99% 11 11 598 903
4.00 - 4.99% 74,835 35,699 51,484 80,831
5.00 - 5.99% 238,564 262,029 232,313 193,281
6.00 - 6.99% 33,983 39,186 33,568 29,571
7.00 - 7.99% 8,856 8,717 8,673 9,817
-------- -------- -------- --------
$357,189 $347,078 $327,671 $316,003
======== ======== ======== ========
</TABLE>
The following table sets forth the amount and maturities of
certificates of deposit at December 31, 1998.
<TABLE>
<CAPTION>
Amount Due
-------------------------------------------------------------------------------------------------------
Less Than 1-2 2-3 3-4 4-5 After 5
One Year Years Years Years Years Years Total
-------- ----- ----- ----- ----- ----- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Rate
3.00% or less $ 109 $ 6 $ 2 $ 16 $ 16 $ 791 $ 940
3.01 - 3.99% -- 11 -- -- -- -- 11
4.00 - 4.99% 71,234 2,319 814 10 458 -- 74,835
5.00 - 5.99% 197,083 17,901 7,422 6,692 9,466 -- 238,564
6.00 - 6.99% 8,481 9,044 7,705 8,072 681 -- 33,983
7.00 - 7.99% 347 8,509 -- -- -- -- 8,856
-------- -------- -------- -------- -------- ----- --------
$277,254 $ 37,790 $ 15,943 $ 14,790 $ 10,621 $ 791 $357,189
======== ======== ======== ======== ======== ===== ========
</TABLE>
The following table indicates the amount of negotiable certificates of
deposit of $100,000 or more by time remaining until maturity as of December 31,
1998.
Certificates
of Deposit
of $100,000
Remaining Maturity or More
------------------ -------------
(In Thousands)
Three months or less $15,597
Three through six months 6,660
Six through twelve months 14,710
Over twelve months 13,100
-------
Total $50,067
=======
Deposits are used to fund loan originations, the purchase of securities
and for general business purposes. The deposit growth in fiscal year 1998 of
$43.7 million reflected the use of odd-term and promotional certificate of
deposit products, as well as increased retail deposits generated by aggressive,
competitive pricing of such products in the market area. The Association also
continues to emphasize commercial checking accounts for small local businesses.
27
<PAGE> 28
The following table sets forth the net changes in the deposit
activities for the periods indicated.
<TABLE>
<CAPTION>
Three Months
Years Ended Ended Year Ended
December 31, December 31, September 30,
--------------------------- ------------ --------------
1998 1997 1996 1996
---------- ---------- -------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Deposits $2,737,244 $2,433,375 $554,294 $2,158,898
Withdrawals 2,715,239 2,416,860 549,264 2,114,903
---------- ---------- -------- ----------
Net increase before
interest credited 22,005 16,515 5,030 43,995
Interest credited 21,687 20,484 9,750 17,558
---------- ---------- -------- ----------
Net increase in deposits $ 43,692 $ 36,999 $ 14,780 $ 61,553
========== ========== ======== ==========
</TABLE>
BORROWINGS. Savings deposits are the primary source of funds for
lending and investment activities and for general business purposes. If the need
arises, advances from the FHLB may be used to supplement the supply of lendable
funds and to meet deposit withdrawal requirements. Advances from the FHLB
typically are collateralized by the Association's stock in the FHLB and a
blanket floating lien on the Association's one- to four-family first mortgage
loans. At December 31, 1998, $91.9 million of FHLB advances were outstanding
with a weighted average interest rate of 5.76%.
The FHLB functions as a central reserve bank providing credit for the
Association and other member savings institutions and financial institutions. As
a member, the Association is required to own capital stock in the FHLB and is
authorized to apply for advances on the security of such stock and certain of
its home mortgages and other assets (principally, securities that are
obligations of, or guaranteed by, the United States) provided certain standards
related to creditworthiness have been met. Advances are made pursuant to several
different programs. Each credit program has its own interest rate and range of
maturities. Depending on the program, limitations on the amount of advances are
based either on a fixed percentage of a member institution's net worth or on the
FHLB's assessment of the institution's creditworthiness. Although advances may
be used on a short-term basis for cash management needs, FHLB advances have not
been, nor are they expected to be, a significant long-term funding source for
the Association, although the Association periodically utilizes its ability to
access advances in order to take advantage of investment opportunities which may
arise.
On September 30, 1983, the Association sold two of its branches to
another financial institution. Under terms of the sale, the Association issued a
10.94%, 30-year term mortgage-backed bond (the "Bond") for approximately $41.6
million. A discount was recorded on the Bond which is being accreted on the
interest method of accounting over the life of the Bond. The Bond bears an
interest rate that is adjustable semi-annually on each April 1 and October 1 to
reflect changes in the average of the United States 10-year and 30-year
long-term bond rates. At December 31, 1998, the net outstanding balance of the
Bond was $15.4 million with an effective rate of 8.78%. For further information
on the Bond, see Note 12 to the Notes to the Consolidated Financial Statements
in the Annual Report attached hereto as Exhibit 13.
On October 24, 1994, in connection with the Association's Plan of
Reorganization into a mutual holding company, the Association established an
Employee Stock Ownership Plan ("ESOP") for all eligible employees. The ESOP's
purchase of 389,248 (as adjusted by the exchange ratio of 2.0445) shares of
common stock in the open market was initially funded by a loan held by an
unaffiliated financial institution with an interest rate based on the monthly
average of the Federal Funds high and low rate plus 2.35%. During 1998, the
Mid-Tier Holding Company loaned sufficient funds to the ESOP to permit the ESOP
to repay the loan to the unaffiliated lender. Such loan was transferred to
Bankshares in the conversion and reorganization. The loan is being repaid from
the Association's contributions to the ESOP over a period of up to seven years
and had an outstanding balance of $1.0 million at December 31, 1998. The loan
has a fixed interest rate of 8.50%. In addition, Bankshares loaned $4.4 million
during the offering to permit the ESOP to purchase an additional 437,652 shares.
The new loan is being repaid over 15 years and has a fixed interest rate of
7.75%. For further information, see Note 11 to the Notes to the Consolidated
Financial Statements in the Annual Report, attached hereto as Exhibit 13.
28
<PAGE> 29
The following table sets forth the source, balance, and rate of
borrowings for the years ended December 31, 1998 and 1997, for the three months
ended December 31, 1996, and for the year ended September 30, 1996.
<TABLE>
<CAPTION>
During the During the
Years Three Months During the
Ended Ended Year Ended
December 31, December 31, September 30,
-----------------------------------------------------------------------
1998 1997 1996 1996
------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
FHLB advances:
Maximum month-end balance $94,443 $57,341 $36,350 $36,350
Balance at end of period 91,920 57,341 34,763 36,350
Average balance(1) 74,614 42,952 35,657 22,110
Weighted average interest rate
during the period 5.94% 6.38% 6.72% 6.36%
Weighted average interest rate
at end of period 5.76% 6.25% 6.69% 6.70%
Mortgage-backed bond:
Maximum month-end balance $16,414 $17,312 $18,204 $18,660
Balance at end of period 15,430 16,333 17,230 17,454
Average balance(1) 15,989 16,888 17,428 18,033
Weighted average interest rate
during the period 9.70% 10.94% 11.17% 10.41%
Weighted average interest
rate at end of period 8.78% 10.49% 11.19% 10.52%
</TABLE>
- - ------------------------------------
(1) Computed on the basis of month-end balances.
SUBSIDIARY ACTIVITIES
The Association currently has one active subsidiary, ComFed, Inc.,
which was formed in February 1971 for the purpose of owning and operating an
insurance agency, Community Insurance Agency, which sells mortgage life
insurance. ComFed, Inc. also receives income and incurs related expenses from
the sale of third party mutual funds and annuities. Such third party mutual
funds and annuities include products widely marketed to the investing public and
have investment advisors that are not affiliated with ComFed, Inc. For the year
ended December 31, 1998, ComFed, Inc. reported net income of $134,000. At
December 31, 1998, the Association had an equity investment in ComFed, Inc. of
$207,000.
PERSONNEL
As of December 31, 1998, Bankshares had no separately compensated
employees. Officers of Bankshares are employees of the Association and receive
all compensation from the Association. Because Bankshares' only activity is
holding the stock of the Association, employees of the Association perform
limited duties for Bankshares.
As of December 31, 1998, the Association had 265 full-time and 52
part-time employees. None of such employees is represented by a collective
bargaining group. The Association believes it has a good relationship with its
employees.
REGULATION
Set forth below is a brief description of certain laws and regulations
which are applicable to Bankshares and the Association. The description of these
laws and regulations, as well as descriptions of laws and regulations contained
elsewhere herein, does not purport to be complete and is qualified in its
entirety by reference to the applicable laws and regulations.
29
<PAGE> 30
GENERAL
The Association, as a federally chartered savings institution, is
subject to federal regulation and oversight by the OTS extending to all aspects
of its operations. The Association also is subject to regulation and examination
by the FDIC, which insures the deposits of the Association to the maximum extent
permitted by law, and requirements established by the Federal Reserve Board.
Federally chartered savings institutions are required to file periodic reports
with the OTS and are subject to periodic examinations by the OTS and FDIC. The
investment and lending authority of savings institutions are prescribed by
federal laws and regulations, and such institutions are prohibited from engaging
in any activities not permitted by such laws and regulations. Such regulation
and supervision primarily is intended for the protection of depositors and not
for the purpose of protecting shareholders.
The OTS' enforcement authority over all savings institutions and their
holding companies includes, among other things, the ability to assess civil
money penalties, to issue cease and desist or removal orders and to initiate
injunctive actions. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with the OTS.
BANKSHARES
HOLDING COMPANY ACQUISITIONS. In December 1998, Bankshares became a
savings and loan holding company within the meaning of the Home Owners' Loan
Act, as amended ("HOLA"), and has registered with the OTS. The HOLA and OTS
regulations generally prohibit a savings and loan holding company, without prior
OTS approval, from acquiring, directly or indirectly, the ownership or control
of any other savings institution or savings and loan holding company, or all, or
substantially all, of the assets or more than 5% of the voting shares thereof.
These provisions also prohibit, among other things, any director or officer of a
savings and loan holding company, or any individual who owns or controls more
that 25% of the voting shares of such holding company, from acquiring control of
any savings institution not a subsidiary of such savings and loan holding
company, unless the acquisition is approved by the OTS.
HOLDING COMPANY ACTIVITIES. Bankshares operates as a unitary savings
and loan holding company. Generally, there are only limited restrictions on the
activities of a unitary savings and loan holding company and its non-savings
institution subsidiaries. However, if the Director of the OTS determines that
there is reasonable cause to believe that the continuation by a savings and loan
holding company of an activity constitutes a serious risk to the financial
safety, soundness or stability of its subsidiary savings institution, the
Director may impose such restrictions as deemed necessary to address such risk,
including limiting (i) payment of dividends by the savings institution; (ii)
transactions between the savings institution and its affiliates; and (iii) any
activities of the savings institution that might create a serious risk that the
liabilities of the holding company and its affiliates may be imposed on the
savings institution. Notwithstanding the above rules as to permissible business
activities of unitary savings and loan holding companies, if the savings
institution subsidiary of such a holding company fails to meet the QTL test, as
discussed under "-The Association - Qualified Thrift Lender Test," then such
unitary holding company also shall become subject to the activities restrictions
applicable to multiple savings and loan holding companies and, unless the
savings institution requalifies as a QTL within one year thereafter, shall
register as, and become subject to the restrictions applicable to, a bank
holding company. See "-The Association - Qualified Thrift Lender Test."
The HOLA requires every savings institution subsidiary of a savings and
loan holding company to give the OTS at least 30 days' advance notice of any
proposed dividends to be made on its guarantee, permanent or other
nonwithdrawable stock, or else such dividend will be invalid. See "- The
Association - Capital Distributions."
AFFILIATE RESTRICTIONS. Transactions between a savings institution and
its "affiliates" are subject to quantitative and qualitative restrictions under
Sections 23A and 23B of the Federal Reserve Act and OTS regulations. Affiliates
of a savings institution include, among other entities, the savings
institution's holding company and companies that are controlled by or under
common control with the savings institution.
In general, Sections 23A and 23B and OTS regulations issued in
connection therewith limit the extent to which a savings institution or its
subsidiaries may engage in certain "covered transactions" with affiliates to an
amount equal to 10% of the institution's capital and surplus, in the case of
covered transactions with any one affiliate, and to an amount equal to 20% of
such capital and surplus, in the case of covered transactions with all
affiliates. In addition, a savings institution and its subsidiaries may engage
in covered transactions and certain other transactions only on terms and under
circumstances that are substantially the same, or at least as favorable to the
savings institution or its subsidiary, as those prevailing at the time for
comparable transactions with nonaffiliated companies. A "covered transaction" is
defined to include a loan or extension of credit to an affiliate; a purchase of
investment securities issued by an affiliate; a purchase of assets from an
affiliate, with certain exceptions; the acceptance of securities issued by an
affiliate as collateral for a loan or extension of credit to any party; or the
issuance of a guarantee, acceptance or letter of credit on behalf of an
affiliate.
30
<PAGE> 31
In addition, under the OTS regulations, a savings institution may not
make a loan or extension of credit to an affiliate unless the affiliate is
engaged only in activities permissible for bank holding companies; a savings
institution may not purchase or invest in securities of an affiliate other than
shares of a subsidiary; a savings institution and its subsidiaries may not
purchase a low-quality asset from an affiliate; and covered transactions and
certain other transactions between a savings institution or its subsidiaries and
an affiliate must be on terms and conditions that are consistent with safe and
sound banking practices. With certain exceptions, each loan or extension of
credit by a savings institution to an affiliate must be secured by collateral
with a market value ranging from 100% to 130% (depending on the type of
collateral) of the amount of the loan or extension of credit.
The OTS regulation generally excludes all non-bank and non-savings
institution subsidiaries of savings institutions from treatment as affiliates,
except to the extent that the OTS or the Federal Reserve Board decides to treat
such subsidiaries as affiliates. The regulation also requires savings
institutions to make and retain records that reflect affiliate transactions in
reasonable detail, and provides that certain classes of savings institutions may
be required to give the OTS prior notice of affiliate transactions.
THE ASSOCIATION
INSURANCE OF ACCOUNTS. The deposits of the Association are insured to
the maximum extent permitted by the SAIF, which is administered by the FDIC, and
are backed by the full faith and credit of the U.S. Government. As insurer, the
FDIC is authorized to conduct examinations of, and to require reporting by,
FDIC-insured institutions. It also may prohibit any FDIC-insured institution
from engaging in any activity the FDIC determines by regulation or order to pose
a serious threat to the FDIC. The FDIC also has the authority to initiate
enforcement actions against savings institutions, after giving the OTS an
opportunity to take such action.
Under current FDIC regulations, SAIF-insured institutions are assigned
to one of three capital groups which are based solely on the level of an
institution's capital("well capitalized," "adequately capitalized," and
"undercapitalized")which are defined in the same manner as the regulations
establishing the prompt corrective action system discussed below. These three
groups are further divided into three subgroups which reflect varying levels of
supervisory concern, from those which are considered to be healthy to those
which are considered to be of substantial supervisory concern. The matrix so
created results in nine assessment risk classifications, with rates ranging
prior to September 30, 1996 from 23 basis points for well-capitalized, healthy
institutions to 31 basis points for undercapitalized institutions with
substantial supervisory concerns.
The deposits of the Association are currently insured by the SAIF. Both
the SAIF and the BIF are required by law to attain and thereafter maintain a
reserve ratio of 1.25% of insured deposits. The BIF achieved a fully funded
status first, and therefore as discussed below, effective January 1, 1996, the
FDIC substantially reduced the average deposit insurance premium paid by
BIF-insured banks. On November 14, 1995, the FDIC approved a final rule
regarding deposit insurance premiums. The final rule reduced deposit insurance
premiums for BIF member institutions to zero basis points (subject to a $2,000
minimum) for institutions in the lowest risk category, while holding deposit
insurance premiums for SAIF members at their then-current levels (23 basis
points for institutions in the lowest risk category). The reduction was
effective with respect to the semiannual premium assessment beginning January 1,
1996.
On September 30, 1996 Congress passed, and the President signed, the
Deposit Insurance Funds Act of 1996 (the "DIF") which mandated that all
institutions which have deposits are insured by SAIF were required to pay a
one-time special assessment of 65.7 basis points on SAIF-insured deposits
(subject to adjustment for certain types of banks with SAIF deposits) that were
held at March 31, 1995 payable by November 27, 1996 to recapitalize the SAIF.
The assessment increased the SAIF's reserve ratio to a comparable level to that
of the BIF at 1.25% of total insured deposits. The Association's share of this
special assessment totaled $2.8 million and is reflected in the 1996 operating
results. The FDIC, in connection with the recapitalization, also lowered SAIF
premiums from $0.23 per $100 to $0.065 per $100 of insured deposits beginning in
January 1997.
31
<PAGE> 32
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Association, if it determines after a hearing that
the institution has engaged or is engaging in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which would result in
termination of the Association's deposit insurance.
REGULATORY CAPITAL REQUIREMENTS. The OTS capital requirements consist
of a "tangible capital requirement," a "leverage capital requirement" and a
"risk-based capital requirement." The OTS is also authorized to impose capital
requirements in excess of those standards on individual institutions on a
case-by-case basis.
Under the tangible capital requirement, a savings association must
maintain tangible capital in an amount equal to at least 1.5% of adjusted total
assets. Tangible capital is defined as core capital less all intangible assets
(including supervisory goodwill), plus a specified amount of purchased mortgage
servicing rights.
Under the leverage capital requirement adopted by the OTS, savings
associations maintain "core capital" in an amount equal to at least 3% of
adjusted total assets. Core capital is defined as common stockholders' equity
(including retained earnings), non-cumulative perpetual preferred stock, and
minority interests in the equity accounts of consolidated subsidiaries, plus
purchased mortgage servicing rights valued at the lower of 90% of fair market
value, 90% of original cost or the current amortized book value as determined
under generally accepted accounting principles ("GAAP"), and "qualifying
supervisory goodwill," less non-qualifying intangible assets. At December 31,
1998, the Association's ratio of core capital to total adjusted assets was
12.8%.
Under the risk-based capital requirement, a savings association must
maintain total capital (which is defined as core capital plus supplementary
capital) equal to at least 8.0% of risk-weighted assets. A savings association
must calculate its risk-weighted assets by multiplying each asset and
off-balance sheet item by various risk factors, which range from 0% for cash and
securities issued by the United States Government or its agencies to 100% for
repossessed assets or loans more than 90 days past due. Qualifying one- to
four-family residential real estate loans and qualifying multi-family
residential real estate loans (not more than 90 days delinquent and having an
80% or lower loan-to-value ratio), are weighted at a 50% risk factor.
Supplementary capital may include, among other items, cumulative perpetual
preferred stock, perpetual subordinated debt, mandatory convertible subordinated
debt, intermediate-term preferred stock, and general allowances for loan losses.
The allowance for loan losses includable in supplementary capital is limited to
1.25% of risk-weighted assets. Supplementary capital is limited to 100% of core
capital.
Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital, in addition to the adjustments
required for calculating core capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
non-residential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. However, in calculating
regulatory capital, institutions can add back unrealized losses and deduct
unrealized gains net of taxes, on debt securities reported as a separate
component of GAAP capital.
The OTS regulations establish special capitalization requirements for
savings associations that own service corporations and other subsidiaries,
including subsidiary savings associations. According to these regulations,
certain subsidiaries are consolidated for capital purposes and others are
excluded from assets and capital. In determining compliance with the capital
requirements, all subsidiaries engaged solely in activities permissible for
national banks, engaged solely in mortgage-banking activities, or engaged in
certain other activities solely as agent for its customers are "includable"
subsidiaries that are consolidated for capital purposes in proportion to the
association's level of ownership, including the assets of includable
subsidiaries in which the association has a minority interest that is not
consolidated for GAAP purposes. For excludable subsidiaries, the debt and equity
investments in such subsidiaries are deducted from assets and capital. At
December 31, 1998 the Association had no investments subject to a deduction from
tangible capital.
The OTS amended its risk-based capital requirements that would require
institutions with an "above normal" level of interest rate risk to maintain
additional capital. A savings association is considered to have a " normal "
level of interest rate risk if the decline in the market value of its portfolio
equity after an immediate 200 basis point increase or decrease in market
interest rates (whichever leads to the greater decline) is less than two percent
of the current estimated market value
32
<PAGE> 33
of its assets. The market value of portfolio equity is defined as the net
present value of expected cash inflows and outflows from an association's
assets, liabilities and off-balance sheet items. The amount of additional
capital that an institution with an above normal interest rate risk is required
to maintain (the "interest rate risk component") equals one-half of the dollar
amount by which its measured interest rate risk exceeds the normal level of
interest rate risk. The interest rate risk component is in addition to the
capital otherwise required to satisfy the risk-based capital requirement.
Implementation of this component has been postponed by the OTS. The final rule
was to be effective as of January 1, 1994, subject however to a three quarter
lag time in implementation. However, in October 1994, the Director of the OTS
indicated that it would waive the capital deductions for institutions with a
greater than "normal" risk until the OTS published an appeals process. On August
21, 1995, the OTS released Thrift Bulletin 67, which established (i) an appeals
process to handle "requests for adjustments" to the interest rate risk component
and (ii) a process by which "well-capitalized" institutions may obtain
authorization to use their own interest rate risk model to determine their
interest rate risk component. The Director of the OTS indicated, concurrent with
the release of Thrift Bulletin 67, that the OTS will continue to delay the
implementation of the capital deduction for interest rate risk pending the
testing of the appeals process set forth in Thrift Bulletin 67.
Effective November 28, 1994, the OTS revised its interim policy issued
in August 1993 under which savings institutions computed their regulatory
capital in accordance with SFAS No. 115 "Accounting for Certain Investments in
Debt and Equity Securities." Under the revised OTS policy, savings institutions
must value securities available for sale at amortized cost for regulatory
capital purposes. This means that in computing regulatory capital, savings
institutions should add back any unrealized losses and deduct any unrealized
gains, net of income taxes, on debt securities reported as a separate component
of GAAP capital.
At December 31, 1998, the Association exceeded all of its regulatory
capital requirements, with tangible, core and risk-based capital ratios 12.8%,
12.8%, and 25.0%, respectively. See Note 13 to the Notes to Consolidated
Financial Statements included in the Annual Report.
The OTS and the FDIC generally are authorized to take enforcement
action against a savings association that fails to meet its capital
requirements, which action may include restrictions on operations and banking
activities, the imposition of a capital directive, a cease-and-desist order,
civil money penalties or harsher measures such as the appointment of a receiver
or conservator or a forced merger into another institution. In addition, under
current regulatory policy, an association that fails to meet its capital
requirements is prohibited from paying any dividends.
PROMPT CORRECTIVE ACTION. Under the prompt corrective action
regulations of the OTS, an institution is deemed to be (i) "well-capitalized" if
it has total risk-based capital of 10.0% or more, has a Tier 1 risk-based
capital ratio of 6.0% or more, has a Tier 1 leverage capital ratio of 5.0% or
more and is not subject to any order or final capital directive to meet and
maintain a specific capital level for any capital measure, (ii) "adequately
capitalized" if it has a total risk-based capital ratio of 8.0% or more, a Tier
1 risk-based capital ratio of 4.0% or more and a Tier 1 leverage capital ratio
of 4.0% or more (3.0% under certain circumstances) and does not meet the
definition of "well capitalized," (iii) "undercapitalized" if it has a total
risk-based capital ratio that is less than 8.0%, a Tier 1 risk-based capital
ratio that is less that 4.0% or a Tier 1 leverage capital ratio that is less
than 4.0% (3.0% under certain circumstances),(iv) "significantly
undercapitalized" if it has a total risk-based capital ratio that is less than
6.0%, a Tier 1 risk-based capital ratio that is less than 3.0% or a Tier 1
leverage capital ratio that is less than 3.0%, and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2.0%. Under specified circumstances, a federal banking
agency may reclassify a well capitalized institution as adequately capitalized
and may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category (except that the FDIC may not reclassify a significantly
undercapitalized institution as critically undercapitalized).
An institution generally must file a written capital restoration plan
which meets specified requirements with its appropriate federal banking agency
within 45 days of the date that the institution receives notice or is deemed to
have notice that it is undercapitalized, significantly undercapitalized or
critically undercapitalized. A federal banking agency must provide the
institution with written notice of approval or disapproval within 60 days after
receiving a capital restoration plan, subject to extensions by the agency. An
institution which is required to submit a capital restoration plan must
concurrently submit a performance guaranty by each company that controls the
institution. In addition, undercapitalized institutions are subject to various
regulatory restrictions, and the appropriate federal banking agency also may
take any number of discretionary supervisory actions.
At December 31, 1998, the Association was in the "well capitalized"
category for purposes of the above regulations and as such is not subject to the
above mentioned restrictions.
33
<PAGE> 34
SAFETY AND SOUNDNESS GUIDELINES. The OTS and the other federal bank
regulatory agencies have established guidelines for safety and soundness,
addressing operational and managerial standards, as well as compensation matters
for insured financial institutions. Institutions failing to meet these standards
are required to submit compliance plans to their appropriate federal regulators.
The OTS and the other agencies have also established guidelines regarding asset
quality and earnings standards for insured institutions. The Association
believes that it is in compliance with these guidelines and standards.
LIQUIDITY REQUIREMENTS. All savings institutions are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings institutions. At the present time, the required minimum
liquid asset ratio is 4%. For the month ended December 31, 1998, the
Association's average liquidity ratio was 17.8%.
CAPITAL DISTRIBUTIONS. OTS regulations govern capital distributions by
savings institutions, which include cash dividends, stock redemptions or
repurchases, cash-out mergers, interest payments on certain convertible debt and
other transactions charged to the capital account of a savings institution to
make capital distributions. Generally, the regulations created a safe harbor for
specified levels of capital distributions from institutions meeting at least
their minimum capital requirements, so long as such institutions notify the OTS
and receive no objection to the distribution from the OTS. Savings institutions
and distributions that do not qualify for the safe harbor are required to obtain
prior OTS approval before making any capital distributions.
Under recently adopted amendments to the OTS' regulations which become
effective April 1, 1999, a savings institution that before and after the
proposed distribution would at least be adequately capitalized, subject to
certain exceptions, may make capital distributions during any calendar year
equal to net income for the applicable calendar year plus net income for the
prior two years less any capital distribution in those prior periods. Failure to
meet minimum capital requirements will result in further restrictions on capital
distributions, including possible prohibition without explicit OTS approval. See
"-Regulatory Capital Requirements."
In order to make distributions under its safe harbor, institutions
which are subsidiaries of savings and loan holding companies must submit 30 days
written notice to the OTS prior to making the distribution. The OTS may object
to the distribution during that 30-day period based on safety and soundness
concerns.
BRANCHING BY FEDERAL SAVINGS INSTITUTIONS. OTS policy permits
interstate branching to the full extent permitted by statute (which is
essentially unlimited). Generally, federal law prohibits federal savings
institutions from establishing, retaining or operating a branch outside that
state in which the federal institution has its home office unless the
institution meets the IRS' domestic building and loan test (generally, 60% of a
thrift's assets must be housing-related) ("IRS Test"). The IRS Test requirement
does not apply if: (i) the branch(es) result(s) from an emergency acquisition of
a troubled savings institution (however, if the troubled savings institution is
acquired by a bank holding company, does not have its home office in the state
of the bank holding company bank subsidiary and does not qualify under the IRS
Test, its branching is limited to the branching laws for state-chartered banks
in the state where the savings institution is located); (ii) the law of the
state where the branch would be located would permit the branch to be
established if the federal savings institution were chartered by the state in
which its home office is located; or (iii) the branch was operated lawfully as a
branch under the state law prior to the savings institution's conversion to a
federal charter.
Furthermore, the OTS will evaluate a branching applicant's record of
compliance with the Community Reinvestment Act of 1977 ("CRA"). An
unsatisfactory CRA record may be the basis for denial of a branching
application.
COMMUNITY REINVESTMENT ACT AND THE FAIR LENDING LAWS. Savings
institutions have a responsibility under the CRA and related regulations of the
OTS to help meet the credit needs of their communities, including low- and
moderate-income neighborhoods. In addition, the Equal Credit Opportunity Act and
the Fair Housing Act (together, the "Fair Lending Laws") prohibit lenders from
discriminating in their lending practices on the basis of characteristics
specified in those statutes. An institution's failure to comply with the
provisions of CRA could, at a minimum, result in regulatory restrictions on its
activities, and failure to comply with the Fair Lending Laws could result in
enforcement actions by the OTS, as well as other federal regulatory agencies and
the Department of Justice.
34
<PAGE> 35
QUALIFIED THRIFT LENDER TEST. All savings institutions are required to
meet a QTL test to avoid certain restrictions on their operations. Under Section
2303 of the Economic Growth and Regulatory Paperwork Reduction Act of 1996, a
savings institution can comply with the QTL test by either qualifying as a
domestic building and loan association as defined in Section 7701(a)(19) of the
Code or by meeting the second prong of the QTL test set forth in Section 10(m)
of the HOLA. A savings institution that does not meet the QTL test must either
convert to a bank charter or comply with the following restrictions on its
operation: (i) the institution may not engage in any new activity or make any
new investment, directly or indirectly, unless such activity or investment is
permissible for a national bank; (ii) the branching powers of the institution
shall be restricted to those of a national bank; (iii) the institution shall not
be eligible to obtain any new advances from its FHLB, other than special
liquidity advances with the approval of the OTA; and (iv) payment of dividends
by the institution shall be subject to the rules regarding payment of dividends
by a national bank. Upon the expiration of three years from the date the savings
institution ceases to be a QTL, it must cease any activity and not retain any
investment not permissible for a national bank and immediately repay any
outstanding FHLB advances (subject to safety and soundness considerations).
Currently, the portion of the QTL test that is based on Section 10(m)
of the HOLA rather than the Code requires that 65% of an institution's
"portfolio assets" (as defined) consist of certain housing and consumer-related
assets on a monthly average basis in nine out of every 12 months. Assets that
qualify without limit for inclusion as part of the 65% requirement are loans
made to purchase, refinance, construct, improve or repair domestic residential
housing and manufactured housing; home equity loans; mortgage-backed securities
(where the mortgages are secured by domestic residential housing or manufactured
housing); stock issued by the FHLB of Atlanta; and direct or indirect
obligations of the FDIC. In a recent amendment to the QTL, small business loans,
credit car loans, student loans and loans for personal, family and household
purposes were allowed to be included without limitation as qualified
investments. In addition, the following assets, among others, may be included in
meeting the test subject to an overall limit of 20% of the savings institution's
portfolio assets: 50% of residential mortgage loans originated and sold within
90 days of origination; 100% of consumer and educational loans (limited to 10%
of total portfolio assets); and stock issued by the FHLMC or the FNMA. Portfolio
assets consist of total assets minus the sum of (i) goodwill and other
intangible assets, (ii) property used by the savings institution to conduct its
business, and (iii) liquid assets up to 20% of the institution's total assets.
At December 31, 1998, the qualified thrift investments of the Association were
approximately 82.2% of its portfolio assets.
FEDERAL HOME LOAN BANK SYSTEM. The Association is a member of the FHLB
of Atlanta, which is one of 12 regional FHLBs that administer the home financing
credit function or savings institutions. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (I.E. advances) in accordance with policies
and procedures established by the Board of Directors of the FHLB. At December
31, 1998, the Association had $91.9 million of FHLB advances. See Note 11 to
Notes to Consolidated Financial Statements.
As a member, the Association is required to purchase and maintain stock
in the FHLB of Atlanta in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year. At December 31, 1998, the Association had $4.7
million in FHLB stock, which was in compliance with this requirement.
The FHLBs are required to provide funds for the resolution of troubled
savings institutions and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid and could continue to do so
in the future. These contributions also could have an adverse effect on the
value of FHLB stock in the future. The dividend yield on the Association's FHLB
stock was 7.25% for the fiscal years ended December 31, 1998, 1997 and 1996.
FEDERAL RESERVE SYSTEM. Federal Reserve Board regulations require all
depository institutions to maintain non-interest earning reserves against their
transaction accounts (primarily NOW and Super NOW checking accounts) and
non-personal time deposits. At December 31, 1998, the Association was in
compliance with there reserve requirements. The balances maintained to meet the
reserve requirements imposed by the Federal Reserve Board may be used to satisfy
liquidity requirements that may be imposed by the OTS.
35
<PAGE> 36
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
For federal income tax purposes, Bankshares files a consolidated
federal income tax return with the Association on a fiscal year basis.
On May 13, 1997, permission was received from the Internal Revenue
Service ("IRS") to change the accounting period, for federal income tax
purposes, from September 30th to December 31st, effective December 31, 1996.
Bankshares and the Association are subject to the rules of federal
income taxation generally applicable to corporations under the Code. Most
corporations are not permitted to make deductible additions to bad debt reserves
under the Code. However, prior to the effective date of legislation passed in
1996, savings and loan associations and savings associations such as the
Association, which met certain tests prescribed by the IRS may have benefited
from favorable provisions provided for in Section 593 of the code regarding
deductions for taxable income for annual additions to the bad debt reserve.
During 1996, effective for years beginning after December 31, 1995,
legislation was passed that repealed section 593 of the Code. Section 593
allowed thrift institutions, including the Association, to use the
percentage-of-taxable income bad debt accounting method, if more favorable than
the specific charge-off method, for federal income tax purposes. The excess
reserves (deduction based on the percentage-of-taxable income less the deduction
based on the specific charge-off method) accumulated post-1987 are required to
be recaptured ratably over a six year period beginning in 1996. The excess
reserve as of December 31, 1996 was approximately $435,000. The same legislation
forgave the tax liability on pre-1987 accumulated bad debt reserves which would
have penalized any thrift choosing to adopt a bank charter because the tax would
have become due and payable. The unrecorded potential liability that was
forgiven approximated $4.3 million. See Note 9 to the Notes to the Consolidated
Financial Statements in the Annual Report, attached hereto as Exhibit 13.
Deferred income taxes arise from the recognition of certain items of
income and expense for tax purposes in years different from those in which they
are recognized in the financial statements. In February 1992, the FASB issued
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS No. 109). SFAS 109 was implemented by Bankshares retroactively,
effective October 1, 1993. The liability method accounts for deferred income
taxes by applying the enacted statutory rates in effect at the balance sheet
date to differences between the book cost and the tax cost of assets and
liabilities. The resulting deferred tax liabilities and assets are adjusted to
reflect changes in tax laws.
Bankshares is subject to the corporate alternative minimum tax which is
imposed to the extent it exceeds Bankshares' regular income tax for the year.
The alternative minimum tax will be imposed at the rate of 20% of a specially
computed tax base. Included in this base will be a number of preference items,
including the interest on certain tax-exempt bonds issued after August 7, 1986.
In addition. for purposes of the alternative minimum tax, the amount of
alternative minimum taxable income that may be offset by net operating losses is
limited to 90% of alternative minimum taxable income.
The Association was audited by the IRS for the tax year 1990 during
fiscal year 1994. Based upon the audit, the Association received a "no-change"
letter from the IRS. Bankshares has not been audited by the IRS. See Notes 1 and
9 to the Notes to the Consolidated Financial Statements in the Annual Report,
attached hereto as Exhibit 13.
STATE TAXATION
Under the laws of the State of Florida, Bankshares and its subsidiary
are generally subject to 5.5% tax on net income. The tax may be reduced by a
credit of up to 65% of the tax due as a result of certain intangible taxes. The
tax is deductible by Bankshares in determining its federal income tax liability.
Bankshares has not been audited by the State of Florida.
36
<PAGE> 37
ITEM 2. PROPERTIES
Bankshares owns no property independently from the Association. The
Association conducts its business through its home office located in North Palm
Beach, Florida, and 21 full-service branch offices and a loan production office
located in Palm Beach, Martin, St. Lucie, and Indian River Counties. The
following table sets forth certain information concerning the home office and
each branch office of the Association at December 31, 1998. The aggregate net
book value of the Association's premises and equipment was $26.0 million at
December 31, 1998. For additional information regarding the Association's
properties, see Note 6 to the Notes to the Consolidated Financial Statements in
the Annual Report, attached hereto as Exhibit 13. In addition, the Association
owns or has placed earnest funds on four parcels of real estate for use as
possible future branch sites. The Association's total investment in such other
properties totaled $3.3 million at December 31, 1998 which is included in the
aggregate net book value of the Association's premises and equipment set forth
above.
<TABLE>
<CAPTION>
Location Address Opening Date Owned/Lease
- - -------- ------- ------------ -----------
<S> <C> <C> <C>
Home Office 660 U.S. Highway l, North Palm Beach, Florida 02/19/88 Owned
BRANCH OFFICES
- - --------------
Riviera Beach 2600 Broadway, Riviera Beach, Florida 08/19/55 Owned
Tequesta 101 N. U.S. Highway One, Tequesta, Florida 07/19/59 Owned
Port Salerno 5545 SE Federal Highway, Port Salerno, 11/05/74 Owned
Florida
Palm Beach Gardens 9600 N. Alternate AlA, Palm Beach Gardens, 12/19/74 Owned
Florida
Jensen Beach 1170 NE Jensen Beach Boulevard, 01/28/75 Owned
Jensen Beach, Florida
Singer Island 1100 East Blue Heron Boulevard, 04/01/75 Owned
Riviera Beach, Florida
Gallery Square 389 Tequesta Drive, Tequesta, Florida 01/30/76 Lease(1)
Ft. Pierce 1050 Virginia Avenue, Ft. Pierce, Florida 07/23/85 Owned
Port St. Lucie Blvd. 147 SW Port St. Lucie Blvd., 12/07/98 Owned
Port St. Lucie, Florida
Martin Downs 3102 Martin Downs Boulevard, 07/24/85 Lease(2)
Palm City, Florida
Maplewood 1570 Indiantown Road., Jupiter, Florida 10/05/98 Owned
Bluffs 3950 U.S. Highway 1, Jupiter, Florida 09/18/86 Lease(3)
Village Commons 971 Village Boulevard, West Palm Beach, 06/26/89 Lease(4)
Florida
Hobe Sound 11400 SE Federal Highway, Hobe Sound, Florida 02/05/90 Owned
</TABLE>
37
<PAGE> 38
<TABLE>
<CAPTION>
Location Address Opening Date Owned/Lease
- - -------- ------- ------------ -----------
<S> <C> <C> <C>
St. Lucie West 1549 St. Lucie West Boulevard, 06/06/94 Owned
Port St. Lucie, Florida
Jupiter 520 Toney Penna Drive, Jupiter, Florida 07/10/95 Owned
PGA PGA Shoppes on the Green, 7102 Fairway 04/22/96 Owned
Drive, Palm Beach Gardens, Florida
Vero Beach 6030 20th Street, Vero Beach, Florida 07/21/97 Owned
Hutchinson Island 4417 NE Ocean Boulevard, Jensen Beach, 01/21/97 Lease(5)
Florida
Lake Worth 5702 Lake Worth Road, Suite # 3, 10/20/97 Lease(6)
Lake Worth, Florida
LOAN PRODUCTION OFFICE
- - ----------------------
Vero Beach 2903 Cardinal Drive 03/01/98 Lease(7)
Vero Beach, Florida
OTHER FACILITIES
- - ----------------
Training Center 20 Waterway Drive, Tequesta, Florida 7/15/98 Owned
Melbourne 1901 S. Harbor City Blvd. 05/01/98 Lease(8)
Suite 801, Melbourne, Florida
</TABLE>
- - ------------------------------
(1) This lease expires on December 31, 2000 and provides for a renewal option
which runs through December 31, 2015.
(2) This lease expires on August 8, 1999 and provides for a renewal option
which runs through August 8, 2004.
(3) This lease expires on October 31, 2001 and provides for a renewal option
which runs through October 31, 2016.
(4) This lease expires on June 25, 2004 and provides for a renewal option
which runs through June 25, 2014.
(5) This lease expires on June 30, 1999 and provides for a renewal option
which runs through December 31, 2002.
(6) This lease expires on March 1, 2000 and provides for a renewal option
which runs through August 1, 2002.
(7) This lease expires on February 28, 2000 and provides for a annual renewal
option which next expires February 28, 2001.
(8) This lease expires on April 30, 2000. The facility, which was previously
used by the Association as a loan production office, is currently being
sub-leased to another tenant.
38
<PAGE> 39
ITEM 3. LEGAL PROCEEDINGS
- - -------------------------------------------------------------------------------
There are various claims and lawsuits in which Bankshares is
periodically involved incident to its business. In the opinion of management, no
material loss is expected from any of such pending claims or lawsuits.
The Association reached a final settlement with its insurance company
during the first quarter of 1999 on a claim related to a defalcation by a former
employee. The Association has recorded a partial recovery of the previously
recorded allowance for loss.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- - -------------------------------------------------------------------------------
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
- - -------------------------------------------------------------------------------
Bankshares had 10,548,884 issued and outstanding shares at December 31,
1998. Bankshares initial registration statement (No. 333-62069) on Form S-1 was
declared effective on October 29, 1998. The Conversion offering commenced on
November 6, 1998 and expired on December 3, 1998. Friedman, Billings, Ramsey and
Co., Inc was the conversion agent in the offering. The sale in the Conversion
offering of 5,470,651 shares of Bankshares' common stock, par value $1.00 per
share ("Common Stock"), closed on December 15, 1998 for gross proceeds of $54.9
million. Net of offering costs and expenses of $1.7 million, the offering
generated net proceeds of $53.2 million. Of such proceeds, $4.4 million was
loaned to Bankshares' ESOP for the purchase by the ESOP of 437,652 shares of
Common Stock and $26.7 million was contributed to the Association in exchange
for the common stock of the Association issued in its conversion and
reorganization and was initially invested in interest-earning deposits at
December 31, 1998 pending investment in loans and securities. Bankshares used a
portion of the remaining $22.2 million to make a $21.0 million intercompany loan
to the Association at December 31, 1998. For information concerning the market
for Bankshares' common stock, see the section captioned "Corporate Information"
in Bankshares' Annual Report attached as Exhibit 13 hereto and which is
incorporated herein by reference.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
- - -------------------------------------------------------------------------------
The "Financial Highlights" section of Bankshares' Annual Report is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- - -------------------------------------------------------------------------------
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section of Bankshares' Annual Report is incorporated
herein by reference.
ITEM 7-A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- - -------------------------------------------------------------------------------
Information with respect to quantitative and qualitative disclosures
about market risk are incorporated by reference to the section captioned
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - " Market Risk Analysis", and "Market Value of Portfolio Equity" in
the Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
- - -------------------------------------------------------------------------------
The financial statements identified in Item 14(a)(1) hereof are
incorporated by reference to Bankshares' Annual Report.
39
<PAGE> 40
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- - -------------------------------------------------------------------------------
Information required by this section is incorporated herein by
reference from Bankshares' definitive Proxy Statement for the Annual Meeting of
Shareholders which will be filed no later than April 30, 199 (the "Proxy
Statement"), specifically the section captioned "Ratification of Appointment of
Independent Accountants".
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
- - -------------------------------------------------------------------------------
Information concerning Directors and Executive Officers of Bankshares
is incorporated herein by reference from the Proxy Statement, specifically the
section captioned "Information with Respect to Nominees for Directors, Directors
Whose Term Continues and Executive Officers".
ITEM 11. EXECUTIVE COMPENSATION
- - -------------------------------------------------------------------------------
Information concerning executive compensation is incorporated herein by
reference from the Proxy Statement, specifically the section captioned
"Executive Compensation".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- - -------------------------------------------------------------------------------
Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the Proxy Statement,
specifically the section captioned "Beneficial Ownership of Common Stock by
Certain Beneficial Owners and Management".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- - -------------------------------------------------------------------------------
Information concerning relationships and transactions is incorporated
herein by reference from the Proxy Statement, specifically the section captioned
"Executive Compensation-Indebtedness of Management and Affiliated Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- - -------------------------------------------------------------------------------
The exhibits and financial statement schedules filed as a part of this
Form 10-K are as follows:
(a)(1) FINANCIAL STATEMENTS
Independent Auditors' Report
Consolidated Statements of Financial Condition,
December 31, 1998, 1997, and 1996.
Consolidated Statements of Operations,
Years Ended December 31, 1998 and 1997, Three Months Ended
December 1996, Years Ended September 30, 1996, and
1995.
Consolidated Statements of Shareholders' Equity,
Years Ended December 31, 1998 and 1997, Three Months
Ended December 31, 1996, Years Ended September 30, 1996,
and 1995.
Consolidated Statements of Cash Flows,
Years Ended December 31, 1998 and 1997, Three Months
Ended December 31, 1996, Years Ended September 30,
1996, and 1995.
Notes to Consolidated Financial Statements.
40
<PAGE> 41
(a)(2) FINANCIAL STATEMENT SCHEDULES
No financial statement schedules are filed because the required
information is not applicable or is included in the consolidated
financial statements or related notes.
(a)(3) EXHIBITS
3.1 Certificate of Incorporation of Community Savings
Bankshares, Inc.*
3.2 Bylaws of Community Savings Bankshares, Inc.*
4.0 Form of Stock Certificate of Community Savings Bankshares,
Inc.*
10.1 1995 Stock Option Plan*
10.2 1995 Recognition and Retention Plan for Employees and
Outside Directors*
10.3 Form of Employment Agreement between Community Savings
Bankshares, Inc. , Community Savings, F. A. and James B.
Pittard, Jr.
10.4 Form of Change in Control Agreement between Community
Savings Bankshares, Inc., Community Savings, F. A. and
James B, Pittard, Jr.
10.5 Form of Change in Control Agreement with Certain Officers
of Community Savings Bankshares, Inc. and Community
Savings, F. A.
13 1998 Annual Report to Shareholders.
21 Subsidiaries of the Registrant - Reference is made to Item
1 "Business" for the required information.
23 Consent of Crowe Chizek and Company LLP.
27 Financial Data Schedule.
* Incorporated by reference from the Registration statement
on Form S-1 (333-62069) first filed with the SEC on August
21, 1998.
(b) REPORTS ON FORM 8-K:
None.
(c) The exhibits listed under (a)(3) above are filed herewith.
(d) Not applicable.
---------------------
* Previously filed.
41
<PAGE> 42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COMMUNITY SAVINGS BANKSHARES, INC.
Date: March 25, 1999 By: /s/ James B. Pittard, Jr.
------------------------------------
James B. Pittard, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C>
By: /s/ James B. Pittard, Jr. By: /s/ Larry J. Baker, CPA
-------------------------------------------- ----------------------------------------------
James B. Pittard, Jr., President and Chief Larry J. Baker, CPA, Senior Vice President,
Executive Officer Chief Financial Officer and Treasurer
(Principal Executive Officer) (Principal Financial and Accounting Officer)
Date: March 25, 1999 Date: March 25, 1999
By: /s/ Frederick A. Teed By: /s/ Forest C. Beaty
-------------------------------------------- ----------------------------------------------
Frederick A. Teed, Chairman of the Board Forest C. Beaty, Jr., Director
Date: March 25, 1999 Date: March 25, 1999
By: /s/ Robert F. Cromwell By: /s/ Karl D. Griffin
-------------------------------------------- ----------------------------------------------
Robert F. Cromwell, Director Karl D. Griffin, Director
Date: March 25, 1999 Date: March 25, 1999
By: /s/ Harold I. Stevenson
--------------------------------------------
Harold I. Stevenson, CPA, Director
Date: March 25, 1999
</TABLE>
42
<PAGE> 1
EXHIBIT 10.3
FORM OF EMPLOYMENT AGREEMENT BETWEEN COMMUNITY SAVINGS BANKSHARES,
INC., COMMUNITY SAVINGS, F. A. AND JAMES B. PITTARD, JR.
AGREEMENT
AGREEMENT, dated this ________ day of _________ 1999, between
Community Savings, F.A. (the "Association"), a federally chartered savings and
loan association, Community Savings Bankshares, Inc. (the "Corporation"), a
Delaware corporation, and James B. Pittard, Jr. (the "Executive"). The
Corporation and the Association are collectively referred to as the
"Employers".
W I T N E S S E T H
WHEREAS, the Executive is presently an officer of the Employers;,
WHEREAS, the Employers desire to be ensured of the Executive's
continued active participation in the business of the Employers; and
WHEREAS, in order to induce the Executive to remain in the employ of
the Employers and in consideration of the Executive's agreeing to remain in the
employ of the Employers, the parties desire to specify the severance benefits
which shall be due the Executive by the Employers in the event that his
employment with the Employers is terminated under specified circumstances;
NOW THEREFORE, in consideration of the mutual agreements herein
contained, and upon the other terms and conditions hereinafter provided, the
parties hereby agree as follows:
1. DEFINITIONS. The following words and terms shall have the meanings
set forth below for the purposes of this Agreement:
(a) ANNUAL COMPENSATION. The Executive's "Annual Compensation" for
purposes of this Agreement shall be deemed to mean the highest level of
compensation paid to the Executive by the Employers or any subsidiary thereof
during the calendar year in which the Date of Termination occurs (determined on
an annualized basis) or either of the two calendar years immediately preceding
the calendar year in which the Date of Termination occurs and which was either
(i) included in the Executive's gross income for tax purposes, including but
not limited to Base Salary, bonuses and amounts taxable to the Executive under
any qualified or non-qualified employee benefit plans of the Employers, or (ii)
deferred at the election of the Executive;
<PAGE> 2
PROVIDED, HOWEVER, that for purposes of the calculation of "Annul
Compensation," income related to restricted stock plans and stock option plans
of the Employers shall not be included.
(b) BASE SALARY. "Base Salary" shall have the meaning set forth in
Section 3(a) hereof.
(c) CAUSE. Termination of the Executive's employment for "Cause" shall
mean termination because of personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law, rule or
regulation (other than traffic violations or similar offenses) or final
cease-and-desist order or material breach of any provision of this Agreement.
For purposes of this paragraph, no act or failure to act on the Executive's
part shall be considered "willful" unless done, or omitted to be done, by the
Executive not in good faith and without reasonable belief that the Executive's
action or omission was in the best interests of the Employers.
(d) CHANGE IN CONTROL OF THE CORPORATION. "Change in Control of the
Corporation" shall mean the occurrence of any of the following: (i) the
acquisition of control of the Corporation as defined in 12 C.F.R. section 574.4,
unless a presumption of control is successfully rebutted or unless the
transaction is exempted by 12 C.F.R. section 574.3(c)(vii), or any successor to
such sections; (ii) an event that would be required to be reported in response
to Item 1(a) of Form 8-K or Item 6(e) of Schedule 14A of Regulation 14A pursuant
to the Securities Exchange Act of 1934, as amended ("Exchange Act"), or any
successor thereto, whether or not any class of securities of the Corporation is
registered under the Exchange Act; (iii) any "person" (as such term is used in
Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Corporation representing 25% or more of the
combined voting power of the Corporation's then outstanding securities; or (iv)
during any period of three consecutive years, individuals who at the beginning
of such period constitute the Board of Directors of the Corporation cease for
any reason to constitute at least two-thirds thereof unless the election, or the
nomination for election by stockholders, of each new director was approved by a
vote of at least majority of the directors then still in office who were
directors at the beginning of the period.
(e) CODE. "Code" shall mean the Internal Revenue Code of 1986, as
amended.
2
<PAGE> 3
(f) DATE OF TERMINATION. "Date of Termination" shall mean (i) if the
Executive's employment is terminated for Cause or for Disability, the date
specified in the Notice of Termination, and (ii) if the Executive's employment
is terminated for any other reason, the date on which a Notice of Termination
is given or as specified in such Notice.
(g) DISABILITY. Termination by the Corporation of the Executive's
employment based on "Disability" shall mean termination because of any physical
or mental impairment which qualifies the Executive for disability benefits
under the applicable long-term disability plan maintained by the Employers or
any subsidiary or, if no such plan applies, which would qualify the Executive
for disability benefits under the Federal Social Security System.
(h) GOOD REASON. Termination by the Executive of the Executive's
employment for "Good Reason" shall have the meaning as set forth in Section
1(g) of that certain Change in Control Severance Agreement between the
Employers and the Executive dated _______________, 1999 (the "Change in Control
Agreement").
(i) IRS. IRS shall mean the Internal Revenue Service.
(j) NOTICE OF TERMINATION. Any purported termination of the
Executive's employment by the Employers for any reason, including without
limitation for Cause, Disability or Retirement, or by the Executive for any
reason shall be communicated by written "Notice of Termination" to the other
party hereto. For purposes of this Agreement, a "Notice of Termination" shall
mean a dated notice which (i) indicates the specific termination provision in
this Agreement relied upon, (ii) sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated, (iii) specifies a Date of
Termination, which shall be not less than thirty (30) nor more than ninety (90)
days after such Notice of Termination is given, except in the case of the
Employers' termination of the Executive's employment for Cause, which shall be
effective immediately, and (iv) is given in the manner specified in Section 10
hereof.
(k) RETIREMENT. "Retirement" shall mean voluntary termination by the
Executive in accordance with the Employers' retirement policies, including
early retirement, generally applicable to their salaried employees.
2. TERM OF EMPLOYMENT.
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(a) The Employers hereby employ the Executive as President and Chief
Executive Officer, and the Executive hereby accepts said employment and agrees
to render such services to the Corporation on the terms and conditions set
forth in this Agreement. The term of this Agreement shall be a period of one
year commencing as of the date hereof (the "Commencement Date"), subject to
earlier termination as provided herein. Beginning on the day following the
Commencement Date, and on each day thereafter, the term of this Agreement shall
be extended for a period of one day in addition to the then-remaining term,
provided that the Employers have not given notice to the Executive in writing
at least 60 days prior to such day that the term of this Agreement shall not be
extended further. Reference herein to the term of this Agreement shall refer to
both such initial term and such extended terms. The Boards of Directors of the
Employers shall review on a periodic basis (and no less frequently than
annually) whether to permit further extensions of the term of this Agreement.
As part of such review, the Boards of Directors shall consider all relevant
factors, including the Executive's performance hereunder, and shall either
expressly approve further extensions of the time of this Agreement or decide to
provide notice to the contrary.
(b) During the term of this Agreement, the Executive shall perform
such executive services for the Employers as may be consistent with his titles
and from time to time assigned to him by the Employers' Boards of Directors.
3. COMPENSATION AND BENEFITS.
(a) The Employers shall compensate and pay the Executive for his
services during the term of this Agreement at a minimum base salary of $______
per year ("Base Salary"), which may be increased from time to time in such
amounts as may be determined by the Boards of Directors of the Employers and
may not be decreased without the Executive's express written consent. In
addition to his Base Salary, the Executive shall be entitled to receive during
the term of this Agreement such bonus payments as may be determined by the
Boards of Directors of the Employers.
(b) During the term of this Agreement, the Executive shall be entitled
to participate in and receive the benefits of any pension or other retirement
benefit plan, profit sharing, stock option, restricted stock grant plan,
employee stock ownership, or other plans, benefits and privileges given to
employees and executives of the Employers, to the extent commensurate with his
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then duties and responsibilities, as fixed by the Boards of Directors of the
Employers. The Employers shall not make any changes in such plans, benefits or
privileges which would adversely affect the Executive's rights or benefits
thereunder, unless such change occurs pursuant to a program applicable to all
executive officers of the Employers and does not result in a proportionately
greater adverse change in the rights of or benefits to the Executive as
compared with any other executive officer of the Employers. Nothing paid to the
Executive under any plan or arrangement presently in effect or made available
in the future shall be deemed to be in lieu of the salary payable to the
Executive pursuant to Section 3(a) hereof.
(c) During the term of this Agreement, the Executive shall be entitled
to paid annual vacation in accordance with the policies as established from
time to time by the Boards of Directors of the Employers. The Executive shall
not be entitled to receive any additional compensation from the Employers for
failure to take a vacation, nor shall the Executive be able to accumulate
unused vacation time from one year to the next, except to the extent authorized
by the Boards of Directors of the Employers.
4. EXPENSES. The Employers shall reimburse the Executive or otherwise
provide for or pay for all reasonable expenses incurred by the Executive in
furtherance of or in connection with the business of the Employers, including,
but not by way of limitation, automobile expenses and other traveling expenses,
and all reasonable entertainment expenses (whether incurred at the Executive's
residence, while traveling or otherwise), subject to such reasonable
documentation and other limitations as may be established by the Boards of
Directors of the Employers. If such expenses are paid in the first instance by
the Executive, the Employers shall reimburse the Executive therefor.
5. TERMINATION.
(a) The Employers shall have the right, at any time upon prior Notice
of Termination, to terminate the Executive's employment hereunder for any
reason, including without limitation termination for Cause, Disability or
Retirement, and the Executive shall have the right, upon prior Notice of
Termination, to terminate his employment hereunder for any reason.
(b) In the event that (i) the Executive's employment is terminated by
the Employers for Cause or (ii) the Executive terminates his employment
hereunder other than for Disability,
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Retirement or death, the Executive shall have no right pursuant to this
Agreement to compensation or other benefits for any period after the applicable
Date of Termination.
(c) In the event that the Executive's employment is terminated as a
result of Disability or Retirement during the term of this Agreement, the
Executive shall have no right pursuant to this Agreement to compensation or
other benefits for any period after the applicable Date of Termination. In the
event that the Executive is terminated by the Employers in the event of a
Change in Control of the Corporation or if the Executive terminates his
employment for Good Reason, the Executive shall be due such payments and
benefits as provided for in the Change in Control Agreement.
(d) In the event that (i) the Executive's employment is terminated by
the Corporation for other than Cause, Disability, Retirement or the Executive's
death or (ii) such employment is terminated by the Executive due to a material
breach of this Agreement by the Employers, which breach has not been cured
within fifteen (15) days after a written notice of non-compliance has been
given by the Executive to the Employers, then the Employers shall:
(A) pay to the Executive, in either twelve (12) equal monthly
installments beginning with the first business day of the month
following the Date of Termination or in a lump sum within five
business days of the Date of Termination (at the Employers' election),
a cash severance amount equal to one (1) times that the Executive's
Annual Compensation paid by the Employers, and
(B) maintain and provide for a period ending at the earlier
of (i) the expiration of the remaining term of employment pursuant
hereto prior to the Notice of Termination or (ii) the date of the
Executive's full-time employment by another employer (provided that
the Executive is entitled under the terms of such employment to
benefits substantially similar to those described in this subparagraph
(B)), at no cost to the Executive (except to the extent the Executive
already bears all or a portion of the expense of such benefits prior
to the Date of Termination), the Executive's continued participation
in all group insurance, life insurance, health and accident insurance,
disability insurance and other employee benefit plans, programs and
arrangements offered by the Employers in which the Executive was
entitled to participate immediately
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prior to the Date of Termination (excluding (x) stock option and
restricted stock plans of the Employers, (y) bonuses and other items
of cash compensation included in Annual Compensation, and (z) other
benefits, or portions thereof, included in Annual Compensation),
provided that in the event that the Executive's participation in any
plan, program or arrangement as provided in this subparagraph (B) is
barred, or during such period any such plan, program or arrangement is
discontinued or the benefits thereunder are materially reduced, the
Employers shall arrange to provide the Executive with benefits
substantially similar to those which the Executive was entitled to
receive under such plans, programs and arrangements immediately prior
to the Date of Termination.
6. LIMITATION OF BENEFITS UNDER CERTAIN CIRCUMSTANCES. If the payments
and benefits pursuant to Section 5 hereof, either alone or together with other
payments and benefits which the Executive has the right to receive from the
Employers, would constitute a "parachute payment" under Section 280G of the
Code, the payments and benefits payable by the Association pursuant to Section
5 hereof shall be reduced, in the manner determined by the Executive, by the
amount, if any, which is the minimum necessary to result in no portion of the
payments and benefits payable by the Employers under Section 5 being
non-deductible to the Employers pursuant to Section 280G of the Code and
subject to the excise tax imposed under Section 4999 of the Code. The
determination of any reduction in the payments and benefits to be made pursuant
to Section 5 shall be based upon the opinion of independent counsel selected by
the Employers' independent public accountants and paid by the Employers. Such
counsel shall be reasonably acceptable to the Employers and the Executive;
shall promptly prepare the foregoing opinion, but in no event later than thirty
(30) days from the Date of Termination; and may use such actuaries as such
counsel deems necessary or advisable for the purpose. Nothing contained herein
shall result in a reduction of any payments or benefits to which the Executive
may be entitled upon termination of employment under any circumstances other
than as specified in this Section 6, or a reduction in the payments and
benefits specified in Section 5 below zero.
7. MITIGATION; EXCLUSIVITY OF BENEFITS.
(a) The Executive shall not be required to mitigate the amount of any
benefits hereunder by seeking other employment or otherwise, nor shall the
amount of any such benefits be reduced
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by any compensation earned by the Executive as a result of employment by
another employer after the Date of Termination or otherwise.
(b) The specific arrangements referred to herein are not intended to
exclude any other benefits which may be available to the Executive upon a
termination of employment with the Employers pursuant to employee benefit plans
of the Employers or otherwise.
8. COVENANT NOT TO COMPETE. The Executive hereby covenants and agrees
that, in the event of his termination of employment with the Employers prior to
the expiration of the term of this Agreement, then for a period equal to one
(1) year following the Date of Termination of employment, he shall not, without
the written consent of the Employers, become an officer, employee, consultant,
director or trustee of any savings bank, savings and loan association, savings
and loan holding company, bank or bank holding company, or any direct or
indirect subsidiary or affiliate of any such entity, that entails working
within fifty (50) miles of the headquarters of the Association, the Corporation
or any affiliate of either of them on the Date of Termination; PROVIDED,
HOWEVER, that this Section 8 shall not apply if the Executive's employment is
terminated for the reasons set forth in Sections 5(c) and 5(d).
9. WITHHOLDING. All payments required to be made by the Employers
hereunder to the Executive shall be subject to the withholding of such amounts,
if any, relating to tax and other payroll deductions as the Employers may
reasonably determine should be withheld pursuant to any applicable law or
regulation.
10. ASSIGNABILITY. The Employers may assign this Agreement and its
rights and obligations hereunder in whole, but not in part, to any corporation,
bank or other entity with or into which the Employers may hereafter merge or
consolidate or to which the Employers may transfer all or substantially all of
their assets, if in any such case said corporation, bank or other entity shall
by operation of law or expressly in writing assume all obligations of the
Employers hereunder as fully as if it had been originally made a party hereto,
but may not otherwise assign this Agreement or its rights and obligations
hereunder. The Executive may not assign or transfer this Agreement or any
rights or obligations hereunder.
11. NOTICE. For the purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when
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delivered or mailed by certified or registered mail, return receipt requested,
postage prepaid, addressed to the respective addresses set forth below:
To the Corporation: Secretary
Community Savings Bankshares, Inc.
660 U.S. Highway One
North Palm Beach, Florida 33408
To the Association: Secretary
Community Savings, F. A.
660 U.S. Highway One
North Palm Beach, Florida 33408
To the Executive: James B. Pittard, Jr.
632 Southeast Colony Way
Jupiter, Florida 33478
12. AMENDMENT; WAIVER. No provisions of this Agreement may be
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in writing and signed by the Executive and such officer or officers
as may be specifically designated by the Boards of Directors of the Employers
to sign on its behalf. No waiver by any party hereto at any time of any breach
by any other party hereto of, or compliance with, any condition or provision of
this Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time.
13. GOVERNING LAW. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the United
States where applicable and otherwise by the substantive laws of the State of
Delaware.
14. NATURE OF OBLIGATIONS. Nothing contained herein shall create or
require the Corporation to create a trust of any kind to fund any benefits
which may be payable hereunder, and to the extent that the Executive acquires a
right to receive benefits from the Employers hereunder, such right shall be no
greater than the right of any unsecured general creditor of the Employers.
15. HEADINGS. The section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
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16. VALIDITY. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, which shall remain in full force and effect.
17. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
18. REGULATORY ACTIONS. The following provisions shall be applicable
to the parties to the extent that they are required to be included in
employment agreements between a savings association and its employees pursuant
to Section 563.39(b) of the Regulations Applicable to All Savings Associations,
12 C.F.R. ss.563.39(b), or any successor thereto, and shall be controlling in
the event of a conflict with any other provision of this Agreement, including
without limitation Section 5 hereof.
(a) If the Executive is suspended from office and/or temporarily
prohibited from participating in the conduct of the Employers' affairs pursuant
to notice served under Section 8(e)(3) or Section 8(g)(1) of the Federal
Deposit Insurance Act ("FDIA") (12 U.S.C. ss.ss.1818(e)(3) and 1818(g)(1)), the
Employers' obligations under this Agreement shall be suspended as of the date
of service, unless stayed by appropriate proceedings. If the charges in the
notice are dismissed, the Employers may, in their discretion: (i) pay the
Executive all or part of the compensation withheld while its obligations under
this Agreement were suspended, and (ii) reinstate (in whole or in part) any of
its obligations which were suspended.
(b) If the Executive is removed from office and/or permanently
prohibited from participating in the conduct of the Employers' affairs by an
order issued under Section 8(e)(4) or Section 8(g)(1) of the FDIA (12 U.S.C.
ss.ss.1818(e)(4) and (g)(1)), all obligations of the Employers under this
Agreement shall terminate as of the effective date of the order, but vested
rights of the Executive and the Employers as of the date of termination shall
not be affected.
(c) If the Association is in default, as defined in Section 3(x)(1) of
the FDIA (12 U.S.C. ss.1813(x)(1)), all obligations under this Agreement shall
terminate as of the date of default, but vested rights of the Executive and the
Employers as of the date of termination shall not be affected.
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(d) All obligations under this Agreement shall be terminated pursuant
to 12 C.F.R. ss.563.39(b)(5) (except to the extent that it is determined that
continuation of the Agreement for the continued operation of the Employers is
necessary): (i) by the Director of the Office of Thrift Supervision ("OTS"), or
his/her designee, at the time the Federal Deposit Insurance Corporation
("FDIC") enters into an agreement to provide assistance to or on behalf of the
Association under the authority contained in Section 13(c) of the FDIA (12
U.S.C. ss.1823(c)); or (ii) by the Director of the OTS, or his/her designee, at
the time the Director or his/her designee approves a supervisory merger to
resolve problems related to operation of the Association or when the
Association is determined by the Director of the OTS to be in an unsafe or
unsound condition, but vested rights of the Executive and the Employers as of
the date of termination shall not be affected.
19. REGULATORY PROHIBITION. Notwithstanding any other provision of
this Agreement to the contrary, any payments made to the Executive pursuant to
this Agreement, or otherwise, are subject to and conditioned upon their
compliance with Section 18(k) of the FDIA (12 U.S.C. ss.1828(k)) and the
regulations promulgated thereunder, including 12 C.F.R. Part 359. In the event
of the Executive's termination of employment with the Association for Cause,
all employment relationships and managerial duties with the Association shall
immediately cease regardless of whether the Executive remains in the employ of
the Corporation following such termination. Furthermore, following such
termination for Cause, the Executive will not, directly or indirectly,
influence or participate in the affairs or the operations of the Association.
20. INDEMNIFICATION. The Corporation shall provide the Executive
(including his heirs, executors and administrators) with coverage under a
standard directors' and officers' liability insurance policy at its expense, or
in lieu thereof, shall indemnify the Executive (and his heirs, executors and
administrators) to the fullest extent permitted under Delaware law against all
expenses and liabilities reasonably incurred by him in connection with or
arising out of any action, suit or proceeding in which he may be involved by
reason of his having been a director or officer of the Corporation (whether or
not he continues to be a director or officer at the time of incurring such
expenses or liabilities). Such expenses and liabilities shall include, but
shall not be limited to, judgments, court costs and attorneys' fees and the
cost of reasonable settlements.
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21. ENTIRE AGREEMENT. This Agreement embodies the entire agreement
between the Corporation and the Executive with respect to the matters agreed to
herein. All prior agreements between the Employers and the Executive with
respect to the matters agreed to herein are hereby superseded and shall have no
force or effect. Notwithstanding the foregoing, nothing contained in this
Agreement shall affect the Change in Control Agreement of even date being
entered into between the Employers and the Executive.
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IN WITNESS WHEREOF, this Agreement has been executed as of the date
first above written.
Attest: COMMUNITY SAVINGS BANKSHARES, INC.
__________________________________ By:_______________________________
Name:
Title:
Attest: COMMUNITY SAVINGS, F. A.
__________________________________ By:_______________________________
Name:
Title:
EXECUTIVE
By:_______________________________
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EXHIBIT 10.4
FORM OF CHANGE IN CONTROL AGREEMENT BETWEEN COMMUNITY SAVINGS
BANKSHARES, INC., COMMUNITY SAVINGS, F. A. AND JAMES B. PITTARD, JR.
CHANGE IN CONTROL SEVERANCE AGREEMENT AMONG
COMMUNITY SAVINGS BANKSHARES, INC.,
COMMUNITY SAVINGS, F. A. AND JAMES B. PITTARD, JR.
THIS CHANGE IN CONTROL SEVERANCE AGREEMENT is dated this ____ day of
_____ 1999, among Community Savings Bankshares, Inc., a Delaware corporation
(the "Corporation"), Community Savings, F. A., a federally chartered savings
association (the "Association"), and James B. Pittard, Jr. (the "Executive").
The Corporation and the Association are collectively referred to as the
"Employers".
WITNESSETH
WHEREAS, the Executive is presently an officer of each of the
Employers;
WHEREAS, the Employers desire to be ensured of the Executive's
continued active participation in the business of the Employers; and
WHEREAS, in order to induce the Executive to remain in the employ of
the Employers and in consideration of the Executive's agreeing to remain in the
employ of the Employers, the parties desire to specify the severance benefits
which shall be due the Executive in the event that his employment with the
Employers is terminated under specified circumstances;
NOW THEREFORE, in consideration of the mutual agreements herein
contained, and upon the other terms and conditions hereinafter provided, the
parties hereby agree as follows:
1. DEFINITIONS. The following words and terms shall have the meanings
set forth below for the purposes of this Agreement:
(a) ANNUAL COMPENSATION. The Executive's "Annual Compensation" for
purposes of this Agreement shall be deemed to mean the highest level of
compensation paid to the Executive by the Employers or any subsidiary thereof
during the calendar year in which the Date of Termination occurs (determined on
an annualized basis) or either of the two calendar years immediately preceding
the calendar year in which the Date of Termination occurs and which was either
(i) included in the Executive's gross income for tax purposes, including but
not limited to Base Salary, bonuses and amounts taxable to the Executive under
any qualified or non-qualified employee benefit plans of the
<PAGE> 2
Employers, or (ii) deferred at the election of the Executive; PROVIDED,
HOWEVER, that for purposes of the calculation of "Annul Compensation," income
related to restricted stock plans and stock option plans of the Employers shall
not be included.
(b) CAUSE. Termination of the Executive's employment for "Cause" shall
mean termination because of personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law, rule or
regulation (other than traffic violations or similar offenses) or final
cease-and-desist order. For purposes of this paragraph, no act or failure to
act on the Executive's part shall be considered "willful" unless done, or
omitted to be done, by the Executive not in good faith and without reasonable
belief that the Executive's action or omission was in the best interests of the
Employers.
(c) CHANGE IN CONTROL OF THE CORPORATION. "Change in Control of the
Corporation" shall mean the occurrence of any of the following: (i) the
acquisition of control of the Corporation as defined in 12 C.F.R. ss.574.4,
unless a presumption of control is successfully rebutted or unless the
transaction is exempted by 12 C.F.R. ss.574.3(c)(vii), or any successor to such
sections; (ii) an event that would be required to be reported in response to
Item 1(a) of Form 8-K or Item 6(e) of Schedule 14A of Regulation 14A pursuant
to the Securities Exchange Act of 1934, as amended ("Exchange Act"), or any
successor thereto, whether or not any class of securities of the Corporation is
registered under the Exchange Act; (iii) any "person" (as such term is used in
Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Corporation representing 25% or more of the
combined voting power of the Corporation's then outstanding securities; or (iv)
during any period of three consecutive years, individuals who at the beginning
of such period constitute the Board of Directors of the Corporation cease for
any reason to constitute at least two-thirds thereof unless the election, or
the nomination for election by stockholders, of each new director was approved
by a vote of at least majority of the directors then still in office who were
directors at the beginning of the period.
(d) CODE. "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(e) DATE OF TERMINATION. "Date of Termination" shall mean (i) if the
Executive's employment is terminated for Cause, the date on which the Notice of
Termination is given, and (ii) if the Executive's employment is terminated for
any other reason, the date specified in the Notice of Termination.
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(f) DISABILITY. Termination by the Employers of the Executive's
employment based on "Disability" shall mean termination because of any physical
or mental impairment which qualifies the Executive for disability benefits
under the applicable long-term disability plan maintained by the Employers or
any subsidiary or, if no such plan applies, which would qualify the Executive
for disability benefits under the Federal Social Security System.
(g) GOOD REASON. Termination by the Executive of the Executive's
employment for "Good Reason" shall mean termination by the Executive within
twelve (12) months following a Change in Control of the Corporation based on:
(i) Without the Executive's express written consent, the
assignment by the Employers to the Executive of any duties which are
materially inconsistent with the Executive's positions, duties,
responsibilities and status with the Employers immediately prior to a
Change in Control of the Corporation, or a material change in the
Executive's reporting responsibilities, titles or offices as an
employee and as in effect immediately prior to such a Change in
Control, or any removal of the Executive from or any failure to
re-elect the Executive to any of such responsibilities, titles or
offices, except in connection with the termination of the Executive's
employment for Cause, Disability or Retirement or as a result of the
Executive's death or by the Executive other than for Good Reason;
(ii) Without the Executive's express written consent, a
reduction by either of the Employers in the Executive's base salary as
in effect immediately prior to the date of the Change in Control of
the Corporation or as the same may be increased from time to time
thereafter or a reduction in the package of fringe benefits provided
to the Executive;
(iii) The principal executive office of either of the
Employers is relocated outside any county in Florida in which the
Association has operated a full-service branch office during the
period of the last three consecutive years immediately preceding the
termination of
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employment or, without the Executive's express written consent, either
of the Employers require the Executive to be based anywhere other than
an area in which the Employers' principal executive office is located,
except for required travel on business of the Employers to an extent
substantially consistent with the Executive's present business travel
obligations;
(iv) Any purported termination of the Executive's employment
for Disability or Retirement which is not effected pursuant to a Notice of
Termination satisfying the requirements of paragraph (i) below; or
(v) The failure by the Employers to obtain the assumption of
and agreement to perform this Agreement by any successor as contemplated in
Section 6 hereof.
(h) IRS. IRS shall mean the Internal Revenue Service.
(i) NOTICE OF TERMINATION. Any purported termination of the
Executive's employment by the Employers for any reason, including without
limitation for Cause, Disability or Retirement, or by the Executive for any
reason, including without limitation for Good Reason, shall be communicated by
written "Notice of Termination" to the other party hereto. For purposes of this
Agreement, a "Notice of Termination" shall mean a dated notice which (i)
indicates the specific termination provision in this Agreement relied upon,
(ii) sets forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of the Executive's employment under the
provision so indicated, (iii) specifies a Date of Termination, which shall be
not less than thirty (30) nor more than ninety (90) days after such Notice of
Termination is given, except in the case of the Employers' termination of the
Executive's employment for Cause, which shall be effective immediately; and
(iv) is given in the manner specified in Section 7 hereof.
(j) RETIREMENT. "Retirement" shall mean voluntary termination by the
Executive in accordance with the Employers' retirement policies, including
early retirement, generally applicable to their salaried employees.
2. BENEFITS UPON TERMINATION. If the Executive's employment by the
Employers shall be terminated subsequent to a Change in Control of the
Corporation by (i) the Employers for
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other than Cause, Disability, Retirement or the Executive's death or (ii) the
Executive for Good Reason, then the Employers shall
(a) pay to the Executive, in either thirty-six (36) equal monthly
installments beginning with the first business day of the month following the
Date of Termination or in a lump sum as of the Date of Termination (at the
Executive's election), a cash severance amount equal to three (3) times the
Executive's Annual Compensation, and
(b) maintain and provide for a period ending at the earlier of (i) the
expiration of the remaining term of this Agreement as of the Date of
Termination or (ii) the date of the Executive's full-time employment by another
employer (provided that the Executive is entitled under the terms of such
employment to benefits substantially similar to those described in this
subparagraph (B)), at no cost to the Executive (except to the extent the
Executive already bears all or a portion of the expense of such benefits prior
to the Date of Termination), the Executive's continued participation in all
group insurance, life insurance, health and accident insurance, disability
insurance and other employee benefit plans, programs and arrangements offered
by the Employers in which the Executive was entitled to participate immediately
prior to the Date of Termination excluding (x) stock option and restricted
stock plans of the Employers, (y) bonuses and other items of cash compensation
included in Annual Compensation, and (z) other benefits, or portions thereof,
included in Annual Compensation), provided that in the event that the
Executive's participation in any plan, program or arrangement as provided in
this subparagraph (B) is barred, or during such period any such plan, program
or arrangement is discontinued or the benefits thereunder are materially
reduced, the Employers shall arrange to provide the Executive with benefits
substantially similar to those which the Executive was entitled to receive
under such plans, programs and arrangements immediately prior to the Date of
Termination.
3. LIMITATION OF BENEFITS UNDER CERTAIN CIRCUMSTANCES. If the payments
and benefits pursuant to Section 2 hereof, either alone or together with other
payments and benefits which the Executive has the right to receive from the
Employers, would constitute a "parachute payment" under Section 280G of the
Code, the payments and benefits payable by the Employers pursuant to Section 2
hereof shall be reduced, in the manner determined by the Executive, by the
amount, if any, which is the minimum necessary to result in no portion of the
payments and benefits payable by the Employers under Section 2 being
non-deductible to the Employers pursuant to Section 280G of the Code and
subject to
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the excise tax imposed under Section 4999 of the Code. The parties hereto agree
that the present value of the payments and benefits payable pursuant to this
Agreement to the Executive upon termination shall be limited to three times the
Executive's Annual Compensation, subject to reduction as provided hereby. The
determination of any reduction in the payments and benefits to be made pursuant
to Section 2 shall be based upon the opinion of independent counsel selected by
the Employers' independent public accountants and paid by the Employers. Such
counsel shall be reasonably acceptable to the Employers and the Executive;
shall promptly prepare the foregoing opinion, but in no event later than thirty
(30) days from the Date of Termination; and may use such actuaries as such
counsel deems necessary or advisable for the purpose. Nothing contained herein
shall result in a reduction of any payments or benefits to which the Executive
may be entitled upon termination of employment under any circumstances other
than as specified in this Section 3, or a reduction in the payments and
benefits specified in Section 2 below zero.
4. MITIGATION; EXCLUSIVITY OF BENEFITS.
(a) The Executive shall not be required to mitigate the amount of any
benefits hereunder by seeking other employment or otherwise, nor shall the
amount of any such benefits be reduced by any compensation earned by the
Executive as a result of employment by another employer after the Date of
Termination or otherwise.
(b) The specific arrangements referred to herein are not intended to
exclude any other benefits which may be available to the Executive upon a
termination of employment with the Employers pursuant to employee benefit plans
of the Employers or otherwise.
5. WITHHOLDING. All payments required to be made by the Employers
hereunder to the Executive shall be subject to the withholding of such amounts,
if any, relating to tax and other payroll deductions as the Employers may
reasonably determine should be withheld pursuant to any applicable law or
regulation.
6. ASSIGNABILITY. The Employers may assign this Agreement and their
rights and obligations hereunder in whole, but not in part, to any corporation,
bank or other entity with or into which either of the Employers may hereafter
merge or consolidate or to which either of the Employers may transfer all or
substantially all of its respective assets, if in any such case said
corporation, bank or other entity shall by operation of law or expressly in
writing assume all obligations of the Employers
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hereunder as fully as if it had been originally made a party hereto, but may
not otherwise assign this Agreement or their rights and obligations hereunder.
The Executive may not assign or transfer this Agreement or any rights or
obligations hereunder.
7. NOTICE. For the purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by certified or
registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth below:
To the Corporation: Secretary
Community Savings Bankshares, Inc.
660 U.S. Highway One
North Palm Beach, Florida 33408
To the Association: Secretary
Community Savings, F. A.
660 U.S. Highway One
North Palm Beach, Florida 33408
To the Executive: James B. Pittard, Jr.
632 Southeast Colony Way
Jupiter, Florida 33478
8. AMENDMENT; WAIVER. No provisions of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing and signed by the Executive and such officer or officers as may be
specifically designated by the Boards of Directors of the Employers to sign on
their behalf. No waiver by any party hereto at any time of any breach by any
other party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time.
9. GOVERNING LAW. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the United
States where applicable and otherwise by the substantive laws of the State of
Delaware.
10. NATURE OF EMPLOYMENT AND OBLIGATIONS.
(a) Nothing contained herein shall be deemed to create other than a
terminable at will employment relationship between
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the Employers and the Executive, and the Employers may terminate the
Executive's employment at any time, subject to providing any payments specified
herein in accordance with the terms hereof.
(b) Nothing contained herein shall create or require the Employers to
create a trust of any kind to fund any benefits which may be payable hereunder,
and to the extent that the Executive acquires a right to receive benefits from
the Employers hereunder, such right shall be no greater than the right of any
unsecured general creditor of the Employers.
11. TERM OF AGREEMENT. The term of this Agreement shall be for three
years, commencing on the date of this Agreement and, upon approval of the
Boards of Directors of the Employers, shall extend for an additional year on
each annual anniversary of the date of this Agreement such that at any time the
remaining term of this Agreement shall be from two to three years. Prior to the
first annual anniversary of the date of this Agreement and each annual
anniversary thereafter, the Boards of Directors of the Employers shall consider
and review (after taking into account all relevant factors, including the
Executive's performance) an extension of the term of this Agreement, and the
term shall continue to extend each year if the Boards of Directors approve such
extension unless the Executive gives written notice to the Employers of the
Executive's election not to extend the term, with such written notice to be
given not less than thirty (30) days prior to any such anniversary date. If the
Boards of Directors of the Employers elect not to extend the term, they shall
give written notice of such decision to the Executive not less than thirty (30)
days prior to any such anniversary date. If any party gives timely notice that
the term will not be extended as of any annual anniversary date, then this
Agreement shall terminate at the conclusion of its remaining term. References
herein to the term of this Agreement shall refer both to the initial term and
successive terms.
12. HEADINGS. The section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
13. VALIDITY. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, which shall remain in full force and effect.
14. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an
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original but all of which together will constitute one and the same instrument.
15. REGULATORY ACTIONS. The following provisions shall be applicable to
the parties to the extent that they are required to be included in severance
agreements between a savings association and its employees pursuant to Section
563.39(b) of the Regulations Applicable to All Savings Associations, 12 C.F.R.
section 563.39(b), or any successor thereto, and shall be controlling in the
event of a conflict with any other provision of this Agreement, including
without limitation Section 5 hereof.
(a) If the Executive is suspended from office and/or temporarily
prohibited from participating in the conduct of the Employers' affairs pursuant
to notice served under Section 8(e)(3) or Section 8(g)(1) of the Federal Deposit
Insurance Act ("FDIA") (12 U.S.C. sections 1818(e)(3) and 1818(g)(1)), the
Employers' obligations under this Agreement shall be suspended as of the date of
service, unless stayed by appropriate proceedings. If the charges in the notice
are dismissed, the Employers may, in their discretion: (i) pay the Executive all
or part of the compensation withheld while its obligations under this Agreement
were suspended, and (ii) reinstate (in whole or in part) any of its obligations
which were suspended.
(b) If the Executive is removed from office and/or permanently
prohibited from participating in the conduct of the Employers' affairs by an
order issued under Section 8(e)(4) or Section 8(g)(1) of the FDIA (12 U.S.C.
sections 1818(e)(4) and (g)(1)), all obligations of the Employers under this
Agreement shall terminate as of the effective date of the order, but vested
rights of the Executive and the Employers as of the date of termination shall
not be affected.
(c) If the Association is in default, as defined in Section 3(x)(1) of
the FDIA (12 U.S.C. section 1813(x)(1)), all obligations under this Agreement
shall terminate as of the date of default, but vested rights of the Executive
and the Employers as of the date of termination shall not be affected.
(d) All obligations under this Agreement shall be terminated pursuant
to 12 C.F.R. section 563.39(b)(5) (except to the extent that it is determined
that continuation of the Agreement for the continued operation of the Employers
is necessary): (i) by the Director of the Office of Thrift Supervision ("OTS"),
or his/her designee, at the time the Federal Deposit Insurance Corporation
("FDIC") enters into an agreement to provide assistance to or on behalf of the
Association under the authority
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contained in Section 13(c) of the FDIA (12 U.S.C. section 1823(c)); or (ii) by
the Director of the OTS, or his/her designee, at the time the Director or
his/her designee approves a supervisory merger to resolve problems related to
operation of the Association or when the Association is determined by the
Director of the OTS to be in an unsafe or unsound condition, but vested rights
of the Executive and the Employers as of the date of termination shall not be
affected.
16. REGULATORY PROHIBITION. Notwithstanding any other provision of
this Agreement to the contrary, any payments made to the Executive pursuant to
this Agreement, or otherwise, are subject to and conditioned upon their
compliance with Section 18(k) of the Federal Deposit Insurance Act (12 U.S.C.
section 1828(k)) and the regulations promulgated thereunder, including 12 C.F.R.
Part 359. In the event of the Executive's termination of employment with the
Association for Cause, all employment relationships and managerial duties with
the Association shall immediately cease regardless of whether the Executive
remains in the employ of the Corporation following such termination.
Furthermore, following such termination for Cause, the Executive will not,
directly or indirectly, influence or participate in the affairs or the
operations of the Association.
17. ENTIRE AGREEMENT. This Agreement embodies the entire agreement
between the Employers and the Executive with respect to the matters agreed to
herein. All prior agreements between the Employers and the Executive with
respect to the matters agreed to herein are hereby superseded and shall have no
force or effect.
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IN WITNESS WHEREOF, this Agreement has been executed as of the date
first above written.
Attest: COMMUNITY SAVINGS BANKSHARES, INC.
By:________________________________________
Name:
Title:
Attest: COMMUNITY SAVINGS, F. A.
By:________________________________________
Name:
Title:
EXECUTIVE
By:__________________________________
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EXHIBIT 10.5
FORM OF CHANGE IN CONTROL AGREEMENT WITH CERTAIN OFFICERS OF COMMUNITY SAVINGS
BANKSHARES, INC. AND COMMUNITY SAVINGS, F. A.
CHANGE IN CONTROL SEVERANCE AGREEMENT
AMONG COMMUNITY SAVINGS BANKSHARES, INC.,
COMMUNITY SAVINGS, F. A. AND __________________
THIS CHANGE IN CONTROL SEVERANCE AGREEMENT is dated this ____ day of
_____ 1999, among Community Savings Bankshares, Inc., a Delaware corporation
(the "Corporation"), Community Savings, F. A., a federally chartered savings
association (the "Association"), and _______________. (the "Executive"). The
Corporation and the Association are collectively referred to as the "Employers".
WITNESSETH
WHEREAS, the Executive is presently an officer of each of the
Employers;
WHEREAS, the Employers desire to be ensured of the Executive's
continued active participation in the business of the Employers; and
WHEREAS, in order to induce the Executive to remain in the employ of
the Employers and in consideration of the Executive's agreeing to remain in the
employ of the Employers, the parties desire to specify the severance benefits
which shall be due the Executive in the event that his employment with the
Employers is terminated under specified circumstances;
NOW THEREFORE, in consideration of the mutual agreements herein
contained, and upon the other terms and conditions hereinafter provided, the
parties hereby agree as follows:
1. DEFINITIONS. The following words and terms shall have the meanings
set forth below for the purposes of this Agreement:
(a) ANNUAL COMPENSATION. The Executive's "Annual Compensation" for
purposes of this Agreement shall be deemed to mean the highest level of
compensation paid to the Executive by the Employers or any subsidiary thereof
during the calendar year in which the Date of Termination occurs (determined on
an annualized basis) or either of the two calendar years immediately preceding
the calendar year in which the Date of Termination occurs and which was either
(i) included in the Executive's gross income for tax purposes, including but
not limited to Base Salary, bonuses and amounts taxable to the Executive under
any qualified or non-qualified employee benefit plans of the
<PAGE> 2
Employers, or (ii) deferred at the election of the Executive; PROVIDED,
HOWEVER, that for purposes of the calculation of "Annul Compensation," income
related to restricted stock plans and stock option plans of the Employers shall
not be included.
(b) CAUSE. Termination of the Executive's employment for "Cause" shall
mean termination because of personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law, rule or
regulation (other than traffic violations or similar offenses) or final
cease-and-desist order. For purposes of this paragraph, no act or failure to
act on the Executive's part shall be considered "willful" unless done, or
omitted to be done, by the Executive not in good faith and without reasonable
belief that the Executive's action or omission was in the best interests of the
Employers.
(c) CHANGE IN CONTROL OF THE CORPORATION. "Change in Control of the
Corporation" shall mean the occurrence of any of the following: (i) the
acquisition of control of the Corporation as defined in 12 C.F.R. section 574.4,
unless a presumption of control is successfully rebutted or unless the
transaction is exempted by 12 C.F.R. section 574.3(c)(vii), or any successor to
such sections; (ii) an event that would be required to be reported in response
to Item 1(a) of Form 8-K or Item 6(e) of Schedule 14A of Regulation 14A pursuant
to the Securities Exchange Act of 1934, as amended ("Exchange Act"), or any
successor thereto, whether or not any class of securities of the Corporation is
registered under the Exchange Act; (iii) any "person" (as such term is used in
Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Corporation representing 25% or more of the
combined voting power of the Corporation's then outstanding securities; or (iv)
during any period of three consecutive years, individuals who at the beginning
of such period constitute the Board of Directors of the Corporation cease for
any reason to constitute at least two-thirds thereof unless the election, or the
nomination for election by stockholders, of each new director was approved by a
vote of at least majority of the directors then still in office who were
directors at the beginning of the period.
(d) CODE. "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(e) DATE OF TERMINATION. "Date of Termination" shall mean (i) if the
Executive's employment is terminated for Cause, the date on which the Notice of
Termination is given, and (ii) if the Executive's employment is terminated for
any other reason, the date specified in the Notice of Termination.
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<PAGE> 3
(f) DISABILITY. Termination by the Employers of the Executive's
employment based on "Disability" shall mean termination because of any physical
or mental impairment which qualifies the Executive for disability benefits
under the applicable long-term disability plan maintained by the Employers or
any subsidiary or, if no such plan applies, which would qualify the Executive
for disability benefits under the Federal Social Security System.
(g) GOOD REASON. Termination by the Executive of the Executive's
employment for "Good Reason" shall mean termination by the Executive within
twelve (12) months following a Change in Control of the Corporation based on:
(i) Without the Executive's express written consent, the
assignment by the Employers to the Executive of any duties which are
materially inconsistent with the Executive's positions, duties,
responsibilities and status with the Employers immediately prior to a
Change in Control of the Corporation, or a material change in the
Executive's reporting responsibilities, titles or offices as an
employee and as in effect immediately prior to such a Change in
Control, or any removal of the Executive from or any failure to
re-elect the Executive to any of such responsibilities, titles or
offices, except in connection with the termination of the Executive's
employment for Cause, Disability or Retirement or as a result of the
Executive's death or by the Executive other than for Good Reason;
(ii) Without the Executive's express written consent, a
reduction by either of the Employers in the Executive's base salary as
in effect immediately prior to the date of the Change in Control of
the Corporation or as the same may be increased from time to time
thereafter or a reduction in the package of fringe benefits provided
to the Executive;
(iii) The principal executive office of either of the
Employers is relocated outside any county in Florida in which the
Association has operated a full-service branch office during the
period of the last three consecutive years immediately preceding the
termination of
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employment or, without the Executive's express written consent, either
of the Employers require the Executive to be based anywhere other than
an area in which the Employers' principal executive office is located,
except for required travel on business of the Employers to an extent
substantially consistent with the Executive's present business travel
obligations;
(iv) Any purported termination of the Executive's employment
for Disability or Retirement which is not effected pursuant to a
Notice of Termination satisfying the requirements of paragraph (i)
below; or
(v) The failure by the Employers to obtain the assumption of
and agreement to perform this Agreement by any successor as
contemplated in Section 6 hereof.
(h) IRS. IRS shall mean the Internal Revenue Service.
(i) NOTICE OF TERMINATION. Any purported termination of the
Executive's employment by the Employers for any reason, including without
limitation for Cause, Disability or Retirement, or by the Executive for any
reason, including without limitation for Good Reason, shall be communicated by
written "Notice of Termination" to the other party hereto. For purposes of this
Agreement, a "Notice of Termination" shall mean a dated notice which (i)
indicates the specific termination provision in this Agreement relied upon,
(ii) sets forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of the Executive's employment under the
provision so indicated, (iii) specifies a Date of Termination, which shall be
not less than thirty (30) nor more than ninety (90) days after such Notice of
Termination is given, except in the case of the Employers' termination of the
Executive's employment for Cause, which shall be effective immediately; and
(iv) is given in the manner specified in Section 7 hereof.
(j) RETIREMENT. "Retirement" shall mean voluntary termination by the
Executive in accordance with the Employers' retirement policies, including
early retirement, generally applicable to their salaried employees.
2. BENEFITS UPON TERMINATION. If the Executive's employment by the
Employers shall be terminated subsequent to a Change in Control of the
Corporation by (i) the Employers for
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other than Cause, Disability, Retirement or the Executive's death or (ii)
the Executive for Good Reason, then the Employers shall
(a) pay to the Executive, in either twelve (12) equal monthly
installments beginning with the first business day of the month following the
Date of Termination or in a lump sum as of the Date of Termination (at the
Executive's election), a cash severance amount equal to one (1) times the
Executive's Annual Compensation, and
(b) maintain and provide for a period ending at the earlier of (i) one
year from the Date of Termination or (ii) the date of the Executive's full-time
employment by another employer (provided that the Executive is entitled under
the terms of such employment to benefits substantially similar to those
described in this subparagraph (B)), at no cost to the Executive (except to the
extent the Executive already bears all or a portion of the expense of such
benefits prior to the Date of Termination), the Executive's continued
participation in all group insurance, life insurance, health and accident
insurance, disability insurance and other employee benefit plans, programs and
arrangements offered by the Employers in which the Executive was entitled to
participate immediately prior to the Date of Termination excluding (x) stock
option and restricted stock plans of the Employers, (y) bonuses and other items
of cash compensation included in Annual Compensation, and (z) other benefits,
or portions thereof, included in Annual Compensation), provided that in the
event that the Executive's participation in any plan, program or arrangement as
provided in this subparagraph (B) is barred, or during such period any such
plan, program or arrangement is discontinued or the benefits thereunder are
materially reduced, the Employers shall arrange to provide the Executive with
benefits substantially similar to those which the Executive was entitled to
receive under such plans, programs and arrangements immediately prior to the
Date of Termination.
3. LIMITATION OF BENEFITS UNDER CERTAIN CIRCUMSTANCES. If the payments
and benefits pursuant to Section 2 hereof, either alone or together with other
payments and benefits which the Executive has the right to receive from the
Employers, would constitute a "parachute payment" under Section 280G of the
Code, the payments and benefits payable by the Employers pursuant to Section 2
hereof shall be reduced, in the manner determined by the Executive, by the
amount, if any, which is the minimum necessary to result in no portion of the
payments and benefits payable by the Employers under Section 2 being
non-deductible to the Employers pursuant to Section 280G of the Code and
subject to the excise tax imposed under Section 4999 of the Code. The
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<PAGE> 6
parties hereto agree that the present value of the payments and benefits
payable pursuant to this Agreement to the Executive upon termination shall be
limited to three times the Executive's Annual Compensation, subject to
reduction as provided hereby. The determination of any reduction in the
payments and benefits to be made pursuant to Section 2 shall be based upon the
opinion of independent counsel selected by the Employers' independent public
accountants and paid by the Employers. Such counsel shall be reasonably
acceptable to the Employers and the Executive; shall promptly prepare the
foregoing opinion, but in no event later than thirty (30) days from the Date of
Termination; and may use such actuaries as such counsel deems necessary or
advisable for the purpose. Nothing contained herein shall result in a reduction
of any payments or benefits to which the Executive may be entitled upon
termination of employment under any circumstances other than as specified in
this Section 3, or a reduction in the payments and benefits specified in
Section 2 below zero.
4. MITIGATION; EXCLUSIVITY OF BENEFITS.
(a) The Executive shall not be required to mitigate the amount of any
benefits hereunder by seeking other employment or otherwise, nor shall the
amount of any such benefits be reduced by any compensation earned by the
Executive as a result of employment by another employer after the Date of
Termination or otherwise.
(b) The specific arrangements referred to herein are not intended to
exclude any other benefits which may be available to the Executive upon a
termination of employment with the Employers pursuant to employee benefit plans
of the Employers or otherwise.
5. WITHHOLDING. All payments required to be made by the Employers
hereunder to the Executive shall be subject to the withholding of such amounts,
if any, relating to tax and other payroll deductions as the Employers may
reasonably determine should be withheld pursuant to any applicable law or
regulation.
6. ASSIGNABILITY. The Employers may assign this Agreement and their
rights and obligations hereunder in whole, but not in part, to any corporation,
bank or other entity with or into which either of the Employers may hereafter
merge or consolidate or to which either of the Employers may transfer all or
substantially all of its respective assets, if in any such case said
corporation, bank or other entity shall by operation of law or expressly in
writing assume all obligations of the Employers hereunder as fully as if it had
been originally made a party
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hereto, but may not otherwise assign this Agreement or their rights and
obligations hereunder. The Executive may not assign or transfer this Agreement
or any rights or obligations hereunder.
7. NOTICE. For the purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by certified or
registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth below:
To the Corporation: Secretary
Community Savings Bankshares, Inc.
660 U.S. Highway One
North Palm Beach, Florida 33408
To the Association: Secretary
Community Savings, F. A.
660 U.S. Highway One
North Palm Beach, Florida 33408
To the Executive: [Name]
[Address]
8. AMENDMENT; WAIVER. No provisions of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing and signed by the Executive and such officer or officers as may be
specifically designated by the Boards of Directors of the Employers to sign on
their behalf. No waiver by any party hereto at any time of any breach by any
other party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time.
9. GOVERNING LAW. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the United
States where applicable and otherwise by the substantive laws of the State of
Delaware.
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10. NATURE OF EMPLOYMENT AND OBLIGATIONS.
(a) Nothing contained herein shall be deemed to create other than a
terminable at will employment relationship between the Employers and the
Executive, and the Employers may terminate the Executive's employment at any
time, subject to providing any payments specified herein in accordance with the
terms hereof.
(b) Nothing contained herein shall create or require the Employers to
create a trust of any kind to fund any benefits which may be payable hereunder,
and to the extent that the Executive acquires a right to receive benefits from
the Employers hereunder, such right shall be no greater than the right of any
unsecured general creditor of the Employers.
11. TERM OF AGREEMENT. The term of this Agreement shall be for three
years, commencing on the date of this Agreement and, upon approval of the
Boards of Directors of the Employers, shall extend for an additional year on
each annual anniversary of the date of this Agreement such that at any time the
remaining term of this Agreement shall be from two to three years. Prior to the
first annual anniversary of the date of this Agreement and each annual
anniversary thereafter, the Boards of Directors of the Employers shall consider
and review (after taking into account all relevant factors, including the
Executive's performance) an extension of the term of this Agreement, and the
term shall continue to extend each year if the Boards of Directors approve such
extension unless the Executive gives written notice to the Employers of the
Executive's election not to extend the term, with such written notice to be
given not less than thirty (30) days prior to any such anniversary date. If the
Boards of Directors of the Employers elect not to extend the term, they shall
give written notice of such decision to the Executive not less than thirty (30)
days prior to any such anniversary date. If any party gives timely notice that
the term will not be extended as of any annual anniversary date, then this
Agreement shall terminate at the conclusion of its remaining term. References
herein to the term of this Agreement shall refer both to the initial term and
successive terms.
12. HEADINGS. The section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
13. VALIDITY. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, which shall remain in full force and effect.
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14. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
15. REGULATORY ACTIONS. The following provisions shall be applicable to
the parties to the extent that they are required to be included in severance
agreements between a savings association and its employees pursuant to Section
563.39(b) of the Regulations Applicable to All Savings Associations, 12 C.F.R.
section 563.39(b), or any successor thereto, and shall be controlling in the
event of a conflict with any other provision of this Agreement, including
without limitation Section 5 hereof.
(a) If the Executive is suspended from office and/or temporarily
prohibited from participating in the conduct of the Employers' affairs pursuant
to notice served under Section 8(e)(3) or Section 8(g)(1) of the Federal Deposit
Insurance Act ("FDIA") (12 U.S.C. sections 1818(e)(3) and 1818(g)(1)), the
Employers' obligations under this Agreement shall be suspended as of the date of
service, unless stayed by appropriate proceedings. If the charges in the notice
are dismissed, the Employers may, in their discretion: (i) pay the Executive all
or part of the compensation withheld while its obligations under this Agreement
were suspended, and (ii) reinstate (in whole or in part) any of its obligations
which were suspended.
(b) If the Executive is removed from office and/or permanently prohibited
from participating in the conduct of the Employers' affairs by an order issued
under Section 8(e)(4) or Section 8(g)(1) of the FDIA (12 U.S.C. sections
1818(e)(4) and (g)(1)), all obligations of the Employers under this Agreement
shall terminate as of the effective date of the order, but vested rights of the
Executive and the Employers as of the date of termination shall not be affected.
(c) If the Association is in default, as defined in Section 3(x)(1) of the
FDIA (12 U.S.C. section 1813(x)(1)), all obligations under this Agreement shall
terminate as of the date of default, but vested rights of the Executive and the
Employers as of the date of termination shall not be affected.
(d) All obligations under this Agreement shall be terminated pursuant to 12
C.F.R. section 563.39(b)(5) (except to the extent that it is determined that
continuation of the Agreement for the continued operation of the Employers is
necessary): (i) by the Director of the Office of Thrift Supervision ("OTS"), or
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his/her designee, at the time the Federal Deposit Insurance Corporation
("FDIC") enters into an agreement to provide assistance to or on behalf of the
Association under the authority contained in Section 13(c) of the FDIA (12
U.S.C. section 1823(c)); or (ii) by the Director of the OTS, or his/her
designee, at the time the Director or his/her designee approves a supervisory
merger to resolve problems related to operation of the Association or when the
Association is determined by the Director of the OTS to be in an unsafe or
unsound condition, but vested rights of the Executive and the Employers as of
the date of termination shall not be affected.
16. REGULATORY PROHIBITION. Notwithstanding any other provision of
this Agreement to the contrary, any payments made to the Executive pursuant to
this Agreement, or otherwise, are subject to and conditioned upon their
compliance with Section 18(k) of the Federal Deposit Insurance Act (12 U.S.C.
section 1828(k)) and the regulations promulgated thereunder, including 12 C.F.R.
Part 359. In the event of the Executive's termination of employment with the
Association for Cause, all employment relationships and managerial duties with
the Association shall immediately cease regardless of whether the Executive
remains in the employ of the Corporation following such termination.
Furthermore, following such termination for Cause, the Executive will not,
directly or indirectly, influence or participate in the affairs or the
operations of the Association.
17. ENTIRE AGREEMENT. This Agreement embodies the entire agreement
between the Employers and the Executive with respect to the matters agreed to
herein. All prior agreements between the Employers and the Executive with
respect to the matters agreed to herein are hereby superseded and shall have no
force or effect.
10
<PAGE> 11
IN WITNESS WHEREOF, this Agreement has been executed as of the date
first above written.
Attest: COMMUNITY SAVINGS BANKSHARES, INC.
By:__________________________________________
Name:
Title:
Attest: COMMUNITY SAVINGS, F. A.
By:__________________________________________
Name:
Title:
EXECUTIVE
By:_______________________________
11
<PAGE> 1
EXHIBIT 13
1998 ANNUAL REPORT TO SHAREHOLDERS
COVER PAGE
COMMUNITY SAVINGS BANKSHARES, INC.
1998 ANNUAL REPORT
<PAGE> 2
INSIDE FRONT COVER
--------------------------------
This is a map of Florida showing
the branches of Community
Savings, FA and the counties
where they are located
--------------------------------
<PAGE> 3
CORPORATE PROFILE
Community Savings Bankshares, Inc. ("Bankshares") is a Delaware-chartered stock
holding company which was organized in August 1998 and became the holding
company for Community Savings, F. A. ("the Association" or "Community Savings")
on December 15, 1998. Bankshares' primary asset consists of its investment in
its wholly-owned subsidiary, the Association, a stock savings and loan
association headquartered in North Palm Beach, Florida, as well as cash. The
Association's 21 full-service banking offices are well positioned in one of
America's fastest-growing markets, known for its affluent population and its
high quality of life. The mission statement of the Association reflects our
dedication to our shareholders and customers.
COMMUNITY SAVINGS IS A SOUTH FLORIDA BASED, COMMUNITY ORIENTED FINANCIAL
INSTITUTION DEDICATED TO PROVIDING QUALITY RETAIL FINANCIAL PRODUCTS AND
CUSTOMER SERVICE AT COMPETITIVE PRICES TO INDIVIDUALS AND BUSINESSES IN
OUR PRIMARY MARKET AREA OF PALM BEACH, MARTIN, ST. LUCIE, AND INDIAN RIVER
COUNTIES, WHILE EFFECTIVELY UTILIZING THE RESOURCES OF THE INSTITUTION,
ITS HOLDING COMPANY'S SHAREHOLDERS, AND OPERATING IN A SAFE, SOUND AND
PROFITABLE MANNER.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Locations Inside front cover
<S> <C>
Community Savings Bankshares, Inc. Corporate Directory 2
President's Message 3
Financial Highlights 7
Management's Discussion and Analysis 8
Independent Auditors' Report 20
Consolidated Statements of Financial Condition 21
Consolidated Statements of Income 22
Consolidated Statements of Comprehensive Income 23
Consolidated Statements of Changes in Shareholders' Equity 24
Consolidated Statements of Cash Flows 25
Notes to Consolidated Financial Statements 26
Corporate Information 50
Community Savings, F. A. Corporate Directory Inside back cover
</TABLE>
<PAGE> 4
This is a picture of the Board of Directors
<TABLE>
<CAPTION>
COMMUNITY SAVINGS BANKSHARES, INC.
BOARD OF DIRECTORS
<S> <C> <C> <C>
Frederick A. Teed Forest C. Beaty, Jr. Robert F. Cromwell
Chairman of the Board Director Director
Karl D. Griffin James B. Pittard, Jr. Harold I. Stevenson, CPA
Director and Assistant Secretary President and Chief Executive Officer Director
CORPORATE OFFICERS
James B. Pittard, Jr.
President and Chief Executive Officer
Larry J. Baker ,CPA Cecil F. Howard, Jr.
Senior Vice President and Treasurer Senior Vice President
Feriel G. Hughes Mary L. Kaminske Michael E. Reinhardt
Senior Vice President Senior Vice President Senior Vice President
Joe L. Knorr Deborah M. Rousseau Donna L. Sheppard, CPA
Vice President Vice President Vice President
Secretary
Trina L. Miles
Assistant Secretary
</TABLE>
2
<PAGE> 5
This is a picture of James B. Pittard, Jr.
President of Community Savings Bankshares, Inc.
James B. Pittard, Jr.
President of Community Savings Bankshares, Inc.
PRESIDENT'S MESSAGE TO SHAREHOLDERS
"1998 WAS A CHALLENGING YET REWARDING YEAR FOR OUR COMPANY."
1998 saw a major change in our corporate structure. In December 1998,
the Association completed its reorganization and conversion from the two-tier
mutual holding company structure to the stock holding structure. Our
reorganization was accompanied by a stock offering by our new holding company,
Community Savings Bankshares, Inc. As a result of the reorganization , Community
Savings Bankshares, Inc., a newly-formed Delaware company, became the parent
holding company for the Association. The proceeds from the offering are
primarily being used to support the Association's lending and investment
activities to meet its strategic goals for 1999, enhancing the Association's
ability to serve the borrowing and other financial needs of its community. The
reorganization also increased the liquidity of our stock from 2.4 million shares
to over 10 million shares in the market.
In connection with the reorganization, 5,470,651 shares of common stock
were sold at $10 per share, resulting in net proceeds of approximately $53
million. In addition, 5,078,233 exchange shares were issued to the existing
minority shareholders at the exchange ratio of 2.0445 shares for each share of
mid-tier holding company common stock. The total number of shares of common
stock outstanding after the reorganization is 10,548,884. The new shares began
trading on The Nasdaq Stock Market on December 16, 1998. The symbol remains
"CMSV".
"WE MET OUR FINANCIAL GOALS FOR 1998."
Net income totaled $5.0 million and total assets increased 17 % to
$844.0 million at year end as we continued implementation of our strategic plan
to increase the size of the company. Our primary strategy was to invest
extensively in new loans secured by property within our market area, emphasizing
one- to four- family residential loans, consumer loans, and commercial real
estate loans. We exceeded our goal by originating and purchasing a total of
$234.6 million of new loans. The new loans were funded by a $62.3 million
reduction in the securities portfolio to $147.8 million at December 31, 1998, as
well as an increase in retail deposits of $43.7 million, resulting in total
deposits of $594.4 million at December 31, 1998. We also funded specific
investment and loan transactions with a $34.6 million net increase in Federal
Home Loan Bank advances.
Our continued efforts to reduce expenses and enhance non-interest
income identified opportunities totaling $1.1 million.
"WE MET OUR COMMITMENT TO IMPROVE OUR TECHNOLOGY TO BETTER SERVE OUR CUSTOMERS'
NEEDS."
During 1998, we completed the installation of our wide-area computer
network and new customer information system in all of our branches and support
departments. This system assists customer service representatives and tellers
with opening accounts, servicing customers, and selling additional products and
services. In addition, it supports our upgraded loan tracking system which
allows us to process new loans more quickly and efficiently. The implementation
of two substantial systems upgrades resulted in a noticeable improvement in
customer service.
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<PAGE> 6
"WE RELOCATED BRANCHES TO NEW LOCATIONS TO BETTER MEET THE NEEDS OF OUR
CUSTOMERS."
During 1998, we relocated two branch offices from leased spaces in
small strip shopping centers to larger free standing buildings in more
convenient locations for our customers. These branches had reached their
potential in the limited space they occupied and need to be moved in order to
continue growing.
The new Maplewood office, located on Indiantown Road in Jupiter,
Florida, replaces our Chasewood office. This office provides drive-in lanes as
well as a drive-up ATM which were not possible in the old location.
- - -------------------------------------------------------------
This is a picture of the Maplewood office in Jupiter, Florida
- - -------------------------------------------------------------
We also opened the Community Savings Professional Center, located on
Pt. St. Lucie Boulevard, in Port St. Lucie, Florida and relocated our Pt. St.
Lucie office as the primary tenant. We have additional space available in the
building for other tenants that will complement our branch business.
- - -------------------------------------------------------------
This is a picture of the Pt. St. Lucie Boulevard
office in Pt. St. Lucie, Florida
- - -------------------------------------------------------------
"THE YEAR 2000 CONTINUES TO BE A MAJOR FOCUS FOR US."
Our preparations for Year 2000 continued throughout 1998. We met our
target dates for testing our mission critical systems and have experienced a
high level of compliance with our existing and newly installed systems. We will
continue to make every effort to prepare for this event. We believe our mission
critical systems are Year 2000 compliant.
"WE EXPECT 1999 TO BE A YEAR OF CONTINUED GROWTH AND PROFITABILITY."
1999 will see us continuing to pursue our strategic objective of
emphasizing residential, consumer, and commercial real estate loan originations.
We will be targeting new loan markets and adding additional lending staff to
achieve this objective.
We will continue to look for new deposit markets in the upcoming year.
As part of this goal, we plan to open a new office in May 1999 near the Ibis
Country Club golf course community, located in suburban West Palm Beach. The
office will be located on land we purchased in a shopping center located at the
entrance to Ibis.
We plan to fully utilize our new Marketing Call Center, which opened in
December 1998, to create additional new business opportunities. The sales team
will assist new residents of the area and handle Internet referrals as well as
make follow-up calls on our direct mail promotions, CD renewals, and new
mortgage customers.
We are committed to exploring avenues that will improve our efficiency
by competitively pricing our products and services and by reducing our costs.
"WE ARE EXCITED BY OUR POSSIBILITIES AS A FULLY PUBLIC COMPANY."
On behalf of all of our employees, officers and directors, I want to
thank you for your loyal support during this past year. 1998 was an exciting
year for us and we look forward to the challenges and opportunities of 1999. We
look forward to earning your continued support in the future, as well.
James B. Pittard, Jr.
President and Chief Executive Officer
4
<PAGE> 7
FINANCIAL HIGHLIGHTS
Community Savings Bankshares, Inc. common stock trades on The Nasdaq Stock
Market under the symbol "CMSV".
<TABLE>
<CAPTION>
12/31/98 12/31/97 12/31/96 9/30/96 9/30/95 9/30/94
FOR THE YEAR ENDED (In Thousands)
- - --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income $54,489 $50,316 $45,580 $43,889 $37,720 $34,130
Interest expense 30,159 27,390 23,888 22,859 18,634 15,525
Net interest income 24,330 22,926 21,692 21,030 19,086 18,605
Net income 4,994 5,356 4,024 3,915 4,574 3,737
AVERAGE FOR THE YEAR ENDED (In Thousands)
- - --------------------------------------------------------------------------------------------------------------------------
Total assets $772,248 $693,175 $631,038 $612,004 $544,555 $528,286
Loans receivable, net 510,491 411,098 359,414 346,880 321,849 321,721
Cash and cash equivalents 44,819 42,029 47,532 48,367 53,736 40,946
Mortgage-backed securities - held to maturity 85,688 99,884 106,387 99,959 53,349 28,843
Investments - held to maturity and securities
available for sale 81,669 110,986 89,378 87,280 130,094 106,031
Deposits 578,574 537,965 494,034 478,955 429,893 452,070
Borrowed funds 90,928 61,551 46,076 42,416 29,086 23,657
Shareholders' equity 86,980 78,822 75,323 74,638 69,263 36,376
AT YEAR END (In Thousands)
- - --------------------------------------------------------------------------------------------------------------------------
Total assets $844,041 $720,133 $655,209 $650,332 $567,006 $560,268
Loans receivable, net 538,204 451,709 389,040 376,219 329,442 317,117
Cash and cash equivalents 117,015 25,954 42,442 44,780 42,497 89,843
Mortgage-backed securities - held to maturity 32,395 46,413 53,405 54,945 77,499 41,281
Investments - held to maturity 20,224 21,388 22,139 22,293 59,679 52,204
Securities available for sale 95,151 142,269 123,152 124,287 27,028 26,729
Real estate owned 522 592 1,455 1,384 1,910 3,686
Deposits 594,400 550,708 513,709 498,929 437,376 459,979
Borrowed funds 107,350 75,098 53,908 55,867 39,101 19,233
Shareholders' equity 133,286 81,259 76,119 75,056 72,848 38,110
KEY FINANCIAL DATA
- - --------------------------------------------------------------------------------------------------------------------------
PERFORMANCE RATIOS:
Return on average assets 0.65% 0.77% 0.64% 0.64% 0.84% 0.71%
Return on average equity 5.74 6.80 5.34 5.25 6.60 10.27
Net interest rate spread 3.04 3.13 3.24 3.24 3.40 3.69
Non-interest income to average assets 0.53 0.64 0.58 0.55 0.62 0.63
Non-interest expense to average assets 2.68 2.72 3.18 3.20 2.74 2.82
Dividend payout ratio 53.5 38.69 39.57 42.89 28.22 --
ASSET QUALITY RATIOS:
Non-performing loans to net loans receivable 0.31 0.31 0.42 0.22 0.20 0.93
Non-performing assets to total assets 0.26 0.27 0.47 0.40 0.45 1.25
Allowance for loan losses to non-performing loans 189.45 193.04 155.86 274.58 527.49 114.72
Allowance for loan losses to net loans receivable 0.59 0.59 0.65 0.61 1.06 1.07
CAPITAL RATIOS:
Shareholders' equity to total assets 15.79 11.28 11.62 11.54 12.85 6.80
Average equity to average assets 11.26 11.37 11.65 12.20 12.72 6.89
</TABLE>
5
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
In the following discussion, references to "Bankshares" relate to Community
Savings Bankshares, Inc. together with its subsidiary, Community Savings, F. A.
(the "Association"). During January 1997, the Board of Directors approved the
change in the fiscal year end for all related entities from September 30th to
December 31st, effective with the year and the three months ended December 31,
1996.
COMMUNITY SAVINGS BANKSHARES, INC.
Bankshares is a Delaware-chartered stock holding company organized in August
1998. Bankshares' significant assets include cash and 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 "Mid-Tier"). Bankshares sold 5,470,65l shares of common
stock at $10.00 per share in a subscription and community offering (the
"Offering") resulting in net proceeds of approximately $53.0 million. Bankshares
also issued 5,078,233 exchange shares to existing minority shareholders (the
"Exchange") at an exchange ratio of 2.0445 shares for each share of Mid-Tier
Holding Company common stock. The conversion and reorganization was accounted
for at historical cost in a manner similar to a pooling of interests. At
December 31, 1998, there were 10,548,884 shares of common stock outstanding.
COMMUNITY SAVINGS, F. A.
The Association, founded in 1955, is a federally chartered stock 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 1994
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. On December 15, 1998, in
connection with the conversion and reorganization, ComFed and the Mid-Tier were
merged with and into the Association and the Association became the wholly-owned
subsidiary of Bankshares.
The Association is a community-oriented financial institution engaged primarily
in the business of attracting deposits from the general public and using such
funds, together with other borrowings, to invest in various consumer-based real
estate loans, mortgage-backed securities ("MBS"), and investment securities. The
Association's plan is to operate as a well-capitalized, profitable and
independent institution. The Association currently exceeds all regulatory
capital requirements. The Association's profitability is highly dependent on its
net interest income. The components that determine net interest income are the
amount of interest-earning assets and interest-bearing liabilities, together
with the rates earned or paid on such interest rate-sensitive instruments. The
Association is sensitive to managing interest rate risk exposure by better
matching maturities and rates of its assets and liabilities. This is
accomplished while considering the credit risk of its 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 17.8% during the month of December 31,
1998 and 12.0% for fiscal 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
operations. While scheduled principal repayments on loans and MBS, and
maturities of securities are relatively predictable sources 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
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<PAGE> 9
deposits with the FHLB of Atlanta amounted to $100.3 million at December 31,
1998. Other assets qualifying for liquidity outstanding at December 31, 1998
amounted to $13.9 million. For additional information about cash flows from
operating, financing, and investing activities, see Consolidated Statements of
Cash Flows included in the consolidated financial statements.
Liquidity management is both a daily and long-term function of business
management. If funds are required beyond the ability to generate them
internally, borrowing agreements exist with the FHLB which provide an additional
source of funds. FHLB advances totaled $91.9 million at December 31, 1998. At
December 31, 1998, loan commitments totaled $14.9 million and the unfunded
portion of loans in process totaled $33.2 million. There were no commitments
outstanding to purchase loans at that date. Certificates of deposit scheduled to
mature in less than one year totaled $277.2 million at December 31, 1998. Based
on prior experience, management believes that a significant portion of such
deposits will remain with the Association.
The deposits of savings and loan associations, such as the Association, are
presently insured by the SAIF. The SAIF and the Bank Insurance Fund ("BIF") are
the two insurance funds administered by the FDIC. On August 8, 1995, in
recognition of BIF achieving its mandated reserve ratio, the FDIC revised the
premium schedule for BIF members to provide a new range of .04% to .31% of
deposits (as compared to the then existing range of .23% to .31% of deposits for
BIF and SAIF insured institutions). Subsequent revisions in such schedule
resulted in most BIF-insured institutions paying the statutory annual minimum
premium of $2,000. As a result, well capitalized and healthy BIF members paid
significantly lower premiums than SAIF-insured institutions. Without a
substantial increase in premium rates, or the imposition of special assessments
or other significant developments, such as a merger of SAIF and BIF, it was not
anticipated that SAIF would be adequately recapitalized until 2002. As a result
of the disparity in BIF and SAIF premium rates, SAIF members were placed at a
significant competitive disadvantage in relation to BIF members with respect to
pricing of loans and deposits and the ability to lower their operating costs.
On September 30, 1996, Congress passed, and the President signed, the Deposit
Insurance Funds Act of 1996 (the "DIF"), which mandated that all institutions
which had deposits insured by SAIF were required to pay a one-time special
assessment of 65.7 basis points on SAIF-insured deposits (subject to adjustment
for certain types of banks with SAIF deposits) that were held at March 31, 1995
payable by November 27, 1996 to recapitalize the SAIF. The assessment increased
the SAIF's reserve ratio to a level comparable to that of the BIF at 1.25% of
total insured deposits. The FDIC, in connection with the recapitalization, also
lowered SAIF premiums from $0.23 per $100 to $0.065 per $100 of insured deposits
beginning in January 1997. The Association's share of this special assessment
totaled $2.8 million and is reflected in the operating results for the year
ended September 30, 1996.
In August 1996, Congress passed legislation which repealed Bankshares' present
method of accounting for bad debts for federal income tax purposes. As discussed
in Note 9 to the consolidated financial statements, Bankshares previously used
the percentage of taxable income method to determine its bad debt deduction in
the computation of its taxable income. Under the new legislation, Bankshares is
required to use the specific charge-off method, which may result in a different
deduction for bad debts in determining taxable income than as computed under the
previous method. Additionally, Bankshares is required to recapture its post-1987
additions to its bad debt reserves. Since Bankshares had previously provided
deferred taxes for the income tax bad debt reserves established after 1987, no
additional income tax liability related to the recapture occurred. The new
legislation was effective for taxable years beginning after December 31, 1995.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements of Bankshares and the notes thereto,
presented elsewhere herein, have been prepared in accordance with generally
accepted accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time and
due to inflation. The impact is reflected in the increased cost of Bankshares'
operations. Unlike most industrial companies, nearly all of the assets and
liabilities of Bankshares are monetary. As a result, interest rates have a
greater impact on Bankshares' performance than do the effects of general levels
of inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the price of goods and services.
FINANCIAL CONDITION
DECEMBER 31, 1998 COMPARED TO DECEMBER 31, 1997
Total assets increased $123.9 million, or 17.2%, to $844.0 million at December
31, 1998 from $720.1 million at December 31, 1997. The increase in total assets
was primarily due to an $86.5 million increase in the loan portfolio as well as
an $88.1 million increase in interest earning deposits. In addition, office
properties and equipment increased $5.8 million primarily related to the
purchase of land intended for two future branch sites totaling $1.8 million, the
relocation of two existing branches totaling $3.6 million, and the exercise of
options to purchase two existing leaseholds and land totaling $2.0 million. FHLB
stock increased by $1.4 million as the required level was increased reflecting
the increase in the deposit portfolio. Other assets increased by $1.8 million
due to an investment in an affordable
7
<PAGE> 10
housing tax credit partnership. These increases resulted from the implementation
of the Association's growth strategy for fiscal year 1998. This strategy
emphasized increased loan production funded by retail deposits, combined with
purchases of securities funded by odd-term certificates of deposit or FHLB
advances. To increase the loan portfolio, the Association continued to emphasize
an incentive-based loan origination program which resulted in new loan
originations and purchases of $234.6 million, of which $208.0 million were
one-to four-family residential loans, $11.3 million were commercial real estate
loans, $6.2 million were commercial business loans, $4.0 million were land loans
and $5.1 million were other loans. These originations and purchases were offset
in part by repayments totaling $139.6 million and other adjustments totaling
$8.5 million.
The securities portfolio, which includes securities both held to maturity and
available for sale, had a net decrease for the year of $62.3 million. Investment
securities held to maturity decreased $15.2 million to $52.6 million at December
31, 1998 from $67.8 million at December 31, 1997. Securities available for sale
also decreased by $47.1 million to $95.2 million at December 31, 1998 from
$142.3 million at December 31, 1997. These decreases were due primarily to calls
totaling $41.7 million, maturities totaling $3.4 million and normal amortization
totaling $44.0 million. During 1998, $25.0 million of new securities were
purchased. Such purchases included $5.0 million in U. S. Government and agency
securities and $20.0 in mortgage-backed and related securities. All such
purchases of securities were classified as available for sale.
Office properties and equipment increased by $5.8 million for the year primarily
as a result of the relocation of two branch offices, the exercise of options to
purchase two existing leaseholds as well as the purchase of new computer
hardware and software in connection with the implementation of the Association's
wide-area computer network. Other assets increased $1.8 million to $7.0 million
at December 31, 1998 from $5.2 million at December 31, 1997, due to the
investment in an affordable housing tax credit partnership. The Association's
approximately 4% limited partnership interest results in tax benefits in the
form of tax deductions from partnership operating losses and tax credits. The
investment in the partnership is being amortized over the estimated 15-year life
of the partnership.
The increase in total assets was funded primarily by a $43.7 million increase in
deposits to $594.4 million at December 31, 1998 as compared to $550.7 million at
December 31, 1997. The deposit growth reflected increased retail deposits
resulting from special promotions of odd-term certificates combined with
competitive pricing intended to maintain existing deposit customers as well as
to attract new customers in the Association's market area. The increase in
assets also reflected the purchase of securities in leveraged transactions
intended to enhance net interest income as well as loan originations and
purchases which were funded by a $34.6 million net increase in advances from the
FHLB to $91.9 million at December 31, 1998 from $57.3 million at December 31,
1997.
Shareholders' equity increased to $133.3 million or $13.43 per share at December
31, 1998 from $81.3 million or $8.02 per share at December 31, 1997, reflecting
increases of $53.0 million of net proceeds raised in the Offering and net income
for the year of $5.0 million offset primarily by dividends totaling $2.7 million
declared during the year on the common stock held by minority shareholders and
the purchase of 437,652 shares of common stock by the Employee Stock Ownership
Plan (the "ESOP") in the Offering, which was funded by a loan from Bankshares.
As a result of the exercise of stock options granted pursuant to the stock
option plan, 9,040 shares of common stock were issued from authorized but
unissued shares during the year ended December 31, 1998, resulting, in
combination with the Offering and the Exchange , in 10,548,884 outstanding
shares as of December 31, 1998.
RESULTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997
GENERAL
Net income for the year ended December 31, 1998 decreased 6.8% to $5.0 million,
or $0.49 per share, compared to $5.4 million, or $0.53 per share for the same
period in 1997. Results for the year ended December 31, 1997 included a one-time
$384,000 after tax gain on the sale of the stock of the Association's data
service bureau which did not reoccur during 1998. However, during fiscal 1998,
net interest income increased $1.4 million to $24.3 million from $22.9 million
for fiscal 1997. Other income and the provision for income taxes decreased
$379,000 and $823,000, respectively, during fiscal 1998 while operating expense
increased $1.9 million during this time period.
INTEREST INCOME
Interest income for the year ended December 31, 1998 totaled $54.5 million, an
increase of $4.2 million, or 8.3%, from $50.3 million for 1997 reflecting, in
part, the implementation of the Association's growth strategy to increase the
loan portfolio and securities available for sale. The increase was due primarily
to a $68.8 million increase in average interest-earning assets of to $722.7
million for the year ended December 31, 1998 from $653.8 million for 1997,
partially offset by a decrease in the average yield on average interest-earning
assets to 7.54% for the year ended December 31, 1998 from 7.70% for fiscal 1997.
Interest income on loans increased $6.7 million, or 20.0%, to $40.2 million for
the year ended December 31, 1998 compared to $33.5 million for 1997. Interest
income on real estate loans increased by $6.5 million, or 20.4%, to $38.3
million for the year ended December 31, 1998 from $31.8 million for 1997,
primarily because of a
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$97.1 million increase in the average balance of real estate loans, or 24.7% to
$489.9 million for the year ended December 31, 1998 from $392.8 million for
1997, partially offset by a decrease in the average yield on real estate loans
to 7.83% from 8.11%. Interest income from securities held to maturity and
securities available for sale decreased by $3.2 million, or 21.5%, to $11.6
million for the year ended December 31, 1998 from $14.9 million for 1997. The
decrease in income from securities held to maturity and securities available for
sale was primarily caused by a $43.5 million decrease in the average balance to
$167.4 million for the year ended December 31, 1998 from $210.9 million for 1997
as well as a decrease in the average yield to 6.95% for the year ended December
31, 1998 from 7.05% for 1997. Other interest and dividend income which includes
interest-earning deposits and FHLB stock, increased $676,000, or 34.6%, to $2.6
million for the year ended December 31, 1998 from $2.0 million for 1997. The
increase in other interest and dividend income is primarily attributable to a
$13.0 million, or 40.7% increase in the average balance of other investments to
$44.8 million during 1998 from $31.8 million during 1997, partially offset by a
decrease in the average yield on other investments to 5.87% for the year ended
December 31, 1998 from 6.14% for 1997.
INTEREST EXPENSE
Interest expense increased $2.8 million, or 10.2%, to $30.2 million for the year
ended December 31, 1998 from $27.4 million for 1997. Interest on deposits
increased $1.4 million, or 6.2%, to $24.1 million for the year ended December
31, 1998 from $22.6 million for 1997. The increase was due primarily to the
increase in the average balance of deposits of $40.6 million, or 7.5%, to $578.6
million during 1998 from $538.0 million during 1997 partially offset by a small
decrease in the average cost of deposits to 4.17% from 4.21%. In order to
increase its market share of total deposits during 1998 as well as to maintain
its existing deposit customers, the Association has continued to place an
increased emphasis on competitively pricing its deposit products, including
odd-term certificate of deposit products, as well as existing certificate of
deposit products, as part of its asset liability policy. Certificates of deposit
typically have a higher interest rate cost to the Association than transaction
accounts. Certificates of deposits and transaction accounts increased $10.1
million and $33.6 million, respectively, at December 31, 1998 as compared to
December 31, 1997. Interest expense attributable to borrowed funds increased
$1.3 million, or 27.7%, to $6.1 million for the year ended December 31, 1998
from $4.7 million for 1997, primarily due to an increase in the average balance
of borrowed funds to $90.9 million during 1998 from $61.6 million during the
1997 period, partially offset by a decrease in the average cost of borrowed
funds to 6.65% for the year ended December 31, 1998 from 7.70% for the 1997
period. During 1998, additional advances from the FHLB were used primarily to
fund the purchase of securities with higher interest yields than the interest
cost of the FHLB advances.
PROVISION FOR LOAN LOSSES
The Association maintains an allowance for loan losses based upon a periodic
evaluation of known and inherent risks in the loan portfolio, 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
guidelines applied by the OTS and the FDIC. The provision for loan losses was
$622,000 for the year ended December 31, 1998 as compared to $264,000 for 1997.
The increase in the provision for loan losses for 1998 was primarily
attributable 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 $86.5 million increase in the loan portfolio during this
period. Management reviews the adequacy of its allowances for loan losses
monthly through asset classification review. The allowance for loan losses as a
percentage of net loans receivable at December 31, 1998 and 1997 was 0.59% and
0.59%, respectively.
OTHER INCOME
Other income consists of servicing income and fee income, service charges, gain
or loss on the sale or early maturity of securities available for sale, loans,
and other assets. Other income decreased $379,000 or 8.4%, to $4.1 million for
the year ended December 31, 1998 from $4.5 million for 1997. Net gain on sale of
other assets of $617,000 in the year ended December 31, 1997 represented the
one-time gain on the sale of stock of the Association's data service bureau. Fee
income (which includes servicing income and other loan fees, and NOW account and
other customer fees) was $3.6 million for both the 1998 and the 1997 periods.
OPERATING EXPENSE
Total operating expense increased $1.9 million to $20.7 million for the year
ended December 31, 1998 from $18.8 million for 1997. Employee compensation and
benefits increased by $1.4 million to $10.4 million during the year ended
December 31, 1998 from $9.0 million during 1997 primarily as a result of
increased staffing and compensation levels and increased cost of the stock
benefit programs reflecting changes in the market value of Bankshares' common
stock during 1998. Occupancy and equipment expense increased $437,000 to $5.5
million for the year ended December 31, 1998, from $5.1 million for the 1997
period primarily as a result of the relocation of two branch offices, the
exercise of options to purchase two existing leaseholds, and increased
depreciation expense. These events involved construction costs as well as
increased depreciation expense related to new hardware and software purchased
for the Association's computer network.
9
<PAGE> 12
PROVISION FOR INCOME TAXES
The provision for income taxes decreased $823,000 million to $2.1 million for
the year ended December 31, 1998 from $2.9 million for the 1997 period due in
part to lower taxable income during the year ended December 31, 1998. The
decrease also reflected the increased benefit from tax credits totaling $320,000
resulting from the Association's investment in the affordable housing
partnership during the year ended December 31, 1998 as compared to $197,000 for
1997.
RESULTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND SEPTEMBER 30, 1996
GENERAL
The comparison periods vary due to the change in the fiscal year of Bankshares
and the Association from September 30th to December 31st. Net income for the
year ended December 31, 1997 increased 38.5 % to $5.4 million, or $0.53 per
share, compared to $3.9 million, or $0.39 per share for the year ended September
30, 1996. This increase in net income was primarily due to the special one-time
SAIF pretax assessment of $2.8 million which was recorded during September 1996
and which did not re-occur during the year ended December 31, 1997. Net interest
income increased $1.9 million to $22.9 million for the year ended December 31,
1997 from $21.0 million for the year ended September 30, 1996. Other income and
the provision for income taxes increased $641,000 and $2.2 million,
respectively, for the year ended December 31, 1997, while operating expense
decreased $1.2 million during these time periods due to the absence of any
special assessment.
INTEREST INCOME
Interest income for the year ended December 31, 1997 totaled $50.3 million, an
increase of $6.4 million, or 14.6%, from $43.9 million for the year ended
September 30, 1996 reflecting, in part, the implementation of the Association's
growth strategy to increase the net loan portfolio and securities held for sale.
The increase was due primarily to an increase in average interest-earning assets
of $77.9 million to $653.8 million for the year ended December 31, 1997 from
$575.9 million for the year ended September 30, 1996, enhanced by an increase in
the average yield on average interest-earning assets to 7.70% for the year ended
December 31, 1997 from 7.62% for the year ended September 30, 1996. Interest
income on loans increased $5.2 million, or 18.5%, to $33.5 million for the year
ended December 31, 1997 compared to $28.3 million for the year ended September
30, 1996. Interest income on real estate loans increased by $5.0 million, or
19.0%, to $31.8 million for the year ended December 31, 1997 from $26.8 million
for the year ended September 30, 1996, primarily because of an increase in the
average balance of real estate loans of $61.6 million, or 18.6%, and an increase
in the average yield on real estate loans to 8.11% from 8.09%. Interest income
from investment securities and securities available for sale increased by $1.8
million, or 13.7%, to $14.9 million for the year ended December 31, 1997 from
$13.1 million for the year ended September 30, 1996. The increase in income from
investment securities and securities available for sale was primarily caused by
an increase in the average balance of $23.7 million to $210.9 million for the
year ended December 31, 1997 from $187.2 million for the year ended September
30, 1996, as well as an increase in the average yield to 7.05% for the year
ended December 31, 1997 from 7.01% for the year ended September 30, 1996.
Interest income from other investments, which includes interest-earning deposits
and FHLB stock, decreased $537,000, or 21.5%, to $2.0 million for the year ended
December 31, 1997 from $2.5 million for the year ended September 30, 1996. The
decrease in interest from other investments is primarily attributable to a $9.9
million, or 23.7%, decrease in the average balance of other investments to $31.9
million during 1997 from $41.8 million during 1996, partially offset by an
increase in the average yield on other investments to 6.14% for the year ended
December 31, 1997 from 5.96% for the year ended September 30, 1996.
INTEREST EXPENSE
Interest expense increased $4.5 million, or 19.8%, to $27.4 million for the year
ended December 31, 1997 from $22.9 million for the year ended September 30,
1996. Interest on deposits increased $3.4 million, or 17.7%, to $22.6 million
for the year ended December 31, 1997 from $19.2 million for the year ended
September 30, 1996. The increase was due primarily to the increase in average
cost of deposits to 4.21% from 4.02%, as well as an increase in the average
balance of deposits of $59.0 million, or 12.3%, to $538.0 million during 1997
from $479.0 million during 1996. In order to increase its market share of total
deposits during 1997 as well as to maintain its existing deposit customers, the
Association placed an increased emphasis on competitively pricing its deposit
products, including odd-term certificate of deposit products, as well as
existing certificate of deposit products, as part of its asset liability policy.
Certificates of deposit typically have a higher interest rate cost to the
Association than transaction accounts. Certificates of deposits and transaction
accounts increased $19.4 million and $17.6 million, respectively, at December
31, 1997 as compared to September 30, 1996. Interest expense attributable to
borrowed funds increased $1.1 million, or 31.2%, to $4.7 million for the year
ended December 31, 1997 from $3.6 million for the year ended September 30, 1996.
The increase in interest expense attributable to borrowed funds is due to an
increase in the average balance of borrowed funds to $61.6 million during 1997
from $42.4 million during the 1996 period, partially offset by a decrease in the
average cost of borrowed funds to 7.70% for the year ended December 31, 1997
from 8.52% for the 1996 period. During 1997, additional advances from the FHLB
were used primarily to fund the purchase of securities with higher interest
yields than the interest cost of the FHLB advances.
10
<PAGE> 13
PROVISION FOR LOAN LOSSES
The provision for loan losses was $264,000 for the year ended December 31, 1997
as compared to $98,000 for the year ended September 30, 1996. The increase in
the provision for loan losses for 1997 reflected management's assessment that
the allowance for loan losses needed to be increased to absorb the risk inherent
in the loan portfolio due not only to the growth in the loan portfolio (which
was increased by $62.7 million during this period) but also due to increased
investment in commercial and multi-family real estate lending which is deemed to
have greater risk than single-family residential lending. The allowance for loan
losses as a percentage of net loans receivable at December 31, 1997 and
September 30, 1996 was 0.59% and 0.61%, respectively.
OTHER INCOME
Other income consists of servicing income and fee income, service charges, gain
or loss on the sale or early maturity of securities available for sale, loans,
and other assets as well as income or loss from a real estate venture in which a
subsidiary of the Association was involved. Other income increased $657,000, or
17.3%, to $4.4 million for the year ended December 31, 1997 from $3.8 million
for the year ended September 30, 1996. Net gain on sale of other assets of
$617,000 in the year ended December 31, 1997 represented the sale of stock of
the Association's data service bureau which did not occur during 1996. In
addition, the year ended December 31, 1997 reflected a $3,000 net gain on the
sale of loans as compared to a $225,000 net loss for the 1996 period. Fee income
(which includes servicing income and other loan fees, and NOW account and other
customer fees) increased $310,000 to $3.6 million for the 1997 year from $3.3
million for the 1996 period as a result of fee structure changes put in place
during 1997.
OPERATING EXPENSE
Total operating expense decreased $1.2 million to $18.8 million for the year
ended December 31, 1997 from $20.0 million for the year ended September 30,
1996. Operating expense was higher in the 1996 period primarily due to the
one-time $2.8 million special assessment for recapitalization of the SAIF. This
special assessment was levied against institutions having SAIF-insured deposits
as of March 31, 1995, as mandated by the DIF. Due to new reduced deposit
insurance premium levels during 1997, the 1997 regular premium was $270,000 as
compared to $l.1 million for the 1996 period. Employee compensation and benefits
increased by $1.2 million to $9.0 million during the year ended December 31,
1997 from $7.8 million during the year ended September 30, 1996 and occupancy
and equipment expense increased $478,000 to $5.1 million for the year ended
December 31, 1997, from $4.6 million for the 1996 period. These increases were
primarily the result of the opening of three new branch offices, the
implementation of a new company wide computer network, and additional costs
related to the incentive-based loan originators. These events involved
construction costs, increases in staffing, and depreciation expense increases
related to new hardware and software for the network.
PROVISION FOR INCOME TAXES
Provision for income taxes increased $2.2 million to $2.9 million for the year
ended December 31, 1997 from $761,000 for the 1996 period. This increase was the
result of higher taxable income during the year ended December 31, 1997. In
addition, the 1996 period included the reversal of a $1.1 million prior accrued
liability which in management's opinion was no longer required and which was
reversed with a credit to the 1996 income tax provision.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1996 AND 1995
GENERAL
Net income for the three months ended December 31, 1996 increased 10.5% to $1.2
million, or $0.12 per share, compared to $1.1 million, or $0.11 per share, for
the three months ended December 31, 1995. The increase in net income was due to
increases in net interest income of $662,000 and in other income of $145,000
partially offset by increases of $213,000 in the provision for loan losses,
$455,000 in operating expense, and $29,000 in the provision for income taxes.
NET INTEREST INCOME
Net interest income increased to $5.5 million for the quarter ended December 31,
1996 from $4.9 million for the three months ended December 31, 1995 primarily as
a result of a $78.0 million increase in average interest-earning assets to
$616.6 million for the three months ended December 31, 1996 from $538.6 million
for the same period in 1995. This increase was offset in large part by a $74.8
million increase in average interest-bearing liabilities to $559.8 million for
the three months ended December 31, 1996 from $485.0 million for the same period
in 1995.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $243,000 for the three months ended December
31, 1996 as compared to $30,000 for the same period in 1995. The increase in the
provision of $213,000 included a $200,000 transfer to the general loan valuation
allowance from a specific reserve which had been maintained with respect to an
interest-earning deposit which was pledged as collateral for the loan made to
the
11
<PAGE> 14
ESOP and which was recovered during the three months ended December 31, 1996.
The allowance for loan losses as a percentage of net loans receivable was 0.65%
and 1.04% at December 31, 1996 and 1995, respectively.
OTHER INCOME
Other income consists of servicing income and fee income, service charges, gain
or loss on the sale of securities available for sale and income or loss from the
Association's subsidiary's real estate venture. Other income increased $145,000
to $1.2 million for the three months ended December 31, 1996 from $1.1 million
for the same period in 1995, due to the reversal of a specific reserve of
$200,000 referenced above which had been maintained with respect to an
interest-earning deposit which was pledged as collateral for the ESOP loan and
which was recovered during the 1996 period.
OPERATING EXPENSE
Operating expense increased $455,000, or 10.9%, to $4.6 million for the three
month period ended December 31, 1996, from $4.2 million from the same period in
1995, primarily due to increases of $135,000 in advertising and promotion due to
increased advertising designed to increase the Association's market share, and
$122,000 in employee compensation and benefits as a result of increased staffing
due to both a branch office opening and the expanded loan production program as
previously discussed.
PROVISION FOR INCOME TAXES
Provision for income taxes increased $29,000 to $696,000 for the three months
ended December 31, 1996 as compared to $667,000 for the same period in 1995 due
to the increase in net income.
IMPACT OF NEW ACCOUNTING STANDARDS
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 generally will 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 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.
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 that critical
systems will continue to function properly.
The Association has identified 64 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 and approximately
30% are in the process of revising and testing their systems for Year 2000
compliance. Of such 64 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.
The initial phase of testing of the data service processor's updated system was
completed in October 1998 with substantially all such systems evidencing Year
2000 compliance. Substantially all of the Association's vendors of its mission
critical and critical applications have provided written assurances that their
products and services will be Year 2000 compliant. The majority of such
modifications and conversions and related testing of such systems was
successfully completed by December 31, 1998 with the remaining ones anticipated
being completed by March 31, 1999. While the Association has received
12
<PAGE> 15
assurances from such 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 June 30, 1998, the Association had contacted all of
its commercial credit customers (69 borrowers with outstanding loans aggregating
$60.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 exposure in the
event that such borrowers do experience problems or delays becoming Year 2000
compliant. Since June 30, 1998, the Association has established an ongoing
policy to perform a Year 2000 assessment of all new commercial credit customers'
Year 2000 awareness and the anticipated impact on their business.
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 its mission
critical hardware and software applications by the end of January 1999. The Year
2000 Committee is reviewing substantially 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 successfully completed by December
1998 with the remainder expected to be completed by March 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, 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.
FORWARD-LOOKING STATEMENTS
Certain information in this annual report may constitute forward-looking
information that involves risks and uncertainties that could cause actual
results to differ materially from those estimated. Persons are cautioned that
such forward-looking statements are not guarantees of future performance and are
subject to various factors which could cause actual results to differ materially
from those estimated. These factors include, but are not limited to, changes in
general economic and market conditions, legislative and regulatory changes,
monetary and fiscal policies of the federal government, demand for loan and
deposit products and the development of an interest rate environment that
adversely affects the interest rate spread or other income from Bankshares'
investments and operations.
13
<PAGE> 16
AVERAGE BALANCE SHEET
The following tables set forth certain information relating to Bankshares'
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated and the average yields earned and rates
paid. Such yields and costs are derived by dividing income or expense by the
average balance of assets or liabilities, respectively, for the periods
presented. The use of monthly average balances (except as noted otherwise)
instead of daily average balances has not caused any material difference in the
information presented.
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------------------
For the Year Ended For the Year Ended
December 31, 1998 December 31, 1997
-------------------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
- - --------------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Real estate loans $489,915 $38,342 7.83% $392,782 $31,846 8.11%
Consumer and other loans 20,576 1,886 9.17 18,316 1,644 8.98
Mortgage-backed and related securities 85,688 6,074 7.09 99,884 7,330 7.34
Investment securities 81,669 5,555 6.80 110,986 7,540 6.79
Other investments(1) 44,819 2,632 5.87 31,851 1,956 6.14
----------- ----------- ------------ ------------
Total interest-earning assets 722,667 54,489 7.54 653,819 50,316 7.70
----------- ------------
Non-interest-earning assets 49,581 39,356
----------- ------------
Total assets $772,248 $693,175
=========== ============
Interest-bearing liabilities:
Deposits $578,574 $24,111 4.17% $537,965 $22,648 4.21%
Borrowed funds 90,928 6,048 6.65 61,551 4,742 7.70
----------- ----------- ------------ ------------
Total interest-bearing liabilities 669,502 30,159 4.50 599,516 27,390 4.57
----------- ------------
Non-interest-bearing liabilities 15,766 14,837
----------- ------------
Total liabilities 685,268 614,353
Shareholders' equity 86,980 78,822
----------- ------------
Total liabilities and shareholders' equity $772,248 $693,175
=========== ============
Net interest income $24,330 $22,926
=========== =======
Net interest rate spread(2) 3.04% 3.13%
========== ==========
Net yield on interest-earning assets(3) 3.37% 3.51%
========== ==========
Ratio of average interest-earning assets to
average interest-bearing liabilities 107.94% 109.06%
========== ==========
- - --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes interest-earning deposits and FHLB stock.
(2) Net interest-rate spread represents the difference between the average
yield earned on interest-earning assets and the average rate paid on
interest-bearing liabilities.
(3) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
14
<PAGE> 17
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------------------
For the Three Months Ended For the Year Ended
December 31, 1996 September 30,1996
-------------------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
- - --------------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Real estate loans $365,269 $ 7,427 8.13% $331,134 $26,765 8.09%
Consumer and other loans 17,989 408 9.07 15,746 1,508 9.48
Mortgage-backed and related securities 107,190 1,992 7.43 99,959 7,423 7.43
Investment securities 93,399 1,578 6.76 87,280 5,700 6.53
Other investments(1) 32,764 491 5.99 41,817 2,493 5.96
----------- ----------- ----------- --------
Total interest-earning assets 616,611 11,896 7.72 575,936 43,889 7.62
----------- --------
Non-interest-earning assets 35,425 36,068
----------- -----------
Total assets $652,036 $612,004
======== ========
Interest-bearing liabilities:
Deposits $504,738 $ 5,251 4.16% $478,955 $19,247 4.02%
Borrowed funds 55,063 1,127 8.19 42,416 3,612 8.52
----------- ----------- ----------- ---------
Total interest-bearing liabilities 559,801 6,378 4.56 521,371 22,859 4.38
----------- ---------
Non-interest-bearing liabilities 16,294 15,995
----------- -----------
Total liabilities 576,095 537,366
Shareholders' equity 75,941 74,638
----------- -----------
Total liabilities and shareholders' equity $652,036 $612,004
=========== ===========
Net interest income $ 5,518 $21,030
======= =========
Net interest rate spread(2) 3.16% 3.24%
========== ========
Net yield on interest-earning assets(3) 3.58% 3.65%
========== ========
Ratio of average interest- earning
assets to average interest-bearing
liabilities 110.15% 110.47%
====== =======
- - --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes interest-earning deposits and FHLB stock.
(2) Net interest-rate spread represents the difference between the average
yield earned on interest-earning assets and the average rate paid on
interest-bearing liabilities.
(3) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
15
<PAGE> 18
RATE VOLUME ANALYSIS
Net interest income can also be analyzed in terms of the impact of changing
interest rates on interest-earning assets and interest-bearing liabilities and
changing the volume or amount of these assets and liabilities. The following
table represents the extent to which changes in interest rates and changes in
the volume of interest-earning assets and interest-bearing liabilities have
affected the interest income and interest expense during the periods indicated.
Information is provided in each category with respect to (i) changes
attributable to changes in average volume (change in average volume multiplied
by prior rate); (ii) changes attributable to changes in rate (changes in rate
multiplied by prior average volume); (iii) changes in rate-volume (changes in
rate multiplied by changes in average volume); and (iv) the net change.
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, Year Ended December 31, 1997 Three Months Ended December 31,
1998 vs. 1997 vs. Year Ended September 30, 1996 1996 vs. 1995
- - -----------------------------------------------------------------------------------------------------------------------------------
Increase/(Decrease) Increase/(Decrease) Increase/(Decrease)
Due to Due to Due to
---------------------- Total --------------------- Total ----------------------- Total
Rate/ Increase Rate/ Increase Rate/ Increase
Volume Rate Volume (Decrease) Volume Rate Volume (Decrease) Volume Rate Volume (Decrease)
----------------------------------------------------------------------------------------------------------------------------------
(In Thousands)
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
First mortgage loans $7,877 $(1,100)$ (281) $6,496 $4,981 $ 99 $ 1 $5,081 $ 947 $175 $27 $1,149
Consumer and other
loans 203 35 4 242 246 (94) (16) 136 74 (9) (2) 63
Mortgage-backed and
related securities (1,042) (250) 36 (1,256) (6) (90) 3 (93) 523 (72) (23) 428
Investment securities (1,991) 11 (5) (1,985) 1,548 227 65 1,840 171 42 4 217
Other investments (1) 796 (86) (34) 676 (594) 75 (18) (537) (157) (12) 3 (166)
----- ----- ---- ------ ------ ----- --- ----- ----- --- --- ------
Total interest-earning
assets 5,843 (1,390) (280) 4,173 6,175 217 35 6,427 1,558 124 9 1,691
----- ----- ---- ------ ------ ----- --- ----- ----- --- --- ------
INTEREST EXPENSE
Deposits 1,710 (215) (32) 1,463 2,372 910 119 3,401 588 145 19 752
Borrowed funds 2,262 (646) (310) 1,306 1,630 (348) (152) 1,130 363 (60) (26) 277
----- ----- ---- ------ ------ ----- --- ----- ----- --- --- ------
Total interest-bearing
liabilities 3,972 (861) (342) 2,769 4,002 562 (33) 4,531 951 85 (7) 1,029
----- ----- ---- ------ ------ ----- --- ----- ----- --- --- ------
Net change in net
interest income $1,871 $(529) $62 $1,404 $2,173 $(345) $68 $1,896 $ 607 $ 39 $16 $662
===== ===== ==== ====== ====== ===== === ===== ===== === === ======
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes interest-earning deposits and FHLB stock.
ASSET/LIABILITY MANAGEMENT
Since substantially all of Bankshares' interest-earning assets and
interest-bearing liabilities are held by the Association, Bankshares' interest
rate risk exposure primarily lies at the Association level. As a result, all
significant interest rate risk management procedures are performed by management
of the Association. The Association's balance sheet consists of investments in
interest-earning assets (primarily loans and investment securities) which are
primarily funded by interest-bearing liabilities (deposits and borrowings.) Such
financial instruments have varying levels of sensitivity to changes in market
interest rates resulting in market risk. All financial instruments are either
classified as held to maturity or available for sale. As of December 31, 1998,
the Association did not own any trading assets, nor did it have any hedging
transactions in place such as interest rate swaps and caps. No assets are held
for trading purposes. Based upon the nature of the Association's operations, the
Association is not subject to foreign currency exchange or commodity price risk.
The Association's loan portfolio is secured by assets located primarily in Palm
Beach, Martin, St. Lucie, and Indian River counties in Florida and therefore is
subject to risks associated with those local economies.
Bankshares is subject to interest rate risk to the extent that its
interest-bearing liabilities with short and intermediate-term maturities reprice
more rapidly, or on a different basis, than its interest-earning assets.
Significant effort has been made to reduce the duration and average life of the
interest-earning assets. Bankshares continues to emphasize adjustable-rate loans
and to increase the amount of its consumer and commercial loan portfolios which
are generally shorter term in nature than its mortgage loan portfolio. In
addition, the majority of all long-term, fixed-rate mortgages are underwritten
in accordance with Fannie Mae ("FNMA") guidelines thereby allowing for
flexibility to sell the assets into the secondary market when market conditions
are favorable. With its funding sources, management has attempted to reduce the
impact of interest rate changes by emphasizing longer-term certificates of
deposit and the use of longer-term advances from the FHLB.
Management measures Bankshares' interest rate risk by computing estimated
changes in net interest income and the net portfolio value ("NPV") of its cash
flows from assets and liabilities in the event of a range of assumed changes in
market interest rates. Bankshares' exposure to interest rate risk is reviewed on
a quarterly basis by the Board of Directors and by the Asset/Liability Committee
(the
16
<PAGE> 19
"ALCO") which is comprised of senior management. The ALCO establishes
policies to monitor and coordinate the Association's sources, uses, and pricing
of funds. Exposure to interest rate risk is measured with the use of interest
rate sensitivity analysis to determine the change in NPV in the event of
hypothetical changes in interest rates. If estimated changes to NPV and net
interest income are not within the limits established by the Board of Directors,
then the Board may direct management to adjust the Association's asset and
liability mix to bring interest rate risk within Board approved limits.
NPV represents the market value of assets less the market value of liabilities.
This analysis assesses the risk of loss in market risk sensitive instruments in
the event of sudden and sustained 1% to 4% increases and decreases in market
interest rates. The Association's Board of Directors has adopted an interest
rate risk policy which establishes maximum decreases in NPV in the event of such
changes in market interest rates.
The following table presents Bankshares' internal calculations of NPV at
December 31, 1998.
<TABLE>
<CAPTION>
NPV as % of
Change in Interest Rates in Basis Points ESTIMATED NET MARKET VALUE OF PORTFOLIO EQUITY PV OF AVERAGE ASSETS
---------------------------------------------- --------------------
(Rate Shock) Amount $ Change % Change NPV Ratio Change
(Dollars in Thousands) (Basis Points)
<S> <C> <C> <C> <C> <C>
400 $118,024 $(36,995) (23.9)% 15.28% (479)
300 126,058 (28,961) (18.7) 16.32 (375)
200 134,834 (20,185) (13.0) 17.46 (261)
100 144,450 (10,569) (6.8) 18.71 (136)
Static 155,019 -- -- 20.07 --
(100) 166,670 11,652 21.58 151
(200) 179,556 24,537 15.8 23.25 167
(300) 193,851 38,832 25.0 25.10 185
(400) 209,761 54,742 35.3 27.16 206
</TABLE>
As illustrated in the table, NPV is more sensitive to rising rates than
declining rates. This occurs principally because, as rates rise, the market
value of fixed-rate loans declines due to both the rate increase and slowing
prepayments. When rates decline, Bankshares does not experience a significant
rise in market value for these loans because borrowers prepay at a relatively
high rate. The value of the Association's deposits and borrowings changes in
approximately the same proportion in rising or falling rate scenarios.
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. The interest rates on certain types of assets and liabilities
may fluctuate in advance of changes in market interest rates, while interest
rates on other types may lag behind changes in market rates. Additionally,
certain assets, such as adjustable-rate mortgage loans have features which
restrict changes in interest rates on a short term basis and over the life of
the asset. In the event of a change in interest rates, expected rates of
prepayments on loans, decay rates of deposits and early withdrawals from
certificates could likely deviate significantly from those assumed in
calculating the table. Finally, the ability of many borrowers to service their
debt may decrease in the event of a significant interest rate increase.
In addition, the above table may not properly reflect the impact of general
interest rate movements on Bankshares' net interest income because the repricing
of certain categories of assets and liabilities are subject to competitive and
other pressures beyond Bankshares' control.
For information regarding the contractual maturities of the loan, securities and
deposit portfolios, see Notes to Consolidated Financial Statements.
17
<PAGE> 20
INDEPENDENT AUDITORS' REPORT
Community Savings Bankshares, Inc.:
We have audited the accompanying consolidated statements of financial condition
of Community Savings Bankshares, Inc. ("Bankshares") as of December 31, 1998 and
1997, and the related consolidated statements of income, comprehensive income,
changes in shareholders' equity and cash flows for the years ended December 31,
1998 and 1997, for the three months ended December 31, 1996 and for the year
ended September 30, 1996. These consolidated financial statements are the
responsibility of Bankshares' management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial condition of Bankshares as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for the years ended December 31, 1998 and 1997, for the three months ended
December 31, 1996 and for the year ended September 30, 1996, in conformity with
generally accepted accounting principles.
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
February 11, 1999
18
<PAGE> 21
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------------------
December 31,
1998 1997
- - --------------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
ASSETS
Cash and amounts due from depository institutions $ 15,305 $12,333
Interest-earning deposits 101,710 13,621
-------- -------
Cash and cash equivalents 117,015 25,954
Securities available for sale 95,151 142,269
Securities held to maturity (Approximate fair value - 1998, $57,303; 1997, $72,523) 52,619 67,801
Loans receivable, net of allowance for loan losses 538,204 451,709
Accrued interest receivable 2,782 3,162
Federal Home Loan Bank stock - at cost 4,722 3,264
Premises and equipment, net 26,016 20,206
Real estate owned, net 522 592
Other assets 7,010 5,176
-------- -------
Total assets $844,041 $720,133
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand deposits $31,769 $24,715
NOW and funds transfer deposits 82,628 69,862
Savings deposits 32,919 30,221
Money market deposits 89,895 78,832
Time deposits 357,189 347,078
-------- -------
Total deposits 594,400 550,708
Mortgage-backed bond, net 15,430 16,333
Advances from Federal Home Loan Bank 91,920 57,341
Employee Stock Ownership Plan borrowings -- 1,424
Advances by borrowers for taxes and insurance 1,208 931
Other liabilities 7,797 12,137
-------- -------
Total liabilities 710,755 638,874
-------- -------
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: 1998, 10,548,884; 1997, 5,094,920
shares issued and outstanding 10,549 5,095
Additional paid-in capital 93,268 30,278
Retained income - substantially restricted 35,545 47,887
Common stock purchased by Employee Stock Ownership Plan (5,407) (1,424)
Common stock issued to Recognition and Retention Plan (237) (423)
Unrealized decrease in market value of securities available for sale, net of income taxes (432) (154)
-------- --------
Total shareholders' equity 133,286 81,259
======== ========
Total liabilities and shareholders' equity $844,041 $720,133
======== ========
</TABLE>
See notes to consolidated financial statements.
19
<PAGE> 22
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------------------------
For the For the For the Three For the
Year Ended Year Ended Months Ended Year Ended
December 31, December 31, December 31, September 30,
1998 1997 1996 1996
- - ---------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands Except Per Share Data)
<S> <C> <C> <C> <C>
Interest income:
Loans $ 40,228 $ 33,490 $ 7,835 $ 28,273
Securities 11,629 14,870 3,570 13,123
Other interest and dividend income 2,632 1,956 491 2,493
----------- ---------- ---------- ----------
Total interest income 54,489 50,316 11,896 43,889
----------- ---------- ---------- ----------
Interest expense:
Deposits 24,082 22,648 5,251 19,247
Advances from Federal Home Loan Bank
and other borrowings 6,077 4,742 1,127 3,612
----------- ---------- ---------- ----------
Total interest expense 30,159 27,390 6,378 22,859
----------- ---------- ---------- ----------
Net interest income 24,330 22,926 5,518 21,030
Provision for loan losses 622 264 243 98
----------- ---------- ---------- ----------
Net interest income after provision for loan losses 23,708 22,662 5,275 20,932
----------- ---------- ---------- ----------
Other income:
Servicing income and other fees 198 269 33 148
NOW account and other customer fees 3,441 3,339 820 3,150
Net gain (loss) on sale and early maturities of
securities 175 (8) 51 254
Net gain (loss) on real estate owned 18 112 (37) 243
Gain on sale of other assets -- 617 -- -
Net gain (loss) on sale of loans receivable -- 3 3 (225)
Miscellaneous 233 112 318 217
----------- ---------- ---------- ----------
Total other income 4,065 4,444 1,188 3,787
----------- ---------- ---------- ----------
Operating expense:
Employee compensation and benefits 10,397 8,989 2,125 7,785
Occupancy and equipment 5,496 5,059 1,201 4,581
Advertising and promotion 915 734 240 616
Federal deposit insurance premium 342 270 288 3,883
Miscellaneous 3,522 3,768 753 3,178
----------- ---------- ---------- ----------
Total operating expense 20,672 18,820 4,607 20,043
----------- ---------- ---------- ----------
Income before provision for income taxes 7,101 8,286 1,856 4,676
----------- ---------- ---------- ----------
Provision (benefit) for income taxes:
Current 2,872 3,042 65 1,817
Deferred (765) (112) 631 (1,056)
----------- ---------- ---------- ----------
Total provision for income taxes 2,107 2,930 696 761
----------- ---------- ---------- ----------
Net income $ 4,994 $ 5,356 $ 1,160 $ 3,915
=========== ========== ========== ==========
Earnings per share - basic $ 0.49 $ 0.53 $ 0.12 $ 0.39
=========== ========== ========== ==========
Earnings per share - diluted $ 0.48 $ 0.52 $ 0.11 $ 0.39
=========== ========== ========== ==========
Weighted average common shares outstanding - basic 10,175,899 10,079,363 10,023,118 9,955,157
=========== ========== ========== ==========
Weighted average common shares outstanding - diluted 10,448,327 10,334,647 10,123,996 10,093,212
=========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
20
<PAGE> 23
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------------------
For the For the For the Three For the
Year Ended Year Ended Months Ended Year Ended
December 31, December 31, December 31, September 30,
1998 1997 1996 1996
- - --------------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Net income $4,994 $5,356 $1,160 $3,915
Other comprehensive income, net of tax:
Unrealized gain in market value of
securities transferred from held to maturity to
available for sale -- -- -- 247
Change in unrealized gain (loss) in market
value of securities available for sale (278) 914 130 (974)
------ ------ ------ ------
Comprehensive income, net of income taxes $4,716 $6,270 $1,290 $3,188
====== ====== ====== ======
</TABLE>
See notes to consolidated financial statements.
21
<PAGE> 24
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997,
THREE MONTHS ENDED DECEMBER 31, 1996 AND THE YEAR ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
Unrealized
Increase
(Decrease)
in
Value
of
Retained Employee Recognition Securities
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 - September 30, 1995 $5,089 $30,182 $41,666 $(2,456) $(1,162) $(471) $ 72,848
Net income for the year ended September 30, 1996 -- -- 3,915 -- -- -- 3,915
Stock options exercised 1 12 -- -- -- -- 13
Transfer from securities held to maturity
to securities available for sale (net of
income taxes) -- -- -- -- -- 247 247
Unrealized decrease in market value of assets
available for sale (net of income taxes) (974) (974)
Adjustment to deferred compensation--
Recognition and Retention Plan -- (378) -- -- 378 -- --
Shares committed to be released -- Employee Stock
Ownership Plan and Recognition and Retention
Plan -- 65 -- 491 130 -- 686
Dividends declared -- -- (1,679) -- -- -- (1,679)
------ ------- ------- ------- -------- ------- --------
Balance - September 30, 1996 5,090 29,881 43,902 (1,965) (654) (1,198) 75,056
Net income for three months ended December 31, 1996 -- -- 1,160 -- -- -- 1,160
Stock options exercised -- 4 -- -- -- -- 4
Unrealized increase in market value of assets
available for sale (net of income taxes) -- -- -- -- -- 130 130
Shares committed to be released - Employee Stock
Ownership Plan and Recognition and Retention
Plan -- 35 -- 147 46 -- 228
Dividends declared -- -- (459) -- -- -- (459)
------ ------- ------- ------- -------- ------- --------
Balance - December 31, 1996 5,090 29,920 44,603 (1,818) (608) (1,068) 76,119
Net income for the year ended December 31, 1997 -- -- 5,356 -- -- -- 5,356
Stock options exercised 5 45 -- -- -- -- 50
Unrealized increase in market value of assets
available for sale (net of income taxes) -- -- -- -- -- 914 914
Shares committed to be released -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 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
====== ======= ======= ======= ========= ======= ========
</TABLE>
See notes to consolidated financial statements.
22
<PAGE> 25
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------------------
For the For the For the Three For the
Year Ended Year Ended Months Ended Year Ended
December 31, December 31, December 31, September 30,
1998 1997 1996 1996
- - -----------------------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
CASH FLOWS FROM (FOR) OPERATING ACTIVITIES:
Net income $4,994 $5,356 $1,160 $3,915
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 1,523 1,993 452 1,800
Employee Stock Ownership Plan and Recognition and
Retention Plan compensation expense 1,025 892 228 686
Deferred income tax provision (765) (112) 631 (1,056)
Accretion of discounts, amortization of premiums, and
other deferred yield items (1,731) (1,915) (396) (1,494)
Provision for loan losses 622 264 243 98
Net (gain) loss on sale and early maturities of:
Securities available for sale -- 8 (51) (254)
Loans and other assets -- (620) (3) 225
Securities held to maturity (175) -- -- --
(Increase) decrease in accrued interest receivable 380 (808) (146) (65)
(Increase) decrease in other assets (1,912) (2,582) 320 (426)
Increase (decrease) in other liabilities (4,371) 1,347 (3,851) 4,424
------- ------ ------ ------
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES (410) 3,823 (1,413) 7,853
------- ------ ------ ------
CASH FLOWS FROM (FOR) INVESTING ACTIVITIES:
Loan originations and principal payments on loans -- net (48,980) (38,624) (11,120) (34,073)
Principal payments received on securities 44,022 16,247 3,315 14,125
Purchases of:
Loans and participations (38,354) (24,455) (1,998) (16,775)
Federal Home Loan Bank stock (1,458) (400) -- --
Securities available for sale (25,086) (46,311) -- (73,654)
Office property and equipment (7,404) (5,300) (344) (1,481)
Proceeds from sales of:
Securities available for sale -- 2,435 100 749
Federal Home Loan Bank stock -- -- 2,520 2,000
Office property and equipment 168 128 178 443
Real estate acquired in settlement of loans, net 840 1,378 -- 700
Loans purchased -- -- -- 3,452
Proceeds from calls or maturities of securities 45,136 19,300 -- 22,012
Investment in real estate venture -- -- 156 1,305
Other investing 6 (351) (184) (455)
------- ------ ------ ------
NET CASH USED FOR INVESTING ACTIVITIES (31,110) (75,953) (7,377) (81,652)
------- ------ ------ ------
CASH FLOWS FROM (FOR) FINANCING ACTIVITIES:
Net increase (decrease) in:
NOW accounts, demand deposits, and
savings accounts 33,581 17,591 3,112 (1,200)
Certificates of deposit 10,111 19,408 11,668 62,753
Advances from Federal Home Loan Bank 42,000 30,000 -- 22,500
Repayment of advances from Federal Home Loan Bank (7,421) (7,425) (1,587) (4,350)
Net increase (decrease) in advances by borrowers for taxes
and insurance 277 (128) (5,802) (136)
Repayment of Employee Stock Ownership Plan loan (1,424) (491) (149) (493)
Sale of common stock-net of issuance costs 53,236 -- -- 13
Purchase of ESOP shares (4,377) -- -- --
Proceeds from exercise of stock options 101 50 4 --
Payments made on mortgage-backed bond (1,387) (1,387) (346) (1,387)
Dividends paid (2,116) (1,976) (448) (1,618)
------- ------ ------ ------
NET CASH PROVIDED BY FINANCING ACTIVITIES 122,581 55,642 6,452 76,082
------- ------ ------ ------
Net increase (decrease) in cash and cash equivalents 91,061 (16,488) (2,338) 2,283
Cash and cash equivalents, beginning of period 25,954 42,442 44,780 42,497
------- ------ ------ ------
Cash and cash equivalents, end of period $117,015 $ 25,954 $42,442 $ 44,780
======= ====== ====== ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes $ 2,943 $ 2,836 $ 1,877 $ 1,877
Cash paid for interest on deposits and other borrowings $29,749 $ 27,959 $22,146 $22,146
Real estate acquired in settlement of loans $ 713 $ 558 $ 400 $ 400
Transfer of securities from held to maturity to
available for sale $ -- $ -- $ -- $49,500
</TABLE>
See notes to consolidated financial statements.
23
<PAGE> 26
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997,
THE THREE MONTHS ENDED DECEMBER 31, 1996, AND THE YEAR ENDED
SEPTEMBER 30, 1996.
1. SIGNIFICANT ACCOUNTING POLICIES
On December 15, 1998, Community Savings Bankshares, Inc. ("Bankshares"),
a Delaware corporation, became the holding company for Community Savings,
F. A. (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 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 net
income is derived from the Association.
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 became the wholly owned subsidiary of the
newly-formed, federally chartered mid-tier stock holding company, the
Mid-Tier Holding Company. The Mid-Tier Holding Company was the majority
owned subsidiary of ComFed. The reorganization was accounted for in a
manner similar to a pooling of interests and did not result in any
significant accounting adjustments.
The accounting and reporting policies of Bankshares, the Association, and
the Association's wholly-owned subsidiary, ComFed, Inc. conform to
generally accepted accounting principles and to general practices within
the savings and loan industry. The following summarizes the more
significant of these policies and practices:
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Bankshares, the Association and ComFed, Inc.
ComFed, Inc. was formed for the purpose of owning and operating an
insurance agency, Community Insurance Agency. Prior to December 31, 1996,
the Association had three other wholly-owned subsidiaries, ComFed
Development Co., which was engaged in real estate development activities
under joint venture arrangements with local developers, Select Florida
Properties, Inc. and Select Florida Properties II, Inc., which were formed
to acquire and sell foreclosed assets as well as hold delinquent loans.
These subsidiaries were dissolved into ComFed, Inc. All significant
intercompany balances and transactions have been eliminated.
CHANGE IN YEAR END - During January 1997, the Board of Directors voted to
change the fiscal year end for all related entities from September 30th to
December 31st, effective with the year and three months ending December
31, 1996.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities as of the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting period, as well as the disclosures provided. Areas
involving the use of significant estimates and assumptions in the
accompanying financial statements include the allowance for loan losses,
fair values of securities and other financial instruments, determination
and carrying value of impaired loans, and the determination of
depreciation of premises and equipment recognized in Bankshares' financial
statements. Actual results could differ from those estimates. Estimates
associated with the allowance for loan losses and the fair values of
securities and other financial instruments are particularly susceptible to
material change in the near term.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents are defined to
include the Association's cash on hand, amounts due from financial
institutions and short-term interest-earning deposits in other financial
institutions with original maturities of 90 days or less. Bankshares
reports net cash flows for customer loan and deposit transactions, advance
payments by borrowers for taxes and insurance, and interest-earning time
deposits in other financial institutions.
SECURITIES - Bankshares classifies securities into held-to-maturity,
available-for-sale and trading categories. Held-to-maturity securities are
those which Bankshares has the positive intent and ability to hold to
maturity, and are reported at amortized cost. Available-for-sale
securities are those Bankshares may decide to sell if needed for
liquidity, asset-liability management or other reasons. Available-for-sale
securities are reported at fair value, with unrealized gains and losses
included as a separate component of shareholders' equity, net of tax,
until realized. Trading securities are bought principally for sale in the
near term, and are reported at fair value with unrealized gains and losses
included in earnings. Securities are written down to fair value when a
decline in fair value is not temporary.
24
<PAGE> 27
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Realized gains and losses resulting from the sale of securities are
computed by the specific identification method. Interest and dividend
income, adjusted by amortization of purchase premium or discount, is
included in earnings. Premiums and discounts are recognized in interest
income using the interest method over the period to maturity.
INTEREST RATE RISK - The Association is engaged principally in providing
first mortgage loans (adjustable-rate, fixed-rate and hybrid-rate) to
individuals and commercial enterprises. At December 31, 1998 and 1997, the
Association's assets consisted primarily of assets that earned interest at
adjustable interest rates. Those assets were funded primarily with
short-term liabilities that have interest rates that vary with market
rates over time.
LOANS RECEIVABLE, NET - Loans receivable are reported at the unpaid
principal balance, less the allowance for loan losses, deferred fees or
costs on originated loans, and unamortized premiums or discounts on
purchased loans.
Discounts on mortgage loans are amortized to income using the level-yield
method over the remaining period to contractual maturity, adjusted for
anticipated prepayments. Interest income is reported on the interest
method and includes amortization of net deferred fees and costs over the
loan term. When full loan repayment is in doubt, interest income is not
reported. Payments received on such loans are reported as principal
reductions.
Because some loans may not be repaid in full, an allowance for loan losses
is recorded. The allowance for loan losses is increased by charges to
income and decreased by charge-offs (net of recoveries). Estimating the
risk of loss and the amount of loss on any loan is necessarily subjective.
Accordingly, the allowance is maintained by management at a level
considered adequate to cover losses that are currently anticipated.
Management's periodic evaluation of the adequacy of the allowance is based
on the Association's past loan loss experience, known and inherent risks
in the portfolio, adverse situations that may affect the borrower's
ability to repay, the estimated value of any underlying collateral, and
current economic conditions. A loan is charged off against the allowance
by management when deemed uncollectible, although collection efforts
continue and future recoveries may occur. In addition, various regulatory
agencies, as an integral part of their examination process, periodically
review the Association's allowances for losses on loans and foreclosed
real estate. Such agencies may require the Association to recognize
additions to the allowances based on their judgments of information
available to them at the time of their examination.
Loan impairment is reported when full payment under the loan terms is not
expected. Impairment is evaluated in the aggregate for smaller balance
loans of similar nature such as residential mortgage, consumer and credit
card loans, and on an individual loan basis for other loans. If a loan is
impaired, a portion of the allowance is allocated so that the loan is
reported, net, at the present value of estimated future cash flows using
the loan's existing rate or at the fair value of the collateral if the
loan is collateral dependent. Loans are evaluated for impairment when
payments are delayed, typically 90 days or more, or when it is probable
that all principal and interest amounts will not be collected according to
the original terms of the loan. The Association's policy on interest
income on impaired loans is to reverse all accrued interest against
interest income if a loan becomes more than 90 days delinquent or if
management determines at an earlier date that the loan is not performing
and ceases accruing interest thereafter. Such interest ultimately
collected is credited to income in the period of recovery. Cash receipts
for impaired loans are used first to satisfy any outstanding interest due,
and any amounts remaining are applied to the outstanding principal
balance.
UNCOLLECTED INTEREST - The Association reverses accrued interest on
mortgage loans which are more than ninety days past due or if management
determines at an earlier date that the loan is not performing and ceases
accruing interest on such loans thereafter. Any such interest ultimately
collected is credited to income in the period of recovery.
LOANS HELD FOR SALE - Mortgage loans originated and intended for sale in
the secondary market are carried at the lower of cost or estimated fair
value determined on an aggregate loan basis. Net unrealized losses are
recognized in a valuation allowance by charges to income.
OFFICE PROPERTIES AND EQUIPMENT - Office properties and equipment are
carried at cost less accumulated depreciation. These assets are reviewed
for impairment when events indicate the carrying amount may not be
recoverable. Depreciation is computed on the straight-line method over the
estimated useful lives of the assets which range from 13 to 50 years for
buildings, executed lease terms for leasehold improvements, and from 3 to
10 years for furniture and equipment.
25
<PAGE> 28
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REAL ESTATE OWNED - Real estate properties acquired through, or in lieu
of, loan foreclosure are to be sold and are initially recorded at fair
value at the date of acquisition, establishing a new cost basis. Any
reduction to fair value from the carrying value of the related loan at the
time of acquisition is accounted for as a loan loss and charged against
the allowance for loan losses. After acquisition, the property is carried
at the lower of cost or fair value, less estimated costs to sell. A
valuation allowance is recorded through a charge to income for the amount
of selling costs. Valuations are periodically performed by management and
valuation allowances are adjusted through a charge to income for changes
in fair value or estimated selling costs. Costs relating to improvement of
the property are capitalized, whereas costs and revenues relating to the
holding of the property are expensed.
LIMITED PARTNERSHIP INVESTMENT IN QUALIFIED AFFORDABLE HOUSING PROJECT -
The Association has an approximate 4% limited partner interest in three
separate real estate partnerships that operates qualified affordable
housing projects. The Association receives tax benefits from the
partnerships in the form of tax deductions from operating losses and tax
credits. The Association accounts for its investments in the partnerships
on the effective yield method and is amortizing the cost over the
estimated life of the partnerships (15 years). The amortized cost of the
investments at December 31, 1998 and 1997 is $4.4 million and $3.0
million, respectively, and is included in other assets. Amortization for
the year ended December 31, 1998 and 1997 was $246,000 and $147,000,
respectively, and is included in miscellaneous expense. In addition to the
tax benefit related to the amortization, tax credits of $320,000 and
$197,000 were recognized during the year ended December 31, 1998 and 1997,
respectively, as a reduction of the provision for income taxes.
INCOME TAXES - The entities included in these consolidated financial
statements file a consolidated federal income tax return. Bankshares
records income tax expense based on the amount of taxes due on its tax
return plus the change in deferred tax assets and liabilities computed
based on the expected future tax consequences of temporary differences
between the carrying amounts and tax bases of assets and liabilities,
using enacted tax rates.
EMPLOYEE STOCK OWNERSHIP PLAN ("ESOP") - Bankshares accounts for its ESOP
in accordance with AICPA Statement of Position 93-6. The cost of shares
issued to the ESOP, but not yet allocated to participants, are presented
as a reduction of shareholders' equity. Compensation expense is recorded
based on the market price of the shares as they are committed to be
released for allocation to participant accounts. The difference between
the market price and the cost of shares committed to be released is
recorded as an adjustment to additional paid-in capital. Dividends on
allocated ESOP shares are recorded as a reduction of retained earnings;
dividends on unearned ESOP shares are reflected as a reduction of debt and
accrued interest.
RECOGNITION AND RETENTION PLAN ("RRP") - The RRP is a stock award plan for
which the measurement of total compensation cost is based upon the fair
value of the shares on the date of grant. RRP awards vest in five equal
annual installments from the date of grant, subject to the continuous
employment of the recipients as defined under such plan. Compensation
expense for the RRP is recognized on a pro rata basis over the vesting
period of the awards. The unearned compensation value of the RRP awards is
shown as a reduction of shareholders' equity.
STOCK OPTION PLAN ("SOP") - Expense for employee compensation under the
SOP would be recognized only if options are granted below the market price
at the grant date which the existing SOP does not allow. As shown in a
separate note, pro forma disclosures of net income and earnings per share
are provided as if the fair value method were used for stock-based
compensation.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK - The Association, in
the normal course of business, makes commitments to make loans which are
not reflected in the financial statements. A summary of these commitments
is disclosed in Note 10.
EARNINGS PER SHARE - Earnings per share are determined in accordance with
the provisions of SFAS No. 128 "Earnings per Share" ("SFAS No. 128"). The
weighted average number of shares of common stock used in calculating
basic earnings per share was determined by reducing outstanding shares by
unallocated ESOP shares and unvested RRP shares. Diluted earnings per
share includes the maximum dilutive effect of common stock issuable upon
exercise of common stock options and unallocated ESOP and RRP shares of
common stock. The effect of common stock options on weighted average
shares outstanding are calculated using the treasury stock method.
COMPREHENSIVE INCOME - Under a new accounting standard, comprehensive
income is now reported for all periods. Comprehensive income includes both
net income and the change in unrealized gains and losses on securities
available for sale.
26
<PAGE> 29
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FAIR VALUES OF FINANCIAL INSTRUMENTS - Fair values of financial
instruments are estimated using relevant market information and other
assumptions. Fair value estimates involve uncertainties and matters of
significant judgment regarding interest rates, credit risk, prepayments
and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates. The fair value estimates of existing
on- and off-balance-sheet financial instruments does not include the value
of anticipated future business or the values of assets and liabilities not
considered financial instruments.
IMPACT OF NEW ACCOUNTING ISSUES- 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 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.
RECLASSIFICATIONS - Certain items in the 1997 and 1996 financial
statements and the notes thereto have been reclassified to conform with
the 1998 presentation and to reflect the second step conversion.
27
<PAGE> 30
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SECURITIES AVAILABLE FOR SALE
Securities available for sale at December 31, 1998 and 1997 are
summarized as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
December 31, 1998:
Equity securities $ 7 $23 $ -- $ 30
United States Government and agency obligations 9,976 96 -- 10,072
Mutual funds 41,000 17 (630) 40,387
Mortgage-backed and related securities:
GNMA II pass-through certificates 19,666 124 -- 19,790
Collateralized mortgage obligations 24,837 124 (89) 24,872
---------- ---- ---- --------
Total mortgage-backed and related securities 44,503 248 (89) 44,662
---------- ---- ---- --------
Total securities available for sale $ 95,496 $384 $(719) $ 95,151
========== ==== ===== ========
Weighted average interest rate 6.26%
----
December 31, 1997:
Equity securities $ 7 $16 $ -- $ 23
United States Government and agency obligations 54,937 258 (20) 55,175
Mutual funds 41,000 58 (337) 40,721
Collateralized mortgage obligations 46,413 275 (338) 46,350
---------- ---- ---- --------
Total securities available for sale $142,357 $607 $(695) $142,269
======== ==== ====== ========
Weighted average interest rate 6.52%
----
</TABLE>
The table below sets forth the contractual maturity distribution of
securities available for sale at December 31, 1998.
-------------------------------------------------------------------------
December 31, 1998
Amortized Fair
Cost Value
-------------------------------------------------------------------------
Due in one year or less $41,007 $40,417
Due after one year through five years 10,007 10,103
Due after five years through ten years -- --
Due after ten years 44,472 44,631
------- -------
Total $95,486 $95,151
======= =======
Proceeds from the sale of securities available for sale were $0,
$2,435,000, $100,000, and $749,000 during the fiscal years ended December
31, 1998 and 1997, the three months ended December 31, 1996, and the year
ended September 30, 1996, respectively. For the year ended December 31,
1997, sales resulted in gross losses of $8,000. For the three months ended
December 31, 1996, sales resulted in gross gains of $51,000. There were no
gross realized gains or losses during the fiscal years ended December 31,
1998 and September 30, 1996.
Securities, with carrying values of approximately $23,781,000 and
$33,681,000 at December 31, 1998 and 1997, were pledged as collateral for
purposes required or permitted by law.
28
<PAGE> 31
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SECURITIES HELD TO MATURITY
Securities held to maturity at December 31, 1998 and 1997 are summarized
as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
DECEMBER 31, 1998:
United States Government and agency obligations $13,088 $4,547 $ -- $17,635
Mortgage-backed and related securities:
United States agency pass through certificates 9,018 118 (12) 9,124
Agency for International Development pass
through certificates 188 -- -- 188
Collateralized mortgage obligations 23,186 56 (300) 22,942
CMO residual interest bonds 4 -- -- 4
------- ------ ----- -------
Total mortgage-backed and related securities 32,396 174 (312) 32,258
------- ------ ----- -------
Corporate debt issues:
Chase Federal mortgage-backed bond 6,420 275 -- 6,695
Auto Bond Receivables Corp. 715 -- 715
------- ------ ----- -------
Total corporate debt issues 7,135 275 -- 7,410
------- ------ ----- -------
Total securities held to maturity $52,619 $4,996 $(312) $57,303
======= ====== ===== =======
DECEMBER 31, 1997:
United States Government and agency obligations $13,039 $3,891 $ -- $16,930
Mortgage-backed and related securities:
United States agency pass through certificates 12,532 136 (95) 12,573
Agency for International Development pass through
certificates 236 -- -- 236
Collateralized mortgage obligations 33,638 617 (133) 34,122
CMO residual interest bonds 7 -- -- 7
------- ------ ----- -------
Total mortgage-backed and related securities 46,413 753 (228) 46,938
------- ------ ----- -------
Corporate debt issues:
Chase Federal mortgage-backed bond 6,856 311 -- 7,167
Auto Bond Receivables Corp. 1,493 -- (5) 1,488
------- ------ ----- -------
Total corporate debt issues 8,349 311 (5) 8,655
------- ------ ----- -------
Total securities held to maturity $67,801 $4,955 $ (233) $72,523
======= ====== ===== =======
</TABLE>
The table below sets forth the contractual maturity distribution of the
securities held to maturity at December 31, 1998.
- - -------------------------------------------------------------------------------
December 31, 1998
Carrying Fair
Value Value
- - -------------------------------------------------------------------------------
Due in one year or less $ -- $ --
Due after one year through five years 15,049 18,475
Due after five years through ten years 2,682 3,822
Due after ten years 34,888 35,006
------- ------
Total $52,619 $57,303
======= =======
29
<PAGE> 32
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Securities held to maturity were called during the years ended December
31, 1998 and September 30, 1996 which resulted in gains of $175,000 and
$254,000, respectively. There were no sales of securities held to maturity
during the year ended December 31, 1998 and 1997, the three months ended
December 31, 1996, or the year ended September 30, 1996. The fair value of
securities held to maturity is based on quoted market prices.
Mortgage-backed securities represent participating interest in pools of
long-term first mortgage loans. Although mortgage-backed securities are
initially issued with a stated maturity date, the underlying mortgage
collateral may be prepaid by the mortgagee and, therefore, such
certificates may not reach their maturity date.
The Association also invests in mortgage-related securities such as
collateralized mortgage obligations ("CMOs"), CMO residual interest bonds,
and real estate investment conduits ("REMICs"). These securities are
generally divided into tranches whereby principal repayments from the
underlying mortgages are used sequentially to retire the securities
according to the priority of the tranches. The Association invests
primarily in senior sequential tranches of CMOs. Such tranches have stated
maturities ranging from 6.5 years to 30 years; however, because of
prepayments, the expected weighted average life of these securities is
less than the stated maturities. At December 31, 1998, the Association had
$32,396,000 in such mortgage-related securities, which were held for
investment and had a fair value of $32,258,000. The fixed-rate CMOs have
coupon rates ranging from 6.0% to 10.0%.
FEDERAL HOME LOAN BANK STOCK - At December 31, 1998 and 1997, the
Association held $4,722,000 and $3,264,000, respectively, of FHLB Stock,
which approximates fair value. FHLB Stock is not readily marketable as it
is not traded on a registered security exchange.
4. LOANS RECEIVABLE
Loans receivable consisted of the following:
-------------------------------------------------------------------------
December 31, December 31,
1998 1997
-------------------------------------------------------------------------
(In Thousands)
Real estate loans:
Residential 1-4 family $421,766 $339,117
Residential construction loans 54,391 32,828
Nonresidential construction loans 6,292 2,022
Land loans 14,624 17,117
Multi-family loans 8,392 8,800
Commercial 46,118 59,220
-------- --------
Total real estate loans 551,583 459,104
-------- --------
Non-real estate loans:
Consumer loans 15,015 15,694
Commercial business 6,635 3,530
-------- --------
Total non-real estate loans 21,650 19,224
-------- --------
Total loans receivable 573,233 478,328
Less:
Undisbursed loan proceeds 33,202 24,163
Unearned discount and premium and
net deferred loan fees and costs (1,333) (206)
Allowance for loan losses 3,160 2,662
-------- --------
Total loans receivable, net $538,204 $451,709
======== ========
LOANS SERVICED FOR OTHERS - Mortgage loans serviced for others are not
included in the accompanying consolidated statements of financial
condition. The unpaid balances of these loans at December 31, 1998, 1997
and 1996 were $14,173,000, $18,967,000 and $21,761,000, respectively.
Custodial escrow balances maintained in connection with the foregoing loan
servicing were $53,000, $47,000 and $57,000, respectively.
30
<PAGE> 33
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LOANS HELD FOR SALE - The Association originates both adjustable- and
fixed-rate loans. Adjustable- rate as well as fixed-rate loans with
original maturities of 15 years or less are held in the Association's
portfolio. Based on management's assessment of current portfolio mix and
Board of Directors' established limits, fixed-rate loans with maturities
greater than 15 years are either held in the portfolio or sold in the
secondary market when originated, except those originated for special
financing on low income housing. There are no loans held for sale included
in loans receivable at December 31, 1998 and 1997.
LOANS TO OFFICERS AND DIRECTORS - The Association offers loans to its
employees, including directors and executive officers, at prevailing
market interest rates. For adjustable-rate loans, employees are offered a
50 basis point reduction from the margin. The Association waives the
points charged for employee loans. However, directors and senior
management pay points based on current loan terms. These loans are made in
the ordinary course of business and on substantially the same terms and
collateral requirements as those of comparable transactions prevailing at
the time. The total loans to such persons did not exceed 5% of
shareholders' equity at December 31, 1998. At December 31, 1998 and 1997,
the total amount of loans to directors, executive officers, and associates
of such persons was $867,000 and $433,000, respectively.
An analysis of the changes in the allowance for loan losses for the years
ended December 31, 1998 and 1997, the three months ended December 31, 1996
and the year ended September 30, 1996 was as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
For the Year For the Three For the Year Ended
Ended December 31, Months Ended September 30,
1998 1997 December 31, 1996 1996
-------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Balance, beginning of period $2,662 $2,542 $2,312 $ 3,492
Provision charged to income 622 264 243 98
Losses charged to allowance (376) (144) (13) (1,278)
Recoveries 252 -- -- --
------- ------ ------ -------
Balance, end of year $3,160 $2,662 $2,542 $ 2,312
======= ====== ====== =======
</TABLE>
During the year ended September 30, 1996, the Association sold its
interest in a note with a net carrying value of $3,453,000. Included in
the allowance for loan losses for the year ended September 30, 1995 was a
$1,200,000 specific reserve related to such interest. In connection with
the sale, the Association recorded an additional loss of $217,000.
IMPAIRED LOANS - An analysis of the recorded investment in impaired loans
was as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
At or for the At or for the At or for the
Years Ended Three Months Ended Year Ended
December 31, December 31, September 30,
1998 1997 1996 1996
-------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Impaired loan balance $25 $1,044 $1,071 $1,081
Related allowance -- 252 252 252
Average impaired loan balance 13 1,057 1,076 4,046
Interest income recognized 1 91 24 94
</TABLE>
31
<PAGE> 34
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. PLEDGED ASSETS
In the normal course of doing business the Association is required to
comply with certain collateral requirements.
The following tables set forth amounts of various asset components, as of
December 31, 1998 and 1997 which were pledged as collateral.
--------------------------------------------------------------------------
December 31, December 31,
1998 1997
--------------------------------------------------------------------------
(In Thousands)
Real estate loans (unpaid
principal balance) $87,109 $54,018
FHLB stock and accrued interest 4,811 3,323
------- -------
Total pledged to the FHLB $91,920 $57,341
------- -------
Other pledged assets:
Deposits of public funds --
State of Florida Mortgage-backed
and related securities $21,681 $31,681
Line of credit -- Federal Reserve Bank
of Atlanta
United States Government
and agency obligations 1,800 1,800
Treasury tax and loan deposits
United States Government and
agency obligations 300 200
Mortgage-backed bond
Unpaid principal balance
of loans 32,046 31,738
------- -------
Total for other pledged assets $55,827 $65,419
======= =======
FHLB ADVANCES - The Association has a security agreement with the FHLB
which includes a blanket floating lien that requires the Association to
maintain as collateral for its advances, the Association's FHLB capital
stock and first mortgage loans equal to 100% of the unpaid amount of FHLB
advances outstanding.
6. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment at December 31, 1998 and 1997 are
summarized as follows:
--------------------------------------------------------------------------
December 31, December 31,
1998 1997
--------------------------------------------------------------------------
(In Thousands)
Land $ 8,291 $ 5,571
Buildings and improvements 19,245 16,431
Furniture and equipment 16,951 15,268
------- -------
Total 44,487 37,270
Less accumulated depreciation (18,471) (17,064)
------- -------
Total office properties and
equipment -- net $ 26,016 $ 20,206
======= =======
32
<PAGE> 35
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. DEPOSITS
Individual deposits greater than $100,000 at December 31, 1998 and 1997
aggregated approximately $86,669,000, and $87,257,000, respectively.
Deposits in excess of $100,000 are not insured.
The total of related party deposits owned by directors, executive
officers, and associates of such persons was $2,913,000 and $3,704,000 at
December 31, 1998 and 1997, respectively.
Scheduled maturities of certificate accounts at December 31, 1998 were as
follows:
-------------------------------------------------------------------------
December 31,
1998
-------------------------------------------------------------------------
(In Thousands)
Maturity
Less than 1 year $277,254
1 year - 2 years 37,790
2 years - 3 years 15,943
3 years - 4 years 14,790
4 years - 5 years 10,621
Thereafter 791
--------
Total certificates of deposit $357,189
========
8. ADVANCES FROM FEDERAL HOME LOAN BANK
At December 31, 1998 and 1997, outstanding advances from the FHLB totaled
$91,920,000 and $59,341,000, respectively.
Scheduled maturities of FHLB advances at December 31, 1998 were as
follows:
-------------------------------------------------------------------------
Years Ending Average Interest Amount
December 31, Rate Maturing
-------------------------------------------------------------------------
(Dollars in Thousands)
1999 6.83% $ 6,734
2000 6.23 8,471
2001 6.36 7,572
2002 5.82 26,071
2003 6.69 1,072
2008 5.32 42,000
-------
Total FHLB advances 5.75% $91,920
==== =======
9. INCOME TAXES
In accordance with SFAS No. 109, deferred income tax assets and
liabilities are computed annually for differences between financial
statement and tax basis of assets and liabilities that will result in
taxable or deductible amounts in the future based on enacted tax laws and
rates applicable to periods in which the differences are expected to
affect taxable income. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be
realized. Income tax expense is the tax payable or refundable for the
period adjusted for the change during the period in deferred tax assets
and liabilities.
33
<PAGE> 36
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income tax provision consists of the following components for the years
ended December 31, 1998 and 1997, the three months ended December 31,
1996, and the year ended September 30, 1996.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
For the Years For the Three For the Year
Ended Months Ended Ended
December 31, December 31, September 30,
1998 1997 1996 1996
-------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Current - federal $2,640 $2,745 $ 49 $ 1,592
Current - state 232 297 16 225
------ ------ ---- -------
Total current 2,872 3,042 65 1,817
Deferred - federal and state (765) (112) 631 (1,056)
------ ------ ---- -------
Total provision for income taxes $2,107 $2,930 $696 $ 761
====== ====== ==== =======
</TABLE>
Bankshares' provision for income taxes differs from the amounts determined
by applying the statutory federal income tax rate to income before income
taxes for the following reasons:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
For the Three
For the Years Ended Months Ended For the Year Ended
December 31, December 31, September 30,
1998 1997 1996 1996
Amount % Amount % Amount % Amount %
-------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tax at federal tax rate $2,485 35.0% $2,900 35.0% $650 35.0% $1,637 35.0%
State income taxes, net of
federal income tax benefits 123 1.7 281 3.3 70 3.8 139 3.0
Low income housing credits (320) (4.5) -- -- -- -- -- --
Reversal of prior year liability -- -- -- -- -- -- (1,140) (24.4)
Other (110) (1.5) (168) (2.0) (6) (0.3) 172 3.7
Benefit of graduated tax rate (71) (1.0) (83) (1.0) (18) (1.0) (47) (1.0)
------ ---- ------ ---- ---- ---- ----- ----
Total provision for income taxes $2,107 29.7% $2,930 35.3% $ 696 37.5% $ 761 16.3%
====== ==== ====== ==== ==== ==== ===== ====
</TABLE>
During the year ended September 30, 1996 , management concluded that a
liability accrued in prior years was no longer required and reversed such
liability resulting in a $1,140,000 credit to the 1996 income tax
provision.
34
<PAGE> 37
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effect of temporary differences that gave rise to deferred tax
assets and deferred tax liabilities are presented below:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
For the Years For the Three For the Year
Ended Months Ended Ended
December 31, December 31, September 30,
1998 1997 1996 1996
------------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Deferred tax liabilities:
Depreciation $ 631 $ 582 $ 627 $ 639
Loan fee income 22 170 167 188
FHLB stock dividends 458 457 454 868
Deferred loan costs 711 467 412 392
Unamortized discount on mortgage-backed bond 1,865 2,112 2,302 2,350
Book over tax on investments in partnerships 55 1,003 1,003 937
Other 13 -- -- --
------ ------ ------ ------
Gross deferred tax liabilities 3,755 4,791 4,965 5,374
------ ------ ------ ------
Deferred tax assets:
Excess of book bad debt reserve over tax reserve 978 1,043 918 907
Retirement plans 360 586 802 686
Unrealized loss on decrease in fair value
of securities available for sale 126 33 561 615
Deferred loss on loans held for sale 39 43 46 48
Deferred compensation 140 130 115 109
SAIF recapitalization -- -- -- 1,088
Other 93 19 -- 83
------ ------ ------ ------
Gross deferred tax assets 1,736 1,854 2,442 3,536
------ ------ ------ ------
Valuation allowance on unrealized loss on decrease
in fair value of securities available for sale (222) (99) (138) (182)
------ ------ ------ ------
Gross deferred tax assets -- net of valuation
allowance 1,514 1,755 2,304 3,354
------ ------ ------ ------
Net deferred tax liability $2,241 $3,036 $2,661 $2,020
====== ====== ====== ======
</TABLE>
During 1996, legislation was passed that repealed Section 593 of the
Internal Revenue Code for taxable years beginning after December 31, 1995.
Section 593 allowed thrift institutions, including the Association, to use
the percentage-of-taxable income bad debt accounting method, if it was
more favorable than the specific charge-off method, for federal income tax
purposes. The excess reserves (deduction based on the
percentage-of-taxable income less the deduction based on the specific
charge-off method) accumulated post-1987 are required to be recaptured
ratably over a six year period beginning in 1996. The Association had
excess reserves of approximately $435,000 as of December 31, 1996. The
recapture will have no effect on Bankshares' statement of operations as
taxes were provided for in prior years in accordance with SFAS 109,
"Accounting for Income Taxes." It is not likely the pre-1988 accumulated
bad debt reserves will be required to be recaptured into taxable income.
The unrecorded potential liability related to the pre-1988 bad debt
reserves approximates $4.3 million.
10. COMMITMENTS AND CONTINGENCIES
LOAN COMMITMENTS - In the normal course of business, the Association makes
commitments to extend credit. Commitments to extend credit are agreements
to lend to a customer as long as there is no violation of any condition
established in the contract. The interest rates on both fixed- and
variable-rate loans are based on the market rates in effect on the date of
closing.
35
<PAGE> 38
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Commitments generally have fixed expiration dates of 30 to 60 days and
other termination clauses. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. Each customer's
creditworthiness is evaluated on a case-by-case basis. The amount of
collateral obtained if deemed necessary by the Association upon extension
of credit is based on management's credit evaluation of the customer.
Collateral held varies, but may include single-family homes, marketable
securities and income-producing residential and commercial properties.
Credit losses may occur when one of the parties fails to perform in
accordance with the terms of the contract. The Association's exposure to
credit risk is represented by the contractual amount of the commitments to
extend credit. Commitments to extend credit for mortgage loans, excluding
undisbursed portions of loans in process, were approximately $14,086,000
and $4,733,000 at December 31, 1998 and December 31, 1997, respectively.
At December 31, 1998, the $14,086,000 of loan commitments were comprised
of approximately $10,049,000 of fixed-rate commitments and $4,037,000 of
variable-rate commitments. These commitments are at prevailing market
rates and terms. Interest rates on fixed-rate loan commitments were from
6.50% to 8.50%. No value is placed on the commitments as the borrower is
required to close at the market rates in effect on the date of closing. No
fees are received in connection with such commitments.
Unused consumer lines of credit were $6,703,000 and $8,948,000 at
December 31, 1998 and 1997, respectively.
Commercial lines and letters of credit and other loan commitments were
$6,129,000 at December 31, 1998. There were no commitments to sell loans
to FNMA at December 31, 1998 and 1997. There were no commitments to
purchase loans at December 31, 1998 and 1997.
LEASE COMMITMENTS - The Association leases various properties for original
periods ranging from 2 to 25 years. Rent expense for the years ended
December 31, 1998 and 1997, the three months ended December 31, 1996, and
the year ended September 30, 1996, was approximately $633,000, $626,000,
$141,000, and $545,000, respectively. At December 31, 1998, future minimum
lease payments under these operating leases were as follows:
-------------------------------------------------------------------------
Years Ending
December 31, Amount
(In Thousands)
-------------------------------------------------------------------------
1999 $ 486
2000 362
2001 279
2002 145
2003 145
Thereafter 73
------
Total $1,490
======
LINE OF CREDIT - The Association has a $1,800,000 available line of credit
with the Federal Reserve Bank of Atlanta which is secured by United States
Government and agency obligations (see Note 5). At December 31, 1998 and
1997, the Association had no outstanding advances.
CASH RESTRICTIONS - The Association maintained a $625,000 required
two-week average balance in the clearing account held at the Federal
Reserve Bank of Atlanta at both December 31, 1998 and 1997.
36
<PAGE> 39
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11.BENEFIT PLANS
PENSION PLAN - The Association has a noncontributory, qualified pension
plan covering substantially all employees. The plan calls for benefits to
be paid to eligible employees at retirement based primarily upon years of
service with the Association and compensation rates during those years.
Currently, the Association's policy is to fund the qualified retirement
plan in an amount that is determined in accordance with the minimum
funding standards of the Employee Retirement Income Security Act, but
falls below the tax deductible contribution. Plan assets consist primarily
of corporate and government agency bonds, mutual funds, common stock, and
managed funds.
Information about the pension plan was as follows:
-------------------------------------------------------------------------
December 31, December 31,
1998 1997
-------------------------------------------------------------------------
(In Thousands)
Change in benefit obligation:
Beginning benefit obligation $ 7,077 $ 6,861
Service cost 609 550
Interest cost 494 447
Actuarial gain 864 (413)
Benefits paid (155) (368)
------- -------
Ending benefit obligation 8,889 7,077
------- -------
Change in plan assets, at fair value:
Beginning plan assets 9,644 7,350
Actual return 578 2,038
Employer contribution 724 624
Benefits paid (155) (368)
------- -------
Ending plan assets 10,791 9,644
------- -------
Funded status 1,902 2,567
Unrecognized net actuarial loss (2,251) (3,557)
Unrecognized prior service cost 25 28
------- -------
Accrued benefit cost $ (324) $ (962)
======= =======
The components of pension expense and related actuarial assumptions were
as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
For the Year For the Three Months For the Year
Ended December 31, Ended December 31, Ended September 30,
1998 1997 1996 1996
-------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Service cost $ 609 $ 550 $138 $552
Interest cost 494 447 112 452
Expected return on plan assets (818) (626) (156) (533)
Amortization of prior service cost (68) (68) (18) (68)
Recognized net actuarial gain (132) (52) (13) --
----- ----- ---- ----
Net $ 85 $ 251 $ 63 $ 403
===== ===== ==== ====
Discount rate on benefit obligation 7.00% 6.75% 6.75% 6.50%
Long-term expected rate of return on
plan assets 8.50% 8.50% 8.50% 8.00%
Rate of compensation increase 5.00% 5.00% 5.00% 5.00%
</TABLE>
For the years ended December 31, 1998, and 1997 the three months ended
December 31, 1996, and the year ended September 30, 1996, pension expense
amounts were based upon actuarial computations.
37
<PAGE> 40
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL RETIREMENT INCOME PLAN ("SERP") - During 1989, the
Association's Board of Directors established a nonqualified unfunded
defined benefit plan for certain officers. For the years ended December
31, 1998 and 1997, the three months ended December 31, 1996, and the year
ended September 30, 1996, the net periodic expense for the officers' plan
totaled $76,000, $54,000, $13,000, and $60,000, respectively.
Information about the SERP was as follows:
-------------------------------------------------------------------------
December 31, December 31,
1998 1997
-------------------------------------------------------------------------
(In Thousands)
Change in benefit obligation:
Beginning benefit obligation $479 $388
Service cost 51 41
Interest cost 33 25
Actuarial gain 136 41
Benefits paid (16) (16)
---- ----
Ending benefit obligation $683 $479
==== ====
The actuarial assumptions were as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
Years Ended Three Months Ended Year Ended
December 31, December 31, September 30,
1998 1997 1996 1996
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Discount rate 6.75% 7.00% 6.75% 6.50%
Salary scale 5.00% 5.00% 5.00% 5.00%
</TABLE>
Bankshares and the Association do not provide any material postretirement
or postemployment benefits.
EMPLOYEE STOCK OWNERSHIP PLAN - As of December 31, 1998, the Employee
Stock Ownership Plan ("ESOP") has outstanding loan balances of $1,031,000
(Loan I)and $4,377,000 (Loan II)related to the purchases of 389,248 shares
and 437,652 shares of common stock, respectively, in the open market.
Collateral for the loans is the common stock purchased by the ESOP.
Payment of the loans is principally from the Association's contributions
to the ESOP over a period of up to seven years and 15 years, respectively.
Interest on ESOP Loan I is a fixed interest rate of 8.50%. Interest on
ESOP Loan II is a fixed rate of 7.75% for the term of the loan.
Contributions of principal and interest for the years ended December 31,
1998 and 1997, the three months ended December 31, 1996 and the year ended
September 30, 1996 totaled $510,000, $525,000, 187,000, and $675,000,
respectively.
Statement of Position 93-6 "Employers' Accounting for Employee Stock
Ownership Plan" ("SOP 93-6") requires that the Association reflect shares
allocated to employees under the ESOP as compensation expense at their
fair value, rather than cost. The difference between the cost of such
shares and their fair value is treated, net of tax, as an adjustment of
additional paid-in capital. Contributions to the ESOP will be in an amount
proportional to the repayment of the ESOP loans, and will be allocated
among participants on the basis of compensation in the year of allocation,
up to an annual adjusted maximum level of compensation. In accordance with
generally accepted accounting principles, the unallocated shares held by
the ESOP are shown as a deduction from shareholders' equity.
Information related to the ESOP was as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
For the Year For the Three Months For the Year
Ended December 31, Ended December 31, Ended September 30,
1998 1997 1996 1996
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Number of shares allocated 55,610 55,610 20,972 69,666
Average fair value per share $ 15.08 $ 12.71 $ 8.72 $ 7.97
------- ------- ------- -------
Compensation expense $839,000 $707,000 $183,000 $555,000
======== ======== ======== ========
Number of shares distributed 11,216 4,034 1,374 --
======== ======== ======== ========
</TABLE>
38
<PAGE> 41
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Shares held by the ESOP were as follows:
-------------------------------------------------------------------------
December 31, December 31,
1998 1997
-------------------------------------------------------------------------
Allocated to participants 227,005 182,611
Unallocated 583,333 201,291
------- -------
Total ESOP shares 810,338 383,902
======= =======
Fair value of unallocated
shares $8,711,000 $7,018,000
========== ==========
RECOGNITION AND RETENTION PLAN - In January 1995, the shareholders of the
Association approved the Recognition and Retention Plan (the "Recognition
Plan") for certain officers and non-employee directors of the Association.
Concurrent with such approval, such officers and directors were awarded
181,756 shares of common stock, which vest in five equal annual
installments, starting January 1996. The fair value of the shares on the
date of award is being recognized as compensation expense over the vesting
period. To fund the Recognition plan, 181,756 shares were issued from
authorized but unissued shares of common stock in July 1995. During the
year ended September 30, 1996, unamortized deferred compensation and
additional paid-in capital were adjusted to correct amounts initially
recorded in connection with the Recognition Plan. Unamortized deferred
compensation of $237,000 at December 31, 1998 is reflected as a reduction
of shareholders' equity. Compensation expense related to the Recognition
Plan was $186,000, $185,000, $46,000 and $130,000 for the years ended
December 31, 1998 and 1997, the three months ended December 31, 1996, and
the year ended September 30, 1996, respectively.
STOCK OPTION PLAN - The Association has a stock option plan for the
benefit of its directors, officers, and other key employees. The number of
shares of Bankshares' common stock reserved for issuance under the stock
option plan was equal to 486,561 shares or 10% of the total number of
common shares issued to persons other than ComFed, pursuant to the
Association's conversion to the stock form of ownership in 1994. The
option exercise price cannot be less than the fair value of the underlying
common stock as of the date of the option grant and the maximum option
term cannot exceed ten years. The stock options granted to the directors,
officers, and employees vest in five equal annual installments. The first
installment became exercisable on January 18, 1996. Below is a summary of
transactions:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
Option Price
---------------------------------------
Average
Number of Exercise Aggregate
Options Price Per Exercise
Outstanding Share Price
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Options Outstanding:
Balance - September 30, 1996 432,708 $5.441 $2,354,364
Granted -- -- --
Exercised -- -- --
Canceled -- -- --
------- ----------
Balance - December 31, 1996 432,708 2,354,364
Granted 15,333 $9.301 142,612
Exercised (9,813) $5.441 (53,393)
Canceled -- -- --
------- ----------
Balance - December 31, 1997 438,228 2,443,583
Granted --
Exercised (18,482) $5.441 (100,561)
Canceled -- -- --
------- ----------
Balance - December 31, 1998 419,746 $2,343,022
======= ==========
</TABLE>
39
<PAGE> 42
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Options exercisable at December 31, 1998, 1997 and 1996, and September 30,
1996 totaled 234,353, 165,861, 86,531, and 86,531, respectively.
Bankshares adopted the disclosure-only option under SFAS No. 123,
"Accounting for Stock-based Compensation" as of January 1, 1997. The fair
value of options granted under the stock option plan during the fiscal
year ended December 31, 1997 was estimated using the Binary Option Pricing
Model with the following assumptions used:
<TABLE>
<CAPTION>
------------- ------------ ------------ --------------- ------------------ -------------- ------------ -------------
Number of Exercise Fair Value Risk Free Expected Expected Dividend
Grant date Options Price of Options Interest Rate Life (Years) Volatility Yield
------------- ------------ ------------ --------------- ------------------ -------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
01/18/97 15,333 $9.30 $2.57 6.37% 5 15.36% 2.67%
</TABLE>
Had compensation cost for the stock options been determined based on the
fair value at the grant date for awards under those plans consistent with
the method of SFAS No. 123, Bankshares' net income and earnings per shares
for the years ended December 31, 1998 and 1997 would have been reduced to
the pro forma amounts indicated below:
--------------------------------------------------------------------------
For the Years Ended December 31,
1998 1997
--------------------------------------------------------------------------
Net income
As reported $4,994,000 $5,356,000
Pro forma $4,989,000 $5,351,000
Earnings per share
As reported - basic $ 0.49 $ 0.53
Pro forma - basic $ 0.49 $ 0.53
As reported - diluted $ 0.48 $ 0.52
Pro forma - diluted $ 0.48 $ 0.52
12. MORTGAGE-BACKED BOND
On September 30, 1983, the Association sold two of its branch offices to
another financial institution with the approval of the Federal Home Loan
Bank Board ("FHLBB"), predecessor to the OTS. Under terms of the sale, the
Association issued a 10.94%, 30-year term mortgage-backed bond (the
"Bond") for approximately $41,601,000. The Bond issue has a stated
interest rate which was less than the market rate (assumed to have been
17.53%) for similar debt at the effective date of the sale. Accordingly,
the Association recorded a discount on the Bond which is being accreted on
the interest method over the life of the Bond.
The Bond bears an interest rate that is adjustable semi-annually, on April
1 and October 1, to reflect changes in the average of the United States
10-year and 30-year long-term bond rates. The Bond's interest rate on
December 31, 1998 and 1997 was 4.28% and 5.62%, respectively. The
unamortized discount at December 31, 1998 and 1997 was $4,955,000 and
$5,439,000, respectively. Principal and interest payments are due
quarterly. During the years ended December 31, 1998 and 1997, the three
months ended December 31, 1996, and the year ended September 30, 1996,
approximately $484,000, $490,000, $123,000, and $496,000, respectively, of
the discount was accreted.
At December 31, 1998 and 1997, the Association held $13,088,000 and
$13,039,000 (net of discounts of $8,712,000 and $10,161,000),
respectively, of Salomon Brothers Certificates of Accrual on Treasury
Securities ("CATS") which were purchased at the time of issuing the Bond.
The accrual of interest on the CATS offsets the discount amortization of
the Bond. The CATS are included in United States Government and agency
obligations described in Note 3 to the consolidated financial statements.
40
<PAGE> 43
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Bond at December 31, 1998 was repayable as follows:
-------------------------------------------------------------------------
Years Ending Amount
December 31, (In Thousands)
-------------------------------------------------------------------------
1999 $ 1,387
2000 1,387
2001 1,387
2002 1,387
2003 1,387
2004 and after 13,450
-------
Total 20,385
Less unamortized discount 4,955
-------
Total mortgage-backed bond $15,430
=======
13. REGULATORY RESTRICTIONS ON RETAINED INCOME AND REGULATORY CAPITAL
REQUIREMENT
The Association is subject to various regulatory capital requirements
administered by the OTS. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary actions
by regulators that, if undertaken, could have a direct material effect on
Bankshares' financial statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, the Association
must meet specific capital guidelines that involve quantitative measures
of the Association's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The
Association's capital amounts and classifications are also subject to
qualitative judgments by regulators about components, risk-weighting, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Association to maintain minimum amounts and ratios of tangible
capital of not less that 1.5% of adjusted total assets, total capital to
risk-weighted assets of not less that 8.0%, Tier I capital equal to
adjusted total assets of 3.0%, and Tier I capital to risk-weighted assets
of 4.0% (as defined in the regulations). Management believes, as of
December 31, 1998, that the Association meets all capital adequacy
requirements to which it is subject.
As of December 31, 1998, the most recent notification from the OTS
categorized the Association as "Well Capitalized" under the framework for
prompt corrective action. To be considered well capitalized under Prompt
Corrective Action Provisions, the Association must maintain total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in
the following table. There are no conditions or events since that
notification that management believes have changed the Association's
categorization.
41
<PAGE> 44
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Association is required to report capital ratios unconsolidated with
Bankshares. The Association's actual capital amounts and ratios are
presented in the following tables:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
To be Considered
For Well Capitalized
Capital Adequacy for Prompt Corrective
Actual Purposes Action Provisions
------------------------------------------------------------------------------
Ratio Amount Ratio Amount Ratio Amount
-----------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Risk-Based Capital (to Risk-weighted Assets) 25.0% $111,398 8.0% $35,647 10.0% $44,559
Core (Tier 1) Capital (to Adjusted Tangible Assets) 12.8 108,238 3.0 25,352 5.0 42,253
Tangible Capital (to Tangible Assets) 12.8 108,238 1.5 12,676 N/A N/A
Core (Tier 1) Capital (to Risk-weighted Assets) 24.3 108,238 N/A N/A 6.0 26,736
</TABLE>
As of December 31, 1998, tangible assets, adjusted tangible assets, and
risk-weighted assets were $845,054,000, $845,054,000, and and $,
respectively $845,054,000, and $445,592,000 respectively.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Risk-Based Capital (to Risk-weighted Assets) 18.4% $70,048 8.0% $30,416 10.0% $38,020
Core (Tier 1) Capital (to Adjusted Tangible Assets) 9.8 70,681 3.0 21,609 5.0 36,014
Tangible Capital (to Tangible Assets) 9.8 70,681 1.5 10,804 N/A N/A
Core (Tier 1) Capital (to Risk-weighted Assets) 18.6 70,681 N/A N/A 6.0 22,812
</TABLE>
As of December 31, 1997, tangible assets, adjusted tangible assets, and
risk-weighted assets were $720,284,000, $720,284,000, and $380,197,000,
respectively.
At the close of the conversion and reorganization of the Association in
December 1998, a liquidation account in the amount of $51,566,000 was
established. The liquidation account will be maintained for the benefit
of eligible depositors who continue to maintain their accounts at the
Association after December 15, 1998. The liquidation account is to be
reduced annually to the extent that eligible depositors have reduced
their qualifying deposits. Subsequent increases of such deposits do not
restore an eligible account holder's interest in the liquidation account.
In the event of a complete liquidation, each eligible depositor will be
entitled to receive a distribution from the liquidation account in an
amount proportionate to the current adjusted qualifying balances for
accounts then held. Bankshares may not pay dividends that would reduce
shareholder's equity below the required liquidation account balance.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, as amended by SFAS No. 119, "Disclosures about Fair Value
of Financial Instruments" ("SFAS No. 107"), requires the estimation of
fair values of financial instruments, as defined in SFAS No. 107.
Estimates of fair value are made at a specific date, based upon, where
available, relevant market prices and information about the financial
instrument. For a substantial portion of the financial instruments, no
quoted market exists. Therefore, estimates of fair value are necessarily
based on a number of significant assumptions (many of which involve events
outside the control of management). Such assumptions include assessments
of current economic conditions, perceived risks associated with these
financial instruments and their counterparties, future expected loss
experience and other factors. Given the uncertainties surrounding these
assumptions, the reported fair values represent estimates only and,
therefore, cannot be compared to the historical accounting model. Use of
different assumptions or methodologies are likely to result in
significantly different fair value estimates.
Although management uses its best judgment in estimating the fair value of
the financial instruments, there are inherent limitations in any
estimation technique. Therefore, the fair value estimates presented herein
are not necessarily indicative of the amounts which could be realized in a
current transaction.
The estimated fair values presented neither include nor give effect to the
values associated with the Association's existing customer relationships,
extensive branch banking network or property, or certain tax implications
related to the realization of unrealized gains or losses. Also under SFAS
No. 107, the fair value of non-interest-bearing checking accounts,
interest-bearing NOW accounts, passbook and statement accounts, and money
market accounts is equal to the carrying amount because these have no
stated maturity. The approach to estimating fair value excludes the
significant benefit that results from the low-cost funding provided by
such deposit liabilities, as compared to alternative sources of funding.
42
<PAGE> 45
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following methods and assumptions were used to estimate the fair value
of each major classification of financial instruments at December 31, 1998
and 1997:
CASH AND CASH EQUIVALENTS - The carrying amounts reported in the Statement
of Financial Condition for cash and cash equivalents approximates their
fair value.
SECURITIES HELD TO MATURITY AND SECURITIES AVAILABLE FOR SALE - Fair value
is determined by reference to quoted market prices or by use of broker
price estimates.
LOANS RECEIVABLE - The fair value of loans was estimated by using a method
which approximates the effect of discounting the estimated future cash
flows over the expected repayment periods using rates which consider
credit risk and other relevant factors.
FHLB STOCK - The carrying amount of FHLB stock is a reasonable estimate
of fair market value.
ACCRUED INTEREST RECEIVABLE - The carrying amount of accrued interest
receivable is a reasonable estimate of fair market value.
DEPOSITS - Current carrying amounts approximate estimated fair value of
deposits with no stated maturity, including demand deposits, interest
bearing NOW accounts, passbooks and statement accounts, and money market
accounts. Fair value for fixed maturity certificate of deposit accounts
was estimated by discounting the contractual cash flow using a rate which
reflects the Association's cost of funds and other relevant factors.
MORTGAGE-BACKED BOND - The fair value of the Bond is estimated using the
Association's cost of funds and other relevant factors.
ADVANCES FROM FEDERAL HOME LOAN BANK - The fair value of advances from
FHLB is estimated using the Association's cost of funds and other relevant
factors.
ESOP LOAN - The aggregate carrying amount of the ESOP loans is a
reasonable estimate of fair market value.
ACCRUED INTEREST PAYABLE - The carrying amount of accrued interest payable
is a reasonable estimate of fair market value.
COMMITMENTS TO EXTEND CREDIT - At December 31, 1998 and 1997, the fair
value of commitments to extend credit was considered insignificant due to
the short-term nature of the commitments.
The estimated fair values of the financial instruments were as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
December 31, 1998 December 31, 1997
Carrying Fair Carrying Fair
Value Value Value Value
----------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $117,015 $117,015 $ 25,954 $ 25,954
Securities held to maturity 52,619 57,303 67,801 72,839
Securities available for sale 95,151 95,151 142,269 142,269
Loans receivable - net 538,204 552,735 451,709 461,650
FHLB stock 4,722 4,722 3,264 3,264
Accrued interest receivable 2,782 2,782 3,162 3,162
Financial liabilities:
Deposits $594,400 $592,085 $550,708 $548,321
Mortgage-backed bond 15,430 15,446 16,333 16,360
Advances from FHLB 91,920 90,157 57,341 57,246
ESOP borrowings -- -- 1,424 1,424
Accrued interest payable 403 403 292 292
</TABLE>
43
<PAGE> 46
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following condensed statements of financial condition as of December
31, 1998 and 1997, and the condensed statements of operations and
statements of cash flows for the years ended December 31, 1998 and 1997,
the three months ended December 31, 1996, and the year ended September
30, 1996 should be read in conjunction with the consolidated financial
statements and the related notes. Since the reorganization of Bankshares
and the Association was accounted for in a manner similar to a pooling of
interests, these statements have been presented as if Bankshares was in
existence for all periods covered by the consolidated financial
statements.
STATEMENTS OF FINANCIAL CONDITION
-------------------------------------------------------------------------
At December 31,
1998 1997
-------------------------------------------------------------------------
(In Thousands)
Assets:
Cash and cash equivalents $ 212 $11,243
Investment in the Association 107,808 70,527
Loans to the Association 26,407 --
Other assets 64 --
-------- --------
Total assets $134,491 $81,770
======== =======
Liabilities $ 1,205 $ 511
Shareholders' equity 133,286 81,259
-------- --------
Total liabilities and
shareholders' equity $134,491 $81,770
======== =======
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
For the For the Three For the Year
Year Ended Months Ended Ended
December 31, December 31, September 30,
1998 1997 1996 1996
----------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Income $ 90 $ -- $ -- $ --
Expenses 5 41 -- --
------ ----- ----- -----
Income (loss) before income taxes and equity in -- --
earnings of the Association 85 (41) -- --
Income tax expense (provision) benefit (32) 15 -- --
------ ----- ----- -----
Income (loss) before equity in earnings
of the Association 53 (26) -- --
Equity in earnings of the Association 4,941 5,382 1,160 3,915
------ ----- ----- -----
Net income 4,994 5,356 1,160 3,915
------ ----- ----- -----
Other comprehensive income, net of tax:
Unrealized gain in market value of securities
transferred from held to maturity to
available for sale -- -- -- 247
Change in unrealized gain (loss) in market value
of securities available for sale (278) 914 130 (974)
------ ----- ----- -----
Comprehensive income, net of income taxes $4,716 $6,270 $1,290 $3,188
====== ===== ===== ======
</TABLE>
44
<PAGE> 47
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
For the For the Three For the Year
Year Ended Months Ended Ended
December 31, December 31, September 30,
1998 1997 1996 1996
----------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $4,994 $ 5,356 $ 1,160 $ 3,915
Adjustments to reconcile net income to net cash
used for operating activities:
Equity in earnings of the Association (4,941) (5,382) (1,160) (3,915)
Other (206) (15) -- --
------ ------- ------- ------
Net cash used for operating activities (153) (41) -- --
------ ------- ------- ------
Cash flows from for investing activities:
Loans to subsidiaries (26,407) -- -- --
Dividends received from the Association -- 13,260 448 1,618
Investment in Association through proceeds from
stock sale (32,340) -- -- --
------ ------- ------- ------
Net cash provided by (used for) investing activities (58,747) 13,260 448 1,618
------ ------- ------- ------
Cash flows from financing activities:
Proceeds from sale of stock, net of issuance costs 26,535 -- -- --
Dividends paid -- (1,976) (448) (1,618)
Purchase of ESOP shares (4,377) -- -- --
Proceeds from exercise of stock options 101 -- -- --
Amortization of deferred compensation 1,025 -- -- --
------ ------- ------- ------
Net cash provided by (used for) financing activities 26,535 (1,976) (448) (1,618)
------ ------- ------- ------
(Decrease) increase in cash and cash equivalents (11,031) 11,243 -- --
Cash and cash equivalents, beginning of period 11,243 -- -- --
------ ------- ------- ------
Cash and cash equivalents, end of period $ 212 $11,243 $ -- $ --
====== ======= ======= ======
</TABLE>
Payment of dividends to Bankshares by the Association is subject to various
limitations by bank regulatory agencies. Undistributed earnings of the
Association available for distribution as dividends under these limitations were
$24,757,000 and $30,773,000 as of December 31, 1998 and 1997, respectively.
45
<PAGE> 48
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. EARNINGS PER SHARE
A reconciliation of the numerators and denominators of basic and diluted
earnings per share for the years ended December 31, 1998 and 1997, for the three
months ended December 31, 1996 and for the year ended September 30, 1996 was as
follows:
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------------------
For the For the Three For the
Year Ended Months Ended Year Ended
December 31, December 31, September 30,
1998 1997 1996 1996
- - -------------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands except per share data)
<S> <C> <C> <C> <C>
Basic earnings per share
Net income available to common shareholders $ 4,994 $ 5,356 $ 1,160 $ 3,915
Weighted average common shares outstanding 10,175,899 10,079,363 10,023,118 9,955,157
----------- ----------- ----------- -----------
Basic earnings per share $ 0.49 $ 0.53 $ 0.12 $ 0.39
=========== =========== =========== ===========
Diluted earnings per share
Net income available to common shareholders $ 4,994 $ 5,356 $ 1,160 $ 3,915
----------- ----------- ----------- -----------
Weighted average common shares outstanding 10,175,899 10,079,363 10,023,118 9,955,157
Add: dilutive effects of assumed exercise of
stock options and unvested RRP shares
Stock options 271,205 255,284 100,878 138,055
RRP shares 1,223 -- -- --
----------- ----------- ----------- -----------
Weighted average common and dilutive potential
common shares outstanding 10,448,327 10,334,647 10,123,996 10,093,212
----------- ----------- ----------- -----------
Diluted earnings per share $ 0.48 $ 0.52 $ 0.11 $ 0.39
=========== =========== =========== ===========
</TABLE>
RRP shares were not considered in the computation of diluted earnings per share
for the year ended December 31, 1997, the three months ended December 31, 1996
and the year ended September 30, 1996 as they were antidilutive.
46
<PAGE> 49
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
----------------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Year ended December 31, 1998:
Interest income $13,358 $13,469 $13,763 $13,899
Interest expense 7,299 7,356 7,741 7,763
------- ------- ------- -------
Net interest income 6,059 6,113 6,022 6,136
Provision for loan losses 117 96 223 186
Other income 947 928 966 1,224
Operating expense 4,976 4,989 5,126 5,581
Provision for income taxes 681 677 401 348
------- ------- ------- -------
Net income $ 1,232 $ 1,279 $ 1,238 $ 1,245
======= ======= ======= =======
Basic earnings per share $ 0.12 $ 0.13 $ 0.12 $ 0.12
======= ======= ======= =======
Diluted earnings per share $ 0.12 $ 0.12 $ 0.12 $ 0.12
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------------------------------------------------------------------
March 31, June 30, September 30 December 31,
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1997
Interest income $12,020 $12,557 $12,894 $12,845
Interest expense 6,448 6,813 7,036 7,093
------- ------- ------- -------
Net interest income 5,572 5,744 5,858 5,752
Provision for loan losses 30 53 138 43
Other income 885 980 1,622 957
Operating expense 4,287 4,521 5,073 4,939
Provision for income taxes 789 767 720 654
------- ------- ------- -------
Net income $ 1,351 $ 1,383 $ 1,549 $ 1,073
======= ======= ======= =======
Basic earnings per share $ 0.13 $ 0.14 $ 0.15 $ 0.11
======= ======= ======= =======
Diluted earnings per share $ 0.13 $ 0.13 $ 0.15 $ 0.11
======= ======= ======= =======
</TABLE>
47
<PAGE> 50
COMMUNITY SAVINGS BANKSHARES, INC.
CORPORATE INFORMATION
<TABLE>
<CAPTION>
<S> <C>
CORPORATE HEADQUARTERS AUDITORS
660 U.S. Highway One Crowe, Chizek and Company LLP
P. O. Box 14547 400 Riverfront Plaza Bldg
North Palm Beach, FL 33408 55 Campau Ave. NW
www.communitysavings.com Grand Rapids, MI 49503
(561) 881-2212
(800) 879-0112 (Florida) SPECIAL COUNSEL
Elias, Matz, Tiernan & Herrick L.L.P.
ANNUAL MEETING 734 15th Street, NW, 12th Floor
June 18, 1999, 1:30 p.m. Washington, DC 20005
Embassy Suites PGA, 4350 PGA Boulevard www.emth.com
Palm Beach Gardens, FL 33410
FORM 10-K
REGISTRAR & TRANSFER AGENT A copy of Bankshares' Annual Report on
ChaseMellon Shareholder Services, L.L.C. Form 10-K, as filed with the Securities and Exchange
Overpeck Centre, 85 Challenger Road Commission, is available without charge.
Ridgefield Park, NJ 07660
(800) 526-0801 www.chasemellon.com STOCK LISTING
The Common Stock of Community Savings Bankshares, Inc.
DIVIDEND SERVICES is traded on The Nasdaq Stock Market
Dividend Reinvestment and Optional under the symbol CMSV.
Cash Investment Plan - provides shareholders
a regular way of investing cash dividends in SHAREHOLDER RELATIONS
additional shares and investing optional cash payments Deborah M. Rousseau, Corporate Secretary
without payment of brokerage commissions. Trina L. Miles, Assistant Corporate Secretary
Susan L. Sabias, Shareholder Relations Secretary
SHAREHOLDER ACCOUNT ASSISTANCE
Shareholders who wish to change the name, address or INVESTOR RELATIONS
ownership of stock or report lost certificates should contact James B. Pittard, Jr., Chief Executive Officer
the Registrar and Transfer Agent at the address Larry J. Baker, CPA, Chief Financial Officer
or phone number above.
</TABLE>
On December 15, 1998, the conversion and reorganization of ComFed, M. H. C. was
consummated. Each existing share of Community Savings Bankshares, Inc. except
for those shares held by ComFed, M. H. C., were exchanged for 2.0445 shares of
common stock of Bankshares. The book value, prices, and dividends per share in
the following table have been adjusted to reflect the transaction. As of
December 31, 1998, there were 10,548,884 shares of Common Stock outstanding and
2,792 shareholders of record, not including the number of persons or entities
whose stock is held in nominee or "street" name through various brokerage firms
or banks. The following table sets forth quarter ending book value, high, low,
and closing trade prices, and dividend per share information.
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------------
Stock Prices
Book -------------------- -------------------- ------------------ Dividend
Value High Low Close Per Share
- - ----------------------- -------------------- -------------------- -------------------- ------------------ -------------------
<S> <C> <C> <C> <C> <C>
December 31, 1998 $13.43 $12.23 $ 8.50 $10.75 $.11
September 30, 1998 $ 8.27 $18.22 $10.27 $10.64 $.11
June 30, 1998 $ 8.15 $19.08 $15.16 $16.14 $.11
March 31, 1998 $ 8.08 $20.05 $16.45 $18.89 $.11
December 31, 1997 $ 8.02 $19.44 $15.77 $17.30 $.10
September 30, 1997 $ 7.95 $18.22 $10.64 $17.73 $.10
June 30, 1997 $ 7.80 $11.01 $ 9.60 $10.76 $.10
March 31, 1997 $ 7.62 $10.09 $ 9.05 $ 9.60 $.09
48
</TABLE>
<PAGE> 51
COMMUNITY SAVINGS, F. A.
CORPORATE DIRECTORY
BOARD OF DIRECTORS
Frederick A. Teed Karl D. Griffin
Chairman of the Board Director and Secretary Emeritus of the Board
Forest C. Beaty, Jr. James B. Pittard, Jr.
Director President and Chief Executive Officer
Robert F. Cromwell Harold I. Stevenson, CPA
Director and Chairman Emeritus of the Board Director
ADMINISTRATIVE DIVISION HUMAN RESOURCES, MARKETING
. & TRAINING DIVISION
James B. Pittard, Jr
President and Chief Executive Officer
Judith M. Hogan Feriel G. Hughes
Compliance Officer Division Director
Joe L. Knorr Cynthia J. Cullen
Internal Auditor Training Manager
Deborah M. Rousseau Juanita Swinton
Corporate Secretary Marketing Manager
FINANCE DIVISION Jane H. Ryder
Personnel Manager
Larry J. Baker, CPA
Chief Financial Officer OPERATIONS DIVISION
Division Director
Mary L. Kaminske
Donna L. Sheppard, CPA Division Director
Controller
Theresa J. Brooks
Bruce C. Tissot Regional Branch Manager
Staff Accountant
Douglas S. Clive
LOAN DIVISION Corporate Security Officer
Cecil F. Howard, Jr. Elizabeth A. DeLosh
Division Director Branch Operations Manager
John C. Allen, Jr. Rizwana Khalid
Commercial Loan Officer Deposit Products Manager
Priscilla Clancy Eileen St. Denis
Commercial Loan Officer Regional Branch Manager
Charles J. Gifford Cindy L. Sheppard
New Loan Operations Manager Information Systems Manager
Mildred C. Lodge PROPOERTIES & INSURANCE
Consumer/Residential Loan Officer DIVISION
Johnny L. Morris Michael E. Reinhardt
Lending Sales Manager Division Director
Lisa M. Rhodes Larry F. Koerner
Loan Servicing Manager Facilities Manager
49
<PAGE> 52
BACK COVER
Community Savings Bankshares, Inc.
P. O. Box 14547
660 U.S. Highway One
North Palm Beach, Florida 33408
www.communitysavings.com
50
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incoporation by reference in Registration No. 333-38971 of
Community Savings Bankshare, Inc. on Form S-8 of our report on the consolidated
financial statements of Community Savings Bankshares, Inc. as of and for the
year ended December 31, 1998, dated February 11, 1999 appearing in this Annual
Report on Form 10-K of Community Savings Bankshares, Inc. for the year ended
December 31, 1998.
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
March 25, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0001068725
<NAME> COMMUNITY SABINGS BANKSHARES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 15,305
<INT-BEARING-DEPOSITS> 101,710
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 95,151
<INVESTMENTS-CARRYING> 52,619
<INVESTMENTS-MARKET> 57,303
<LOANS> 541,364
<ALLOWANCE> 3,160
<TOTAL-ASSETS> 844,041
<DEPOSITS> 594,400
<SHORT-TERM> 0
<LIABILITIES-OTHER> 9,005
<LONG-TERM> 107,350
0
0
<COMMON> 10,549
<OTHER-SE> 122,737
<TOTAL-LIABILITIES-AND-EQUITY> 844,041
<INTEREST-LOAN> 40,228
<INTEREST-INVEST> 11,629
<INTEREST-OTHER> 2,632
<INTEREST-TOTAL> 54,489
<INTEREST-DEPOSIT> 24,082
<INTEREST-EXPENSE> 30,159
<INTEREST-INCOME-NET> 24,330
<LOAN-LOSSES> 622
<SECURITIES-GAINS> 175
<EXPENSE-OTHER> 20,672
<INCOME-PRETAX> 7,101
<INCOME-PRE-EXTRAORDINARY> 4,994
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,994
<EPS-PRIMARY> 0.49
<EPS-DILUTED> 0.48
<YIELD-ACTUAL> 3.09
<LOANS-NON> 1,668
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,463
<ALLOWANCE-OPEN> 2,662
<CHARGE-OFFS> 376
<RECOVERIES> 252
<ALLOWANCE-CLOSE> 3,160
<ALLOWANCE-DOMESTIC> 3,160
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
