UNITED STATES
SECURITIES & EXCHANGE COMMISSION
WASHINGTON, DC 20552
---------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to _________________
Commission File Number 000-29460
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COMMUNITY SAVINGS BANKSHARES, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 65-0870004
------------------------------------- -----------------------------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
660 US Highway One
North Palm Beach, FL 33408
---------------------------------------- ------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (561) 881-2212
---------------
Indicate by check whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of July 24, 2000, there were 9,247,608 shares of the Registrant's common
stock outstanding.
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COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
----------------------------- ----
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
June 30, 2000 (Unaudited) and December 31, 1999 2
Consolidated Statements of Operations (Unaudited) for
the three and six months ended June 30, 2000 and 1999 3
Consolidated Statements of Changes in Shareholders'
Equity for the six months ended June 30, 2000
(Unaudited) and for the year ended December 31, 1999 4
Consolidated Statements of Cash Flows (Unaudited) for
the six months ended June 30, 2000 and 1999 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II. OTHER INFORMATION
--------------------------
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Default Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signature Page 16
1
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ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AT JUNE 30, 2000 (UNAUDITED) AND DECEMBER 31, 1999
June 30, December 31,
2000 1999
--------- ---------
(Unaudited)
ASSETS (In thousands)
<S> <C> <C>
Cash and cash equivalents:
Cash and amounts due from depository institutions $ 21,756 $ 22,057
Interest-bearing deposits 18,070 23,182
--------- ---------
Total cash and cash equivalents 39,826 45,239
Securities available for sale 143,378 144,840
Securities held to maturity 36,514 38,802
Loans receivable, net 658,995 608,369
Accrued interest receivable 3,941 3,788
Premises and equipment, net 25,007 24,939
Real estate held for investment 2,161 1,872
Investment in and advances to real estate venture 13,332 11,633
Real estate owned, net 463 494
Federal Home Loan Bank stock - at cost 8,063 7,009
Other assets 6,509 5,989
--------- ---------
Total assets $ 938,189 $ 892,974
========= =========
LIABILITIES
Deposits:
Demand deposits $ 43,456 $ 39,429
NOW and statement savings 79,050 76,073
Savings deposits 36,000 34,466
Money market deposits 87,163 100,299
Certificates of deposit 393,398 363,676
--------- ---------
Total deposits 639,067 613,943
Mortgage-backed bond, net 14,045 14,508
Advances from Federal Home Loan Bank 156,250 140,186
Advances by borrowers for taxes and insurance 6,140 1,403
Other liabilities 5,777 7,233
--------- ---------
Total liabilities 821,279 777,273
--------- ---------
SHAREHOLDERS' EQUITY
Preferred stock ($1 par value): 10,000,000 shares authorized, no shares issued -- --
Common stock ($1 par value): 60,000,000 shares authorized; 9,247,608 and 9,319,873
shares outstanding at June 30, 2000 and December 31, 1999, respectively 10,571 10,571
Additional paid-in capital 93,867 93,744
Retained income - substantially restricted 39,753 37,869
Common stock purchased by Employee Stock Ownership Plan (4,380) (4,722)
Common stock issued to or purchased by Recognition and Retention Plans (2,192) (2,586)
Accumulated other comprehensive income (3,300) (3,358)
Treasury stock, at cost: 1,323,532 and 1,251,267 shares at June 30, 2000 and
December 31, 1999, respectively (17,409) (15,817)
--------- ---------
Total shareholders' equity 116,910 115,701
--------- ---------
Total liabilities and shareholders' equity $ 938,189 $ 892,974
========= =========
</TABLE>
2
See notes to consolidated financial statements.
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<TABLE>
<CAPTION>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
For the three months For the six months
ended June 30, ended June 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(Unaudited)
(Dollars in thousands except per share data)
Interest income:
<S> <C> <C> <C> <C>
Loans $ 12,350 $ 11,103 $ 24,017 $ 21,527
Securities 3,104 2,599 6,291 5,082
Other interest and dividend income 572 782 1,256 1,877
------------ ------------ ------------ ------------
Total interest income 16,026 14,484 31,564 28,486
------------ ------------ ------------ ------------
Interest expense:
Deposits 6,313 5,372 12,367 10,897
Advances from Federal Home Loan Bank and other borrowings 2,576 1,724 4,919 3,345
------------ ------------ ------------ ------------
Total interest expense 8,889 7,096 17,286 14,242
------------ ------------ ------------ ------------
Net interest income 7,137 7,388 14,278 14,244
Provision for loan losses 75 195 225 517
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 7,062 7,193 14,053 13,727
------------ ------------ ------------ ------------
Other income:
Servicing income and other fees 68 110 157 190
NOW account and other customer fees 874 855 1,686 1,706
Net gain (loss) on real estate owned 21 (44) 25 (56)
Loss on write down of securities available for sale (138) -- (138) --
Equity in net loss of real estate venture (125) -- (200) --
Net gain on termination of defined benefit plan 922 -- 922 --
Miscellaneous 84 73 185 132
------------ ------------ ------------ ------------
Total other income 1,706 994 2,637 1,972
------------ ------------ ------------ ------------
Operating expense:
Employee compensation and benefits 3,099 3,093 6,235 5,953
Occupancy and equipment 1,476 1,400 2,947 2,934
Advertising and promotion 144 204 379 492
Federal deposit insurance premium 31 85 62 173
Miscellaneous 802 920 1,749 1,751
------------ ------------ ------------ ------------
Total operating expense 5,552 5,702 11,372 11,303
------------ ------------ ------------ ------------
Income before provision for income taxes 3,216 2,485 5,318 4,396
Provision for income taxes 1,216 760 1,711 1,286
------------ ------------ ------------ ------------
Net income $ 2,000 $ 1,725 $ 3,607 $ 3,110
============ ============ ============ ============
Basic earnings per share $ 0.23 $ 0.17 $ 0.42 $ 0.31
============ ============ ============ ============
Diluted earnings per share $ 0.23 $ 0.17 $ 0.41 $ 0.30
============ ============ ============ ============
Weighted average common shares outstanding - basic 8,610,356 9,942,287 8,618,986 9,931,442
============ ============ ============ ============
Weighted average common shares outstanding - diluted 8,850,132 10,346,608 8,865,108 10,334,827
============ ============ ============ ============
</TABLE>
3
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED) AND
FOR THE YEAR ENDED DECEMBER 31, 1999
-----------------------------------------------------------------------------------------
Retained Employee Recognition Accumulated
Additional Income- Stock and Other
Common Paid-In Substantially Ownership Retention Comprehensive Treasury
Stock Capital Restricted Plan Plans Income Stock Total
-----------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1998 $10,549 $93,268 $35,545 $(5,407) $ (237) $ (432) $ -- $133,286
Net income for the year ended
December 31, 1999 -- -- 6,534 -- -- -- -- 6,534
Other comprehensive income:
Unrealized decrease in market
value of assets available for
sale (net of income taxes) -- -- -- -- -- (2,926) -- (2,926)
--------
Comprehensive income 3,608
Stock options exercised 22 99 -- -- -- -- 88 209
Shares committed to be released -
Employee Stock Ownership Plan and
Recognition and Retention Plans -- 371 -- 685 539 -- -- 1,595
Purchase of common stock by 1999 and 1995
Recognition and Retention Plans -- 60 (95) -- (2,888) -- -- (2,923)
Cost of stock issuance -- (54) -- -- -- -- -- (54)
Purchase of treasury stock -- -- -- -- -- -- (15,905) (15,905)
Dividends declared -- -- (4,115) -- -- -- -- (4,115)
-----------------------------------------------------------------------------------------
Balance - December 31, 1999 10,571 93,744 37,869 (4,722) (2,586) (3,358) (15,817) 115,701
Net income for the six months ended
June 30, 2000 -- -- 3,607 -- -- -- -- 3,607
Other comprehensive income:
Unrealized increase in market value
of assets available for sale
(net of income taxes) -- -- -- -- -- 58 -- 58
--------
Comprehensive income 3,665
Stock options exercised -- -- -- -- -- -- 675 675
Shares committed to be released -
Employee Stock Ownership Plan and
Recognition and Retention Plans -- 123 -- 342 394 -- -- 859
Stock benefit plan tax adjustment -- -- 159 -- -- -- -- 159
Purchase of treasury stock -- -- -- -- -- -- (2,267) (2,267)
Dividends declared -- -- (1,882) -- -- -- -- (1,882)
-----------------------------------------------------------------------------------------
Balance - June 30, 2000 (unaudited) $10,571 $93,867 $39,753 $(4,380) $(2,192) $(3,300) $(17,409) $116,910
=========================================================================================
4
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
For the six months ended
June 30,
----------------------
2000 1999
--------- ---------
(Unaudited)
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 3,607 $ 3,110
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,106 1,195
ESOP and Recognition and Retention Plans compensation expense 1,018 661
Accretion of discounts, amortization of premiums, and other
deferred yield items (865) (791)
Provision for loan losses 225 517
Increase in other assets (642) (810)
Increase in other liabilities 3,200 7,105
--------- ---------
Net cash from operating activities 7,649 10,987
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in loans (22,345) (50,947)
Principal payments, calls and maturities received on
securities and Federal Home Loan Bank stock 5,386 25,246
Purchases of:
Loans and participations (28,507) --
Securities available for sale and Federal Home Loan
Bank stock (1,686) (67,996)
Premises and equipment, net and real estate held for
investment, net (1,232) (1,516)
Investment in real estate venture (1,699) --
--------- ---------
Net cash from investing activities (50,083) (95,213)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 25,124 (8,344)
Advances from Federal Home Loan Bank 38,000 20,000
Repayments, calls of advances from Federal Home Loan Bank (21,936) (3,711)
Purchase of treasury stock (2,267) --
Purchase of common stock by Recognition and Retention Plans -- (2,977)
Proceeds from exercise of stock options 675 79
Payments made on mortgage-backed bond (693) (692)
Dividends paid (1,882) (2,155)
--------- ---------
Net cash from financing activities 37,021 2,200
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (5,413) (82,026)
CASH AND CASH EQUIVALENTS, beginning of period 45,239 117,015
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 39,826 $ 34,989
========= =========
</TABLE>
5
See notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited consolidated interim financial statements for Community
Savings Bankshares, Inc. ("Bankshares") and its subsidiary Community
Savings, F. A. (the "Association"), reflect all adjustments (consisting
only of normal recurring accruals) which, in the opinion of management, are
necessary to present fairly Bankshares' consolidated financial condition
and the consolidated results of operations and cash flows for the interim
periods presented herein. The results for interim periods are not
necessarily indicative of trends or results to be expected for the full
fiscal year. All weighted interest rates are presented on an annualized
basis. The unaudited consolidated interim financial statements and notes
should be read in conjunction with the audited consolidated financial
statements and the notes thereto included in Bankshares' Annual Report to
Shareholders for the year ended December 31, 1999.
RECLASSIFICATIONS - Certain items in the 1999 financial statements and the
notes thereto have been reclassified to conform with the 2000 presentation.
2. LOANS RECEIVABLE
Loans receivable consists of the following:
June 30, December 31,
2000 1999
----------- -----------
(In thousands)
Real estate loans:
Residential 1-4 family $ 493,963 $ 420,845
Residential 1-4 family construction 113,644 105,282
Multi-family 6,853 11,135
Multi-family construction 26,654 17,251
Land 20,046 50,885
Commercial 31,834 28,626
Commercial construction 8,079 9,633
----------- -----------
Total real estate loans 701,073 643,657
----------- -----------
Non-real estate loans:
Consumer 14,163 12,685
Commercial business 9,124 11,409
----------- -----------
Total non-real estate loans 23,287 24,094
----------- -----------
Total loans receivable 724,360 667,751
Undisbursed loan proceeds (63,326) (56,948)
Unearned discounts and premiums and
net deferred loan fees and costs 1,799 1,489
Allowance for loan losses (3,838) (3,923)
----------- -----------
Total loans receivable, net $ 658,995 $ 608,369
=========== ===========
An analysis of the changes in the allowance for loan losses is as follows:
For the six months
ended June 30,
----------------------------
2000 1999
----------- -----------
(In thousands)
Balance, beginning of period $ 3,923 $ 3,160
Provision charged to income 225 517
Losses charged to allowance (310) (50)
Recoveries -- --
----------- -----------
Balance, end of period $ 3,838 $ 3,627
=========== ===========
6
<PAGE>
The Association accounts for impaired loans in accordance with SFAS No. 114
"Accounting by Creditors for Impairment of a Loan" ("SFAS 114") as amended by
SFAS No. 118 "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures". At June 30, 2000 and December 31, 1999, impaired
loans totaled $4.0 million and $5,000, net of write-downs of $244,000 and $0,
respectively. Included in the $4.0 million of impaired loans at June 30, 2000,
were two loans to a local builder, on a $2.1 million acquisition and development
loan and the other a $1.5 million revolving construction line of credit loan,
for the purpose of developing Phase I of a project to build 78 homes on an eight
acre parcel of land in Palm Beach County. Due to slower sales than projected
which resulted in reduced cash flows, the borrower notified the Association in
May 2000 of its inability to make scheduled interest payments in the near
future. In accordance with SFAS 114, management reversed all accrued but unpaid
interest and placed the loans on non-accrual status. A fair value calculation
was performed which estimated the value of existing collateral as of June 30,
2000 and indicated a fair market value in excess of the principal loan balances.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
In the following discussion, references to "Bankshares" relate to Community
Savings Bankshares, Inc. together with its 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. 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 holding company reorganization was accounted for at
historical cost in a manner similar to a pooling of interests. Therefore, all
financial information has been presented as if Bankshares had been in existence
for all periods presented in this report. The common stock of Bankshares trades
on The Nasdaq Stock Market under the symbol "CMSV".
COMMUNITY SAVINGS, F. A.
The Association, founded in 1955, is a federally chartered savings and loan
association headquartered in North Palm Beach, Florida. The Association's
deposits are federally insured by the Federal Deposit Insurance Corporation
("FDIC") through the Savings Association Insurance Fund ("SAIF"). The
Association has been a member of the Federal Home Loan Bank of Atlanta ("FHLB")
since 1955. The Association is regulated by the Office of Thrift Supervision
("OTS").
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 residential and
commercial real estate loans, consumer and commercial business 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, non-interest-bearing
liabilities and capital, together with the yields earned or rates paid on such
interest rate-sensitive instruments. The Association manages interest rate risk
exposure by matching, in part, asset and liability maturities and rates. This is
accomplished while considering the credit risk of certain assets. The
Association maintains asset quality by utilizing comprehensive loan underwriting
standards and collection efforts as well as by primarily originating or
purchasing secured or guaranteed assets.
The Association has two wholly-owned subsidiaries. ComFed, Inc. ("ComFed"),
formed in 1971, conducts business as Community Insurance Agency, selling
mortgage life insurance and receiving income and incurring related expenses from
7
<PAGE>
the sale of third party mutual funds and annuities. Palm River Development Co.,
Inc. ("Palm River"), incorporated in 1999, is involved in a real estate
development joint venture to construct and sell single-family lots,
condominiums, carriage homes and patio homes on 117 acres of land located in
Indian River County, Florida. Palm River's investment in and advances to the
real estate joint venture totaled $13.3 million at June 30, 2000. During the
preliminary stages of this construction project, the expected recognition of
start-up costs created losses of $125,000 and $200,000 for the three and six
months ended June 30, 2000, respectively. Management estimates that an
additional loss will be incurred in the third quarter of 2000 but that the
aggregate losses incurred during 2000 will be partially offset by gains
recognized on projected developed lot closings expected to commence during the
fourth quarter of 2000.
Management believes the success of the Association as a community-oriented
financial institution depends on building long-term relationships with its
customers while meeting their current financial needs. Goals for 2000 include
aggressively pursuing new loan opportunities in its market area of Palm Beach,
Martin, St. Lucie and Indian River counties, funding the resulting increase in
the interest-earning assets primarily with deposit growth. While management will
still look for suitable locations for new branch offices, they will also
evaluate the effectiveness of the existing branch network. In addition,
management will continue to focus on improving the efficiency ratio, through
cost reduction and enhanced fee income strategies.
As previously announced, the Association's Board of Directors has taken steps to
terminate the Association's defined benefit plan and replace it with a 401(k)
defined contribution plan. As a result , the Association recognized a one-time
$922,000 unusual gain, net of expenses, in the second quarter. However, in
connection with the final settlement of the plan, which will not occur until the
Association receives a favorable termination letter from the Internal Revenue
Service, the Association currently estimates it will incur a $500,000 settlement
expense in the fourth quarter of 2000.
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 12.4% during the six months ended June
30, 2000 while liquidity ratios averaged 14.7% for the year ended December 31,
1999.
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, as well as earnings and funds provided
from operations. While scheduled principal repayments on loans and MBS, and
maturities of securities are a relatively predictable source of funds, deposit
flows and loan prepayments are greatly influenced by general interest rates,
economic conditions, and competition. The Association manages the pricing of its
deposits to maintain a desired deposit balance. In addition, the Association
invests funds in excess of its immediate needs in short-term interest-earning
deposits and other assets, which provide liquidity to meet lending requirements.
Short-term interest-bearing deposits with the FHLB of Atlanta totaled $16.6
million at June 30, 2000. Other assets qualifying for liquidity outstanding at
June 30, 2000 amounted to $50.6 million. For additional information about cash
flows from operating, financing, and investing activities, see the unaudited
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 $156.3 million at June 30, 2000.
At June 30, 2000, commitments to originate loans totaled $7.7 million. The
unfunded portion of consumer lines of credit totaled $8.1 million and available
commercial lines and letters of credit totaled $10.1 million. Certificates of
deposit scheduled to mature in less than one year totaled $342.6 million at June
30, 2000. Based on prior experience, management believes that a significant
portion of such deposits will remain with the Association.
8
<PAGE>
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999
GENERAL
Net income for the quarter ended June 30, 2000 was $2.0 million, or $0.23
diluted earnings per share, a $275,000 increase from $1.7 million, or $0.17
diluted earnings per share, for the quarter ended June 30, 1999. The increase in
net income was primarily the result of an unusual gain on the termination of the
Association's defined benefit plan as well as decreases of $120,000 and $150,000
in the provision for loan losses and operating expense, respectively. Such
decreases were offset by decreases in net interest income and other income of
$251,000 and $210,000, respectively.
NET INTEREST INCOME
Net interest income decreased to $7.1 million for the quarter ended June 30,
2000 from $7.4 million for the same period in 1999 primarily as a result of a
decrease in the net interest rate spread to 3.05% for the quarter ended June 30,
2000 from 3.28% for the 1999 period. In the rising interest rate environment
experienced during the three months ended June 30, 2000, the Company's
interest-bearing liabilities repriced more rapidly than its interest-earning
assets. As a result, the average cost of interest-bearing liabilities increased
by 42 basis points, while the average yield on interest-earning assets increased
by only 19 basis points. A 30 basis point increase in the average cost of
deposits was responsible in large part for the increase in the cost of
interest-bearing liabilities. The Association used higher costing odd-term
certificates of deposit during the second quarter of 2000 to maintain existing
customers as well as to attract new deposits needed to fund growth in the loan
portfolio, resulting in not only an increased cost of deposits but also a shift
in the composition of the deposit portfolio. The dollar balance of total
certificates of deposit, which have a higher cost to the Association, increased
by 15.8%, while the dollar balance of lower costing core deposits (consisting of
checking, NOW, statement, passbook, and money market deposit accounts) decreased
by 0.3%. The Association continues to emphasize lower costing core deposit
products to its customers to establish a complete deposit relationship. In
addition, the average balance of interest-bearing liabilities increased by $94.8
million to $796.7 million for the three months ended June 30, 2000 primarily due
to the increases in deposits and borrowings which were used to fund loan growth.
Average interest-earning assets increased $62.2 million to $853.7 million for
the three months ended June 30, 2000 as compared to $791.6 million for the same
period in 1999. The majority of this growth occurred in single-family
residential real estate loans.
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 actual loss experience, as well as guidelines
established by the OTS. The provision for loan losses was $75,000 for the
quarter ended June 30, 2000 as compared to $195,000 for the quarter ended June
30, 1999 primarily due to management's assessment that the allowance for loan
losses did not need to be increased as much during the 2000 period as it had in
the previous year. Such assessment considered, among other things, the declining
risk in the loan portfolio as a result of the concentration of the growth in
one-to-four family residential loans which inherently bear the least risk of
loss to the Association. The allowance for loan losses as a percentage of net
loans receivable was 0.58% and 0.61% at June 30, 2000 and 1999, respectively.
OTHER INCOME
Other income consists of service charges, fee income, gains or losses on the
sale of assets, and other items excluding interest income. Other income
increased $712,000 to $1.7 million for the quarter ended June 30, 2000, from
$994,000 for the same period in 1999, primarily due to the $922,000 unusual
gain, net of expenses, on the termination of the Association's defined benefit
plan. This gain was partially offset by a $138,000 loss on the write down of the
Association's investment in Auto Bonds Receivable during the three months ended
June 30, 2000. Management determined that the further decline in the fair value
of this investment which is classified as available for sale, was other than
temporary resulting in a $254,000 carrying value after the write down. In
9
<PAGE>
addition, a $125,000 expense related to the real estate joint venture in Vero
Beach was recognized during the same period in 2000. The joint venture began
operations in July 1999. For further information on this project, see
"Investments in and Advances to Real Estate Venture" in the Notes to
Consolidated Financial Statements in Bankshares' 1999 Annual Report.
OPERATING EXPENSE
Operating expense decreased $150,000 to $5.6 million for the three month period
ended June 30, 2000 from $5.7 million for the same period in 1999 primarily due
to a $103,000 decrease in the amortization of the Association's investment in an
affordable housing partnership during the quarter ended June 30, 2000 as
compared to the same period in 1999.
PROVISION FOR INCOME TAXES
The provision for income taxes was $1.2 million for the three months ended June
30, 2000 as compared to $760,000 for the same period in 1999. Taxes were higher
in the 2000 period due to the increase in net income for the three months ended
June 30, 2000 as well as an adjustment which was made for taxes previously
recorded in the last quarter of 1999 and the first quarter of 2000. In addition,
there was as a decrease in the benefit from tax credits resulting from the
Association's investment in an affordable housing partnership which totaled
$46,000 for the 2000 period as compared to $150,000 for the 1999 period.
RESULTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
GENERAL
Net income for the six months ended June 30, 2000 was $3.6 million, or $0.41
diluted earnings per share, a $497,000 increase from $3.1 million, or $0.30
diluted earnings per share, for the six months ended June 30, 1999. In addition
to the $922,000 unusual gain, net of expenses, on the termination of the
Association's defined benefit plan described above, the provision for loan
losses decreased $292,000, partially offset by a $257,000 decrease in other
income.
NET INTEREST INCOME
Net interest income increased to $14.3 million for the six months ended June 30,
2000 from $14.2 million for the same period in 1999 primarily as a result of a
$50.9 million increase in average interest-earning assets to $841.3 million for
the six months ended June 30, 2000 from $790.4 million for the same period in
the prior year. In addition, the average yield on interest-earning assets
increased to 7.51% for the six months ended June 30, 2000 from 7.21% for the
1999 period, primarily as a result of increased yields on the securities
portfolio and other interest-earning investments. The increase in interest
income was partially offset by a $84.7 million increase in average
interest-bearing liabilities to $785.3 million for the six months ended June 30,
2000 from $700.6 million for the same period in 1999, primarily reflecting the
growth of the Association's deposit portfolio and additional FHLB advances. The
average rate paid on interest-bearing liabilities was 4.40% for the six months
ended June 30, 2000 as compared to 4.07% for the 1999 period. The weighted
average cost of deposits increased to 3.93% for the six months ended June 30,
2000 from 3.70% for the same period in 1999. This increase in cost reflected the
Association's decision to offer special rates for odd-term certificates of
deposits on a more aggressive basis, increasing certificates of deposits by 8.2%
during the six months ended June 30, 2000. The certificate of deposit growth was
used in conjunction with FHLB advances to fund loan portfolio growth.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $225,000 for the six months ended June 30,
2000, as compared to $517,000 for the six months ended June 30, 1999. The
allowance for loan losses as a percentage of net loans receivable was 0.58% and
0.61% at June 30, 2000 and 1999, respectively. Management determined to increase
loan loss reserves to a greater extent in the 1999 period as compared to the
same time period in 2000, after evaluating the risks inherent in the then
current loan portfolio.
10
<PAGE>
OTHER INCOME
Other income consists of service charges, fee income, gains or losses on the
sale of assets, and other items excluding interest income. Other income
increased $665,000 to $2.6 million for the six months ended June 30, 2000 from
$2.0 million for the same period in 1999, primarily due to the $922,000 unusual
gain, net of expenses, on the termination of the Association's defined benefit
plan. This gain was partially offset by a $138,000 loss on the write down of a
security classified as available for sale during the second quarter of 2000. In
addition, a $200,000 expense related to the real estate joint venture in Vero
Beach was recognized during the same period in 2000. The joint venture began
operations in July 1999. For further information on this project, see
"Investments in and Advances to Real Estate Venture" in the Notes to
Consolidated Financial Statements in Bankshares' 1999 Annual Report.
OPERATING EXPENSE
Operating expense increased $69,000 to $11.4 million for the six month period
ended June 30, 2000 from $11.3 million for the same period in 1999. Employee
compensation and benefits increased $282,000 during the six months ended June
30, 2000 as compared to the 1999 period. The increase primarily reflected the
acceleration of costs related to a stock benefit plan as a result of the death
of a member of the Board of Directors. The increase in compensation and benefits
was partially offset by a decrease in the FDIC premiums combined with a $113,000
decrease in advertising and promotion expense, as the Association continues to
implement its cost reduction program.
PROVISION FOR INCOME TAXES
The provision for income taxes was $1.7 million for the six months ended June
30, 2000 as compared to $1.3 million for the same period in 1999 reflecting the
increase in net income for the six months ended June 30, 2000 as well as the
$180,000 decrease in the tax benefit received during the six months ended June
30, 2000 from the affordable housing tax credit partnership previously noted as
compared to a $299,000 tax benefit for the 1999 period.
FINANCIAL CONDITION
JUNE 30, 2000 COMPARED TO DECEMBER 31, 1999
The following table summarizes certain information relating to Bankshares'
financial condition at the dates indicated.
<TABLE>
<CAPTION>
June 30, December 31, Increase
2000 1999 (Decrease)
----------- ----------- -----------
(Unaudited)
(In thousands)
Assets:
<S> <C> <C> <C>
Total assets $ 938,189 $ 892,974 $ 45,215
Cash and cash equivalents 39,826 45,239 (5,413)
Securities portfolio:
Securities available for sale 143,378 144,840 (1,462)
Securities held to maturity 36,514 38,802 (2,288)
----------- ----------- -----------
Total securities portfolio 179,892 183,642 (3,750)
Loans receivable, net 658,995 608,369 50,626
Investments in and advances to real estate venture 13,332 11,633 1,699
Real estate owned, net 463 494 (31)
Liabilities and Shareholders' Equity:
Total liabilities 821,279 777,273 44,006
Deposits 639,067 613,943 25,124
Federal Home Loan Bank advances 156,250 140,186 16,064
Advances by borrowers for taxes and insurance 6,140 1,403 4,737
Shareholders' equity 116,910 115,701 1,209
</TABLE>
11
<PAGE>
Total assets increased $45.2 million to $938.2 million at June 30, 2000, as
compared to $893.0 million at December 31, 1999 primarily due to a $50.6 million
increase in net loans receivable to $659.0 million at June 30, 2000 from $608.4
million at December 31, 1999. The loan growth was funded by increases in
deposits and borrowings, as well as decreases in interest-earning deposits and
the securities portfolio (which includes securities available for sale and held
to maturity).
As a result of continued emphasis on expanded lending activities, loan
originations and purchases totaled $120.6 million and $21.0 million,
respectively, and included loans secured by residential one- to four-family
properties totaling $122.7 million, multi-family properties totaling $3.6
million, land totaling $5.0 million, commercial real estate properties totaling
$2.4 million, consumer loans totaling $2.4 million and commercial business loans
totaling $5.6 million. The originations and purchases of $141.6 million were
offset by repayments of $84.3 million. Repayments included the payoff of a $21.0
million loan secured by land.
The securities portfolio net decrease of $3.8 million primarily reflects
$632,000 in purchases of new securities available for sale offset by a $138,000
write down of a security available for sale as well as scheduled principal
reductions and amortization of premiums and discounts and other adjustments
amounting to $4.3 million.
Total liabilities increased $44.0 million to $821.3 million at June 30, 2000,
from $777.3 million at December 31, 1999. Total deposits increased by $25.1
million to $639.0 million at June 30, 2000 from $613.9 million at December 31,
1999. The increase in deposits reflected increases of $29.7 million, $4.0
million, $3.0 million and $1.5 million in certificates of deposits, demand
accounts, NOW, and savings accounts, respectively. During the six months ended
June 30, 2000, the Association aggressively pursued odd-term certificates of
deposits as well as savings and checking accounts which were used in conjunction
with FHLB advances to fund new loan originations. These increases were partially
offset by a $13.1 million decrease in money market deposit accounts. The
weighted average rate paid on deposits increased to 4.28% at June 30, 2000 as
compared to 3.95% at December 31, 1999 due to the rising-interest rate
environment existing during 2000, reflecting the market's adjustment to
increases in interest rates changed by the Board of Governors of the Federal
Reserve Bank. FHLB advances increased $16.1 million to $156.3 million at June
30, 2000 from $140.2 million at December 31, 1999. The increases included new
advances obtained during the first six months of 2000 totaling $38.0 million
offset in part by the call and maturity of advances totaling $15.0 million and
$5.0 million, respectively, as well as $1.9 million of normal amortization.
Total equity, which totaled $116.9 million at June 30, 2000, increased $1.2
million from December 31, 1999, reflecting net income for the six months of $3.6
million, stock options exercised totaling $675,000, and the amortization of
deferred compensation represented by stock benefit plans totaling $859,000,
offset in part by the purchase of treasury stock totaling $2.3 million and the
declaration of dividends totaling $1.9 million. For further information, see the
unaudited consolidated statements of changes in shareholders' equity in the
accompanying consolidated financial statements.
The Association is required to report regulatory capital ratios unconsolidated
with Bankshares. The Association's actual capital amounts and ratios at June 30,
2000 are as follows:
<TABLE>
<CAPTION>
For To be Considered Well
Capital Capitalized for Prompt
Adequacy Corrective Action
Actual Purposes Provisions
--------------------- ------------------ -------------------
Ratio Amount Ratio Amount Ratio Amount
----- ------ ----- ------ ----- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 2000:
Total Risk-Based Capital
(to Risk-weighted Assets) 16.4% $82,534 8.0% $40,188 10.0% $50,235
Core (Tier 1) Capital
(to Adjusted Tangible Assets) 8.6 78,834 4.0 36,827 5.0 46,033
Core (Tier 1) Capital
(to Risk-weighted Assets) 15.7 78,834 4.0 20,094 6.0 30,141
</TABLE>
12
<PAGE>
As of June 30, 2000, adjusted tangible assets and risk-weighted assets were
$920.7 million and $502.4 million, respectively.
ASSET QUALITY
Loans 90 days past due are generally placed on non-accrual status. The
Association ceases to accrue interest on a loan once it is placed on non-accrual
status and interest accrued but unpaid at such time is charged against interest
income. Additionally, any loan where it appears evident prior to being past due
90 days that the collection of interest is in doubt is also placed on
non-accrual status. Real estate owned is carried at the lower of cost or fair
value, less cost to dispose. Management regularly reviews assets to determine
proper valuation. There were no restructured loans as defined by SFAS No. 15 at
June 30, 2000 or December 31, 1999.
The following table sets forth information regarding the delinquent loans and
foreclosed real estate at the dates indicated:
June 30, December 31,
2000 1999
---------- ----------
(In thousands)
Non-performing loans:
Residential real estate:
Loans 60 to 89 days delinquent $ 628 $ 426
Loans more than 89 days delinquent 507 1,015
Commercial and multi-family real estate:
Loans 60 to 89 days delinquent -- --
Loans more than 89 days delinquent -- 5
Consumer and commercial business:
Loans 60 to 89 days delinquent -- --
Loans more than 89 days delinquent 5 12
Land:
Loans 60 to 89 days delinquent -- --
Loans more than 89 days delinquent 410 7
REO, net of related allowance 463 494
Other repossessed assets -- --
Loans to facilitate sale of REO 232 234
---------- ----------
Total $ 2,245 $ 2,193
========== ==========
Real estate owned consists of the following:
June 30, December 31,
2000 1999
---------- ----------
(In thousands)
Real estate owned $ 477 $ 500
Less allowance for loss 14 6
---------- ----------
Total real estate owned $ 463 $ 494
========== ==========
Changes in allowance for loss on real estate owned are as follows:
For the six months
ended June 30,
------------------------
2000 1999
---------- ----------
(In thousands)
Balance, beginning of period $ 6 $ 36
Provision charged to income 14 10
Losses charged to allowance (6) (8)
---------- ----------
Balance, end of period $ 14 $ 38
========== ==========
13
<PAGE>
YEAR 2000 CONSIDERATIONS
Year 2000 issues result from the inability of many computer programs or
computerized equipment to accurately calculate, store or use data for the Year
2000 or later. These potential shortcomings could result in a system failure or
miscalculations causing disruptions of operation, including among other things,
a temporary inability to process transactions, track important customer
information, provide convenient access to this information, or engage in normal
business operations. While lingering concern exists about certain dates during
the Year 2000, the most significant date, January 1, 2000, passed without
material incident. As a result of its diligent efforts, Bankshares is pleased to
report no interruptions of business or financial losses resulting from Year 2000
issues.
Please be advised that this portion of this Quarterly Report is designated as a
year 2000 Readiness Disclosure pursuant to the Year 2000 Information and
Readiness Disclosure Act (Public Law 105-271, October 19, 1998). It is intended
for informational purposes only and is not intended to be a representation or
warranty.
FORWARD-LOOKING STATEMENTS
Certain information in this Form 10-Q may constitute forward-looking information
that involves risks and uncertainties that could cause actual results to differ
materially from those estimated. Persons are cautioned that such forward-looking
statements are not guarantees of future performance and are subject to various
factors which could cause actual results to differ materially from those
estimated. These factors include, but are not limited to, changes in general
economic and market conditions, legislative and regulatory changes, monetary and
fiscal policies of the federal government, demand for loan and deposit products
and the development of an interest rate environment that adversely affects the
interest rate spread or other income from Bankshares' investments and
operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of Bankshares' asset and liability management policies as well
as the potential impact of interest rate changes upon the market value of
Bankshares' portfolio equity, see "Management's Discussion and Analysis - Market
Risk Analysis" and -"Market Value of Portfolio Equity" in Bankshares' Annual
Report to Shareholders. There has been no material change in Bankshares' asset
and liability position or the market value of Bankshares' portfolio equity since
December 31, 1999.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are various claims and lawsuits in which Bankshares or the
Association are periodically involved incidental to its business. In
the opinion of management, no material loss is expected from any of
such pending claims or lawsuits.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
--------
27 Financial Data Schedule.
(b) Current Reports on Form 8-K.
---------------------------
None during the reporting period.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this Report to be signed on its behalf by
the undersigned thereunto duly authorized.
COMMUNITY SAVINGS BANKSHARES, INC.
/s/ JAMES B. PITTARD, JR.
-----------------------------------------
Date: August 2, 2000 James B. Pittard, Jr.
President and Chief Executive Officer
Date: August 2, 2000 /s/ LARRY J. BAKER
-----------------------------------------
Larry J. Baker
Senior Vice President and Treasurer
16
