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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________to ___________________
Commission File Number 000-25089
COMMUNITY SAVINGS BANKSHARES, INC.
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(Exact name of registrant as specified in its charter)
United States 65-0870004
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification Number)
660 US Highway One, North Palm Beach, FL 33408
- ------------------------------------------ -----------------------
(Address of Principal Executive Offices) (Zip Code)
(561) 881-2212
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(Registrant's Telephone Number including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
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Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, Par Value $1.00 Per Share
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(Title of Class)
Indicate by check mark whether the Registrant (1) his filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file reports) and (2) has been subject to such
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [X]
As of March 16, 2000, there were issued and outstanding 9,292,508
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 executive officers) of the Registrant, computed by reference to
the closing price of the Common Stock as of March 16, 2000, ($10.375), was
$4,081,266.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Shareholders for the fiscal year ended
December 31, 1999 (Parts II and IV).
2. Proxy Statement for the Annual Meeting of Shareholders (Portions of Parts II
and III).
<PAGE>
PART I
ITEM 1. BUSINESS
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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 (the "Reorganization") in
connection with the conversion and reorganization of ComFed, M. H. C. (the
"Holding Company"), a mutual holding company, and its mid-tier holding company,
Community Savings Bankshares, Inc., a federal mid-tier stock holding company
(the "Mid-Tier"). 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 $53.0 million. Bankshares also issued 5,078,233 shares
of common stock to existing minority shareholders of the Mid-Tier (the
"Exchange") at an exchange ratio of 2.0445 shares (the "Exchange Ratio") for
each share of Mid-Tier common stock. The 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 was applied to
all stock-related data for comparability purposes.
At December 31, 1999, Bankshares had total assets of $893.0 million,
total loans of $608.4 million, total deposits of $613.9 million, and total
shareholders' equity of $115.7 million. At December 31, 1999, there were
9,319,873 shares of common stock outstanding which 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 and is the
wholly-owned subsidiary of Bankshares. The Association's deposits are federally
insured by the Federal Deposit Insurance Corporation ("FDIC") through the
Savings Association Insurance Fund ("SAIF"). The Association has been a member
of the Federal Home Loan Bank of Atlanta ("FHLB") since 1955. The Association is
regulated by the Office of Thrift Supervision ("OTS").
On December 15, 1998, Bankshares became the holding company for the
Association as a result of the completion of the Reorganization. In the course
of the Reorganization, the Holding Company and the Mid-Tier 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. Net proceeds from the Reorganization approximated $53.0 million
which were initially invested in interest-earning deposits at December 31, 1998,
and which have since been disbursed primarily to fund loan originations and
securities purchases, and repurchases of Bankshares' common stock in the open
market. This use of funds reflected the implementation of the Association's
business plan to prudently deploy the capital raised in the Reorganization,
without an increase in high risk lending or investment activities.
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 residential and commercial real
estate loans, consumer and commercial business loans, and mortgage-backed and
related securities ("MBS") and investment securities. See "- Lending Activities"
and "- Securities Portfolio". 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 strategy is to operate as a well-capitalized, profitable and
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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 MBS and in 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
yields earned or rates paid on such 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. The
Association also uses leveraged transactions in which security purchases are
funded with FHLB advances at an acceptable interest rate spread (the difference
between the yield earned on the securities and the rate paid on the borrowings).
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.
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.
YEAR 2000 CONSIDERATIONS
Bankshares completed the change to January 1, 2000 on all of its
systems with no material problems. Management and staff will continue to monitor
its systems and to test date sensitive calculations throughout 2000.
FORWARD-LOOKING STATEMENTS
Certain information in this Annual Report on Form 10-K (the "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' most 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, four of which are located in Martin
County, thirteen 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.
As a result of the 1999 sales of the majority of the MacArthur
Foundation land holdings in Palm Beach, Martin and St. Lucie Counties, major
real estate development is scheduled to begin in Northern Palm Beach County
during 2000. Developers have filed plans for residential and commercial projects
with construction scheduled to begin in early 2000. The Association's lending
staff will aggressively pursue lending opportunities during 2000 as a result of
this development.
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 competitive
interest rates and the 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.
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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 1999. This study projects a 1.6% growth
rate to 1.5 million by the end of the year 2000 and an additional 3.0% between
2000 and 2002. This population growth suggests increased demand for mortgage
loans in the four county market. However, such estimates may not prove
representative of actual experience for the remainder of 2000 or in 2001 and
2002. In addition, rising interest rates as experienced in the first quarter of
2000 may slow the demand for loans.
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 continues to implement a $375 million project called City Place
which is 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
continues on Abacoa, a new subdivision development which features a baseball
stadium, a Florida Atlantic University honors campus, commercial office and
retail space, as well as single-family and multi-family residential properties
designed to accommodate up to 10,000 residents. TriRail, the commuter train
service for southern Florida, will be extended northward to service this
community. The western communities of Wellington, Royal Palm Beach, Loxahatchee
and the Acreage are the fastest growing areas of Palm Beach County. Wellington
Green, a 466-acre project under development in Wellington, will include a 1.2
million square-foot shopping mall, as well as a 300-unit adult living facility,
a 400-unit multi-family residential community, a 125-room hotel and 350,000
square feet of office and retail space. The Association opened a branch office
at the Shoppes of Ibis in late 1999 on one of the major roads into the western
communities and has purchased a branch site at Andros Isle on another major
artery leading to these same communities. (See "- Properties").
In St. Lucie County, the population of the city of Port St. Lucie has
increased by an estimated 83,000 people, which is a 49.0% increase since 1990
and a 3.5% increase during 1999 making it the largest city in St. Lucie, Martin
and Palm Beach counties. It is the third largest city in Florida in terms of
land mass comprising between 80 to 85 square miles. Founded in 1961 as a
retirement home community, it has grown into a diverse city. Planners expect
significant growth to continue in the city, estimating the final population to
be approximately 250,000 people. Also in St. Lucie County, redevelopment of
downtown Ft. Pierce is expected to be completed by 2001. The redevelopment
centers around the Sunrise Theater, the restoration of City Hall, and new
construction in the Indian River Lagoon area including a new bridge and road
improvements.
The economy in the Association's 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 counties. 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.
During 1999, about 26,000 jobs were created in Palm Beach County, a growth rate
of 5.2%. However, Palm Beach County's largest employer, Pratt and Whitney,
announced that it is moving about 2,800 military jet engine jobs to Connecticut.
Employees will be offered transfers to Connecticut, early retirement or
termination by the end of 2000. The majority of the affected employees live in
Palm Beach and Martin counties. This loss of jobs will be partially offset by
the expansion of Pratt and Whitney's liquid space operations which will remain
in Palm Beach County. In addition, other employers such as Wal-Mart have
announced expansion plans for Palm Beach County in 2000 and 2001. Other major
employers in Palm Beach County include Columbia Palm Beach Healthcare System,
Inc., Motorola, Inc., Florida Power and Light Co., the Boca Raton Resort and
Club, 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
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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 further increasing competition.
Based on total assets as of December 31, 1999, the Association was the
third largest financial institution headquartered in Palm Beach County. The
Association held 2.0%, 6.4%, 2.9% and 0.9% of all bank and savings association
deposits in Palm Beach, Martin, St. Lucie, and Indian River counties,
respectively, at September 30, 1999.
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 residential mortgage loans which provide for a fixed-rate of interest
during the first five or seven years and which thereafter converts to ARM loans,
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
time and Board of Director established limits, the Association may periodically
decide to retain such loans in the portfolio. There were no loans held for sale
at December 31, 1999. Loans serviced for other institutions totaled $11.3
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 customers' needs. In
response to customer demand, the Association has expanded its commercial lending
programs by adding new commercial loan officers and a credit analyst to its
staff. The Association intends to continue to pursue the origination of such
loans during 2000 in connection with providing services to its small business
customers.
At December 31, 1999, the gross loan portfolio totaled $667.8 million.
At such date, the weighted average remaining term to maturity of the loan
portfolio was approximately 15.5 years. At December 31, 1999, $287.9 million, or
43.1% of the total gross loan portfolio consisted of loans with adjustable
interest rates.
To supplement local loan originations, the Association also invests in
MBS 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 $31.0 million, net of premiums, at
December 31, 1999. The Association also participates with other financial
institutions in programs which provide residential mortgage loans to low-and
moderate-income borrowers. During 2000, 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,
----------------------------------------------------------------------------------------------------
1999 1998 1997 1996
--------------------- --------------------- --------------------- ---------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential 1-4
family (1) $432,301 64.73% $421,766 73.58% $339,117 70.90% $293,366 71.11%
Residential
construction (2) 110,710 16.58 54,391 9.49 32,828 6.86 33,158 8.04
Land 40,399 6.05 14,624 2.55 17,117 3.58 19,426 4.71
Multi-family (3) 5,845 0.88 8,392 1.46 8,800 1.84 8,096 1.96
Commercial (4) 58,492 8.76 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 647,747 97.00 551,583 96.22 459,104 95.98 394,061 95.52
-------- --------- -------- --------- -------- --------- -------- ---------
Non-real estate loans:
Consumer loans (5) 13,484 2.02 15,015 2.62 15,694 3.28 16,028 3.88
Commercial business 6,520 0.98 6,635 1.16 3,530 0.74 2,458 0.60
-------- --------- -------- --------- -------- --------- -------- ---------
Total non-real loans 20,004 3.00 21,650 3.78 19,224 4.02 18,486 4.48
-------- --------- -------- ---------- -------- --------- -------- ---------
Total loans receivable 667,751 100.00% 573,233 100.00% 478,328 100.00% 412,547 100.00%
-------- ========= -------- ========== -------- ========= -------- =========
Less:
Undisbursed loan
proceeds 56,948 33,202 24,163 20,765
Unearned discounts
and premiums and
net deferred fees
costs (1,489) (1,333) (206) 200
Allowance for loan
losses 3,923 3,160 2,662 2,542
-------- -------- -------- --------
Total loans receivable
net $608,369 $538,204 $451,709 $389,040
======== ======== ======== ========
</TABLE>
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<TABLE>
<CAPTION>
At September 30,
------------------------------------------------
1996 1995
--------------------- ----------------------
<S> <C> <C> <C> <C>
Real estate loans:
Residential 1-4
family (1) $284,474 70.92% $248,769 71.27%
Residential
construction (2) 35,720 8.91 27,314 7.83
Land 16,846 4.20 15,601 4.47
Multi-family (3) 8,153 2.03 7,351 2.11
Commercial (4) 38,433 9.58 35,402 10.14
Non-residential
construction -- -- -- --
-------- --------- -------- ---------
Total real estate 383,626 95.64 334,437 95.82
-------- --------- -------- ---------
Non-real estate loans:
Consumer loans (5) 15,606 3.89 12,638 3.62
Commercial business 1,874 0.47 1,958 0.56
-------- --------- -------- ---------
Total non-real loans 17,480 4.36 14,596 4.18
-------- --------- -------- ---------
Total loans receivable 401,106 100.00% 349,033 100.00%
======== ========= ======== =========
Less:
Undisbursed loan
proceeds 22,318 15,253
Unearned discounts
and premiums and
net deferred fees
costs 257 846
Allowance for loan
losses 2,312 3,492
-------- --------
Total loans receivable
net $376,219 $329,442
======== ========
</TABLE>
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(1) Includes participations or whole loans purchased of $30.6 million, $44.7
million, $19.5 million, $1.7 million, $1.8 million, and $2.2 million, at
December 31, 1999, 1998, 1997, 1996, September 30, 1996, and 1995,
respectively.
(2) Includes construction loans for both single- and multi-family residential
properties.
(3) Includes participations of $505,000 and $360,000, at December 31, 1996,
September 30, 1996, respectively.
(4) Includes participations of $131,000, $146,000, $162,000, $190,000,
$198,000, and $4.9 million, at December 31, 1999, 1998, 1997, 1996,
September 30, 1996, and 1995, respectively.
(5) Includes primarily home equity lines of credit, automobile loans, and loans
secured by savings deposits. At December 31, 1999, the disbursed portion of
home equity lines of credit totaled $8.3 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,
1999, regarding the dollar amount of loans, net of loans in process ("LIP") and
MBS 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. Fixed-rate loans are included in the period in which the final
contractual repayment is due. Fixed-rate MBS 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) $158,766 $101,061 $ 64,336 $ 79,082 $ 67,479 $470,724
Commercial, multi-family and land (1) 91,868 13,136 9,157 3,564 2,106 119,831
Consumer (excluding lines of credit) 2,868 2,115 340 36 -- 5,359
Equity line of credit (2) 8,369 -- -- -- -- 8,369
Commercial business 5,715 538 244 23 -- 6,520
-------- -------- -------- -------- -------- --------
Total loans receivable (net of LIP) $267,586 $116,850 $ 74,077 $ 82,705 $ 69,585 $610,803
======== ======== ======== ======== ======== ========
Mortgage-backed and related securities $ 13,465 $ 10,723 $ 4,257 $ 15,424 $ 31,026 $ 74,895
======== ======== ======== ======== ======== ========
</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, 1999, the dollar amount
of all fixed-rate and adjustable-rate loans due after December 31, 2000 based on
either the repricing date or the contractual maturity as described above.
Fixed Adjustable Total
-------- ---------- --------
(Dollars in thousands)
Real estate loans:
One- to four-family residential $257,875 $ 54,083 $311,958
Commercial, multi-family and land 18,953 9,010 27,963
Consumer and commercial business 3,296 -- 3,296
-------- -------- --------
Total (net of LIP) $280,124 $ 63,093 $343,217
======== ======== ========
Percentage of total loans (net of LIP) 45.86% 10.33% 56.19%
======== ======== ========
Mortgage-backed and related securities $ 61,430 $ -- $ 61,430
======== ======== ========
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 residential loans secured by
properties in the southeast United States and California. At December 31, 1999,
$432.3 million, or 64.73%, 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 25 years. However, it has been the Association's
experience that the average length of time which such loans remain outstanding
is approximately 5 years.
The Association currently offers one- to four-family residential
mortgage loans with terms typically ranging from 15 to 30 years, and with
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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 strategy, and loan products offered by its competitors. In a
rising interest rate environment, which existed throughout much of 1999,
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 $93.4 million, or 65.0%, of all one- to four-family
loan originations during the year ended December 31, 1999. 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 on ARM loans originated in
the local market. This loan product is generally offered with a term of 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 ("Treasury Index") plus a margin,
usually 287.5 basis points. 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
$176.7 million at December 31, 1999.
The primary purpose of offering ARM loans is to make the loan portfolio
more interest rate sensitive. However, because the interest income earned on ARM
loans varies with prevailing interest rates, such loans do not offer as
consistently a predictable stream of 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 in 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.
As an integral part of its community reinvestment activities, the
Association participates with other financial institutions in local consortiums
which are committed to provide financing of one- to four-family mortgage loans
for low and moderate income borrowers. The consortiums underwrite and package
the loans which are then 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 $1.2
million in consortium loans during 1999. 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 1999, $66,000 of such loans were
purchased. It is management's intent, subject to market conditions, to continue
purchasing such loans.
9
<PAGE>
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, 1999, the loan portfolio included
$30.6 million of loan participations and whole loans secured by one- to
four-family residences, none of which were purchased during 1999.
The Association's fixed-rate 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 loans secured by 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 title insurance regarding good title, are
required on all properties securing real estate loans made by the Association.
CONSTRUCTION AND LAND LOANS. At December 31, 1999, $95.7 million, or
14.33%, and $40.4 million, or 6.05%, of the gross loan portfolio consisted of
one- to four-family residential construction loans and land loans, respectively.
There were no non-residential construction loans at December 31, 1999. Fixed-
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
each phase of construction is completed and verified by the Association. In
addition, construction loans are also made to builders for single-family
residences held for sale. Such loans totaled $10.6 million at December 31, 1999.
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 residences held for sale are generally
originated for a term of up to one year and provide for interest-only payments.
At December 31, 1999, the Association's largest real estate
construction loan was a $15.0 million line of credit, with disbursed funds of
$12.9 million, which was within the Association's regulatory
loans-to-one-borrower limit at the time of the origination of the loan. As a
result of the Association's funding by dividend distribution of Bankshares'
repurchase program of treasury stock, the lending relationship exceeded the
loans-to-one-borrower capital limitation at December 31, 1999. A $5.0 million
participation interest in the line of credit was sold by the Association to
Bankshares subsequent to December 31, 1999 in order to comply with the
regulation. This acquisition and construction line of credit is secured by
single-family estate homes and condominiums located on the Atlantic Ocean in
Indian River County.
Construction loans are also offered on multi-family and commercial real
estate property. At December 31, 1999, multi-family construction loans totaled
$15.0 million, or 2.25% of the gross loan portfolio. There were no commercial
real estate construction loans at December 31, 1999.
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%. During 1999, the Association sold a $6.0 million
participation interest in a $21.0 million loan secured by land to Bankshares in
order to comply with the loans-to-one-borrower regulation. Bankshares recorded
the transaction as a $6.0 million participation loan purchased.
10
<PAGE>
Adjustable-rate single-family construction and land loans are currently
offered at the Treasury Index plus a margin, usually between 287.5 and 400 basis
points. Adjustable-rate construction loans and land loans have an annual
interest rate cap of 200 basis points and a lifetime interest rate cap of 600
basis points over the initial interest rate. Initial interest rates may be below
the fully indexed rate but the loan is underwritten at the fully indexed rate.
Construction lending generally involves a greater degree of credit risk
than one- to four-family residential mortgage lending. Risk of loss on a
construction loan is dependent largely upon the accuracy of the initial estimate
of the property's value at completion of construction or development and the
estimated cost (including interest) of construction. During the construction
phase, a number of factors could result in delays and cost overruns. If the
estimate of value proves to be inaccurate, the Association may be confronted
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 $5.8 million, or 0.88%, of
the gross loan portfolio at December 31, 1999. At December 31, 1999, a total of
38 loans were secured by multi-family residential properties. Multi-family
residential loans are primarily secured by rental properties with between five
and thirty-six units. At December 31, 1999, substantially all multi-family
residential loans were secured by properties located within the Association's
market area. At December 31, 1999, multi-family residential loans had an average
principal balance of approximately $154,000. At such date, the largest
multi-family residential loan had a principal balance of $553,000, and was
performing in accordance with its terms. Multi-family residential loans are
currently only offered with adjustable interest rates, although in the past,
fixed-rate multi-family residential loans also were originated. Multi-family
residential 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 residential loans. Multi-family
residential 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 residential loans is currently priced using the Treasury Index plus
a margin, usually between 325 and 375 basis points 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
may 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 $58.5 million, or 8.76 %, of the gross loan portfolio
at December 31, 1999. 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, 1999, substantially all of the commercial real estate loans were
secured by properties located within the Association's market area. At December
31, 1999, a total of 217 loans were secured by commercial real estate with an
average principal balance of approximately $270,000. 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 such as the prime rate plus a margin. 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 increased its commercial real estate loan originations
in 1999. An experienced commercial lending manager, two commercial loan officers
and a credit analyst are part of the Lending Division staff. During the year
ended December 31, 1999, $26.1 million of commercial real estate loans were
originated resulting in an aggregate total of such loans of $58.5 million. The
11
<PAGE>
Association intends to continue to emphasize the origination of commercial real
estate and business loans to its commercial customers in the future due to the
return available to the Association on such loans.
At December 31, 1999, the largest commercial real estate loan
relationship had an outstanding principal balance of $2.5 million, which is
within the Association's regulatory loans-to-one-borrower limit. Collateral for
the loan is two business parcels containing multiple retail stores, lumber yards
and office buildings located in the Association's market area. 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, 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, 1999, consumer loans totaled $13.5
million, or 2.02%, 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
consumer lending will continue but recognizes that local competition for
consumer loans may limit the Association's ability to significantly increase the
total of its consumer loan portfolio.
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. The Association
emphasizes its activities in the commercial business lending market as part of
its overall increased commercial lending activity. At December 31, 1999, the 62
commercial business loans outstanding had an aggregate balance of $6.5 million
and an average loan balance of approximately $105,000. Commercial business loans
originated during the year ended December 31, 1999 totaled $1.9 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, 1999, the largest commercial business loan was a line
of credit secured by accounts receivable, contract rights, inventory, equipment,
furniture and personal property. The $2.5 million line of credit had an
outstanding principal balance of $1.3 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.
12
<PAGE>
Outside members of the Board of Directors, the Chairman of the Board of
Directors, the President, certain other officers, and branch managers have been
granted the authority to approve loans in various amounts depending on the types
of loans involved. In addition, the Association has a Loan Committee which
consists of at least one outside director and the President, the Division
Director of Lending and the New Loan Operations Manager. Larger loans must be
approved by one or more of such members of the Loan Committee depending on the
size of the loan. Loans in excess of $2.5 million may only be approved by any
three members of the Large Loan Committee. The members of the Large Loan
Committee include five of the outside directors, the President, the Division
Director of Lending and the New Loan Operations Manager. At December 31, 1999,
commitments to originate loans, excluding the undisbursed portion of loans in
process, totaled $5.3 million.
If the loan is approved, the commitment letter specifies the terms and
conditions of the proposed loan including the amount of the loan, interest rate,
amortization term, a brief description of the required collateral, and required
insurance coverage. Fire and casualty insurance is required at the time the loan
is made and throughout the term of the loan, and upon request of the
Association, flood insurance may be required. Title insurance is required on all
loans secured by real property.
In addition to originations, the Association also purchases loans
secured by one- to four-family residences from consortiums, mortgage origination
companies, or brokers, as previously discussed in "One- to Four-Family
Residential Real Estate Loans." In addition, the Association may purchase
participation loans when funds available for lending exceed the demand for loans
in the local market or to facilitate funding of larger projects. All of such
purchased loans, which totaled $30.6 million at December 31, 1999, are secured
by residential real estate loans. Substantially all of such loans are whole
loans; however, participation interests account for approximately $790,000 of
the $30.6 million.
ORIGINATION, PURCHASE AND SALE OF LOANS. The table below shows the loan
origination, purchase and sales activity for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1999 1998 1997
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Loans receivable, net at beginning of period $ 538,204 $ 451,709 $ 389,040
Originations:
Real estate loans:
One- to four-family residential (1) 150,951 169,636 67,923
Land 31,431 3,996 14,360
Multi-family (1) 15,000 283 1,427
Commercial (1) 26,098 11,347 28,667
--------- --------- ---------
Total real estate loans 223,480 185,262 112,377
Non-real estate loans:
Consumer 2,858 4,760 4,116
Commercial business 1,909 6,220 2,699
--------- --------- ---------
Total originations 228,247 196,242 119,192
Transfer of mortgage loans to
foreclosed real estate (656) (713) (558)
Loans and participations purchased (2) 6,066 38,354 24,455
Repayments (133,212) (139,635) (76,816)
Loans and participations sold (2) (6,000) -- (631)
Decrease (increase) in allowance for loan losses (763) (498) (120)
Decrease in amortization of unearned discounts
and premiums and net deferred fees and costs 156 1,127 406
(Increase) decrease in loans in process (23,746) (9,038) (3,398)
Change in other 73 656 139
--------- --------- ---------
Net loan activity 70,165 86,495 62,669
--------- --------- ---------
Total loans receivable, net at end of period $ 608,369 $ 538,204 $ 451,709
========= ========= =========
</TABLE>
- --------------------------------------
(l) Includes loans to finance the construction of one- to four-family
residential properties, and loans originated for sale in the secondary
market.
(2) Includes a $6.0 million participation interest in a $21.0 million loan
secured by land sold by the Association to Bankshares in order to comply
with the loans-to-one-borrower regulation.
13
<PAGE>
LOAN ORIGINATION FEES AND OTHER INCOME. In addition to interest earned
on loans, the Association may receive loan origination fees. To the extent that
loans are originated or acquired for the portfolio, Statement of Financial
Accounting Standards No. 91, "Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases" ("SFAS No. 91") requires that loan origination fees and costs be
deferred and amortized as an adjustment of yield over the life of the loan by
use of the level yield method. ARM loans originated below the fully-indexed
interest rate will have a substantial portion of the deferred amount recognized
as income in the initial adjustment period. Fees and costs deferred under SFAS
No. 91 are recognized into income immediately upon the prepayment or the sale of
the related loan. At December 31, 1999, unearned discounts and premiums and
deferred loan origination fees and costs totaled $1.5 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 $387,000, $198,000 and
$269,000 for the years ended December 31, 1999, 1998 and 1997, 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, 1999, the unpaid principal balances of loans sold
totaled approximately $11.3 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 $14.5 million at December 31, 1999. A
partially funded lending relationship had exceeded the loans-to-one borrower
limits at December 31, 1999. A $5.0 million participation interest in the loan
was sold subsequent to December 31, 1999 in order to comply with the regulation.
The following table presents the five largest lending relationships at
December 31, 1999:
<TABLE>
<CAPTION>
At December 31, 1999
-----------------------------------
Total of loans Amount disbursed
-------------- ----------------
(In thousands)
<S> <C> <C>
Description of collateral:
Seven loans which include construction loans to build single-family
homes, acquisition and development loans to build a mixed use project
including commercial and single-family homes and
secured lines of credit $13,140 $ 7,374
Three loans which include an acquisition and construction loan to build
single-family estate homes and condominiums and single family home
loans 17,642 13,664
Fifteen construction loans to build single-family homes 8,563 5,288
Five acquisition and development loans to build single-family homes 10,879 5,848
One acquisition loan to purchase land to be held for future development 15,000 15,000
</TABLE>
At December 31, 1999, 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
again 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
borrower 10 days to repay all outstanding interest and principal. If the
delinquency is not cured, foreclosure proceedings are initiated.
14
<PAGE>
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 if less
than 90 days, in the event that 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.
At December 31,
---------------------------------
1999 1998 1997
------- ------- -------
(In thousands)
Loans past due 60-89 days:
One- to four-family residential $ 426 $ 695 $ 469
Commercial and multi-family real estate - - -
Consumer and commercial business - 100 54
Land - - -
------- ------- -------
Total loans past due 60-89 days $ 426 $ 795 $ 523
======= ======= =======
NON-PERFORMING ASSETS. At December 31, 1999, non-performing assets
(non-performing loans and real estate owned ("REO")) totaled $1.5 million, and
the ratio of non-performing assets to total assets was 0.17%. 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,
------------------------------------ ----------------
1999 1998 1997 1996 1996 1995
------ ------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-performing loans:
One- to four-family residential $1,015 $1,537 $1,289 $1,524 $ 832 $ 605
Commercial and multi-family real estate 5 52 -- -- --
Consumer and commercial business loans 12 67 55 107 10 39
Land 7 12 35 -- -- 18
------ ------ ------ ------ ------ ------
Total non-performing loans 1,039 1,668 1,379 1,631 842 662
REO 494 522 592 1,455 1,384 1,910
Other repossessed assets -- 22 -- -- -- --
Other non-performing asset (1) -- -- -- -- 400 --
------ ------ ------ ------ ------ ------
Total non-performing assets (2) $1,533 $2,212 $1,971 $3,086 $2,626 $2,572
====== ====== ====== ====== ====== ======
Total non-performing loans to net loans receivable 0.17% 0.31% 0.31% 0.42% 0.22% 0.20%
Total non-performing loans to total assets 0.12 0.20 0.19 0.25 0.13 0.12
Total non-performing assets to total assets 0.17 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.
The largest non-performing asset at December 31, 1999 was a REO
property consisting of a single-family house located in St. Lucie county with a
recorded balance of $243,000, and an appraised value of $340,000. There are
currently no immediate prospects for the sale of the property.
During the year ended December 31, 1999, gross interest income of
$61,000 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.
15
<PAGE>
The following table sets forth information regarding delinquent loans,
REO and loans to facilitate the sale of REO at December 31, 1999.
At December 31, 1999
--------------------
Balance Number
-------- ------
(Dollars in thousands)
Residential real estate:
Loans 60 to 89 days delinquent $ 426 8
Loans more than 89 days delinquent 1,015 13
Commercial and multi-family real estate:
Loans 60 to 89 days delinquent -- --
Loans more than 89 days delinquent 5 1
Consumer and commercial business:
Loans 60 to 89 days delinquent -- --
Loans more than 89 days delinquent 12 2
Land:
Loans 60 to 89 days delinquent -- --
Loans more than 89 days delinquent 7 1
REO 494 5
Other repossessed assets -- --
Loans to facilitate sale of REO 234 4
-------- ------
Total $ 2,193 34
======== ======
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 of such loans require classification
in accordance with applicable regulations.
16
<PAGE>
The following table sets forth the aggregate amount of the
Association's classified assets at the dates indicated.
At December 31,
----------------------------------
1999 1998 1997
-------- -------- --------
(In thousands)
Substandard assets (1) $ 3,052 $ 3,056 $ 3,056
Doubtful assets -- -- --
Loss assets 6 291 547
-------- -------- --------
Total classified assets $ 3,058 $ 3,347 $ 3,603
======== ======== ========
- --------------
(1) Includes three loans aggregating $1.1 million which were performing
according to their terms at December 31, 1999, but which management had
determined to classify as substandard due to future doubt about the
collectibility of such loans.
17
<PAGE>
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.
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,
--------------------------------------------------- -----------------------
1999 1998 1997 1996 1996 1995
--------- --------- --------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total loans outstanding $ 608,369 $ 538,204 $ 451,709 $ 389,040 $ 376,219 $ 329,442
========= ========= ========= ========= ========= =========
Average loans outstanding for the period $ 577,603 $ 510,491 $ 411,098 $ 383,258 $ 346,880 $ 321,849
========= ========= ========= ========= ========= =========
Allowance balance (at beginning of period) $ 3,160 $ 2,662 $ 2,542 $ 2,312 $ 3,492 $ 3,390
Provision for losses 905 622 264 243 98 240
Recoveries 4 252 -- -- -- --
Charge-offs:
Real estate loans (17) (376) (143) (13) (1,264) (132)
Consumer and commercial business loans (129) -- (1) -- (14) (6)
--------- --------- --------- --------- --------- ---------
Allowance balance (at end of period) $ 3,923 $ 3,160 $ 2,662 $ 2,542 $ 2,312 $ 3,492
========= ========= --------- ========= ========= =========
Allowance for loan losses as a percent
of loans receivable at end of period 0.64% 0.58% 0.59% 0.65% 0.61% 1.05%
Net loans charged off as a percent of
average loans outstanding 0.02% 0.02% 0.04% -- 0.37% 0.04%
Ratio of allowance for loan losses to
non-performing loans at end of period (2) 377.57% 189.45% 193.04% 155.86% 274.58% 527.49%
Ratio of allowance for loan losses to
non-performing assets at end of period (2) 255.90% 142.86% 135.06% 82.37% 103.86% 135.77%
</TABLE>
- --------------
(1) The charge off of real estate loans for September 30, 1996 includes a $1.2
million charge off of a commercial real estate loan for which the provision
for loss was recorded in 1994.
(2) Net of specific reserves.
18
<PAGE>
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES. The following table sets forth
the allocation of allowance for loan losses by loan category for the periods
indicated. Management believes that the allowance can be allocated by category
only on an approximate basis. The allocation of the allowance by category is not
necessarily indicative of future losses and does not restrict the use of the
allowance to absorb losses in any category.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------------------------------------
1999 1998 1997 1996
-------------------- ------------------- -------------------- -------------------
% of Loans % of Loans % of Loans % of Loans
In Each In Each In Each In Each
Category to Category to Category to Category to
Amount Total Loans (1) Amount Total Loans (1) Amount Total Loans (1) Amount Total Loans (1)
------ ----------- ------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at end of period
applicable to:
One- to four-family
residential (2) $2,073 81.31% $1,540 84.16% $1,042 78.18% $1,037 79.68%
Land 650 6.05 650 2.55 650 3.58 630 4.71
Multi-family residential 300 0.88 300 1.46 300 1.84 300 1.96
Commercial real estate (2) 700 8.76 550 8.05 550 12.38 500 9.17
Consumer and commercial
business 200 3.00 120 3.78 120 4.02 75 4.48
------ ------- ------ ------- ------ ------- ------ -------
Total allowance for loan loss $3,923 100.00% $3,160 100.00% $2,662 100.00% $2,542 100.00%
====== ======= ====== ======= ====== ======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
At September 30,
--------------------------------------------
1996 1995
------------------- -------------------
% of Loans % of Loans
In Each In Each
Category to Category to
Amount Total Loans (1) Amount Total Loans (1)
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Balance at end of period
applicable to:
One- to four-family
residential (2) $ 870 79.83% $ 790 79.10%
Land 630 4.20 630 4.47
Multi-family residential 300 2.03 300 2.11
Commercial real estate (2) 452 9.58 1,712 10.14
Consumer and commercial
business 60 4.36 60 4.18
------ ------- ------ -------
Total allowance for loan loss $2,312 100.00% $3,492 100.00%
====== ======= ====== =======
- --------------
(1) Percentages do not reflect adjustments for undisbursed loan proceeds,
unearned discount and net deferred fees, and allowance for loan losses.
(2) Includes construction loans for such properties.
</TABLE>
19
<PAGE>
SECURITIES PORTFOLIO.
The Association's primary focus is the origination of loans. However,
during past periods when mortgage loan demand was moderate and the Association
had de-emphasized the origination of fixed-rate loans, management invested
excess liquidity in investment securities, including mutual funds, and in
mortgage-backed and related securities rather than purchasing whole loans or
loan participations. At December 31, 1999, the Association's securities
portfolio totaled $183.6 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.
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, MBS, 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 $5.0 million for 1999.
Principal repayments on amortizing securities totaled $29.5 million in 1999. The
repayments are a general reflection of lower market rates of interest 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, 1999 (the "Annual Report") attached hereto as Exhibit 13.
20
<PAGE>
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, 1999.
<TABLE>
<CAPTION>
At December 31, 1999
-----------------------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years More than Ten Years
-------------------- --------------------- --------------------- ---------------------
Annualized Annualized Annualized Annualized
Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
-------- ------- -------- ------- -------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities held to maturity:
United States Government
and agency obligations $ -- --% $ 11,629 11.76% $ 2,935 9.40% $ -- --%
Corporate debt issues -- -- -- -- 5,944 5.85 -- --
Mortgage-backed and related
securities -- -- -- -- -- -- 18,294 7.01
-------- -------- -------- --------
Total securities held to maturity -- -- 11,629 11.76 8,879 7.04% 18,294 7.01
-------- ------- -------- ------- -------- ------- -------- -------
Securities available for sale:
United States Government
and agency obligations -- -- 33,479 5.93 -- -- -- --
Equity securities 50 0.76 -- -- -- -- -- --
Mutual funds 49,845 5.87 -- -- -- -- -- --
Corporate debt issues 413 -- -- -- -- -- 4,453 8.42
Mortgage-backed and related
securities -- -- -- -- -- -- 56,600 7.27
-------- -------- -------- --------
Total securities available
for sale 50,308 5.82 33,479 5.93 -- -- 61,053 7.36
-------- ------- -------- ------- -------- ------- -------- -------
Total securities portfolio $ 50,308 5.82% $ 45,108 7.22% $ 8,879 7.04% $ 79,347 7.27%
======== ======= ======== ======= ======== ======= ======== =======
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1999
----------------------------------------------
Total Annualized
--------------------- Average Weighted
Carrying Market Life in Average
Value Value Years Yield
-------- -------- ------- ------
<S> <C> <C> <C> <C>
Securities held to maturity:
United States Government
and agency obligations $ 14,564 $ 17,066 3.91 11.28%
Corporate debt issues 5,944 6,184 9.76 5.85
Mortgage-backed and related
securities 18,294 18,021 17.64 7.01
-------- --------
Total securities held to maturity 38,802 41,271 8.44
-------- -------- ------
Securities available for sale:
United States Government
and agency obligations 33,479 33,479 2.95 5.93
Equity securities 50 50 -- 0.76
Mutual funds 49,845 49,845 -- 5.87
Corporate debt issues 4,866 4,866 17.94 7.71
Mortgage-backed and related
securities 56,600 56,600 28.17 7.27
-------- -------- ------
Total securities available
for sale 144,840 144,840 6.23
-------- -------- ------
Total securities portfolio $183,642 $186,111 6.70%
======== ======== ======
</TABLE>
21
<PAGE>
MORTGAGE-BACKED AND RELATED SECURITIES. The Association invests in MBS
which are included in the securities portfolio and are classified as either
available for sale or held to maturity. At December 31, 1999, net MBS totaled
$74.9 million, or 8.4%, of total assets. Of this amount, $18.3 million and $56.6
million were classified as held to maturity and available for sale,
respectively. At December 31, 1999, the market value of the net MBS portfolio
totaled approximately $74.6 million. Management primarily invests in fixed-rate
MBS with weighted average lives of five to seven years. Management believes that
investing in short-term MBS limits the Association's exposure to higher interest
rates. During fiscal year 1999, $29.7 million of MBS 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 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 Government National Mortgage
Association ("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, 1999, investment
securities held to maturity totaled $38.8 million and included United States
Government and agency obligations totaling $14.6 million, MBS totaling $18.3
million and corporate debt issues totaling $5.9 million.
Included in corporate debt issues at December 31, 1998 and 1997, are
two asset-backed securities issued by the Auto Bonds Receivable Corporation (the
"Auto Bonds"), which were purchased during fiscal year 1994, and are secured by
automobile loan receivables. The Auto Bonds totaled $413,000 at December 31,
1999. During 1999, management determined that the decline in fair value on the
Association's investment in the Auto Bonds was other than temporary resulting in
a write down of $138,000 and a reclassification from held to maturity to
available for sale.
The following tables set forth the carrying value of, and activity in
the securities held to maturity at the dates indicated. At December 31, 1999,
the market value of the investments was approximately $41.3 million.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------
1999 1998 1997
----------------- ----------------- -----------------
Amount % Amount % Amount %
------- ------ ------- ------ ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities:
US Government and agency obligations $14,564 37.53% $13,088 24.87% $13,039 19.23%
Corporate debt issues 5,944 15.32 7,135 13.56 8,349 12.31
Mortgage-backed and related securities:
FHLMC 3,763 9.70 5,245 9.97 7,465 11.01
FHMA 1,706 4.40 2,504 4.76 3,316 4.89
GNMA 853 2.20 1,269 2.41 1,751 2.58
CMO 11,831 30.49 23,190 44.07 33,645 49.63
AID loans 141 0.36 188 0.36 236 0.35
------- ------ ------- ------ ------- ------
Total mortgage-backed and
related securities 18,294 47.15 32,396 61.57 46,413 68.45
------- ------ ------- ------ ------- ------
Total securities held to maturity $38,802 100.00% $52,619 100.00% $67,801 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
22
<PAGE>
Year Ended December 31,
--------------------------------
1999 1998 1997
-------- -------- --------
(In thousands)
Securities held to maturity
Balance, beginning of period $ 52,619 $ 67,801 $ 75,544
Purchases -- -- --
Calls -- (1,427) --
Sales -- -- --
Maturities -- (3,386) (300)
Repayments (14,723) (12,067) (8,956)
Discount and premium amortization 1,457 1,523 1,513
Transfer to available for sale (413) -- --
Write down of impaired security (138) -- --
Gain on calls -- 175 --
-------- -------- --------
Balance, end of period $ 38,802 $ 52,619 $ 67,801
======== ======== ========
SECURITIES AVAILABLE FOR SALE. Securities available for sale are
carried on the books at fair value as required by FASB No. 115 and totaled
$144.8 million at December 31, 1999. Included in securities available for sale
are equity securities totaling $50,000, mutual funds totaling $49.8 million,
United States Government and agency obligations totaling $33.5 million,
corporate debt issues totaling $4.9 million and MBS totaling $56.6 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 MBS in
which they invest. Mutual fund investments include approximately $35.1 million
in funds which invest in adjustable-rate mortgage-backed securities issued by
FNMA, FHLMC and GNMA, as well as CMOs and real estate mortgage investment
conduits and other securities collateralized by or representing interests in
real estate mortgages, and approximately $14.7 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 December 31,
------------------------------------------------------------
1999 1998 1997
----------------- ----------------- -----------------
$ % $ % $ %
-------- ------ -------- ------ -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Equity securities:
FNMA stock $ 25 0.02% $ 30 0.03% $ 23 0.02%
Independent Bankers Bank of Florida 25 0.02 -- -- -- --
U. S. Government and agency
obligations 33,479 23.11 10,072 10.59 55,175 38.78
Mutual funds 49,845 34.41 40,387 42.44 40,721 28.62
Corporate debt issues 4,866 3.36 -- -- -- --
Mortgage-backed and related securities:
GNMAs 44,309 30.59 19,790 20.80 -- --
CMOs 12,291 8.49 24,872 26.14 46,350 32.58
-------- ------ -------- ------ -------- ------
Total securities available for sale $144,840 100.00% $ 95,151 100.00% $142,269 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
23
<PAGE>
Year Ended December 31,
-----------------------------------
1999 1998 1997
--------- --------- ---------
(In thousands)
Securities available for sale:
Balance, beginning of period $ 95,151 $ 142,269 $ 123,151
Purchases 73,314 25,086 46,311
Transfer from held to maturity 413 -- --
Calls (5,000) (40,323) (16,000)
Sales -- -- (2,435)
Maturities -- -- (3,000)
Repayments (14,802) (31,955) (7,291)
Discount and premium amortization 116 323 137
(Gain) loss on sales and calls -- -- (8)
Increase (decrease) in market value (4,352) (249) 1,404
--------- --------- ---------
Balance, end of period $ 144,840 $ 95,151 $ 142,269
========= ========= =========
Included in corporate debt issues at December 31, 1999 are two
asset-backed securities issued by the Auto Bonds Receivable Corporation, which
were purchased during fiscal year 1994, and are secured by automobile loan
receivables. At December 31, 1999, the Auto Bonds were in default with
materially reduced payments occurring. Consequently, management determined that
the decline in fair value on the Association's investment in the Auto Bonds was
other than temporary resulting in a write down of $138,000 and a
reclassification from held to maturity to available for sale, resulting in a
balance of $413,000. At December 31, 1999, the trustee for the Auto Bonds had
brought suit against the risk default insurance carrier to require payment of
the principal balance and accrued interest on these bonds. Management cannot be
certain as to the outcome of such litigation.
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 $21.4 million at December
31, 1999. In addition, interest-earning deposits totaling $1.8 million were held
in other financial institutions at December 31, 1999. 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,
-----------------------------------------
1999 1998 1997 1996
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Interest earning deposits:
FHLB-Atlanta $ 21,422 $100,332 $ 13,621 $ 28,895
Other deposits 1,760 1,378 -- --
-------- -------- -------- --------
Total interest-earning deposits $ 23,182 $101,710 $ 13,621 $ 28,895
======== ======== ======== ========
FHLB stock $ 7,009 $ 4,722 $ 3,264 $ 2,864
======== ======== ======== ========
</TABLE>
24
<PAGE>
SOURCES OF FUNDS
GENERAL. Deposits are the major source of funds for lending and other
investment purposes. In addition to deposits, funds are derived from the
amortization and prepayment of loans and mortgage-backed and related securities,
the maturity of investment securities, operations and, if needed, advances from
the FHLB. Scheduled loan principal repayments are a relatively stable source of
funds, while deposit inflows and outflows and loan prepayments are influenced
significantly by general interest rates and market conditions. Borrowings may be
used on a short-term basis to compensate for reductions in the availability of
funds from other sources or on a longer term basis for general business
purposes. Although the Association periodically reviews the features and terms
of its deposit products, the Association 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, 1999.
<TABLE>
<CAPTION>
Weighted Percentage
Average Minimum Minimum of Total
Interest Rate Term Checking and Savings Deposits (1) Amount Balances Deposits
------------- ------- ------------------------------- ------- ---------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
0.00% None Non-interest-bearing accounts None $ 39,429 6.42%
0.75 None NOW accounts $ 100 76,073 12.39
1.73 None Passbook accounts 100 34,466 5.61
3.09 None Money market deposit accounts 1,000 100,299 16.34
---------- ------
Total checking and savings deposits 250,267 40.76
---------- ------
Certificates of Deposit (1)
------------------------
4.90 1 - 5 months Fixed term, fixed-rate 1,000 16,627 2.71
4.90 6-11 months Fixed term, fixed-rate 1,000 43,521 7.09
5.27 12-17 months Fixed term, fixed-rate 1,000 204,209 33.26
5.34 24-30 months Fixed term, fixed-rate 1,000 22,849 3.72
5.60 36-47 months Fixed term, fixed-rate 1,000 10,364 1.69
5.90 48-59 months Fixed term, fixed-rate 1,000 1,936 0.32
6.31 Over 60 months Fixed term, fixed-rate 1,000 60,681 9.88
1.73 Various Fixed term, fixed-rate 1,000 286 0.05
5.08 Various Negotiated Jumbo 100,000 3,203 0.52
---------- ------
Total certificates of deposit 363,676 59.24
---------- ------
Total deposits $ 613,943 100.00%
========== ======
</TABLE>
- --------------
(1) IRA and KEOGH accounts are generally offered throughout all terms stated
above with aggregate balances of $50.0 million and $1.0 million,
respectively, at December 31, 1999.
25
<PAGE>
The following tables sets forth the change in dollar amount in the
various types of savings accounts offered between the dates indicated:
<TABLE>
<CAPTION>
Balance Percent Balance Percent Balance Percent
at of Incr. At of Incr. at of Incr.
12/31/99 Deposits (Decr.) 12/31/98 Deposits (Decr.) 12/31/97 Deposits (Decr.)
--------- -------- -------- --------- -------- -------- --------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest-bearing demand
accounts $ 39,429 6.42% $ 7,660 $ 31,769 5.34% $ 7,054 $ 24,715 4.49% $ 6,088
NOW accounts 76,073 12.39 (6,555) 82,628 13.91 12,766 69,862 12.69 2,786
Passbooks 34,466 5.61 1,547 32,919 5.54 2,698 30,221 5.49 (600)
Money market deposit
accounts 100,299 16.34 10,404 89,895 15.12 11,063 78,832 14.31 9,318
Time deposits which mature:
Within 12 months 257,928 42.01 (19,326) 277,254 46.64 16,482 260,772 47.35 6,975
Within 12-36 months 85,758 13.97 32,025 53,733 9.04 (5,061) 58,794 10.67 17,590
Beyond 36 months 19,990 3.26 (6,212) 26,202 4.41 (1,310) 27,512 5.00 (5,158)
--------- ------ -------- --------- ------ -------- --------- ------ --------
Total deposits $ 613,943 100.00% $ 19,543 $ 594,400 100.00% $ 43,692 $ 550,708 100.00% $ 36,999
========= ====== ======== ========= ====== ======== ========= ====== ========
</TABLE>
26
<PAGE>
The following table sets forth the certificates of deposit classified
by rates as of the dates indicated.
At December 31,
----------------------------------
1999 1998 1997
-------- -------- --------
Rate (In thousands)
3.00% or less $ 286 $ 940 $ 1,436
3.01 - 3.99% 12 11 11
4.00 - 4.99% 135,880 74,835 35,699
5.00 - 5.99% 151,899 238,564 262,029
6.00 - 6.99% 67,028 33,983 39,186
7.00 - 7.99% 8,571 8,856 8,717
-------- -------- --------
$363,676 $357,189 $347,078
======== ======== ========
The following table sets forth the amount and maturities of
certificates of deposit at December 31, 1999.
<TABLE>
<CAPTION>
Amount Due
-----------------------------------------------------------------------------------------------
Less Than 1-2 2-3 3-4 4-5 After 5
Rate One Year Years Years Years Years Years Total
- ---- ---------- --------- ---------- ---------- -------- -------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
3.00% or less $ 108 $ 2 $ -- $ 29 $ 16 $ 131 $ 286
3.01 - 3.99% 12 -- -- -- -- -- 12
4.00 - 4.99% 129,422 3,345 996 552 1,565 -- 135,880
5.00 - 5.99% 110,523 25,241 6,952 8,607 576 -- 151,899
6.00 - 6.99% 9,292 41,427 7,795 668 7,806 40 67,028
7.00 - 7.99% 8,571 -- -- -- -- -- 8,571
---------- --------- ---------- ---------- -------- -------- ----------
$ 257,928 $ 70,015 $ 15,743 $ 9,856 $ 9,963 $ 171 $ 363,676
========== ========= ========== ========== ======== ======== ==========
</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,
1999.
Certificates
of Deposit
of $100,000
Remaining Maturity or More
------------------ ------------
(In thousands)
Three months or less $ 12,007
Three through six months 7,118
Six through twelve months 19,815
Over twelve months 23,360
---------
Total $ 62,300
=========
Deposits are used to fund loan originations, the purchase of securities
and for general business purposes. The deposit growth in fiscal year 1999 of
$19.5 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>
The following table sets forth the net changes in the deposit
activities for the periods indicated.
Year Ended December 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
(In thousands)
Deposits $2,875,680 $2,737,244 $2,433,375
Withdrawals 2,875,669 2,715,239 2,416,860
---------- ---------- ----------
Net increase before interest credited 11 22,005 16,515
Interest credited 19,532 21,687 20,484
---------- ---------- ----------
Net increase in deposits $ 19,543 $ 43,692 $ 36,999
========== ========== ==========
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 as well as in leveraged
transactions used to purchase securities. 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, 1999, $140.2 million of FHLB advances were outstanding with a weighted
average interest rate of 5.59%.
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, or to fund loan originations if liquidity is low.
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, 1999, the net outstanding balance of the
Bond was $14.5 million with an effective rate of 10.09%. For further information
on the Bond, see Note 10 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 is
funded by two loans from Bankshares. ESOP Loan I was used to purchase 389,248
(as adjusted by the Exchange Ratio of 2.0445) shares of common stock in the open
market. 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
$637,000 at December 31, 1999. The loan has a fixed interest rate of 8.50%. ESOP
Loan II was used to permit the ESOP to purchase an additional 437,652 shares.
The loan is being repaid over 15 years and the loan had an outstanding balance
of $4.1 million at December 31, 1999 and has a fixed interest rate of 7.75%. For
further information, see Note 13 to the Notes to the Consolidated Financial
Statements in the Annual Report attached hereto as Exhibit 13.
28
<PAGE>
The following table sets forth the source, balance, and rate of
borrowings for the years ended December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1999 1998 1997
--------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
FHLB advances:
Maximum month-end balance $ 140,186 $ 94,443 $ 57,341
Balance at end of period 140,186 91,920 57,341
Average balance (1) 108,627 74,614 42,952
Weighted average interest rate during the period 5.64% 5.94% 6.38%
Weighted average interest rate at end of period 5.59% 5.76% 6.25%
Mortgage-backed bond:
Maximum month-end balance $ 15,502 $ 16,414 $ 17,312
Balance at end of period 14,508 15,430 16,333
Average balance (1) 15,062 15,989 16,888
Weighted average interest rate during the period 9.30% 9.70% 10.94%
Weighted average interest rate at end of period 10.09% 8.78% 10.49%
</TABLE>
- --------------
(1) Computed on the basis of month-end balances.
SUBSIDIARY ACTIVITIES
The Association currently has two active subsidiaries.
ComFed, Inc. ("ComFed") was formed in February 1971 for the purpose of
operating an insurance agency, Community Insurance Agency, which sells mortgage
life insurance. ComFed 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. For the year ended
December 31, 1999, ComFed reported net income of $130,000. At December 31, 1999,
the Association had an equity investment in ComFed of $338,000.
Palm River Development Co., Inc. ("Palm River") was formed in July 1999
to engage in a real estate development joint venture. Palm River purchased 117
acres of land located in Indian River County which is being developed by the
joint venture as 17 single-family lots, 48 condominiums, 22 carriage homes and
116 patio homes. A $15.0 million inter-company line of credit from the
Association is used by Palm River to fund the joint venture as needed. For the
year ended December 31, 1999, Palm River reported a net loss of $166,000. At
December 31, 1999, the Association had an equity loss in Palm River of $166,000
and the balance of the inter-company loan was $11.8 million.
PERSONNEL
As of December 31, 1999, Bankshares had no separately compensated
employees. Officers of Bankshares are employees of the Association and receive
all compensation from the Association. Because Bankshares' primary activity is
holding the stock of the Association, employees of the Association perform
limited duties for Bankshares.
As of December 31, 1999, the Association had 247 full-time and 41
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.
29
<PAGE>
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.
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.
BANKSHARES
HOLDING COMPANY ACQUISITIONS. In December 1998, Bankshares became a
unitary 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
than 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 which applied to become
or were a unitary savings and loan holding company prior to May 4, 1999 and its
non-savings institution subsidiaries. Under the enacted Gramm-Leach-Bliley Act
of 1999 (the "GBLA"), companies which applied to the OTS to become unitary
savings and loan holding companies will be restricted to engaging in those
activities traditionally permitted to multiple savings and loan holding
companies. 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
grandfathered unitary savings and loan holding companies under the GBLA, 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.
30
<PAGE>
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.
In addition, under 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.
OTS regulations generally exclude 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 regulations also require 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.
On September 30, 1996, new legislation required all SAIF member
institutions to pay a one-time special assessment to recapitalize the SAIF, with
the aggregate amount to be sufficient to bring the reserve ratio to 1.25% of
insured deposits.
Currently, FDIC deposit insurance rates generally range from zero basis
points to 27 basis points, depending on the assessment risk classification
assigned to the depository institution. From 1998 through 1999, SAIF members
paid approximately 6.0 basis points, while BIF member institutions paid
approximately 1.3 basis points.
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.
31
<PAGE>
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 4% of
adjusted total assets. Core capital is generally defined as common stockholders'
equity, including retained earnings. At December 31, 1999, the Association's
ratio of core capital to total adjusted assets was 9.20%.
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, 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.
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, 1999, the Palm River investment was subject to a deduction from
tangible capital.
The OTS amended its risk-based capital requirements that would require
institutions with an "above normal" level of interest rate risk to maintain
additional capital. A savings association is considered to have a "normal" level
of interest rate risk if the decline in the market value of its portfolio equity
after an immediate 200 basis point increase or decrease in market interest rates
(whichever leads to the greater decline) is less than two percent of the current
estimated market value of its assets. The market value of portfolio equity is
defined as the net present value of expected cash inflows and outflows from an
association's assets, liabilities and off-balance sheet items. The amount of
additional capital that an institution with an above normal interest rate risk
is required to maintain (the "interest rate risk component") equals one-half of
the dollar amount by which its measured interest rate risk exceeds the normal
level of interest rate risk. The interest rate risk component is in addition to
the capital otherwise required to satisfy the risk-based capital requirement.
Implementation of this component has been postponed by the OTS. The final rule
was to be effective as of January 1, 1994, subject however to a three quarter
lag time in implementation. However, because of continuing delays by the OTS,
the interest rate risk component has never been operative.
At December 31, 1999, the Association exceeded all of its regulatory
capital requirements, with tangible, core and risk-based capital ratios of
9.20%, 9.20%, and 17.84%, respectively. See Note 14 to the Notes to Consolidated
Financial Statements included in the Annual Report, attached hereto as Exhibit
13.
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
32
<PAGE>
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, 1999, 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.
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, 1999, the
Association's average liquidity ratio was 12.2%.
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.
A savings institution must file an application for OTS approval of the
capital distribution if either (1) the total capital distributions for the
applicable calendar year exceed the sum of the institution's net income for that
year to date plus the institution's retained net income (which takes into
account capital distributions made) for the preceding two years, (2) the
institution would not be at least adequately capitalized following the
distribution, (3) the distribution would violate any applicable statute,
regulation, agreement or OTS-imposed condition, or (4) the institution is not
eligible for expedited treatment of its filings. If an application is not
required to be filed, savings institutions which are a subsidiary of a holding
33
<PAGE>
company (as well as certain other institutions) must still file a notice with
the OTS at least 30 days before the Board of Directors declares a dividend or
approves a capital distribution.
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 was 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.
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 the Code or by meeting the
second prong of the QTL test set forth in 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. 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 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; and direct or indirect obligations of the FDIC. In
addition, small business loans, credit card loans, student loans and loans for
personal, family and household purposes are allowed to be included without
limitation as qualified investments. The following assets, among others, also
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, 1999, the qualified thrift
investments of the Association were approximately 74.2% 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
34
<PAGE>
and procedures established by the Board of Directors of the FHLB. At December
31, 1999, the Association had $140.2 million of FHLB advances. See Note 9 to
Notes to Consolidated Financial Statements in the Annual Report.
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, 1999, the Association had $7.0
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 7.57%, 7.25% and 7.25% for the fiscal years ended December 31, 1999,
1998, and 1997, respectively.
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, 1999, the Association was in
compliance with the 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.
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 11 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.
35
<PAGE>
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
11 to the Notes to the Consolidated Financial Statements in the Annual Report.
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.
ITEM 2. PROPERTIES
- --------------------------------------------------------------------------------
Bankshares owns no property independently from the Association. The
Association conducts its business through its home office located in North Palm
Beach, Florida, and 21 full-service branch offices located in Palm Beach,
Martin, St. Lucie, and Indian River Counties. The following table sets forth
certain information concerning the home office and each branch office of the
Association at December 31, 1999. The aggregate net book value of the
Association's premises and equipment and real estate held for investment was
$24.9 million and $1.9 million at December 31, 1999, respectively. Real estate
held for investment represents a pro-rata portion of the Association's office
building located on Port St. Lucie Blvd. which is leased to tenants and a parcel
of land held for future sale located adjacent to the Association's Maplewood
office. For additional information regarding the Association's properties, see
Note 6 to the Notes to the Consolidated Financial Statements in the Annual
Report. 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 $2.9 million at
December 31, 1999 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, 02/19/88 Owned (1)
Florida
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 (2)
Florida
Palm Beach Gardens 9600 N. Alternate AlA, Palm Beach 12/19/74 Owned
Gardens, Florida
Jensen Beach 1170 NE Jensen Beach Boulevard, 01/28/75 Owned
Jensen Beach, Florida
Singer Island 1100 East Blue Heron Boulevard, 04/01/75 Owned
Riviera Beach, Florida
Gallery Square 389 Tequesta Drive, Tequesta, Florida 01/30/76 Lease (3)
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 (4)
Palm City, Florida
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
LOCATION ADDRESS OPENING DATE OWNED/LEASE
- -------- ------- ------------ -----------
<S> <C> <C> <C>
Maplewood 1570 Indiantown Road, Jupiter, Florida 10/05/98 Owned
Bluffs 3950 U.S. Highway 1, Jupiter, Florida 09/18/86 Lease (5)
Village Commons 971 Village Boulevard, West Palm Beach, 06/26/89 Lease (6)
Florida
Hobe Sound 11400 SE Federal Highway, Hobe Sound, 02/05/90 Owned
Florida
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 4/22/96 Owned
Drive, Palm Beach Gardens, Florida
Vero Beach 6030 20th Street, Vero Beach, Florida 07/21/97 Owned
Lake Worth 5702 Lake Worth Road, Suite # 3, 10/20/97 Lease (7)
Lake Worth, Florida
Ibis 10100 Northlake Blvd. 12/13/99 Owned
West Palm 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) A branch office is also located at the same site.
(2) A portion of land was taken by the State of Florida during late 1999 under
the doctrine of eminent domain. To solve a temporary parking problem, the
land is being leased back from the State on a six-month lease which expires
May 1, 2000. The lease may then be extended on a month-to-month basis until
the State begins construction.
(3) This lease expires on December 31, 2000 and provides for a renewal option
which runs through December 31, 2015.
(4) This lease expires on August 8, 2001 and provides for a renewal option
which runs through August 8, 2003.
(5) This lease expires on October 31, 2001 and provides for a renewal option
which runs through October 31, 2016.
(6) This lease expires on June 25, 2004 and provides for a renewal option which
runs through June 25, 2014.
(7) This lease expires on September 1, 2000 and provides for a renewal option
which runs through August 31, 2002.
(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. The lease will not be renewed by the
Association.
37
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
There are various claims and lawsuits in which Bankshares is
periodically involved incident to its business. In the opinion of management, no
material loss is expected from any of such pending claims or lawsuits.
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 recorded a partial recovery of the previously recorded
allowance for loss.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- --------------------------------------------------------------------------------
Bankshares held its Special Meeting of Shareholders on December 21,
1999. Of the 10,051,873 shares eligible to vote, 9,091,159 shares or 90.4%, were
represented in person or by proxy at the meeting.
The shareholders acted on the following matter at the Special Meeting,
approving such matter.
1. The approval of the amendment of the Community Savings Bankshares,
Inc. 1999 Stock Option Plan, the 1999 Recognition and Retention Plan and Trust
Agreement, the 1995 Stock Option Plan and the 1995 Recognition and Retention
Plan for Employees and Outside Directors.
For Against Abstain Not Voted
--- ------- ------- ---------
Number of Votes 7,961,143 1,051,268 78,748 960,714
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
- --------------------------------------------------------------------------------
For information concerning the market for Bankshares' common stock, see
"The Association - Capital Distributions" and 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.
38
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- --------------------------------------------------------------------------------
Information required by this section is incorporated herein by
reference from Bankshares' definitive Proxy Statement for the Annual Meeting of
Shareholders filed March 24, 2000 (the "Proxy Statement"), specifically the
section captioned "Ratification of Appointment of Independent Accountants".
PART III
ITEM 10. DIRECTORS AND EXECUTIVE 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, 1999, and 1998
Consolidated Statements of Operations,
Years Ended December 31, 1999, 1998, and 1997
Consolidated Statements of Shareholders' Equity,
Years Ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows,
Years Ended December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
(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.
39
<PAGE>
(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 Amended and Restated 1995 Stock Option Plan**
10.3 Amended and restated 1995 Recognition and Retention
Plan for Employees and Outside Directors**
10.3 Amended and Restated 1999 Stock Option Plan**
10.4 Amended and Restated 1999 Recognition and Retention
Plan and Trust Agreement**
10.5 Employment Agreement between Community Savings
Bankshares, Inc., Community Savings, F. A. and
James B. Pittard, Jr.
10.6 Change in Control Agreement between Community Savings
Bankshares, Inc., Community Savings, F. A. and
James B, Pittard, Jr.
10.7 Change in Control Agreement with Larry J. Baker, CPA,
Cecil F. Howard, Jr., Mary L. Kaminske, Michael E.
Reinhardt and certain non-executive officers, and
Community Savings Bankshares, Inc. and Community
Savings, F. A.
13 1999 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.
** Incorporated by reference from Bankshares' definitive
proxy statement dated November 10, 1999 filed with
the SEC on said date.
(b) REPORTS ON FORM 8-K:
None.
(c) The exhibits listed under (a)(3) above are filed herewith.
(d) Not applicable.
40
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COMMUNITY SAVINGS BANKSHARES, INC.
Date: March 24, 2000 By: /s/ JAMES B. PITTARD, JR.
------------------------------
James B. Pittard, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ JAMES B. PITTARD, JR. By: /s/ LARRY J. BAKER, CPA
--------------------------- --------------------------
James B. Pittard, Jr., President Larry J. Baker, CPA, Senior
and Chief Executive Officer Vice President, Chief Financial
(Principal Executive Officer) Officer and Treasurer
(Principal Financial and
Accounting Officer)
Date: March 24, 2000 Date: March 24, 2000
By: /s/ FREDERICK A. TEED By: /s/ FOREST C. BEATY
---------------------------- --------------------------
Frederick A. Teed, Chairman of Forest C. Beaty, Jr., Director
the Board
Date: March 24, 2000 Date: March 24, 2000
By: /s/ ROBERT F. CROMWELL By: /s/ KARL D. GRIFFIN
----------------------------- --------------------------
Robert F. Cromwell, Director Karl D. Griffin, Director
Date: March 24, 2000 Date: March 24, 2000
By: /s/ HAROLD I. STEVENSON
-----------------------------
Harold I. Stevenson, CPA, Director
Date: March 24, 2000
41
EXHIBIT 10.5
EMPLOYMENT AGREEMENT BETWEEN COMMUNITY SAVINGS BANKSHARES, INC.,
COMMUNITY SAVINGS, F. A. AND JAMES B. PITTARD, JR.
<PAGE>
Exhibit 10.5
AGREEMENT
AGREEMENT, dated this 25th day of February 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; 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
<PAGE>
duty involving personal profit, intentionalfailure 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. 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.
(e) CODE. "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(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 February 25, 1999 (the "Change in Control Agreement").
(i) IRS. IRS shall mean the Internal Revenue Service.
2
<PAGE>
(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.
(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 $241,210
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
3
<PAGE>
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
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, 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.
4
<PAGE>
(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 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
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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 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
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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 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.
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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.
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.
(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
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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.
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.
/s/ DEBORAH M. ROUSEAU By: /s/ FREDERICK A. TEED
- ---------------------- ---------------------
Deborah M. Rouseau Name: Frederick A. Teed
Title:
Attest: COMMUNITY SAVINGS, F. A.
/s/ DEBORAH M. ROUSEAU By: /s/ FREDERICK A. TEED
- ---------------------- ---------------------
Deborah M. Rouseau Name: Frederick A. Teed
Title:
EXECUTIVE
By: /s/ JAMES B. PITTARD, JR.
-------------------------
James B. Pittard, Jr.
10
EXHIBIT 10.6
CHANGE IN CONTROL AGREEMENT BETWEEN COMMUNITY SAVINGS BANKSHARES, INC.,
COMMUNITY SAVINGS, F. A. AND JAMES B. PITTARD, JR.
<PAGE>
Exhibit 10.6
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 25th day of
February 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 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
<PAGE>
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.
(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
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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 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
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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 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
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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 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 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.
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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 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.
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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 sixty (60) 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 sixty (60)
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 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.
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
7
<PAGE>
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.
(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.
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.
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.
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.
8
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed as of the date first
above written.
Attest: COMMUNITY SAVINGS BANKSHARES, INC.
/s/ DEBORAH M. ROUSSEAU By: /s/ FREDERICK A. TEED
- ----------------------- ---------------------
Deborah M. Rousseau Name: Frederick A. Teed
Title:
Attest: COMMUNITY SAVINGS, F. A.
/s/ DEBORAH M. ROUSSEAU By: /s/ FREDERICK A. TEED
- ----------------------- ---------------------
Deborah M. Rousseau Name: Frederick A. Teed
Title:
EXECUTIVE
By: /s/ JAMES B. PITTARD, JR.
-------------------------
James B. Pittard, Jr.
9
EXHIBIT 10.7
FORM OF CHANGE IN CONTROL AGREEMENT WITH LARRY J. BAKER, CPA,
CECIL F. HOWARD, JR., MARY L. KAMINSKE,
MICHAEL E. REINHARDT AND CERTAIN NON-EXECUTIVE OFFICERS,
AND COMMUNITY SAVINGS BANKSHARES, INC.
AND COMMUNITY SAVINGS, F. A.
<PAGE>
Exhibit 10.7
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 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
<PAGE>
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.
(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
2
<PAGE>
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 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
3
<PAGE>
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 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
4
<PAGE>
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 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 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.
5
<PAGE>
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.
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.
6
<PAGE>
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 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. 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
7
<PAGE>
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.
(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.
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.
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.
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.
8
<PAGE>
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:_______________________________
9
EXHIBIT 13
COMMUNITY SAVINGS BANKSHARES, INC.
1999 ANNUAL REPORT TO SHAREHOLDERS
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC.
- --------------------------------------------------------------------------------
This is a picture of the Board of Directors and Executive Officers
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(FROM TOP DOWN) Robert F. Cromwell, Larry J. Baker, Feriel G. Hughes, Harold I.
Stevenson, Frederick A. Teed, Karl D. Griffin, Forest C. Beaty, Jr., Cecil F.
Howard, Jr., Mary L. Kaminske, Michael E. Reinhardt and James B. Pittard, Jr.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS
Frederick A. Teed, CHAIRMAN
Forest C. Beaty, Jr.
Robert F. Cromwell
Karl D. Griffin
James B. Pittard, Jr.
Harold I. Stevenson, CPA
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
EXECUTIVE OFFICERS
James B. Pittard, Jr., PRESIDENT AND CHIEF EXECUTIVE OFFICER
Larry J. Baker ,CPA, CHIEF FINANCIAL OFFICER AND TREASURER
Cecil F. Howard, Jr., SENIOR VICE PRESIDENT
Feriel G. Hughes, SENIOR VICE PRESIDENT
Mary L. Kaminske, SENIOR VICE PRESIDENT
Michael E. Reinhardt, SENIOR VICE PRESIDENT
OTHER CORPORATE OFFICERS
(not shown in photograph)
Joe L. Knorr, VICE PRESIDENT
Trina L. Miles, ASSISTANT SECRETARY
Deborah M. Rousseau, VICE PRESIDENT AND SECRETARY
Donna L. Sheppard, CPA, VICE PRESIDENT
- --------------------------------------------------------------------------------
<PAGE>
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. 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
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Community Savings Bankshares, Inc.
Corporate Directory Inside Front Cover
President's Message 2
Corporate Information 4
Financial Highlights 5
Management's Discussion and Analysis 6
Independent Auditors' Report 15
Consolidated Statements of Financial Condition 16
Consolidated Statements of Income 17
Consolidated Statements of Changes in Shareholders' Equity 18
Consolidated Statements of Cash Flow 19
Notes to Consolidated Financial Statements 20
Community Savings, F. A. Corporate Directory 44
Locations Inside back cover
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1
<PAGE>
"OUR SHAREHOLDERS AND CUSTOMERS ARE IMPORTANT TO OUR SUCCESS AS A COMPANY."
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This is a picture of James B. Pittard, Jr.
President and Chief Executive Officer
of Community Savings Bankshares, Inc.
- --------------------------------------------------------------------------------
PRESIDENT'S MESSAGE TO SHAREHOLDERS
Dear Shareholders,
Our mission statement states that we will provide quality products and
outstanding service to individuals and businesses in our market area. In my 1998
letter to shareholders, I described some of our goals for 1999 to accomplish
this mission and shared my expectation that 1999 would be a year of continued
growth and profitability. I'd like to share with you our accomplishments.
"WE WILL EMPHASIZE RESIDENTIAL, CONSUMER, AND COMMERCIAL REAL ESTATE LOANS."
Lending is an important part of our business. As part of our business plan to
prudently deploy the capital raised in our second step conversion in December
1998, we grew the loan portfolio by a net of $70.2 million during 1999 while
maintaining our conservative loan underwriting standards. To accomplish this
growth, we originated $226.3 million of residential, consumer, and commercial
real estate loans in our local market area through our loan origination network.
To better serve our growing number of commercial customers, we added a third
commercial loan officer to our staff.
"WE WILL LOOK FOR NEW DEPOSIT MARKETS."
Our goal continues to be to make our delivery system the best in the local
communities we serve. In December 1999, we opened a new office near the Ibis
Country Club golf community, located in suburban West Palm Beach. The office is
located on an outparcel in a shopping center near the entrance to the Ibis
development. In addition to seeking new branching opportunities, we constantly
analyze our existing offices to determine whether they are not only profitable
but are serving their markets efficiently. As a result of this review, we
decided to close our Hutchinson Island office at the expiration of its lease in
1999. The accounts at this branch were transferred to our Jensen Beach office,
located just two miles away. As a result, we ended 1999 with 21 full service
branch offices.
"WE WILL UTILIZE THE MARKETING CALL CENTER TO CREATE ADDITIONAL NEW BUSINESS
OPPORTUNITIES."
The Marketing Call Center became fully operational early in 1999. It has proven
to be an effective tool for cross selling our products and services to a wide
range of customers, with more than 600 new and expanded customer relationships
resulting from the efforts of the Call Center team during this first year.
"WE WILL IMPROVE OUR EFFICIENCY BY COMPETITIVELY PRICING OUR PRODUCTS AND
SERVICES AND BY REDUCING OUR COSTS."
Our net income increased by $1.5 million, or 31%, during 1999, primarily as a
result of a $4.6 million increase in net interest income. This increase in net
interest income was due in large part to an increase in interest-earning assets,
as well as to a certain extent, a decline in weighted average interest costs
during 1999. Interest-earning assets increased, primarily due to the new loan
originations. Partly offsetting this increase, Federal Home Loan Bank advances
2
<PAGE>
were used primarily in leveraged transactions to purchase securities. Net
interest income was also positively affected by the decline in interest rates
for much of 1999. The decline in rates on deposits and borrowings was greater
than the decline in rates on loans and investments which produced a slight
increase in the interest rate spread to 3.19%, increasing net interest income.
The increase in net interest income was offset in part by a $2.3 million
increase in operating expense. Of that increase, $1.5 million was attributable
to employee compensation and benefits as a result of increased staffing and
compensation levels and the increased cost of the stock benefit plans approved
by the shareholders, as well as the amortization of the cost of the additional
shares purchased by the Employee Stock Ownership Plan in the second step
conversion.
"WE CONTINUE OUR EFFORTS TO ENHANCE SHAREHOLDER VALUE."
During 1999, the Office of Thrift Supervision approved our applications to
repurchase stock in the open market. A total of 1,267,444 shares at an average
cost of $12.55 were repurchased during 1999, resulting in a book value of $13.50
per share at December 31, 1999. In addition, the Board of Directors again
declared dividends during 1999 totaling $0.44 per share.
"THE YEAR 2000 ISSUE WAS A MAJOR FOCUS FOR US."
Due to the hard work and dedication of our staff, we completed the change to
January 1, 2000 on all of our systems with no material problems. We will
continue to monitor and test all date sensitive calculations throughout 2000. As
an added benefit of the Year 2000 project, much of our computer technology and
systems were upgraded, allowing our personnel to more efficiently perform their
duties.
"OUR GOALS FOR 2000 ARE EXCITING."
We will continue to seek out lending opportunities in our local market area. Our
lending staff will aggressively meet the needs of residential and commercial
borrowers, emphasizing the origination of commercial real estate and business
loans, as well as single-family residential mortgage and consumer loans. As a
result of the 1999 sales of the majority of the MacArthur Foundation land
holdings in Palm Beach, Martin and St. Lucie counties, major real estate
development is scheduled to begin in northern Palm Beach County during 2000.
Developers have already filed plans for residential projects with construction
scheduled to begin in 2000.
We will continue to look for suitable locations for new branch offices. During
2000, we plan to open a new office on land we purchased at Andros Isle in West
Palm Beach. Also in 2000, we will develop one of the other branch sites we own
in our current market area.
We will continue to enhance shareholder value in 2000. Our stock buyback, which
was approved by the Office of thrift Supervision in December 1999, will continue
during 2000. In addition, our plan is to continue the growth of our asset base
and, consequently, to continue to grow core earnings both through the asset
growth and by improving our operating efficiency. Strategic planning committees
are focusing on identifying cost reduction and enhanced fee income strategies
and exploring new business opportunities during 2000.
"OUR CUSTOMERS, EMPLOYEES AND SHAREHOLDERS ARE IMPORTANT TO OUR SUCCESS AS A
COMPANY."
The most significant asset in our "Customers First" quality service program is
our employees because of their extensive banking knowledge and commitment to
customer satisfaction.
Our directors, officers and employees appreciate the support and encouragement
of our shareholders and remain committed to increasing shareholder value. We
look forward to a successful year 2000 with growth and profitability as our
primary goals.
Sincerely,
James B. Pittard, Jr.
President and Chief Executive Officer of Community Savings Bankshares, Inc.
CUSTOMERS FIRST
COMMUNITY SAVINGS
LOGO
3
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY SAVINGS BANKSHARES, INC.
CORPORATE INFORMATION
<S> <C>
CORPORATE HEADQUARTERS AUDITORS
660 U.S. Highway One , P. O. Box 14547 Crowe, Chizek and Company LLP
North Palm Beach, FL 33408 400 Riverfront Plaza Bldg. 55 Campau Ave. NW
www.communitysavings.com Grand Rapids, MI 49503
(561) 881-2212 (800) 879-0112 (Florida)
SPECIAL COUNSEL
ANNUAL MEETING Elias, Matz, Tiernan & Herrick L.L.P.
April 26, 2000, 1:30 p.m. 734 15th Street, NW, 12th Floor
Embassy Suites PGA, 4350 PGA Boulevard Washington, DC 20005
Palm Beach Gardens, FL 33410 www.emth.com
FORM 10-K GENERAL COUNSEL
A copy of Bankshares' Annual Report on Form 10-K, Hurd, Horvath & Dinkin P. A.
as filed with the Securities and Exchange Commission, 8295 N. Military Trail, Suite A
is available without charge. Palm Beach Gardens, FL 33410
STOCK LISTING REGISTRAR & TRANSFER AGENT
The common stock of Community Savings Bankshares, Inc. is ChaseMellon Shareholder Services, L.L.C.
traded on The Nasdaq Stock Market under the symbol CMSV. Overpeck Centre, 85 Challenger Road
Ridgefield Park, NJ 07660
DIVIDEND SERVICES (800) 526-0801 www.chasemellon.com
Dividend Reinvestment and Optional Cash Investment Plan
provides shareholders a regular way of investing cash SHAREHOLDER RELATIONS
dividends in additional shares and investing optional cash Deborah M. Rousseau, Corporate Secretary
payments 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
ChaseMellon Shareholder Services, L.L.C. 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., was 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, 1999, there were 9,319,873 shares of Common Stock outstanding and
1,742 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.
- --------------------------------------------------------------------------------
Stock Prices
------------------------------
Book Dividend
Quarter Ended Value High Low Close Per Share
- --------------------------------------------------------------------------------
December 31, 1999 $13.50 $13.44 $11.44 $12.56 $.1100
September 30, 1999 $13.41 $13.50 $11.63 $12.00 $.1100
June 30, 1999 $13.38 $13.13 $11.81 $12.63 $.1100
March 31, 1999 $13.42 $13.13 $10.69 $12.50 $.1100
December 31, 1998 $13.43 $12.23 $ 8.50 $10.75 $.1100
September 30, 1998 $ 8.27 $18.22 $10.27 $10.64 $.1100
June 30, 1998 $ 8.15 $19.08 $15.16 $16.14 $.1100
March 31, 1998 $ 8.08 $20.05 $16.45 $18.89 $.1100
4
<PAGE>
FINANCIAL HIGHLIGHTS
The common stock of Community Savings Bankshares, Inc. trades on The Nasdaq
Stock Market under the symbol "CMSV".
<TABLE>
<CAPTION>
12/31/99 12/31/98 12/31/97 12/31/96 9/30/96 9/30/95
FOR THE YEAR ENDED (In Thousands)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income $ 58,464 $ 54,489 $ 50,316 $ 45,580 $ 43,889 $ 37,720
Interest expense 29,535 30,159 27,390 23,888 22,859 18,634
Net interest income 28,929 24,330 22,926 21,692 21,030 19,086
Net income 6,534 4,994 5,356 4,024 3,915 4,574
AVERAGE FOR THE YEAR ENDED (In Thousands)
- --------------------------------------------------------------------------------------------------------------------
Total assets $858,785 $772,248 $693,175 $631,038 $612,004 $544,555
Loans receivable, net 577,603 510,491 411,098 359,414 346,880 321,849
Cash and cash equivalents 49,794 44,819 42,029 47,532 48,367 53,736
Securities held to maturity and available for 171,212 167,357 210,870 195,765 187,239 183,443
Deposits 591,849 578,574 537,965 494,034 478,955 429,893
Borrowed funds 123,689 90,928 61,551 46,076 42,416 29,086
Shareholders' equity 130,119 86,980 78,822 75,323 74,638 69,263
AT YEAR END (In Thousands)
- --------------------------------------------------------------------------------------------------------------------
Total assets $892,974 $844,041 $720,133 $655,209 $650,332 $567,006
Loans receivable, net 608,369 538,204 451,709 389,040 376,219 329,442
Cash and cash equivalents 45,239 117,015 25,954 42,442 44,780 42,497
Securities held to maturity 38,802 52,619 67,801 75,544 77,238 137,178
Securities available for sale 144,840 95,151 142,269 123,152 124,287 27,028
Real estate owned 494 522 592 1,455 1,384 1,910
Deposits 613,943 594,400 550,708 513,709 498,929 437,376
Borrowed funds 154,694 107,350 75,098 53,908 55,867 39,101
Shareholders' equity 115,701 133,286 81,259 76,119 75,056 72,848
KEY FINANCIAL DATA
- --------------------------------------------------------------------------------------------------------------------
PERFORMANCE RATIOS:
Return on average assets 0.76% 0.65% 0.77% 0.64% 0.64% 0.84%
Return on average equity 5.02 5.74 6.80 5.34 5.25 6.60
Net interest rate spread 3.19 3.04 3.13 3.24 3.24 3.40
Net interest margin 3.62 3.37 3.51 3.64 3.65 3.78
Non-interest income to average assets 0.45 0.53 0.64 0.58 0.55 0.62
Non-interest expense to average assets 2.68 2.68 2.72 3.18 3.20 2.74
Dividend payout ratio 62.98 53.54 38.69 39.57 42.89 28.22
ASSET QUALITY RATIOS, AT PERIOD END:
Non-performing loans to net loans receivable 0.17 0.31 0.31 0.42 0.22 0.20
Non-performing assets to total assets 0.17 0.26 0.27 0.47 0.40 0.45
Allowance for loan losses
to non-performing loans 377.57 189.45 193.04 155.86 274.58 527.49
Allowance for loan losses to loans receivable 0.64 0.58 0.59 0.65 0.61 1.05
CAPITAL RATIOS:
Shareholders' equity to total assets,
at period end 12.96 15.79 11.28 11.62 11.54 12.85
Average equity to average assets 15.15 11.26 11.37 11.94 12.20 12.72
OTHER DATA:
Number of offices 21 21 21 18 18 17
</TABLE>
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
In the following discussion, references to "Bankshares" refer 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. (the "Holding Company"), a
mutual holding company, and its mid-tier holding company ("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 shares of
common stock to existing minority shareholders of Mid-Tier (the "Exchange") at
an exchange ratio of 2.0445 shares for each share of the Mid-Tier common stock.
At December 31, 1999, there were 9,319,873 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 December 15, 1998, Bankshares became the holding company for the Association
as a result of the completion of the conversion and reorganization of the
Association from the two-tier mutual holding company structure to the stock
holding company structure and the related stock offering of Bankshares (the
"Reorganization"). In the course of the Reorganization, the Holding Company and
Mid-Tier were merged with and into the Association. The Reorganization,
including the mergers, was accounted for in a manner similar to a pooling of
interests and did not result in any significant accounting adjustments. Net
proceeds from the Reorganization approximated $53.0 million which were initially
invested in interest-earning deposits at December 31, 1998, and which have been
since disbursed primarily to fund loan originations, securities purchases, and
repurchases of Bankshares' common stock in the open market This use of funds
reflected the implementation of the Association's business plan to prudently
deploy the capital raised in the Reorganization, without an increase in high
risk lending or investment activities.
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. As part of its
asset/liability strategy, the Association emphasizes the origination of
adjustable- and hybrid-rate loans on residential properties. The interest on
adjustable-rate loans adjusts annually. Hybrid loans are loans which have a
fixed-interest rate for the first five or seven years. After this period, the
loans convert to adjustable-rate loans. The Association also offers traditional
fixed-rate residential loans for terms of 15 or 30 years. 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, to a degree, 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, operates as Community Insurance Agency. Palm River Development
Co., Inc. ("Palm River"), incorporated in 1999, is engaged in a real estate
development joint venture in Indian River County.
6
<PAGE>
RESULTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND DECEMBER 31, 1998
GENERAL
Net income for the year ended December 31, 1999 increased 30.8% to $6.5 million,
or $0.65 diluted earnings per share, compared to $5.0 million, or $0.48 diluted
earnings per share for the same period in 1998. The increase was primarily the
result of a $4.6 million increase in net interest income, partially offset by a
$2.3 million increase in operating expense.
INTEREST INCOME
Interest income for the year ended December 31, 1999 totaled $58.5 million, an
increase of $4.0 million, or 7.3%, from $54.5 million for 1998 reflecting, in
part, the implementation of the Association's growth strategy to expand the loan
and securities available for sale portfolios, offset in part by the
lower-interest environment which existed for much of 1999. The increase was due
primarily to a $75.9 million increase in average interest-earning assets to
$798.6 million for the year ended December 31, 1999 from $722.7 million for
1998, partially offset by a decrease in the average yield on average
interest-earning assets to 7.32% for the year ended December 31, 1999 from 7.54%
for 1998. Interest income on loans increased $4.3 million, or 10.7%, to $44.5
million for the year ended December 31, 1999 compared to $40.2 million for 1998.
Interest income from securities held to maturity and securities available for
sale decreased by $371,000, or 3.2%, to $11.3 million for the year ended
December 31, 1999 from $11.6 million for 1998. The decrease in income from
securities held to maturity and securities available for sale was caused by a
$3.8 million decrease in the average balance to $171.2 million for the year
ended December 31, 1999 from $167.4 million for 1998 as well as a decrease in
the average yield to 6.58% for the year ended December 31, 1999 from 6.95% for
1998. For further details on the increase in interest income, see the charts in
"Average Balance Sheet" and "Rate Volume Analysis" on pages 8-9.
Management's strategy during 2000 will be to continue to grow the Association's
loan portfolio with a continued emphasis on higher yielding commercial real
estate and business loans. Such growth, in the rising interest-rate environment
which exists in early 2000, should have a positive effect on interest income and
the over all yield on interest-earning assets. However, such growth may also
result in additional provisions for loan losses. Interest rate spreads on the
growth may tighten due to the current interest rate environment and the cost of
funding sources.
INTEREST EXPENSE
Interest expense decreased $624,000, or 2.1%, to $29.5 million for the year
ended December 31, 1999 from $30.2 million for 1998. Interest on deposits
decreased $2.1 million, or 8.7%, to $22.0 million for the year ended December
31, 1999 from $24.1 million for 1998. The decrease was due primarily to a
decrease in the average cost of deposits to 3.71% from 4.17%, which reflected a
lower-interest rate environment in the Association's market area for much of
1999. Such decreases were partially offset by a $13.3 million, or 2.3%, increase
in the average balance to $591.8 million in 1999. For most of 1999, management's
policy was to maintain existing deposit accounts when possible without matching
competitor's rates on certificates of deposits. However, during the last quarter
of 1999, management found it necessary 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, in order
to attract new deposits, as well as to maintain its existing deposit customers.
Because certificates of deposit typically have a higher interest rate cost to
the Association than transaction accounts, an increased emphasis was placed on
obtaining a checking account as well as the certificate of deposit from new
customers. Such strategy was implemented as part of the Association's asset
liability policy. As a result, certificates of deposits and transaction accounts
increased $6.5 million and $13.0 million, respectively, at December 31, 1999 as
compared to December 31, 1998. Interest expense attributable to borrowed funds
increased $1.5 million, or 24.2%, to $7.6 million for the year ended December
31, 1999 from $6.1 million for 1998, primarily due to a $32.8 million, or 36.0%,
increase in the average balance of borrowed funds to $123.7 million during 1999
from $90.9 million during the 1998 period, partially offset by a decrease in the
average cost of borrowed funds to 6.10% for the year ended December 31, 1999
from 6.65% for the 1998 period. During 1999, additional FHLB advances totaling
$65.0 million included advances totaling $35.7 million used primarily to fund
the purchase of securities with higher interest yields than the rate paid on the
advances. For further details on interest expense, see the tables in "Average
Balance Sheet" and "Rate Volume Analysis" on pages 8-9.
The Association will be operating in a rising interest-rate environment during
the beginning of 2000. In such an environment, interest rate spreads tend to
decrease as rates paid on funding sources typically rise faster than yields
received on interest-earning assets. The Association will continue to match new
asset growth with the least expensive funding sources available. Some strategies
may include emphasizing lower-costing transaction accounts or FHLB advances.
7
<PAGE>
AVERAGE BALANCE SHEET
The following tables set forth certain additional information relating to
Bankshares' average balance sheet and reflect 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 instead of daily average
balances has not caused any material difference in the information presented.
This information, when considered with the prior comments and the following Rate
Volume Analysis table, explains the reasons for the growth in net interest
income.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31,
------------------------------------------------------------------------------------------
1999 1998 1997
----------------------------- --------------------------- ----------------------------
AVERAGE Average Average
AVERAGE YIELD/ Average Yield/ Average Yield/
BALANCE INTEREST COST Balance Interest Cost Balance Interest Cost
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Real estate loans $557,419 $42,759 7.67% $489,915 $38,342 7.83% $392,782 $31,846 8.11%
Consumer and commercial business 20,184 1,756 8.70 20,576 1,886 9.17 18,316 1,644 8.98
Securities held to maturity and
available for sale 171,212 11,258 6.58 167,357 11,629 6.95 210,870 14,870 7.05
Other investments (1) 49,794 2,691 5.40 44,819 2,632 5.87 31,851 1,956 6.14
-------- ------- -------- ------- -------- -------
Total interest-earning assets 798,609 58,464 7.32 722,667 54,489 7.54 653,819 50,316 7.70
------- ------- -------
Non-interest-earning assets 60,176 49,581 39,356
-------- -------- --------
Total assets $858,785 $772,248 $693,175
======== ======== ========
Interest-bearing liabilities:
Deposits $591,849 21,987 3.71 $578,574 24,111 4.17 $537,965 22,648 4.21
Borrowed funds 123,689 7,548 6.10 90,928 6,048 6.65 61,551 4,742 7.70
-------- ------- -------- ------- -------- -------
Total interest-bearing liabilities 715,538 29,535 4.13 669,502 30,159 4.50 599,516 27,390 4.57
------- ------- -------
Non-interest-bearing liabilities 13,128 15,766 14,837
-------- -------- --------
Total liabilities 728,666 685,268 614,353
Shareholders' equity 130,119 86,980 78,822
-------- -------- --------
Total liabilities and shareholders'
equity $858,785 $772,248 $693,175
======== ======== ========
Net interest income $28,929 $24,330 $22,926
======= ======= =======
Net interest rate spread (2) 3.19% 3.04% 3.13%
====== ====== ======
Net yield on interest-earning assets (3) 3.62% 3.37% 3.51%
====== ====== ======
Ratio of average interest-earning assets
to average interest-bearing liabilities 111.61% 107.94% 109.06%
====== ====== ======
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Includes interest-earning deposits and FHLB stock.
(2) Net interest-rate spread represents the difference between the weighted
average yield earned on interest-earning assets and the weighted 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.
</TABLE>
8
<PAGE>
RATE VOLUME ANALYSIS
Net interest income can also be analyzed in terms of the impact of changing
interest rates on interest-earning assets and interest-bearing liabilities and
changing the volume or amount of these assets and liabilities. The following
table represents the extent to which changes in interest rates and changes in
the volume of interest-earning assets and interest-bearing liabilities have
affected the interest income and interest expense during the periods indicated.
Information is provided in each category with respect to (i) changes
attributable to changes in average volume (change in average volume multiplied
by prior rate); (ii) changes attributable to changes in rate (changes in rate
multiplied by prior average volume); (iii) changes in rate-volume (changes in
rate multiplied by changes in average volume); and (iv) the net change.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, Year Ended December 31, Year Ended December 31, 1997
1999 VS. 1998 1998 vs. 1997 vs. Year Ended September 30, 1996
---------------------------------- ----------------------------------- --------------------------------
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:
Real estate loans $5,287 $ (784) $ (86) $4,417 $7,877 $(1,100) $ (281) $6,496 $4,981 $ 99 $ 1 $5,081
Consumer and commercial
business loans (37) (97) 4 (130) 203 35 4 242 246 (94) (16) 136
Securities held to
maturity and available
for sale 231 (535) (67) (371) (3,033) (239) 31 (3,241) 1,542 137 68 1,747
Other investments (1) 292 (211) (22) 59 796 (86) (34) 676 (594) 75 (18) (537)
------ ------ ----- ------ ------ ------- ------ ------ ------ ----- ---- ------
Total interest-earning
assets 5,773 (1,627) (171) 3,975 5,843 (1,390) (280) 4,173 6,175 217 35 6,427
------ ------ ----- ------ ------ ------- ------ ------ ------ ----- ---- ------
INTEREST EXPENSE
Deposits 525 (2,661) 12 (2,124) 1,710 (215) (32) 1,463 2,372 910 119 3,401
Borrowed funds 2,208 (500) (208) 1,500 2,262 (646) (310) 1,306 1,630 (348) (152) 1,130
------ ------ ----- ------ ------ ------- ------ ------ ------ ----- ---- ------
Total interest-bearing
liabilities 2,733 (3,161) (196) (624) 3,972 (861) (342) 2,769 4,002 562 (33) 4,531
------ ------ ----- ------ ------ ------- ------ ------ ------ ----- ---- ------
Net change in net $3,040 $1,534 $ 25 $4,599 $1,871 $ (529) $ 62 $1,404 $2,173 $(345) $ 68 $1,896
interest income ====== ====== ====== ====== ====== ======= ====== ====== ====== ===== ==== ======
-------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes interest-earning deposits and FHLB stock.
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
$905,000 for the year ended December 31, 1999 as compared to $622,000 for 1998.
The provision for loan losses was reduced in 1998 due to a $252,000 recovery of
a prior loss which reduced the necessary provision amount for 1998. The
Association did not experience this level of recoveries in 1999. Management
increased the allowance for loan losses in 1999 in order to protect against the
inherent risk in the loan portfolio due to the $70.2 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 loans receivable at December 31,
1999 and 1998 was 0.64% and 0.58%, 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 $227,000 or 5.6%, to $3.8 million for
the year ended December 31, 1999 from $4.1 million for 1998 primarily due to the
recognition of a $138,000 loss reflecting the decline in fair value of a
security that was determined during 1999 by management to be other than
temporary. In addition, the results for 1998 included a $175,000 gain on the
call of a security that did not reoccur in 1999. The decrease was partially
offset by a $194,000 increase in fee income (which includes servicing income and
other loan fees, and NOW account and other customer fees) which was $3.8 million
and $3.6 million for the 1999 and the 1998 periods, respectively.
9
<PAGE>
OPERATING EXPENSE
Total operating expense increased $2.3 million to $23.0 million for the year
ended December 31, 1999 from $20.7 million for 1998. Employee compensation and
benefits increased by $1.6 million to $11.9 million during the year ended
December 31, 1999 from $10.3 million during 1998 primarily as a result of
increased staffing and compensation levels designed to maintain non-management
employee wages at competitive levels in the Association's market area and the
increased cost of the 1999 stock benefit programs. Occupancy and equipment
expense increased $521,000 to $6.0 million for the year ended December 31, 1999,
from $5.5 million for the 1998 period primarily as a result of increased
depreciation expense, repairs and maintenance costs, and real estate taxes,
offset in part by a decrease in lease expense. The increase in depreciation
expense and the decrease in lease expense are related to the relocation of two
branch offices from leased facilities to new buildings built by the Association
during the latter part of 1998, as well as by the closing during 1999 of a
leased branch office. In addition, miscellaneous expense (which includes but is
not limited to such expense items as legal, shareholder relations, accounting,
tax and regulatory services, stationery and supplies, postage, telephone, and
other miscellaneous expenses) increased $295,000 for the year ended December 31,
1999 as compared to 1998.
PROVISION FOR INCOME TAXES
The provision for income taxes increased $236,000 to $2.3 million for the year
ended December 31, 1999 from $2.1 million for 1998 due in part to higher taxable
income during the year ended December 31, 1998. The increase was partially
offset by the increased benefit from tax credits totaling $599,000 during the
year ended December 31, 1999 resulting from the Association's investment in
affordable housing partnerships, as compared to $320,000 for 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 $0.48 diluted earnings per share, compared to $5.4 million, or $0.52 diluted
earnings per share for 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 1998, net interest income increased $1.4 million to $24.3 million from
$22.9 million for 1997 as described below and is shown in the tables in "Average
Balance Sheet" and "Rate Volume Analysis" on pp. 8-9. Other income and the
provision for income taxes decreased $379,000 and $823,000, respectively, during
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 expand the loan
and securities available for sale portfolios. 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 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 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 (invested in loans above) 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.
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 $1.5 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 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 strategy during 1998. 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 which have higher yields than the interest cost of the FHLB
advances.
10
<PAGE>
PROVISION FOR LOAN LOSSES
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 0.58% 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 1998 and 1997.
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 $10.3 million for the year ended December
31, 1998 from $8.9 million for 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 1997 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.
PROVISION FOR INCOME TAXES
The provision for income taxes decreased $823,000 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 for the year
ended December 31, 1998 resulting from the Association's investment in
affordable housing partnerships as compared to $197,000 for 1997.
FINANCIAL CONDITION
DECEMBER 31, 1999 COMPARED TO DECEMBER 31, 1998
Total assets increased $49.0 million, or 6%, to $893.0 million at December 31,
1999 from $844.0 million at December 31, 1998. The increase in total assets was
primarily due to a $70.2 million increase in the loan portfolio funded in part
by a $71.8 million decrease in cash and cash equivalents. The 1999 business plan
included the prudent deployment of the capital raised in the second step
conversion, without an increase in high risk lending or investment activities.
As part of this effort, the loan portfolio was increased by $70.2 million, or
13%, by emphasizing the origination of residential and commercial real estate
loans secured by properties located in the Association's local market area
through its loan origination network while still maintaining its conservative
loan underwriting standards. The $70.2 million increase represented new loan
originations and purchases totaling $228.2 million and $6.1 million,
respectively, of which $151.0 million were one-to four-family residential loans,
$15.0 million were multi-family residential loans, $26.1 million were commercial
real estate loans, $1.9 million were commercial business loans, $37.4 million
were land loans and $2.9 million were consumer loans. These originations and
purchases were offset in part by sales, principal repayments, an increase in
loans in process and other adjustments totaling $6.0 million, $133.2 million,
$23.7 million and $1.2 million, respectively.
The securities portfolio, which includes securities both held to maturity and
available for sale, had a net increase for the year of $35.9 million. Investment
securities held to maturity decreased $13.8 million to $38.8 million at December
31, 1999 from $52.6 million at December 31, 1998. Securities available for sale
increased by $49.6 million to $144.8 million at December 31, 1999 from $95.2
million at December 31, 1998. Purchases of new securities totaled $74.2 million,
which included $29.4 million in U.S. Government and agency securities, $5.0
million in corporate debt, $10.0 million in mutual funds, and $29.8 million in
mortgage-backed securities. Of these new purchases, $35.7 million were financed
in leveraged transactions using FHLB advances. All of the securities purchased
were classified as available for sale. The purchases were offset in part by $5.0
million in calls and $33.3 million in principal repayments, amortization and
accretion. Included in the securities portfolio are Auto Bonds Receivables (the
"Auto Bonds") which are asset-backed securities secured by automobile loan
receivables During 1999, management determined that the decline in fair value on
the Association's investment in the Auto Bonds was other than temporary
11
<PAGE>
resulting in a write down of $138,000 and a reclassification from held to
maturity to available for sale. The Auto Bonds are reported at their fair value
of $413,000 at December 31, 1999.
During July 1999, the Association formed a wholly-owned subsidiary, Palm River.
This subsidiary entered into a development agreement (the "Agreement") with a
local developer to construct and sell 17 single-family lots, 48 condominiums, 22
carriage homes and 116 patio homes on 117 acres of land in Indian River County,
Florida. Palm River's investment in and advances to this real estate venture
totaled $11.6 million at December 31, 1999.
Office properties and equipment increased by $795,000 to $24.9 million at
December 31, 1999 primarily as a result of the opening of a new branch office in
the Shoppes of Ibis. FHLB stock increased $2.3 million to $7.0 million at
December 31, 1999.
The increase in total assets was funded primarily by a $19.5 million increase in
deposits to $613.9 million at December 31, 1999 as compared to $594.4 million at
December 31, 1998. For most of 1999, management's policy was to maintain
existing deposit accounts when possible without matching competitor's rates on
certificates of deposit. However, during the last quarter of 1999, management
found it necessary 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, in order to attract new deposits, and
to maintain its existing deposit customers. Because certificates of deposit
typically have a higher interest rate cost to the Association than core
accounts, an increased emphasis was placed on obtaining a checking account as
well as the certificate of deposit from new customers. As a result, core
deposits (which include passbooks and NOW, demand, statement and money market
accounts) increased $13.0 million, or 5.5%, and certificates of deposit
increased $6.5 million, or 1.8%. This resulted in an increase in the actual rate
paid on total deposits to 3.88% at December 31, 1999, from an average yield for
1999 of 3.71%. In addition, the Association used FHLB advances more extensively
to fund its asset growth. Such advances increased $48.3 million primarily due to
$65.0 million in new advances used to fund securities purchases and loan
originations, offset in part by $10.0 million and $6.7 million in calls and
normal repayments, respectively.
Shareholders' equity decreased to $115.7 million or $13.50 per share at December
31, 1999 from $133.3 million or $13.43 per share at December 31, 1998. This
decrease was due primarily to the repurchase during 1999 of 1,267,444 of
Bankshares' issued and outstanding common stock at a cost of approximately $15.9
million, in addition to the payment of dividends aggregating $0.44 per share.
The decrease also reflected the cost of the open market purchases of common
stock totaling $2.9 million which were used to fund grants in the 1995 and 1999
Recognition and Retention Plans, offset in part by net income for the year of
$6.5 million.
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 12.2% during the month of December 31,
1999 and 14.7% for fiscal 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 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 deposits with the FHLB of Atlanta amounted to $21.4
million at December 31, 1999. Other assets qualifying for liquidity outstanding
at December 31, 1999 amounted to $51.1 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 which
are part of this Annual Report.
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 $140.2 million at December 31, 1999. At
December 31, 1999, loan commitments totaled $5.3 million, the unfunded portion
of consumer lines of credit totaled $7.8 million, and available commercial lines
and letters of credit totaled $6.4 million. There were no commitments
outstanding to purchase loans at that date. Commitments to purchase
mortgage-backed securities totaled $1.1 million at December 31, 1999.
Certificates of deposit scheduled to mature in less than one year totaled $257.9
million at December 31, 1999. Based on prior experience, management believes
that a significant portion of such deposits will remain with the Association.
12
<PAGE>
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements of Bankshares and the accompanying notes
presented in this Annual Report, 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.
IMPACT OF NEW ACCOUNTING STANDARDS
For fiscal years beginning after June 15, 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 on Bankshares' financial statements but the effect will depend
on the extent of Bankshares' derivative holdings, if any, when this standard
applies.
Mortgage loans originated in mortgage banking are converted into securities on
occasion. A new accounting standard effective in 1999 allows these securities to
be classified as available for sale, held to maturity, or trading instead of the
previous requirement to classify such assets as trading.
YEAR 2000 CONSIDERATIONS
Bankshares completed the change to January 1, 2000 on all of its systems with no
material problems. Management and staff will continue to monitor its systems and
to test date sensitive calculations throughout 2000.
FORWARD-LOOKING STATEMENTS
Certain information in this annual report may constitute forward-looking
information, as that term is defined in the Private Securities Litigation Reform
Act of 1995, 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.
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. Bankshares' balance sheet consists of investments in
interest-earning assets (primarily loans and 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, 1999, Bankshares
did not own any trading assets, nor did it have any hedging transactions in
place such as interest rate swaps and caps. Based upon the nature of Bankshares'
operations, it is not subject to foreign currency exchange or commodity price
risk. Bankshares' 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 real estate and
business loans which are generally shorter term in nature than its mortgage
loans. In addition, the majority of all long-term, fixed-rate single-family
residential mortgages are underwritten in accordance with Fannie Mae ("FNMA")
guidelines, thereby allowing the flexibility to sell the assets into the
secondary market when market conditions are favorable. With respect to its
13
<PAGE>
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 "ALCO") which is comprised of senior management of the Association. The
ALCO establishes policies to monitor and coordinate Bankshares' 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 Bankshares' 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, 1999.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Change in Interest Rates NPV as % of
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> <C>
200 $111,656 $(28,906) (20.6)% 13.00% (337)
100 125,361 (15,201) (10.8) 14.60 (177)
Static 140,562 -- -- 16.37 --
(100) 157,480 16,918 12.0 18.34 197
(200) 176,370 35,808 25.5 20.54 417
</TABLE>
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 both 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,
deposit and borrowing portfolios, see the Notes to Consolidated Financial
Statements which are part of this Annual Report.
14
<PAGE>
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, 1999 and
1998, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. 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, 1999 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999 in conformity
with generally accepted accounting principles.
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
February 18, 2000
15
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY SAVINGS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- -----------------------------------------------------------------------------------------------------------------------
December 31,
1999 1998
------------ ------------
(In Thousands)
<S> <C> <C>
ASSETS
Cash and amounts due from depository institutions $ 22,057 $ 15,305
Interest-earning deposits 23,182 101,710
------------ ------------
Cash and cash equivalents 45,239 117,015
Securities available for sale 144,840 95,151
Securities held to maturity (Approximate fair value - 1999, $41,271; 1998, $57,303) 38,802 52,619
Loans receivable, net of allowance for loan losses 608,369 538,204
Accrued interest receivable 3,788 2,782
Federal Home Loan Bank stock - at cost 7,009 4,722
Premises and equipment, net 24,939 24,144
Real estate held for investment 1,872 1,872
Investment in and advances to real estate venture 11,633 --
Real estate owned, net 494 522
Other assets 5,989 7,010
------------ ------------
Total assets $ 892,974 $ 844,041
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand deposits $ 39,429 $ 31,769
NOW and statement savings 76,073 82,628
Savings deposits 34,466 32,919
Money market deposits 100,299 89,895
Certificates of deposit 363,676 357,189
------------ ------------
Total deposits 613,943 594,400
Mortgage-backed bond, net 14,508 15,430
Advances from Federal Home Loan Bank 140,186 91,920
Advances by borrowers for taxes and insurance 1,403 1,208
Other liabilities 7,233 7,797
------------ ------------
Total liabilities 777,273 710,755
------------ ------------
SHAREHOLDERS' EQUITY
Preferred stock ($1 par value per share), 10,000,000 authorized shares, no shares issued -- --
Common stock ($1 par value per share), 60,000,000 authorized shares: 1999, 9,319,873;
1998, 10,548,884 shares issued and outstanding 10,571 10,549
Additional paid-in capital 93,744 93,268
Retained income - substantially restricted 37,869 35,545
Common stock purchased by Employee Stock Ownership Plan (4,722) (5,407)
Common stock issued to Recognition and Retention Plans (2,586) (237)
Accumulated other comprehensive income (3,358) (432)
Treasury stock, at cost: 1999, 1,251,267 shares (15,817) --
------------ ------------
Total shareholders' equity 115,701 133,286
------------ ------------
Total liabilities and shareholders' equity $ 892,974 $ 844,041
============ ============
</TABLE>
See notes to consolidated financial statements.
16
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
For the Years Ended December 31,
1999 1998 1997
---------- ---------- ----------
(Dollars In Thousands Except Per Share Data)
<S> <C> <C> <C>
Interest income:
Loans $ 44,515 $ 40,228 $ 33,490
Securities 11,258 11,629 14,870
Other interest and dividend income 2,691 2,632 1,956
---------- ---------- ----------
Total interest income 58,464 54,489 50,316
---------- ---------- ----------
Interest expense:
Deposits 21,987 24,082 22,648
Advances from Federal Home Loan Bank and other 7,548 6,077 4,742
---------- ---------- ----------
Total interest expense 29,535 30,159 27,390
---------- ---------- ----------
Net interest income 28,929 24,330 22,926
Provision for loan losses 905 622 264
---------- ---------- ----------
Net interest income after provision for loan losses 28,024 23,708 22,662
---------- ---------- ----------
Other income:
Servicing income and other fees 387 198 269
NOW account and other customer fees 3,446 3,441 3,339
Net gain (loss) on sale and early maturities of securities -- 175 (8)
Loss on impairment of securities (138) -- --
Net (loss) gain on real estate owned (89) 18 112
Gain on sale of other assets -- -- 617
Miscellaneous 232 233 115
---------- ---------- ----------
Total other income 3,838 4,065 4,444
---------- ---------- ----------
Operating expense:
Employee compensation and benefits 11,853 10,307 8,892
Occupancy and equipment 6,017 5,496 5,059
Advertising and promotion 866 915 734
Federal deposit insurance premium 342 342 270
Miscellaneous 3,907 3,612 3,865
---------- ---------- ----------
Total operating expense 22,985 20,672 18,820
---------- ---------- ----------
Income before provision for income taxes 8,877 7,101 8,286
---------- ---------- ----------
Provision (benefit) for income taxes:
Current 2,668 2,872 3,042
Deferred (325) (765) (112)
---------- ---------- ----------
Total provision for income taxes 2,343 2,107 2,930
---------- ---------- ----------
Net income $ 6,534 $ 4,994 $ 5,356
========== ========== ==========
Earnings per share - basic $ 0.67 $ 0.49 $ 0.53
========== ========== ==========
Earnings per share - diluted $ 0.65 $ 0.48 $ 0.52
========== ========== ==========
Weighted average common shares outstanding - basic 9,748,916 10,175,899 10,079,363
========== ========== ==========
Weighted average common shares outstanding - diluted 10,123,717 10,448,327 10,334,647
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
17
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY SAVINGS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
---------------------------------------------------------------------------------------------
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, 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
Other comprehensive income:
Unrealized increase in market value
of assets available for sale
(net of income taxes) -- -- -- -- -- 914 -- 914
---------
Comprehensive income 6,270
Stock options exercised 5 45 -- -- -- -- -- 50
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
Other comprehensive income:
Unrealized decrease in market value
of assets available for sale
(net of income taxes) -- -- -- -- -- (278) -- (278)
---------
Comprehensive income 4,716
Stock options exercised 9 92 -- -- -- -- -- 101
Shares committed to be released -
Employee Stock Ownership Plan and
Recognition and Retention Plan -- 445 -- 394 186 -- -- 1,025
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)
Dividends declared -- -- (2,674) -- -- -- -- (2,674)
--------- -------- -------- --------- ------- --------- -------- ---------
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
========= ======== ======== ========= ======= ========= ======== =========
</TABLE>
See notes to consolidated financial statements.
18
<PAGE>
<TABLE>
<CAPTION>
COMMUNITY SAVINGS BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------
For the Years Ended December 31,
1999 1998 1997
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,534 $ 4,994 $ 5,356
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 2,297 1,523 1,993
ESOP and Recognition and Retention Plans
compensation expense 1,595 1,025 892
Accretion of discounts, amortization of premiums,
and other deferred yield items (1,572) (1,731) (1,915)
Provision for loan losses 905 622 264
Impairment loss on securities 138 -- --
(Increase) decrease in other assets 1,469 (686) (2,983)
Increase (decrease) in other liabilities (369) (4,859) 1,107
-------- -------- --------
NET CASH FROM OPERATING ACTIVITIES 10,997 888 4,714
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in loans (65,004) (48,980) (38,624)
Principal payments, calls and maturities received
on securities and FHLB stock 35,091 88,983 35,555
Purchases of: Loans and participations (6,066) (38,354) (24,455)
Securities available for
sale and FHLB stock (76,167) (26,544) (46,711)
Office property and
equipment, net (2,628) (7,236) (5,172)
Proceeds from sales of: Securities available for sale -- -- 2,435
Real estate held for investment -- (1,872) --
Investment in real estate venture (11,633) -- --
-------- -------- --------
NET CASH FROM INVESTING ACTIVITIES (126,407) (32,131) (76,972)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 19,543 43,692 36,999
Advances from FHLB 65,000 42,000 30,000
Repayment of advances and calls from FHLB (16,734) (7,421) (7,425)
Repayment of ESOP loan -- (1,424) (491)
Sale of common stock-net of issuance costs (54) 53,236 --
Purchase of common stock by Recognition
and Retention Plans (2,923) -- --
Purchase of treasury stock (15,905) -- --
Purchase of ESOP shares -- (4,377) --
Proceeds from exercise of stock options 209 101 50
Payments made on mortgage-backed bond (1,387) (1,387) (1,387)
Dividends paid (4,115) (2,116) (1,976)
--------- --------- ---------
NET CASH FROM FINANCING ACTIVITIES 43,634 122,304 55,770
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (71,776) 91,061 (16,488)
Cash and cash equivalents, beginning of period 117,015 25,954 42,442
--------- --------- ---------
Cash and cash equivalents, end of period $ 45,239 $ 117,015 $ 25,954
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes $ 1,829 $ 2,943 $ 2,836
Cash paid for interest on deposits and
other borrowings $ 28,774 $ 29,749 $ 27,959
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES:
Real estate acquired in settlement of loans $ 656 $ 713 $ 558
Transfer of securities from held to maturity
to available for sale $ 413 $ -- $ --
Write-down of securities held to maturity
for impairment $ 138 $ -- $ --
</TABLE>
See notes to consolidated financial statements.
19
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997.
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. (the "Holding Company") 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' most significant asset is the common
stock of the Association. Consequently, the majority of its net income is
derived from the Association.
The accounting and reporting policies of Bankshares, the Association, and
the Association's wholly-owned subsidiaries ComFed, Inc. ("ComFed") and
Palm River Development Co., Inc. ("Palm River") 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, ComFed and Palm
River. ComFed was formed for the purpose of operating an insurance
agency, Community Insurance Agency. Palm River, incorporated in July
1999, is engaged in a real estate development joint venture in Indian
River County. (See Note 7.) All significant intercompany balances and
transactions have been eliminated.
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, the fair value of the investment in
and advances to the real estate venture, 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.
INTEREST RATE RISK - The Association is engaged principally in providing
first mortgage loans (adjustable-, fixed- and hybrid-rate) to individuals
and commercial enterprises. At December 31, 1999 and 1998, the
Association's assets that earned interest at adjustable interest rates
were 45.0% and 50.4%, respectively, of total interest-earning assets.
Those assets were funded primarily with short-term liabilities that have
interest rates that vary with market rates over time.
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 and
available-for-sale 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 or incurred. Securities are written down to fair value
when a decline in fair value is determined not to be temporary.
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.
20
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
INVESTMENT IN REAL ESTATE VENTURE - The Association's wholly-owned
subsidiary, Palm River, owns 100% of the River Club at Carlton real
estate development and shares evenly in the profits and losses from the
development with CRC Development Company. The Association accounts for
Palm River's investment in the River Club at Carlton using the equity
method. Further detail is provided in Note 7.
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.
21
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LIMITED PARTNERSHIP INVESTMENT IN QUALIFIED AFFORDABLE HOUSING PROJECT -
The Association has an approximate 4% limited partner interest in three
separate real estate partnerships that operate 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 lives of the partnerships (15 years). The amortized cost of the
investments at December 31, 1999 and 1998 was $3.9 million and $4.4
million, respectively, and is included in other assets. Amortization for
the year ended December 31, 1999 and 1998 was $496,000 and $246,000,
respectively, and is included in miscellaneous expense. In addition to
the tax benefit related to the amortization, tax credits of $600,000 and
$320,000 were recognized for the years ended December 31, 1999 and 1998,
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 PLANS ("1995 RRP", "1999 RRP" OR COLLECTIVELY
"RRPS") - The RRPs are stock award plans 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 the RRPs. Compensation expense for the RRPs 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 PLANS ("1995 SOP" AND "1999 SOP" OR "SOPS") - Expense for
employee compensation under the SOPs would be recognized only if options
are granted below the market price at the grant date which the existing
SOPs do 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 12.
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.
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.
SEGMENT INFORMATION - While Bankshares' chief decision makers monitor the
revenue streams of various products, and services, operations are managed
and financial performance is evaluated on a company-wide basis.
Accordingly, all of Bankshares' operations are considered by management
to be aggregated in one reportable operating segment.
22
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IMPACT OF NEW ACCOUNTING ISSUES - For fiscal years beginning after June
15, 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 on Bankshares' financial statements but the effect will
depend on Bankshares' derivative holdings, if any, when this standard is
applied in January 2001.
Mortgage loans originated in mortgage banking are converted into
securities on occasion. A new accounting standard effective in 1999
allows these securities to be classified as available for sale, held to
maturity or trading, instead of the previous requirement to classify such
assets as trading.
RECLASSIFICATIONS - Certain items in the 1998 and 1997 financial
statements and the notes thereto have been reclassified to conform with
the 1999 presentation.
2. SECURITIES AVAILABLE FOR SALE
Securities available for sale at December 31, 1999 and 1998 are
summarized as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
(In Thousands)
<S> <C> <C> <C> <C>
DECEMBER 31, 1999:
EQUITY SECURITIES $ 32 $ 18 $ -- $ 50
UNITED STATES GOVERNMENT AND AGENCY OBLIGATIONS 34,385 -- (906) 33,479
MUTUAL FUNDS 51,000 -- (1,155) 49,845
CORPORATE DEBT ISSUES:
BEAR STEARNS CORPORATE BOND 4,890 -- (437) 4,453
AUTO BONDS RECEIVABLE CORP 413 -- -- 413
-------- -------- -------- --------
TOTAL CORPORATE DEBT ISSUES 5,303 -- (437) 4,866
-------- -------- -------- --------
MORTGAGE-BACKED AND RELATED SECURITIES:
GNMA II PASS-THROUGH CERTIFICATES 46,172 -- (1,862) 44,310
COLLATERALIZED MORTGAGE OBLIGATIONS 12,635 1 (346) 12,290
-------- -------- -------- --------
TOTAL MORTGAGE-BACKED AND RELATED SECURITIES 58,807 1 (2,208) 56,600
-------- -------- -------- --------
TOTAL SECURITIES AVAILABLE FOR SALE $149,527 $ 19 $ (4,706) $144,840
======== ======== ======== ========
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 $ 95,486 $ 384 $ (719) $ 95,151
======== ======== ======== ========
</TABLE>
23
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The table below sets forth the contractual maturity distribution of securities
available for sale at December 31, 1999.
- ------------------------------------------------------------------------------
DECEMBER 31, 1999
AMORTIZED FAIR
COST VALUE
--------- ----------
(In Thousands)
Due in one year or less $ 413 $ 413
Due after one year through five years 34,385 33,479
Due after five years through ten years -- --
Due after ten years 4,890 4,453
Mortgage-backed and related securities 58,807 56,600
Equity securities 51,032 49,895
--------- ----------
Total $ 149,527 $ 144,840
========= ==========
Proceeds from the sale of securities available for sale were $0, $0, and
$2,435,000, during the years ended December 31, 1999, 1998 and 1997,
respectively. For the year ended December 31, 1997, sales resulted in
gross losses of $8,000. There were no gross realized gains or losses
during the years ended December 31, 1999 and 1998.
Securities, with carrying values of approximately $7,940,000 and
$10,797,000 at December 31, 1999 and 1998, were pledged as collateral for
purposes required or permitted by law.
During the quarter ended December 31, 1999, management determined that
the decline in fair value on the Association's investment in Auto Bond
Receivables was other than temporary resulting in a write down of
$138,000 and a reclassification from held to maturity to available for
sale.
24
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SECURITIES HELD TO MATURITY
Securities held to maturity at December 31, 1999 and 1998 are summarized
as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------- ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C>
DECEMBER 31, 1999:
UNITED STATES GOVERNMENT AND
AGENCY OBLIGATIONS $14,564 $ 2,502 $ -- $17,066
MORTGAGE-BACKED AND RELATED SECURITIES:
UNITED STATES AGENCY PASS THROUGH
CERTIFICATES 6,322 59 (84) 6,297
AGENCY FOR INTERNATIONAL DEVELOPMENT
PASS THROUGH CERTIFICATES 141 -- -- 141
COLLATERALIZED MORTGAGE OBLIGATIONS 11,829 5 (253) 11,581
CMO RESIDUAL INTEREST BONDS 2 -- -- 2
------- ------- ------- -------
TOTAL MORTGAGE-BACKED AND RELATED SECURITIES 18,294 64 (337) 18,021
------- ------- ------- -------
CORPORATE DEBT ISSUES:
CHASE FEDERAL MORTGAGE-BACKED BOND 5,944 240 -- 6,184
------- ------- ------- -------
TOTAL SECURITIES HELD TO MATURITY $38,802 $ 2,806 $ (337) $41,271
======= ======= ======= =======
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
======= ======= ======= =======
</TABLE>
The table below sets forth the contractual maturity distribution of the
securities held to maturity at December 31, 1999.
- -----------------------------------------------------------------------------
DECEMBER 31, 1999
CARRYING FAIR
VALUE VALUE
-------- -------
(In Thousands)
Due in one year or less $ -- $ --
Due after one year through five years 11,629 13,706
Due after five years through ten years 8,880 9,544
Mortgage-backed and related securities 18,293 18,021
------- -------
Total $38,802 $41,271
======= =======
25
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Securities held to maturity were called during the year ended December
31, 1998 which resulted in a gain of $175,000. There were no sales of
securities held to maturity during the years ended December 31, 1999,
1998 and 1997. 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 mortgage 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, 1999, the
Association had $11,829,000 in such mortgage-related securities, which
were held for investment and had a fair value of $11,581,000. The
fixed-rate CMOs have coupon rates ranging from 6.0% to 10.0%.
FEDERAL HOME LOAN BANK STOCK - At December 31, 1999 and 1998, the
Association held $7,009,000 and $4,722,000, 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,
1999 1998
------------ ------------
(In Thousands)
Real estate loans:
Residential 1-4 family $ 432,301 $ 421,766
Residential construction 110,710 54,391
Nonresidential construction -- 6,292
Land 40,399 14,624
Multi-family 5,845 8,392
Commercial 58,492 46,118
--------- ---------
Total real estate loans 647,747 551,583
--------- ---------
Non-real estate loans:
Consumer 13,484 15,015
Commercial business 6,520 6,635
--------- ---------
Total non-real estate loans 20,004 21,650
--------- ---------
Total loans receivable 667,751 573,233
Less:
Undisbursed loan proceeds 56,948 33,202
Unearned discount and premium and
net deferred loan fees and costs (1,489) (1,333)
Allowance for loan losses 3,923 3,160
--------- ---------
Total loans receivable, net $ 608,369 $ 538,204
========= =========
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, 1999, 1998
and 1997 were $11,277,000, $14,173,000, and $18,967,000, respectively.
Custodial escrow balances maintained in connection with the foregoing
loan servicing were $54,000, $53,000, and $47,000, respectively.
26
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC.
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 were no loans held for sale
included in loans receivable at December 31, 1999 and 1998.
An analysis of the changes in the allowance for loan losses for the years
ended December 31, 1999, 1998 and 1997, is as follows:
-----------------------------------------------------------------------
For the Years Ended December 31,
1999 1998 1997
------ ------ ------
(In Thousands)
Balance, beginning of period $3,160 $2,662 $2,542
Provision charged to income 905 622 264
Losses charged to allowance (146) (376) (144)
Recoveries 4 252 --
------ ------ ------
Balance, end of year $3,923 $3,160 $2,662
====== ====== ======
IMPAIRED LOANS - An analysis of the recorded investment in impaired loans
is as follows:
-------------------------------------------------------------------------
At or for the Years Ended December 31,
1999 1998 1997
------ ------ ------
(In Thousands)
Impaired loan balance $ 5 $ 25 $1,044
Related allowance -- -- 252
Average impaired loan balance 71 13 1,057
Interest income recognized -- 1 91
NON-PERFORMING LOANS AND REAL ESTATE OWNED - 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 on such loans is fully reserved and the loan ceases to accrue
interest thereafter.
-----------------------------------------------------------------------
At December 31,
1999 1998 1997
------ ------- ------
(Dollars In Thousands)
Non-performing loans:
One- to four-family residential $1,015 $ 1,537 $1,289
Commercial and multi-family
real estate 5 52 --
Consumer and commercial business
loans 12 67 55
Land 7 12 35
------ ------- ------
Total non-performing loans 1,039 1,668 1,379
REO 494 522 592
Other repossessed assets -- 22 --
------ ------- ------
Total non-performing assets, net
of specific valuation allowances $1,533 $ 2,212 $1,971
====== ======= ======
Total non-performing loans to net
loans receivable 0.17% 0.31% 0.31%
Total non-performing loans to
total assets 0.12 0.20 0.19
Total non-performing assets to
total assets 0.17 0.26 0.27
27
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. However, employees 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, 1999. At December 31, 1999 and 1998, the total amount of
loans to directors, executive officers, and associates of such persons
was $834,000 and $867,000, respectively. During 1999, principal advances
and repayments on loans to officers and directors totaled $79,000 and
$112,000, respectively,
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, 1999 and
1998, which were pledged as collateral.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
December 31, December 31,
1999 1998
------------ ------------
(In Thousands)
<S> <C> <C>
Real estate loans (unpaid principal balance) $133,047 $87,109
FHLB stock and accrued dividends 7,139 4,811
-------- -------
Total pledged to the FHLB $140,186 $91,920
======== =======
Other pledged assets:
Deposits of public funds - State of Florida
Mortgage-backed and related securities $ 5,840 $ 8,697
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 300 300
Mortgage-backed bond
Unpaid principal balance of loans 33,642 32,046
-------- -------
Total of other pledged assets $ 41,582 $42,843
======== =======
</TABLE>
FHLB ADVANCES - The Association has a security agreement with the FHLB
which includes a blanket floating lien that requires the Association
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. PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1999 and 1998 are summarized as
follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
December 31, December 31,
1999 1998
------------ ------------
(In Thousands)
<S> <C> <C>
Land $ 8,801 $6,419
Buildings and improvements 18,641 19,245
Furniture and equipment 16,404 16,951
------- -------
Total 43,846 42,615
Less accumulated depreciation (18,907) (18,471)
------- -------
Total office properties and equipment - net $24,939 $24,144
======= =======
</TABLE>
28
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. INVESTMENT IN AND ADVANCES TO REAL ESTATE VENTURE
On July 12, 1999, the Association's wholly-owned subsidiary, Palm River,
entered into a development agreement (the "Agreement") with CRC
Development Company ("CRC") to construct and sell 17 single family lots,
48 condominiums, 22 carriage homes and 116 patio homes on 117 acres of
land in Indian River County, Florida. The joint venture is known as the
River Club at Carlton (the "River Club").
The terms of the Agreement provide for Palm River to fund all
construction and development costs, via advances from the Association to
Palm River, including the costs of acquiring the land, and to receive
interest on any outstanding funding. Such loans are included within
"Investment in and Advances to Real Estate Venture" in the Consolidated
Statements of Financial Condition. Profits from home and lot sales, after
interest, are to be split evenly between CRC and Palm River. Cash flows
are first allocated to Palm River to pay off any outstanding funding and
interest, then split evenly between the parties. Since the substance of
the Agreement is that of a joint venture, the Association accounts for it
as such.
The condensed financial information for the River Club is as follows:
-------------------------------------------------------------------------
DECEMBER 31,
Balance Sheet 1999
-------------------------------------------------------------------------
(In Thousands)
Assets:
Cash $ 59
Land 10,764
Construction in progress 461
Receivables from partners 22
---------
Total assets $ 11,306
=========
Liabilities and partners' capital:
Advances and interest due to Palm River $ 11,900
Other liabilities 18
Partners' capital:
Palm River (311)
CRC (301)
---------
Total liabilities and partners' capital $ 11,306
=========
-------------------------------------------------------------------------
FOR THE YEAR ENDED
Summary of Operations DECEMBER 31, 1999
-------------------------------------------------------------------------
(In Thousands)
Income:
Sales $ --
Miscellaneous --
---------
Total income --
---------
Expenses:
Cost of sales 233
General and administrative 389
---------
Total expenses 622
---------
Net loss $ (622)
=========
-------------------------------------------------------------------------
Statement of Changes in Partners' Capital
-------------------------------------------------------------------------
(In Thousands)
PALM RIVER CRC
Balance - December 31, 1998 $ -- $ --
Cash contributed by CRC 10
Net loss for the year ended December 31, 1999 (311) (311)
------ -------
Balance - December 31, 1999 $ (311) $ (301)
====== =======
29
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. DEPOSITS
Individual deposits greater than $100,000 at December 31, 1999 and 1998
aggregated approximately $112,003,000, and $86,669,000, 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 $3,071,000 and $2,913,000 at
December 31, 1999 and 1998, respectively.
Scheduled maturities of certificate accounts at December 31, 1999 and
1998 were as follows:
-------------------------------------------------------------------------
DECEMBER 31,
1999 1998
---------- ---------
(In Thousands)
Maturity:
Less than 1 year $ 257,928 $277,254
1 year - 2 years 70,015 37,790
2 years - 3 years 15,743 15,943
3 years - 4 years 9,856 14,790
4 years - 5 years 9,963 10,621
Thereafter 171 791
---------- ---------
Total certificates of deposit $ 363,676 $ 357,189
========== =========
9. ADVANCES FROM FEDERAL HOME LOAN BANK
At December 31, 1999 and 1998, outstanding advances from the FHLB totaled
$140,186,000 and $91,920,000, respectively.
Scheduled maturities of FHLB advances at December 31, 1999 were as
follows:
-------------------------------------------------------------------------
YEARS ENDING AVERAGE INTEREST AMOUNT
DECEMBER 31, RATE MATURING
-------------------------------------------------------------------------
(Dollars in Thousands)
2000 4.96% $ 25,400
2001 6.41 8,500
2002 6.18 20,000
2003 6.69 4,286
2004 5.76 35,000
2008 5.37 37,000
2009 5.06 10,000
--------
TOTAL FHLB ADVANCES 5.59% $140,186
==== ========
Prepayment of certain remaining advances is permitted only upon the
Association's termination of its FHLB membership, while others are
subject to prepayment penalties under the provisions and conditions of
the credit policy of the FHLB. The Association did not incur prepayment
penalties for the years ended December 31, 1999, 1998 and 1997.
10. 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"), the 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.
30
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1999 and 1998 was 5.27% and 4.28%, respectively. The
unamortized discount at December 31, 1999 and 1998 was $4,491,000 and
$4,955,000, respectively. Principal and interest payments are due
quarterly. During the years ended December 31, 1999, 1998 and 1997,
approximately $464,000, $484,000, and $490,000, respectively, of the
discount was accreted.
At December 31, 1999 and 1998, the Association held $14,316,000 and
$13,088,000 (net of discounts of $7,484,000 and $8,712,000),
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.
At December 31, 1999, the Bond was repayable as follows:
-------------------------------------------------------------------------
YEARS ENDING
DECEMBER 31, AMOUNT
-------------------------------------------------------------------------
(In Thousands)
2000 $ 1,387
2001 1,387
2002 1,387
2003 1,387
2004 1,387
2005 AND AFTER 12,064
-------
TOTAL 18,999
LESS UNAMORTIZED DISCOUNT 4,491
-------
TOTAL MORTGAGE-BACKED BOND $14,508
=======
11. 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.
The income tax provision consists of the following components for the
years ended December 31, 1999, 1998 and 1997.
-------------------------------------------------------------------------
For the Years Ended December 31,
1999 1998 1997
------ ------ ------
(In Thousands)
Current - federal $2,250 $2,640 $2,745
Current - state 418 232 297
------ ------ ------
Total current 2,668 2,872 3,042
Deferred - federal and state (325) (765) (112)
------ ------ ------
Total provision for income taxes $2,343 $2,107 $2,930
====== ====== ======
31
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Years Ended December 31,
1999 1998 1997
----------------- ----------------- -----------------
Amount % Amount % Amount %
------- ------ ------- ------ ------- ----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Tax at federal tax rate $ 3,107 35.0% $ 2,485 35.0% $ 2,900 35.0%
State income taxes, net of
federal income tax benefits 257 2.9 123 1.7 281 3.3
Low income housing credits (600) (6.8) (320) (4.5) -- --
Other (333) (3.8) (110) (1.5) (168) (2.0)
Benefit of graduated tax rate (88) (0.9) (71) (1.0) (83) (1.0)
------- ------ ------- ------ ------- ----
Total provision for income taxes $ 2,343 26.4% $ 2,107 29.7% $ 2,930 35.3%
======= ====== ======= ====== ======= ====
The tax effect of temporary differences that gave rise to deferred tax
assets and deferred tax liabilities are presented below:
---------------------------------------------------------------------------------------
For the Years Ended December 31,
1999 1998 1997
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Deferred tax liabilities:
Depreciation $ 995 $ 631 $ 582
Loan fee income 23 22 170
FHLB stock dividends 424 458 457
Deferred loan costs 881 711 467
Unamortized discount on mortgage-backed bond 1,690 1,865 2,112
Book over tax on investments in partnerships -- 55 1,003
Other 61 13 --
------- ------- -------
Gross deferred tax liabilities 4,074 3,755 4,791
------- ------- -------
Deferred tax assets:
Excess of book bad debt reserve over tax reserve 1,337 978 1,043
Retirement plans 479 360 586
Unrealized loss on decrease in fair value
of securities available for sale 1,329 126 33
Deferred loss on loans held for sale 36 39 43
Deferred compensation 129 140 130
Investment in partnerships 137 -- --
Other 136 93 19
------- ------- -------
Gross deferred tax assets 3,583 1,736 1,854
------- ------- -------
Valuation allowance on unrealized loss on decrease in
fair value of securities available for sale (428) (222) (99)
------- ------- -------
Gross deferred tax assets - net of valuation allowance 3,155 1,514 1,755
------- ------- -------
Net deferred tax liability $ 919 $ 2,241 $ 3,036
======= ======= =======
</TABLE>
Under the Internal Revenue Code, the Association may, for tax purposes,
deduct a provision for bad debts in excess of such provisions recorded in
the financial statements. Retained earnings at December 31, 1999 includes
approximately $11,388,000, consisting of bad debt deductions accumulated
prior to 1988, on which no provision for federal income taxes has been
made. The related amount of unrecognized deferred tax liability was
approximately $4,285,000.
32
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. 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.
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 real estate loans,
excluding undisbursed portions of loans in process, were approximately
$5,053,000 and $14,086,000 at December 31, 1999 and December 31, 1998,
respectively. Commitments to originate non-mortgage loans were
approximately $250,000 and $840,000 at December 31, 1999 and 1998,
respectively.
At December 31, 1999, the $5,053,000 of real estate loan commitments were
comprised of approximately $1,945,000 of fixed-rate commitments and
$3,108,000 of variable-rate commitments. These commitments are at
prevailing market rates and terms. Interest rates on fixed-rate loan
commitments were from 7.00% to 8.75%. 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 totaled $7,788,000 and $6,703,000 at
December 31, 1999 and 1998, respectively. Commercial lines and letters of
credit and other loan commitments totaled $6,381,000 at December 31,
1999. There were no commitments to sell or purchase loans at December 31,
1999 and 1998. Commitments to purchase mortgage-backed securities totaled
$1,063,000 at December 31, 1999. There were no commitments to purchase
securities at December 31, 1998.
LEASE COMMITMENTS - The Association leases various properties for
original periods ranging from 2 to 25 years. Rent expense for the years
ended December 31, 1999, 1998 and 1997 was approximately $498,000,
$633,000, and $626,000, respectively. At December 31, 1999, future
minimum lease payments under these operating leases were as follows:
-------------------------------------------------------------------------
YEARS ENDING
DECEMBER 31, AMOUNT
-------------------------------------------------------------------------
(In Thousands)
2000 $ 446
2001 321
2002 145
2003 145
2004 73
-------
TOTAL $ 1,130
=======
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, 1999 and 1998, the Association had no outstanding advances.
CASH RESTRICTIONS - The Association maintained a $625,000 required
two-week average balance in a clearing account held at the Federal
Reserve Bank of Atlanta at both December 31, 1999 and 1998.
33
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. 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 maximum 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,
1999 1998
----------- -----------
(In Thousands)
Change in benefit obligation:
Beginning benefit obligation $ 8,889 $ 7,077
Service cost 725 609
Interest cost 598 494
Actuarial gain 165 864
Benefits paid (280) (155)
------- ---------
Ending benefit obligation 10,097 8,889
------- ---------
Change in plan assets, at fair value:
Beginning plan assets 10,791 9,644
Actual return 588 578
Employer contribution 179 724
Benefits paid (280) (155)
------- --------
Ending plan assets 11,278 10,791
------- --------
Funded status 1,181 1,902
Unrecognized net actuarial gain (1,741) (2,251)
Unrecognized prior service cost 21 25
------- --------
Accrued benefit cost $ (539) $ (324)
======= ========
The components of pension expense and related actuarial assumptions were
as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
For the Years Ended December 31,
1999 1998 1997
----- ---- -----
(Dollars In Thousands)
<S> <C> <C> <C>
Service cost $ 725 $609 $ 550
Interest cost 598 494 447
Expected return on plan assets (807) (818) (626)
Amortization of prior service cost (69) (68) (68)
Recognized net actuarial gain (52) (132) (52)
----- ---- -----
Net $ 395 $ 85 $ 251
===== ==== =====
Discount rate on benefit obligation 6.75% 7.00% 6.75%
Long-term expected rate of return on plan assets 7.50% 8.50% 8.50%
Rate of compensation increase 5.00% 5.00% 5.00%
</TABLE>
For the years ended December 31, 1999, 1998, and 1997, pension expense
amounts were based upon actuarial computations.
34
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL RETIREMENT INCOME PLAN ("SERP") - During 1989, the
Association's Board of Directors established a supplemental nonqualified
unfunded defined benefit plan for certain officers. For the years ended
December 31, 1999, 1998 and 1997, the net periodic expense for the
officers' plan totaled $114,000, $76,000, and $54,000, respectively.
Information about the SERP was as follows:
-------------------------------------------------------------------------
December 31, December 31,
1999 1998
------------ ------------
(In Thousands)
Change in benefit obligation:
Beginning benefit obligation $ 683 $ 479
Service cost 72 51
Interest cost 46 33
Actuarial (loss) gain (65) 136
Benefits paid (16) (16)
------ ------
Ending benefit obligation $ 720 $ 683
====== ======
The actuarial assumptions were as follows:
---------------------------------------------------------------
Years Ended December 31,
-------------------------------
1999 1998 1997
---- ---- ----
Discount rate 7.25% 6.75% 7.00%
Salary scale 5.00% 5.00% 5.00%
Bankshares and the Association do not provide any other material
postretirement or postemployment benefits.
EMPLOYEE STOCK OWNERSHIP PLAN - As of December 31, 1999, the ESOP has
outstanding loan balances of $637,000 (Loan I) and $4,085,000 (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% for the term of loan. 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, 1999, 1998 and
1997 totaled $1,092,000, $510,000, and $525,000, 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:
------------------------------------------------------------------------
For the Years Ended December 31,
1999 1998 1997
--------- -------- --------
Number of shares allocated 84,784 55,610 55,610
Average fair value per share $ 12.45 $ 15.08 $ 12.71
--------- -------- --------
Compensation expense 1,056,000 $839,000 $707,000
========= ======== ========
Number of shares distributed 14,386 11,216 4,034
========= ======== ========
35
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Shares held by the ESOP were as follows:
-------------------------------------------------------------------------
December 31, December 31,
1999 1998
------------ ------------
Allocated to participants 297,403 227,005
Unallocated 498,549 583,333
---------- ----------
Total ESOP shares 795,952 810,338
========== ==========
Fair value of unallocated shares $6,262,000 $6,271,000
========== ==========
RECOGNITION AND RETENTION PLANS - Bankshares has two RRPs for the benefit
of the Association's directors, officers, and other key employees. Under
these plans, the fair value of the shares on the date of award is being
recognized as compensation expense over the vesting period. The vesting
period for both plans is five years.
1995 RRP - In January 1995, the shareholders of the Association approved
the 1995 RRP 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 over a five year
period beginning in January 1996. To fund the 1995 RRP, 181,756 shares
were issued from authorized but unissued shares of common stock in July
1995. Certain of these shares were forfeited. 2,044 of the forfeited
shares were granted to an officer in January 1996. These shares began
vesting January 1997. In May 1999, the remaining 8,525 forfeited shares
as well as 12,868 shares purchased in the open market were awarded to
certain officers, key employees and non-employee directors of the
Association. These shares vest over a five year period beginning in May
2000.
1999 RRP - In June 1999, the shareholders of Bankshares approved the 1999
RRP for certain officers, key employees and non-employee directors of the
Association. Concurrent with such approval, such officers, key employees
and directors were awarded 218,826 shares of common stock, which vest
over a five year period beginning in June 2000. To fund the 1999 RRP,
218,826 shares of Bankshares' common stock were purchased in the open
market.
Unamortized deferred compensation of $2,586,000 at December 31, 1999 is
reflected as a reduction of shareholders' equity for the RRPs.
Compensation expense related to the RRPs was $539,000, $186,000, and
$185,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
STOCK OPTION PLANS - Bankshares has two stock option plans for the
benefit of the Association's directors, officers, and other key
employees. Under these plans, 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.
1995 SOP - The number of shares of Bankshares' common stock reserved for
issuance under the 1995 SOP was equal to 486,561 shares or 10% of the
total number of common shares issued to persons other than the Mid-Tier
Holding Company, pursuant to the Association's conversion to the stock
form of ownership in 1994. The stock options granted to the directors,
officers, and employees in 1995 vest in five equal annual installments.
The first installment became exercisable on January 18, 1996. An
additional grant of options was made to directors, officers and employees
on May 19, 1999. These grants will vest over five years. The first
installment is exercisable on May 19, 2000.
1999 SOP - The number of shares of Bankshares' common stock reserved for
issuance under the 1999 SOP was equal to 547,065 shares which was equal
to 10% of the shares of common stock sold by Bankshares in the
Reorganization. The stock options granted to the directors, officers, and
employees vest in five equal annual installments. The first installment
becomes exercisable on June 18, 2000.
36
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Below is a summary of options transactions:
-----------------------------------------------------------------------
Option Price
--------------------------
Number of Average Aggregate
Options Exercise Price Exercise
Outstanding Per Share Price
----------- -------------- -----------
Options Outstanding:
Balance - December 31, 1997 438,228 $ 2,444,000
Granted --
Exercised (18,482) $ 5.441 (101,000)
Canceled -- -- --
-------- -----------
Balance - December 31, 1998 419,746 2,343,000
Granted 582,578 12.200 7,107,000
Exercised (38,433) 5.441 (209,000)
Canceled (10,631) 12.188 (130,000)
-------- -----------
Balance - December 31, 1999 953,260 $ 9,111,000
======== ===========
Options exercisable at December 31, 1999, 1998, and 1997, totaled
288,330, 234,396, and 163,271, 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 plans during the years ended December 31, 1999 and
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%
05/19/99 35,513 $ 12.375 $2.20 5.66% 5 18.10% 3.57%
06/18/99 547,065 $ 12.188 $2.03 5.76% 5 16.46% 3.57%
</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, 1999 and 1998 would have been
reduced to the pro forma amounts indicated below:
--------------------------------------------------------------------
For the Years Ended December 31,
1999 1998
---------- -----------
Net income
As reported $6,534,000 $ 4,994,000
Pro forma $6,381,000 $ 4,989,000
Earnings per share
As reported - basic $ 0.67 $ 0.49
Pro forma - basic $ 0.65 $ 0.49
As reported - diluted $ 0.65 $ 0.48
Pro forma - diluted $ 0.63 $ 0.48
14. 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.
37
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1999, that the Association meets all capital
adequacy requirements to which it is subject.
As of December 31, 1999, the most recent notification from the OTS
categorized the Association as "Well Capitalized" under the framework for
prompt corrective action. To be considered well capitalized under Prompt
Corrective Action Provisions, the Association must maintain total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in
the following table. There are no conditions or events since that
notification that management believes have changed the Association's
categorization.
The Association is required to report capital ratios unconsolidated with
Bankshares. The Association's actual capital amounts and ratios are
presented in the following tables:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
To be Considered
For Well Capitalized
Capital Adequacy for Prompt 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, 1999:
TOTAL RISK-BASED CAPITAL (TO RISK-WEIGHTED ASSETS) 17.84% $ 84,710 8.0% $37,989 10.0% $47,486
CORE (TIER 1) CAPITAL (TO ADJUSTED TANGIBLE ASSETS) 9.20 80,787 4.0 35,140 5.0 43,925
CORE (TIER 1) CAPITAL (TO RISK-WEIGHTED ASSETS) 17.01 80,787 4.0 18,994 6.0 28,491
As of December 31, 1999, adjusted tangible assets and risk-weighted
assets were $878,501,000 and $474,857,000, respectively.
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
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, adjusted tangible assets and risk-weighted
assets were $845,054,000 and $445,592,000, respectively.
At the close of the conversion and reorganization of the Association in
December 1998, a liquidation account in the amount of $50,800,000 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. The balance of the liquidation account was
$25,322,000 at December 31, 1999. Subsequent increases of such deposits
will not restore an eligible depositor'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. The Association may not pay dividends that would
reduce shareholder's equity below the required liquidation account
balance.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each major classification of financial instruments at December
31, 1999 and 1998:
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.
38
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LOANS RECEIVABLE, NET - 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.
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.
MORTGAGE-BACKED BOND - The fair value of the Bond is estimated using the
Association's cost of funds and other relevant factors.
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, 1999 and 1998, 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, 1999 December 31, 1998
--------------------------- --------------------------
Carrying Value Fair Value Carrying Value Fair Value
-------------- ---------- -------------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 45,239 $ 45,239 $ 117,015 $117,015
Securities held to maturity 38,802 41,271 52,619 57,303
Securities available for sale 144,840 144,840 95,151 95,151
Loans receivable, net 608,369 600,315 538,204 552,735
FHLB stock 7,009 7,009 4,722 4,722
Accrued interest receivable 3,788 3,788 2,782 2,782
Financial liabilities:
Deposits $613,943 $617,889 $ 594,400 $592,085
Advances from FHLB 140,186 136,653 91,920 90,157
Mortgage-backed bond 14,508 14,661 15,430 15,446
Accrued interest payable 612 612 403 403
</TABLE>
39
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following are condensed statements of financial condition as of
December 31, 1999 and 1998, and condensed statements of operations and
cash flows for the years ended December 31, 1999, 1998 and 1997. 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,
1999 1998
--------- --------
(In Thousands)
Assets:
Cash and cash equivalents $ 101 $ 212
Investment in the Association 89,162 107,808
Loans to the Association 15,640 21,000
Loans to the ESOP 4,722 5,407
Real estate loans 6,000 --
Other assets 1,101 64
--------- --------
Total assets $ 116,726 $134,491
========= ========
Liabilities $ 1,025 $ 1,205
Shareholders' equity 115,701 133,286
--------- --------
Total liabilities and shareholders' equity $ 116,726 $134,491
========= ========
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
---------------------------------------------------------------------------------------
For the Years Ended December 31,
1999 1998 1997
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Income $ 1,630 $ 90 $ --
Expenses 519 5 41
------- ------- -------
Income (loss) before income taxes and
equity in earnings of the Association 1,111 85 (41)
Income tax expense (provision) benefit (418) (32) 15
------- ------- -------
Income (loss) before equity in earnings
of the Association 693 53 (26)
Equity in earnings of the Association 5,841 4,941 5,382
------- ------- -------
Net income 6,534 4,994 5,356
------- ------- -------
Other comprehensive income, net of tax:
Change in unrealized gain (loss) in market
value of securities available for sale (2,926) (278) 914
------- ------- -------
Comprehensive income, net of income taxes $ 3,608 $ 4,716 $ 6,270
======= ======= =======
</TABLE>
40
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
----------------------------------------------------------------------------------------------
For the Years Ended December 31,
1999 1998 1997
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 6,534 $ 4,994 $ 5,356
Adjustments to reconcile net income to net cash used
for operating activities:
Equity in undistributed earnings of the Association (2,541) (4,941) (5,382)
Other (243) 819 (15)
-------- -------- --------
Net cash from operating activities 3,750 872 (41)
-------- -------- --------
Cash flows from investing activities:
Loans to subsidiaries 6,045 (26,407) --
Real estate loans (6,000) -- --
Dividends received from the Association 15,905 -- 13,260
Investment in Association through proceeds from
stock sale -- (32,340) --
-------- -------- --------
Net cash from investing activities 15,950 (58,747) 13,260
-------- -------- --------
Cash flows from financing activities:
Proceeds from sale of stock, net of issuance costs -- 53,236 --
Dividends paid (4,115) (2,116) (1,976)
Purchase of treasury stock (15,905) -- --
Purchase of ESOP shares -- (4,377) --
Proceeds from exercise of stock options 209 101 --
-------- -------- --------
Net cash from financing activities (19,811) 46,844 (1,976)
-------- -------- --------
(Decrease) increase in cash and cash equivalents (111) (11,031) 11,243
Cash and cash equivalents, beginning of period 212 11,243 --
-------- -------- --------
Cash and cash equivalents, end of period $ 101 $ 212 $ 11,243
======== ======== ========
</TABLE>
OTS regulations place certain restrictions on the amount of dividends an
association can pay to its holding company. Under the most restrictive of these
dividends limitations, $7,118,000 was available at December 31, 1999 to the
Association for payment of dividends to Bankshares during 2000 without prior
regulatory approval.
41
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. EARNINGS PER SHARE
A reconciliation of the numerators and denominators of basic and diluted
earnings per share for the years ended December 31, 1999, 1998 and 1997,
was as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
For the Years Ended December 31,
1999 1998 1997
------------ ----------- -----------
(Dollars In Thousands except per share data)
<S> <C> <C> <C>
Basic earnings per share
Net income available to common shareholders $ 6,534 $ 4,994 $ 5,356
Weighted average common shares outstanding 9,748,916 10,175,899 10,079,363
------------ ----------- -----------
Basic earnings per share $ 0.67 $ 0.49 $ 0.53
============ =========== ===========
Diluted earnings per share
Net income available to common shareholders $ 6,534 $ 4,994 $ 5,356
------------ ----------- -----------
Weighted average common shares outstanding 9,748,916 10,175,899 10,079,363
Add: dilutive effects of assumed exercise of stock
Stock options 216,482 271,205 255,284
RRP shares 158,319 1,223 --
------------ ----------- -----------
Weighted average common and dilutive potential
common shares outstanding 10,123,717 10,448,327 10,334,647
------------ ----------- -----------
Diluted earnings per share $ 0.65 $ 0.48 $ 0.52
============ =========== ===========
RRP shares were not considered in the computation of diluted earnings per
share for the year ended December 31, 1997, as they were antidilutive.
18. OTHER COMPREHENSIVE INCOME
Other comprehensive income components and related taxes were as follows:
-------------------------------------------------------------------------------------------------------
For the Years Ended December 31,
1999 1998 1997
------- ------ ------
(In Thousands)
<S> <C> <C> <C>
Unrealized holding gains and losses on available-for-sale
securities $(4,691) $ (621) $1,473
Less reclassification adjustments for gains and losses
later recognized in income -- 175 (8)
------- ------ ------
Net unrealized gains and losses (4,691) (446) 1,465
Tax effect 1,765 168 (551)
------- ------ ------
Other comprehensive income $(2,926) $ (278) $ 914
======= ====== ======
</TABLE>
42
<PAGE>
COMMUNITY SAVINGS BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
-----------------------------------------------------------------------------------------
Quarter Ended
March 31, June 30, September 30, December 31,
--------- -------- ------------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Year Ended December 31, 1999:
Interest Income $14,002 $14,484 $14,742 $15,236
Interest Expense 7,146 7,096 7,311 7,982
------- ------- ------- -------
Net Interest Income 6,856 7,388 7,431 7,254
Provision for Loan Losses 322 195 193 195
Other Income 978 994 1,045 821
Operating Expense 5,601 5,702 5,926 5,756
Provision for Income Taxes 526 760 679 378
------- ------- ------- -------
Net Income $ 1,385 $ 1,725 $ 1,678 $ 1,746
======= ======= ======= =======
Basic Earnings Per Share $ 0.14 $ 0.17 $ 0.17 $ 0.19
======= ======= ======= =======
Diluted Earnings Per Share $ 0.14 $ 0.17 $ 0.16 $ 0.18
======= ======= ======= =======
-----------------------------------------------------------------------------------------
Quarter Ended
March 31, June 30, September 30, December 31,
--------- -------- ------------- ------------
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>
43
<PAGE>
COMMUNITY SAVINGS, F. A.
CORPORATE DIRECTORY
BOARD OF DIRECTORS
- --------------------------------------------------------------------------------
Frederick A. Teed, Chairman of the Board
Forest C. Beaty, Jr., Director
Robert F. Cromwell, Director and Chairman Emeritus of the Board
Karl D. Griffin, Director and Secretary Emeritus of the Board
James B. Pittard, Jr., President and Chief Executive Officer
Harold I. Stevenson, CPA, Director
ADMINISTRATIVE DIVISION
- --------------------------------------------------------------------------------
James B. Pittard, Jr., President and Chief Executive Officer
Judith M. Hogan, Compliance Officer
Joe L. Knorr, Internal Auditor
Deborah M. Rousseau, Corporate Secretary
FINANCE DIVISION
- --------------------------------------------------------------------------------
Larry J. Baker, CPA, Chief Financial Officer, Division Director
Donna L. Sheppard, CPA, Controller
Bruce C. Tissot, Staff Accountant
HUMAN RESOURCES, MARKETING & TRAINING DIVISION
- --------------------------------------------------------------------------------
Feriel G. Hughes, Division Director
Cynthia J. Cullen, Training Manager
Jane H. Ryder, Personnel Manager
Juanita Swinton. Marketing Manager
LOAN DIVISION
- --------------------------------------------------------------------------------
Cecil F. Howard, Jr., Division Director
J. Cary Allen, Jr., Commercial Lending Manager
Jamonica Gay Barnes, Commercial Loan Officer
Priscilla Clancy, Commercial Loan Officer
Thomas Eby, Lending Sales Manager
Charles J. Gifford, New Loan Operations Manager
Mildred C. Lodge, Consumer/Residential Loan Officer
Johnny L. Morris, Lending Sales Manager
Lisa M. Rhodes, Loan Servicing Manager
OPERATIONS DIVISION
- --------------------------------------------------------------------------------
Mary L. Kaminske, Division Director
Theresa J. Brooks, Regional Branch Manager
Douglas S. Clive, Corporate Security Officer
Elizabeth A. DeLosh, Branch Operations Manager
Rizwana Khalid, Deposit Products Manager
Cindy L. Sheppard, Information Systems Manager
Eileen St. Denis, Regional Branch Manager
PROPERTIES & INSURANCE DIVISION
- --------------------------------------------------------------------------------
Michael E. Reinhardt, Division Director
Larry F. Koerner, Facilities Manager
44
<PAGE>
Community Savings
21 CONVENIENT LOCATIONS
- --------------------------------------------------------------------------------
This is a map of Florida showing the branches of Community Savings, FA and the
counties where they are located
- --------------------------------------------------------------------------------
HOME OFFICE
North Palm Beach
561-881-4800
800-432-1911
PALM BEACH COUNTY
Bluffs (Jupiter), 3950 U.S. Highway One
Maplewood (Jupiter), 1570 W. Indiantown Road
Toney Penna (Jupiter), 520 Toney Penna Drive
North Palm Beach, 660 U. S. Highway One
Shoppes on the Green( PGA), 7102 Fairway Drive
Palm Beach Gardens, 9600 N. Alternate A1A
Riviera Beach, 2600 Broadway
Singer Island, 1100 E. Blue Heron Boulevard
Tequesta, 101 N. U. S. Highway One
Gallery Square (Tequesta), 389 Tequesta Drive
Village Commons (West Palm Beach), 971 Village Boulevard
Lake Worth, 5702 Lake Worth Road
Ibis (West Palm Beach), 10100 Northlake Boulevard
MARTIN COUNTY
Hobe Sound, 11400 SE Federal Highway
Jensen Beach, 1170 NE Jensen Beach Boulevard
Martin Downs (Palm City), 3102 Martin Downs Boulevard
Port Salerno, 5545 SE Federal Highway
ST. LUCIE COUNTY
Fort Pierce, 1050 Virginia Avenue
Port St. Lucie, 147 SW Port St. Lucie Boulevard
St. Lucie West, 1549 St. Lucie West Boulevard
INDIAN RIVER COUNTY
Vero Beach, 6030 20th Street (SR 60)
45
<PAGE>
- --------------------------------------------------------------------------------
CMSV NASDAQ LOGO
- --------------------------------------------------------------------------------
WE WOULD LIKE TO THANK OUR CUSTOMERS AND SHAREHOLDERS
FOR THEIR CONTINUED SUPPORT, CONFIDENCE AND
FRIENDSHIP.
- --------------------------------------------------------------------------------
Logo
- --------------------------------------------------------------------------------
Community Savings
Bankshares, Inc.
P. O. Box 14547, 660 U. S. Highway One, North Palm Beach, Florida 33408
www.communitysavings.com
46
<PAGE>
Community Savings Bankshares, Inc.
P. O. Box 14547
660 U.S. Highway One
North Palm Beach, Florida 33408
www.communitysavings.com
47
EXHIBIT 23
CONSENT OF CROWE, CHIZEK AND COMPANY LLP
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration No. 333-38971 of
Community Savings Bankshares, Inc. on Form S-8 of our report on the consolidated
financial statements of Community Savings Bankshares, Inc. as of and for the
year ended December 31, 1999, dated February 18, 2000 appearing in this Annual
Report on Form-10K of Community Savings Bankshares, Inc. for the year ended
December 31, 1999.
Crowe, Chizek and Company LLP
Grand Rapids, Michigan
March 22, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
</LEGEND>
<CIK> 0001068725
<NAME> COMMUNITY SAVINGS BANKSHARES, INC.
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 22,057
<INT-BEARING-DEPOSITS> 23,182
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 144,840
<INVESTMENTS-CARRYING> 38,802
<INVESTMENTS-MARKET> 41,271
<LOANS> 612,292
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<DEPOSITS> 613,943
<SHORT-TERM> 26,787
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<LONG-TERM> 127,907
0
0
<COMMON> 10,571
<OTHER-SE> 105,130
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<INTEREST-LOAN> 44,515
<INTEREST-INVEST> 11,258
<INTEREST-OTHER> 2,691
<INTEREST-TOTAL> 58,464
<INTEREST-DEPOSIT> 21,987
<INTEREST-EXPENSE> 29,535
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<LOAN-LOSSES> 905
<SECURITIES-GAINS> 0
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<INCOME-PRE-EXTRAORDINARY> 6,534
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<EPS-BASIC> 0.67
<EPS-DILUTED> 0.65
<YIELD-ACTUAL> 3.52
<LOANS-NON> 1,039
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<CHARGE-OFFS> (146)
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<ALLOWANCE-CLOSE> 3,923
<ALLOWANCE-DOMESTIC> 3,923
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
