10-Q 1 com-3q01.txt FORM 10-Q UNITED STATES SECURITIES & EXCHANGE COMMISSION Washington, DC 20552 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 ------------------ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------------- --------------- Commission File Number 000-29460 --------- COMMUNITY SAVINGS BANKSHARES, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) DELAWARE 65-0870004 ------------------------------- ------------------- (State or other jurisdiction of (IRS employer incorporation or organization) Identification no.) 660 US Highway One North Palm Beach, FL 33408 ------------------------------- ---------- (Address of principal executive (ZIP code) offices) Registrant's telephone number, including area code (561) 881-2212 -------------- Indicate by check whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of October 22, 2001, there were 8,660,254 shares of the Registrant's common stock outstanding. COMMUNITY SAVINGS BANKSHARES, INC. AND SUBSIDIARY Table of Contents Part I. Financial Information PAGE ------------------------------ ---- Item 1. Financial Statements Consolidated Statements of Financial Condition as of September 30, 2001 (Unaudited) and December 31, 2000 2 Consolidated Statements of Operations (Unaudited) for the three and nine months ended September 30, 2001 and 2000 3 Consolidated Statements of Changes in Shareholders' Equity (Unaudited) for the nine months ended September 30, 2001 and 2000 4 Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2001 and 2000 5 Notes to Consolidated Financial Statements (Unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Item 3. Quantitative and Qualitative Disclosures About Market Risk 14 Part II. Other Information -------------------------- Item 1. Legal Proceedings 16 Item 2. Changes in Securities and Use of Proceeds 16 Item 3. Default Upon Senior Securities 16 Item 4. Submission of Matters to a Vote of Security Holders 16 Item 5. Other Information 16 Item 6. Exhibits and Reports on Form 8-K 16 Signature Page 17 1 Item 1. Financial Statements

See notes to consolidated financial statements. 2

See notes to consolidated financial statements. 3

See notes to consolidated financial statements. 4

See notes to consolidated financial statements. 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The unaudited consolidated interim financial statements for Community Savings Bankshares, Inc. ("Bankshares") and its subsidiary Community Savings, F. A. (the "Association"), reflect all adjustments (consisting only of normal recurring accruals) which, in the opinion of management, are necessary to present fairly Bankshares' consolidated financial condition and the consolidated results of operations and cash flows for the interim periods presented herein. The results for interim periods are not necessarily indicative of trends or results to be expected for the full fiscal year. All weighted interest rates are presented on an annualized basis. The unaudited consolidated interim financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and the notes thereto included in Bankshares' Annual Report to Shareholders for the year ended December 31, 2000. Reclassifications - Certain items in the 2000 financial statements and the notes thereto have been reclassified to conform with the 2001 presentation. 2. AGREEMENT AND PLAN OF MERGER On September 9, 2001, Bankshares and BankAtlantic Bancorp ("BankAtlantic") (NYSE:BBX) executed the Agreement and Plan of Merger, (the "definitive agreement"), pursuant to which BankAtlantic will acquire Bankshares. In the transaction, Bankshares' shareholders will receive $19.00 per share in cash resulting in a transaction value of approximately $170 million. The transaction is currently expected to close in the first quarter of 2002 and is subject to certain conditions including, among other things, approval by the Office of Thrift Supervision ("OTS") and Bankshares' shareholders. 3. LOANS RECEIVABLE Loans receivable consists of the following: September 30, December 31, 2001 2000 ---- ---- (In thousands) Real estate loans: Residential 1-4 family $ 534,022 $ 511,324 Residential 1-4 family construction 84,015 113,179 Multi-family 8,776 10,501 Multi-family construction 20,541 33,960 Land 21,767 20,216 Commercial 40,178 37,255 Commercial construction 11,333 8,170 --------- --------- Total real estate loans 720,632 734,605 --------- --------- Non-real estate loans: Consumer 14,992 14,029 Commercial business 8,783 5,454 --------- --------- Total non-real estate loans 23,775 19,483 --------- --------- Total loans receivable 744,407 754,088 Undisbursed loan proceeds (46,981) (60,874) Unearned discounts and premiums and net deferred loan fees and costs 1,987 1,955 Allowance for loan losses (4,375) (3,875) --------- --------- Total loans receivable, net $ 695,038 $ 691,294 ========= ========= 6 An analysis of the changes in the allowance for loan losses is as follows: For the nine months ended September 30, 2001 2000 ---- ---- (In thousands) Balance, beginning of period $ 3,875 $ 3,923 Provision charged to income 270 300 Losses charged to allowance (14) (381) Recoveries 244 -- ------- ------- Balance, end of period $ 4,375 $ 3,842 ======= ======= The Association accounts for impaired loans in accordance with SFAS No. 114 "Accounting by Creditors for Impairment of a Loan" ("SFAS 114") as amended by SFAS No. 118 "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures". An analysis of the recorded investment in impaired loans is as follows: At or for the nine months ended September 30, 2001 2000 ---- ---- (In thousands) Impaired loan balance $ 2,195 $ 3,675 Related allowance -- -- Average impaired loan balance 2,394 2,059 Interest income recognized 46 187 For a further discussion of delinquent loans, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Asset Quality" in this Form 10-Q. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General In the following discussion, references to "Bankshares" relate to Community Savings Bankshares, Inc. together with its wholly-owned subsidiary, the Association. Community Savings Bankshares, Inc. Bankshares is a Delaware-chartered stock holding company organized in August 1998. Bankshares' significant assets include cash, loans, and its investment in its wholly-owned subsidiary, the Association. The common stock of Bankshares trades on The Nasdaq Stock Market under the symbol "CMSV". On September 9, 2001, Bankshares and BankAtlantic Bancorp ("BankAtlantic")(NYSE:BBX) executed a definitive agreement pursuant to which BankAtlantic will acquire Bankshares. The transaction currently is expected to close in the first quarter of 2002 and is subject to certain conditions including, among other things, approval by the Office of Thrift Supervision ("OTS") and Bankshares' shareholders. Community Savings, F. A. The Association, founded in 1955, is a federally chartered savings and loan association headquartered in North Palm Beach, Florida. The Association's deposits are federally insured by the Federal Deposit Insurance Corporation ("FDIC") through the Savings Association Insurance Fund ("SAIF"). The Association has been a member of the Federal Home Loan Bank of Atlanta ("FHLB") since 1955. The Association is regulated by the OTS. The Association is a community-oriented financial institution engaged primarily in the business of attracting deposits from the general public and using such funds, together with other borrowings, to invest in various residential and commercial real estate loans, consumer and commercial business loans, mortgage-backed and related securities ("MBS"), and investment securities. The Association currently exceeds all regulatory capital requirements. 7 The Association's profitability is highly dependent on its net interest income. The components that determine net interest income are the amount of interest-earning assets and interest-bearing liabilities, non-interest-bearing liabilities and capital, together with the yields earned or rates paid on such interest rate-sensitive instruments. The Association manages interest rate risk exposure by matching, in part, asset and liability maturities and rates. This is accomplished while considering the credit risk of certain assets. The Association maintains asset quality by using conservative loan underwriting standards and collection efforts as well as by primarily originating or purchasing secured or guaranteed assets. The Association has two wholly-owned subsidiaries. ComFed, Inc. ("ComFed"), formed in 1971, conducts business as Community Insurance Agency, selling mortgage life insurance and receiving income and incurring related expenses from the sale of third party mutual funds and annuities. Beginning July 2001, ComFed also began operating as ComFed Title Insurance Agency, providing title search and closing services with respect to loans. Palm River Development Co., Inc. ("Palm River"), incorporated in 1999, is involved in a real estate development venture commenced in mid-1999 to construct and sell 17 riverfront single-family lots, 48 condominiums, 112 villa single-family homes and 22 carriage duplex homes on 117 acres of land located on the inland waterway in Indian River County, Florida. Palm River's investment in and advances to the real estate development venture totaled $17.7 million at September 30, 2001. Bankshares recognized a $28,000 net gain (including interest income) from the project for the three months ended September 30, 2001 as compared to a $145,000 net gain (including interest income) for the same period in 2000. The operating results were anticipated and are typical for projects of this type. Management believes the success of the Association as a community-oriented financial institution depends on building long-term relationships with its customers while meeting their current financial needs. A business strategy priority for 2001 is to lower the cost of deposits to improve the net interest rate spread. During 2001, management discontinued offering higher-costing odd-term certificates of deposit and did not aggressively match competitors' rates offered for certificates of deposit, resulting in a $41.3 million decrease in certificates of deposit during 2001. The Association's efforts are focused on obtaining new lower costing core deposit accounts (consisting of demand, NOW, savings and money market accounts), resulting in a $27.2 million increase in core deposits. The shift in deposit products, as well as the decreasing interest rate environment experienced during 2001, resulted in a 92 basis point improvement in the weighted average cost at September 30, 2001 as compared to December 31, 2000. Management expects to see a continued improvement in the interest rate spread during the next six months as maturing certificates of deposit either reprice at lower rates or are not renewed. Certificates of deposit totaling $95.2 million and $149.9 million, with weighted average rates of 5.18% and 5.80% will mature during the three month periods ending December 31, 2001 and March 31, 2002, respectively. New deposits and loan repayments will be supplemented with FHLB advances as needed to fund loan originations. In July 2001, the Association opened a new office building in Palm City. This facility includes a full service branch to replace the leased Martin Downs branch, as well as a training and meeting room for the Association's northern branches, and leasable office space. The Association has also entered into a contract to purchase the land and building where the Bluffs branch office is located. The purchase is currently expected to be completed in the last quarter of 2001. For the remainder of 2001, management will continue to focus on additional cost reduction and enhanced fee income strategies. 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. While the OTS liquidity regulation has been discontinued for 2001, liquidity levels will continue to be monitored by Association management on a regular schedule. The Association's primary sources of funds are deposits, amortization and prepayment of loans and MBS, maturities of investment securities and other short-term investments, FHLB advances, as well as earnings and funds provided from operations. While scheduled principal repayments on loans and MBS, and maturities of securities are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, 8 economic conditions, and competition. The Association manages the pricing of its deposits in order to maintain desired deposit balances. In addition, the Association invests funds in excess of its immediate needs in short-term interest-earning deposits and other assets, which provide liquidity to meet lending requirements. Short-term interest-bearing deposits with the FHLB of Atlanta totaled $47.3 million at September 30, 2001. Other liquid assets outstanding at September 30, 2001 amounted to $19.5 million. For additional information about cash flows from operating, financing, and investing activities, see the unaudited consolidated statements of cash flows included in the consolidated financial statements. Liquidity management is both a daily and long-term function of business management. If funds are required beyond the Association's ability to generate them in the local market, borrowing agreements exist with the FHLB which provide an additional source of funds. FHLB advances totaled $134.1 million at September 30, 2001. At September 30, 2001, commitments to originate loans totaled $12.4 million. The unfunded portion of consumer lines of credit totaled $9.2 million and available commercial lines and letters of credit totaled $8.0 million and $803,000, respectively. Certificates of deposit scheduled to mature in less than one year totaled $331.2 million at September 30, 2001. Based on prior experience, management believes that a significant portion of such deposits will remain with the Association. Results of Operations for the Three Months Ended September 30, 2001 and 2000 General Net income for the quarter ended September 30, 2001 was $1.3 million, or $0.15 diluted earnings per share, a $321,000 decrease from the $1.6 million, or $0.18 diluted earnings per share, earned during the quarter ended September 30, 2000. Net Interest Income Net interest income increased to $7.1 million for the quarter ended September 30, 2001 from $6.9 million for the same period in 2000. The interest rate spread increased seven basis points to 2.90% for the three months ended September 30, 2001 as compared to 2.83% for the 2000 period, primarily due to changes in rates paid and yields earned on interest-bearing liabilities and interest-earning assets, respectively. Management expects to continue to see an improvement in the interest rate spread over the next six months as maturing certificates of deposit either reprice at lower rates or are not renewed. The average cost of interest-bearing liabilities decreased 43 basis points for the three months ended September 30, 2001 as compared to the same period in 2000 primarily as a result of a 35 basis point decrease in the weighted average cost of interest-bearing deposits During the quarter ended September 30, 2001, management continued its 2001 strategy of not offering new higher costing odd-term certificates of deposit and not aggressively matching competitors' rates offered for certificates of deposit. The Association focused its efforts on obtaining new lower costing core deposit accounts. The weighted average yield on interest-earning assets decreased 36 basis points for the quarter ended September 30, 2001 as compared to the same period in 2000. The decrease was primarily from decreases in the weighted average yield on real estate loans and interest-earning bank deposits of 19 and 373 basis points, respectively. Provision for Loan Losses The Association maintains an allowance for loan losses based upon the 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 economic conditions. Loan loss provisions are based upon management's estimate of the fair value of the collateral and actual loss experience, as well as guidelines established by the OTS. The provision for loan losses was $90,000 for the quarter ended September 30, 2001 as compared to $75,000 for the quarter ended September 30, 2000. The allowance for loan losses as a percentage of net loans receivable was 0.63% and 0.56% at September 30, 2001 and 2000, respectively. Although management believes the loan loss allowance was adequate at September 30, 2001, further additions to the allowance for loan losses may be necessary. For a further information regarding asset quality, see " - Asset Quality" in this Form 10-Q. 9 Other Income Other income consists of service charges, fee income, gains or losses on the sale of assets, gain or loss on the real estate development venture and other non-interest income. Other income decreased $67,000 to $1.1 million for the quarter ended September 30, 2001, from $1.2 million for the same period in 2000. Other income includes the results of the activity of Palm River which is involved in a real estate development venture commenced in mid-1999 to develop and sell single-family riverfront lots, and construct and sell condominiums, villa homes and carriage homes on 117 acres of land on the inland waterway near Vero Beach in Indian River County, Florida. The investment in and advances to the real estate development venture totaled $17.7 million at September 30, 2001. Bankshares recognized a $28,000 net gain (including interest income) from the project for the three months ended September 30, 2001 as compared to a $145,000 net gain (including interest income) for the same period in 2000. The operating results were anticipated and are typical for projects of this type. For further information on this project, see "Investments in and Advances to Real Estate Venture" in the Notes to Consolidated Financial Statements in Bankshares' Annual Report to Shareholders for the year ended December 31, 2000 ("2000 Annual Report"). Operating Expense Operating expense increased $603,000 to $6.2 million for the three month period ended September 30, 2001 from $5.6 million for the same period in 2000 primarily due to a $327,000 increase in compensation and benefits expense to $3.4 million from $3.1 million for the same period in 2000. The increase in compensation expense in large part reflected increased wages paid by the Association in order to attract and retain employees in its competitive market place. In addition, miscellaneous operating expense increased $230,000 due in large part to expenses incurred during the quarter ended September 30, 2001 related to the September 9, 2001 execution of a definitive merger agreement between BankAtlantic and Bankshares. Provision for Income Taxes The provision for income taxes was $612,000 for the three months ended September 30, 2001 as compared to $850,000 for the 2000 period. Taxes were higher in the 2000 period due to the level of net income for the three months ended September 30, 2000. In addition, the benefit from tax credits resulting from the Association's investment in an affordable housing partnership increased $78,000 to $141,000 for the 2001 period as compared to $63,000 in the 2000 period. Results of Operations for the Nine Months Ended September 30, 2001 and 2000 General Net income for the nine months ended September 30, 2001 was $4.1 million, or $0.49 diluted earnings per share, a $1.1 million decrease from $5.2 million, or $0.59 diluted earnings per share, for the nine months ended September 30, 2000. In addition to the one-time $907,000 gain, net of expenses, recognized in the 2000 period on the termination of the Association's defined benefit plan described above, for the nine months ended September 30, 2001 net interest income decreased $183,000 and employee compensation and benefits and miscellaneous operating expense increased $936,000 and $553,000, respectively. Partially offsetting these shifts was the recognition of $249,000 net income in the real estate venture in 2001 as compared to a $55,000 net loss in the same period in 2000. Net Interest Income Net interest income decreased to $21.0 million for the nine months ended September 30, 2001 from $21.2 million for the same period in 2000 primarily as a result of a 22 basis point increase in the weighted average cost of interest-bearing deposits to 4.30% for the nine months ended September 30, 2001 as compared to 4.08% for the same period in 2000. In addition, the average balance of deposits increased by $39.7 million. The increase in the rate paid and the average balance resulted in an increase in the weighted average cost of interest-bearing liabilities to 4.63% for the 2001 period and in total interest expense. The increase in interest expense was partially offset by a $60.2 million increase in the average balance of the loan portfolio. As a result of these changes, the interest rate spread decreased 16 basis points to 2.85% for the nine months ended September 30, 2001. 10 Provision for Loan Losses The provision for loan losses was $270,000 for the nine months ended September 30, 2001, as compared to $300,000 for the nine months ended September 30, 2000. Management determined to increase the allowance for loan loss reserves to a greater extent in the 2000 period as compared to the same time period in 2001, after evaluating the risks inherent in the then current loan portfolio. For a further information regarding asset quality, see " - Asset Quality" in this Form 10-Q. Other Income Other income decreased $278,000 to $3.5 million for the nine months ended September 30, 2001 from $3.8 million for the same period in 2000, primarily due to the one-time $907,000 gain, net of expenses, recorded as a result of the termination of the Association's defined benefit plan in the 2000 period. This gain was partially offset by a $138,000 impairment loss during the 2000 period taken on a security classified as available for sale. In addition, equity in the net income related to the real estate development venture in Vero Beach increased $304,000 to $249,000 from a net loss of $55,000 for the 2000 period. For further information on this project, see "Investments in and Advances to Real Estate Venture" in the Notes to Consolidated Financial Statements in Bankshares' 2000 Annual Report. Operating Expense Operating expense increased $1.4 million to $18.3 million for the nine month period ended September 30, 2001 from $16.9 million for the same period in 2000. Employee compensation and benefits increased $936,000 during the nine months ended September 30, 2001 as compared to the 2000 period primarily reflecting increased wages paid by the Association in order to attract and retain employees in its competitive market place. In addition, the $553,000 increase in miscellaneous operating expense included an increase in the amortization of the Association's investment in tax credit partnership as well as expenses incurred during the quarter ended September 30, 2001 related to the September 9, 2001 negotiation of the definitive merger agreement between BankAtlantic and Bankshares. Provision for Income Taxes The provision for income taxes was $1.9 million for the nine months ended September 30, 2001 as compared to $2.6 million for the same period in 2000. Taxes were higher in the 2000 period due to the higher level of net income for the nine months ended September 30, 2000 as well as a $181,000 increase in the benefit from tax credits resulting from the Association's investment in an affordable housing partnership in the 2001 period. Financial Condition September 30, 2001 compared to December 31, 2000 At September 30, 2001, Bankshares' assets totaled $950.0 million, a $12.7 million decrease from December 31, 2000. The declining interest rate market experienced during 2001 has impacted the Association's securities portfolio, which includes callable U.S. Government and agency securities and amortizing mortgage-backed and related securities. When market interest rates decline, some securities may be called and prepayments of mortgage-backed and related securities may accelerate. Calls and maturities of securities classified as available for sale totaling $34.4 million and $1.8 million, respectively, as well as scheduled principal reductions and amortization of premiums and discounts and other adjustments amounting to $6.4 million resulted in a $42.6 million net decrease in the securities portfolio for the nine months ended September 30, 2001. The decrease in the securities portfolio in the first nine months of 2001 was partially offset by purchases of Fannie Mae ("FNMA") and Freddie Mac ("FHLMC") stock aggregating $2.8 million. At September 30, 2001, the Association's investment portfolio included mortgage-backed and related securities aggregating $55.0 million but did not include any callable securities. Cash and cash equivalents totaled $66.3 million at September 30, 2001, a $21.2 million increase from December 31, 2001 as funds received from the decline in the securities portfolio which were not used to fund deposit outflow, or to pay off FHLB advances, are being held in a short-term interest bearing account at the FHLB of Atlanta. Net loans receivable increased $3.7 million during the nine months ended September 30, 2001. New loan originations, loan purchases and loans in process funding totaling $131.5 million, $2.1 million, and $13.9 million, respectively, were offset by loan repayments and other adjustments of $142.9 million and $870,000, respectively. The new loan originations of $131.5 million included residential, land, commercial real estate, consumer and commercial business loans aggregating $108.7 million, $6.0 million, $10.9 million, $2.5 million and $3.4 million, respectively. 11 Deposits aggregated $667.0 million at September 30, 2001, a $14.1 million decrease from December 31, 2001. The Association, implementing a strategy designed to lower its cost of funds, focused on obtaining new core deposit accounts, and discontinued offering higher costing odd-term certificates of deposit product. This strategy resulted in a $41.3 million decrease in certificates of deposit offset in part by a $27.2 million increase in core deposits. At September 30, 2001, the weighted average cost of the deposit portfolio was 3.83%, a 92 basis points decrease from December 31, 2001. FHLB advances decreased $12.6 million to $134.1 million at September 30, 2001 from $146.7 million at December 31, 2000. The decreases included the maturity and payoff of $10.0 million in advances as well as $2.6 million of normal amortization. The early payoff was made without penalty. Total equity, which totaled $117.6 million at September 30, 2001, increased $5.2 million from December 31, 2000, reflecting net income for the nine months of $4.1 million, stock option exercises totaling $953,000, an increase in the market value of the Association's securities available for sale totaling $1.3 million (net of tax) and the amortization of compensation represented by stock benefit plans totaling $1.5 million, offset in part by the declaration of dividends totaling $2.7 million. For further information, see the unaudited consolidated statements of changes in shareholders' equity in the accompanying consolidated financial statements. The Association is required to report regulatory capital ratios unconsolidated with Bankshares. The Association's actual capital amounts and ratios at September 30, 2001 are as follows:

As of September 30, 2001, adjusted tangible assets and risk-weighted assets were $931.2 million and $529.0 million, respectively. 12 Asset Quality Loans 90 days past due are considered non-performing and are generally placed on non-accrual status. The Association ceases to accrue interest on a loan once it is placed on non-accrual status and any interest accrued but unpaid at such time is reversed from interest income. Additionally, any loan for which it appears evident prior to being past due 90 days that the collection of interest is in doubt is also placed on non-accrual status. Real estate owned is carried at the lower of cost or fair value, less cost to dispose. Management regularly reviews assets to determine proper valuation. The following table sets forth information regarding non-performing and delinquent loans, foreclosed real estate, and loans to facilitate the sale of REO at the dates indicated:

In the above table, residential real estate loans more than 89 days delinquent included two loans to a local builder, aggregating $2.2 million, extended for the purpose of developing Phase I of a project to build 78 golf villas on an eight acre parcel of land located in Palm Beach County. Due to slower sales than projected which resulted in reduced cash flows, the borrower notified the Association during fiscal 2000 of its inability to make scheduled interest payments. In accordance with SFAS No. 114, management reversed all accrued but unpaid interest and placed the loans on non-accrual status at that time. A fair value calculation was performed which estimated the fair market value of existing collateral as being in excess of the principal loan balances at September 30, 2001. At the present time, management does not anticipate incurring any loss of principal on these loans. 13 Real estate owned consists of the following: September 30, December 31, 2001 2000 ---- ---- (In thousands) Real estate owned $ 12 $172 Less allowance for loss 2 2 ---- ---- Total real estate owned $ 10 $170 ==== ==== Changes in allowance for loss on real estate owned are as follows: For the nine months ended September 30, 2001 2000 ---- ---- (In thousands) Balance, beginning of period $ 2 $ 6 Provision charged to income -- 14 Losses charged to allowance -- (18) ---- ---- Balance, end of period $ 2 $ 2 ==== ==== Forward-Looking Statements Statements included in this Form 10-Q which are not historical facts are forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995. Amounts herein could vary as a result of market and other factors, as well as costs incurred in connection with and in furtherance of the acquisition by BankAtlantic. Such forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, factors discussed in documents filed by Bankshares with the Securities and Exchange Commission from time to time. Such forward-looking statements may be identified by the use of such words as "believe," "expect," "anticipate," "should," "planned," "estimated," "potential" and "projected." Examples of forward-looking statements include, but are not limited to, estimates with respect to the financial condition, expected or anticipated revenue, results of operations and business of Bankshares that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, but are not limited to, general economic conditions; changes in interest rates; deposit flows; the levels of defaults, losses and prepayments on mortgage-related securities or loans held by Bankshares in portfolio or sold in the secondary market; loan demand; real estate values; competition; changes in accounting principles, policies, practices or guidelines; changes in legislation or regulation; and other economic, competitive, governmental, regulatory, and technological factors affecting Bankshares' operations, pricing, products and services. The forward-looking statements are made as of the date of this Form 10-Q, and Bankshares' assumes no obligation to update the forward-looking statements or to update the reasons why actual results could or did differ from those projected in the forward-looking statements. Item 3. Quantitative and Qualitative Disclosures About Market Risk For a discussion of Bankshares' asset and liability management policies, see "Management's Discussion and Analysis - Market Risk Analysis" and -"Market Value of Portfolio Equity" in Bankshares' 2000 Annual Report. 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 Association's 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 Association's Board of Directors, then the Board may direct management to adjust Bankshares' asset and liability mix to bring its interest rate risk within Board approved limits. 14 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 2% 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' most recent internal calculations of NPV at June 30, 2001, the most recent date for which information is available.

As of December 31, 2000, Bankshares' NPV was $155.1 million or 16.0% of the present value of average assets. Following a 200 basis point increase in interest rates, Bankshares' "post shock" NPV was $145.4 million or 15.0% of the present value of average assets. The change in the NPV ratio or Bankshares' sensitivity measure was (6.30%). Based upon management's knowledge as of the date hereof, Bankshares' does not believe that there has been any material change in its asset and liability position or the market value of its portfolio equity since June 30, 2001. 15 PART II. OTHER INFORMATION -------------------------- Item 1. Legal Proceedings There are various claims and lawsuits in which Bankshares or the Association are periodically involved incidental to its business. In the opinion of management, no material loss is expected from any of such pending claims or lawsuits. Item 2. Changes in Securities and Use of Proceeds Not applicable. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. -------- None. (b) Current Reports on Form 8-K. --------------------------- The following Current Report on Form 8-K was filed during the three months ended September 30, 2001. Date Item Description ---- ---- ----------- September 9, 2001 5 Report execution of the Agreement and Plan of Merger with BankAtlantic 16 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. COMMUNITY SAVINGS BANKSHARES, INC. Date: November 14, 2001 /s/ JAMES B. PITTARD, JR. ------------------------------------- James B. Pittard, Jr. President and Chief Executive Officer Date: November 14, 2001 /s/ LARRY J. BAKER ------------------------------------- Larry J. Baker Chief Financial Officer, Treasurer and Senior Vice President 17

COMMUNITY SAVINGS BANKSHARES INC /DE/ 10-Q