1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2000.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
----------------- -----------------
Commission file number: 0-24611
CFS Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Delaware 35-2042093
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
707 Ridge Road, Munster, Indiana 46321
(Address of principal executive offices)
(219) 836-5500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports 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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
The Registrant had 18,026,018 shares of Common Stock issued and outstanding as
of July 21, 2000.
2
CFS BANCORP, INC.
INDEX
Page No.
--------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition at June 30,
2000 and December 31, 1999 3
Consolidated Statements of Income for the Three and Six
Months Ended June 30, 2000 and 1999 4
Consolidated Statements of Changes in Stockholders' Equity
for the Six Months Ended June 30, 2000 5
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2000 and 1999 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 22
PART II OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
2
3
CFS BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars In Thousands)
(Unaudited)
June 30, 2000 December 31, 1999
------------- -----------------
ASSETS
Cash and amounts due from depository institutions $ 25,735 $ 33,062
Interest-bearing deposits 16,138 28,866
Federal funds sold 10,000 33,875
----------- -----------
Cash and cash equivalents 51,873 95,803
Investment securities available-for-sale 77,692 32,693
Investment securities held-to-maturity
(fair value 2000-$166,687; 1999-$165,692) 176,760 176,737
Mortgage-related securities available-for-sale 284,291 299,056
Mortgage-related securities held-to-maturity
(fair value 2000-$86,148; 1999-$97,586) 90,038 101,066
Loans receivable 978,565 882,676
Investment in FHLB stock, at cost 27,764 22,448
Office properties and equipment 17,216 17,223
Accrued interest receivable 10,299 9,678
Real estate owned 800 609
Prepaid expenses and other assets 17,567 11,546
----------- -----------
Total assets $ 1,732,865 $ 1,649,535
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 955,793 $ 925,047
Borrowed money 542,642 494,699
Advance payments by borrowers for taxes
and insurance 6,212 5,738
Other liabilities 27,462 18,618
----------- -----------
Total liabilities 1,532,109 1,444,102
----------- -----------
Stockholders' Equity:
Common stock; $.01 par value: 85,000,000 shares authorized;
Shares issued: 23,298,790 and 23,198,606 at
June 30, 2000 and December 31, 1999, respectively
Shares outstanding: 18,026,018 and 18,627,685 at
June 30, 2000 and December 31, 1999, respectively 233 232
Additional paid-in capital 188,581 187,138
Retained earnings, substantially restricted 95,358 93,927
Treasury stock, at cost: 5,272,772 and 4,570,921 shares at
June 30, 2000 and December 31, 1999, respectively (55,172) (48,079)
Unearned common stock acquired by ESOP (11,962) (11,962)
Unearned common stock acquired by RRP (6,019) (6,389)
Accumulated other comprehensive loss, net of tax (10,263) (9,434)
----------- -----------
Total stockholders' equity 200,756 205,433
----------- -----------
Total liabilities and stockholders' equity $ 1,732,865 $ 1,649,535
=========== ===========
See accompanying notes
3
4
CFS BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars In Thousands Except Per Share Data)
(Unaudited)
For Three Months Ended For Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
Interest income:
Loans $18,300 $13,952 $35,360 $27,821
Mortgage-related securities 6,808 7,420 13,708 15,434
Other investment securities 3,597 3,528 7,122 6,852
Other 979 339 2,018 727
------ ------ ------ ------
Total interest income 29,684 25,239 58,208 50,834
Interest expense:
Deposits 10,902 9,897 21,230 20,259
Borrowings 7,067 3,611 13,691 6,950
------ ------ ------ ------
Total interest expense 17,969 13,508 34,921 27,209
Net interest income before
provision for losses on loans 11,715 11,731 23,287 23,625
Provision for losses on loans 300 150 2,550 300
------ ------ ------ ------
Net interest income after
provision for losses on loans 11,415 11,581 20,737 23,325
Non-interest income:
Loan fees 353 278 774 470
Insurance commissions 222 216 440 419
Investment commissions 378 393 747 756
Gain on sale of investment securities - net 73 94 73 38
Net gain on sale of loans -- 1 -- 68
Gain (loss) on sale of real estate owned -- 26 -- (28)
Other income 424 448 800 1,038
------ ------ ------ ------
Total non-interest income 1,450 1,456 2,834 2,761
Non-interest expense:
Compensation and employee benefits 5,218 4,463 10,329 9,025
Net occupancy expense 600 630 1,220 1,284
Furniture and equipment expense 613 487 1,264 1,068
Federal deposit insurance premiums 48 96 98 294
Data processing 168 309 464 594
Marketing 214 105 461 213
Other general and administrative expenses 1,163 937 2,184 2,047
------ ------ ------ ------
Total non-interest expense 8,024 7,027 16,020 14,525
Income before income taxes 4,841 6,010 7,551 11,561
Income tax expense 1,839 2,356 3,042 4,631
------ ------ ------ ------
Net income $3,002 $3,654 $4,509 $6,930
====== ====== ====== ======
Per share data:
Basic earnings per share $0.18 $0.19 $0.27 $0.34
Diluted earnings per share 0.18 0.19 0.27 0.34
Cash dividends declared per share 0.09 0.08 0.18 0.16
Weighted average shares outstanding 16,377,538 19,253,527 16,475,221 20,279,515
Weighted average diluted shares outstanding 16,542,490 19,670,791 16,640,173 20,696,779
See accompanying notes
4
5
CFS BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars In Thousands)
(Unaudited)
Unearned Unearned
Common Common Accumulated
Additional Stock Stock Other
Common Paid-In Retained Treasury Acquired Acquired Comprehensive
Stock Capital Earnings Stock by ESOP by RRP (Loss) Total
----- ------- -------- ----- ------- ------ ------ -----
Balance January 1, 2000 $ 232 $187,138 $93,927 ($48,079) ($11,962) ($6,389) ($9,434) $205,433
Net income -- -- 4,509 -- -- -- -- 4,509
Other comprehensive income, net of tax:
Change in unrealized appreciation on
available-for-sale securities, net
of reclassification adjustment -- -- -- -- -- -- (829) (829)
Total comprehensive income $3,680
Purchase of treasury stock -- -- -- (7,093) -- -- -- (7,093)
Exercise of stock options 1 388 -- -- -- -- -- 389
Adjustment in the recording of rabbi trust -- 1,015 -- -- -- -- -- 1,015
Adjustment to shares for Recognition and
Retention Plan -- 40 -- -- -- (1,110) -- (1,070)
Vesting of awards granted under
Recognition and Retention Plan -- -- -- -- -- 1,480 -- 1,480
Dividends declared on common stock -- -- (3,078) -- -- -- -- (3,078)
-------------------------------------------------------------------------------------
Balance June 30, 2000 $ 233 $188,581 $95,358 ($55,172) ($11,962) ($6,019) ($10,263) $200,756
====== ======== ======= ======== ======== ======== ======== ========
See accompanying notes
5
6
CFS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Six Months Ended
June 30,
--------
2000 1999
---- ----
Operating activities:
Net income $ 4,509 $ 6,930
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for losses on loans 2,550 300
Depreciation expense 1,071 1,006
Deferred income taxes (153) (5,587)
Amortization of cost of stock benefit plans 715 357
Change in deferred income 242 683
Increase in interest receivable 621 372
Decrease in accrued interest payable 153 122
Proceeds from sale of loans held for sale 546 4,548
Origination of loans held for sale (1,028) (4,247)
Proceeds from sale of Visa accounts -- 1,533
Net gain on sale of VISA accounts -- (59)
Net gain on sale of available for sale securities (73) (6)
Net gain on sale of loans -- (9)
Gain of sale of office property -- (1)
Net loss on sale of real estate owned -- 28
Increase (decrease) in prepaid expenses and other assets (4,598) 2,346
Increase in other liabilities 7,377 5,279
--------- ---------
Net cash provided by operating activities 11,932 13,595
--------- ---------
Investing activities:
Available for sale investment securities:
Purchases (45,391) (185)
Repayments -- 137
Sales 606 23,026
Held to maturity investment securities:
Purchases -- (90,073)
Repayments and maturities -- 56,285
Available for sale mortgage-related securities:
Purchases -- (55,248)
Repayments 13,400 27,705
Sales -- 1,088
Held to maturity mortgage-related securities:
Purchases -- --
Repayments 11,028 52,864
Purchase of Federal Home Loan Bank stock (5,316) (3,554)
Loan originations and principal payments on loans (99,039) (47,056)
Additional costs on real estate owned (53) (64)
Proceeds from sale of real estate owned 619 394
Purchases of property and equipment (1,085) (870)
Disposals of property and equipment 21 1
--------- ---------
Net cash used in investing activities (125,210) (35,550)
--------- ---------
6
7
CFS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in Thousands)
(Unaudited)
Six Months Ended
June 30,
--------
2000 1999
---- ----
Financing activities:
Proceeds from exercise of stock options 389 833
Dividends paid on common stock (3,111) (3,133)
Purchase of treasury stock (7,093) (35,557)
Purchase of shares for Recognition and Retention Plan -- (7,499)
Net increase in NOW, passbook and money
market accounts 8,881 18,441
Net increase (decrease) in certificates of deposit 21,865 (48,586)
Net increase (decrease) in advance payments by borrowers for
taxes and insurance 474 (88)
Net increase in borrowed funds 47,943 64,321
------ ------
Net cash flows (used) provided by financing activities 69,348 (11,268)
------ --------
Increase (decrease) in cash and cash equivalents (43,930) (33,223)
Cash and cash equivalents at beginning of period 95,803 49,843
------ ------
Cash and cash equivalents at end of period $51,873 $16,620
======= =======
Supplemental disclosure of non-cash activities:
Transfer of loans to real estate owned $757 $419
See accompanying notes
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8
CFS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF FINANCIAL STATEMENTS PRESENTATION
The accompanying consolidated financial statements were prepared in accordance
with instructions to Form 10-Q and therefore do not include all the information
or footnotes necessary for a complete presentation of financial position,
results of operations and cash flows in conformity with generally accepted
accounting principles. However, all normal recurring adjustments which, in the
opinion of management, are necessary for a fair presentation of financial
statements have been included. These financial statements should be read in
conjunction with the audited financial statements and the notes thereto for the
period ended December 31, 1999 contained in the CFS Bancorp, Inc. (the
"Company") annual report. The results for the three and six months ended June
30, 2000 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2000.
2. LOAN PORTFOLIO
The Company's loan portfolio consisted of the following at the dates indicated:
June 30, 2000 December 31, 1999
------------- -----------------
(Dollars in Thousands)
Mortgage Loans: Amount % Amount %
------ ---- ------ ----
Single-family residential $ 703,619 66.16% $ 669,280 69.46%
Multi-family residential 32,733 3.08 33,840 3.51
Commercial real estate 119,804 11.26 93,320 9.68
Construction and land
development:
Single-family residential 40,797 3.84 39,045 4.05
Multi-family residential 44,902 4.23 36,843 3.82
Commercial and land development 79,934 7.51 57,417 5.96
Home equity 19,470 1.83 16,001 1.66
---------------------- ----------------------------
Total mortgage loans 1,041,259 97.91 945,746 98.14
Other loans 22,210 2.09 17,861 1.86
---------------------- ----------------------------
Total loans receivable 1,063,469 100.00% 963,607 100.00%
---------------------- ----------------------------
Less:
Undisbursed portion of
loan proceeds 77,017 73,086
Allowance for losses on
loans 6,452 5,973
Deferred loan fees 1,435 1,872
---------- ---------
Loans receivable, net $ 978,565 $ 882,676
========== =========
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3. INVESTMENT SECURITIES
Amortized cost of investment securities and their fair values were as follows
(in thousands):
Available-for-Sale at June 30, 2000: Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
Callable agency securities and corporate bonds $64,645 $142 $400 $64,387
Trust preferred securities 4,924 -- 245 4,679
Equity securities 9,040 522 936 8,626
--------- ---------- ---------- --------
$78,609 $664 $1,581 $77,692
========= ========== ========== ========
Available-for-Sale at December 31, 1999: Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
Callable agency securities and corporate bonds $20,006 $ 1 $419 $19,588
Trust preferred securities 4,923 ---- 405 4,518
Equity securities 9,566 136 1,115 8,587
--------- ---------- ---------- --------
$34,495 $137 $1,939 $32,693
========= ========== ========== ========
Held-to-Maturity at June 30, 2000: Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
Callable agency securities and corporate
bonds $176,760 $ - $10,073 $166,687
========= ========== ========== ========
Held-to-Maturity at December 31, 1999: Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
Callable agency securities and corporate bonds $176,737 $ -- $11,045 $165,692
========= ========== ========== ========
9
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4. MORTGAGE-RELATED SECURITIES
The amortized cost of mortgage-related securities and their fair values are as
follows (in thousands):
Available-for-Sale at June 30, 2000:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
Participation certificates $59,105 $43 $869 $58,279
Real estate mortgage investment conduits
and collateralized mortgage obligations 240,847 -- 14,835 226,012
--------- ---------- ---------- --------
$299,952 $43 $15,704 $284,291
========= ========== ========== ========
Available-for-Sale at December 31, 1999:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
Participation certificates $59,931 $341 $1,271 $59,001
Real estate mortgage investment conduits
and collateralized mortgage obligations 253,185 94 13,224 240,055
--------- ---------- ---------- --------
$313,116 $435 $14,495 $299,056
========= ========== ========== ========
Held-to-Maturity at June 30, 2000:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
Participation certificates $36,692 $48 $2,269 $34,471
Real estate mortgage investment conduits
and collateralized mortgage obligations 53,346 59 1,728 51,677
--------- ---------- ---------- --------
$90,038 $107 $3,997 $86,148
========= ========== ========== ========
Held-to-Maturity at December 31, 1999:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
Participation certificates $39,196 $44 $2,291 $36,949
Real estate mortgage investment conduits
and collateralized mortgage obligations 61,870 147 1,308 60,637
--------- ---------- ---------- --------
$101,066 $191 $3,599 $97,586
========= ========== ========== ========
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5. PENDING ACCOUNTING PRONOUNCEMENTS
In June 1998, FAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued. FAS No. 133 establishes accounting and reporting
standards requiring that derivative instruments (including certain derivative
instruments embedded in other contracts) be recorded on the balance sheet as
either assets or liabilities measured at fair value. FAS No. 133 requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gain and losses to offset related
changes in value of the hedged item in the income statement and requires that a
company document, designate and assess the effectiveness of transactions that
qualify for hedge accounting. In June 1999, FAS No. 137, "Accounting for
Derivatives and Hedging Activities-Deferral of the Effective Date of FASB
Statement No. 133," was issued. FAS No. 137 defers the effective date of FAS No.
133 until fiscal years beginning after June 15, 2000. As such, the Company will
adopt FAS No. 133 on January 1, 2001. The Company does not believe adoption of
FAS No. 133 will have a material impact on its financial position or results of
operations.
11
12
6. EARNINGS PER SHARE
Set forth below is information with respect to calculation of basic and diluted
earnings per share for the periods indicated.
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
(Dollars in thousands, except per share data)
Net income $3,002 $3,654 $4,509 $6,930
Weighted average number of common shares outstanding 18,102,069 21,238,682 18,265,205 22,041,573
Average ESOP shares not committed to be released (1,151,381) (1,271,005) (1,166,334) (1,285,958)
Average RRP shares not vested (573,150) (714,150) 623,650 (476,100)
--------- --------- ------- ---------
Weighted average number of shares outstanding for
basic earnings per share computation purposes 16,377,538 19,253,527 16,475,221 20,279,515
Dilutive effects of stock options 164,952 417,264 164,952 417,264
------- ------- ------- -------
Weighted average shares and common share equivalents
outstanding for diluted earnings per share purposes 16,542,490 19,670,791 16,640,173 20,696,779
========== ========== ========== ==========
Basic earnings per share $0.18 $0.19 $0.27 $0.34
Diluted earnings per share $0.18 $0.19 $0.27 $0.34
7. COMPREHENSIVE INCOME
Comprehensive income is the total of reported net income and all other revenues,
expenses, gains and losses that under generally accepted accounting principles
are not includable in reported net income but are reflected in stockholders'
equity.
The following table presents the Company's comprehensive income (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
Net income $3,002 $3,654 $4,509 $6,930
Net change in unrealized gain or (loss) on
securities available-for-sale, net (381) (4,034) (829) (4,100)
----- ------ ---- -----
Comprehensive income (loss) ($2,621) ($380) $3,680 $2,830
======== ====== ====== =======
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8. NON-PERFORMING ASSETS
The following table sets forth information with respect to non-performing assets
at the dates indicated:
June 30, 2000 December 31, 1999
------------- -----------------
(Dollars In Thousands)
Non-accrual loans:
Mortgage loans:
Construction and land development $2,011 $1,313
Single-family residential 6,735 7,303
Multi-family residential 863 460
Non-residential 1,252 2,498
Other loans 86 258
------- -------
Total non-performing loans 10,947 11,832
Other real estate owned 800 609
------- -------
Total non-performing assets $11,747 $12,441
======= =======
Non-performing assets to total assets 0.68% 0.75%
Non-performing loans to total loans 1.12 1.23
The following table is a summary of changes in the allowance for losses on loans
for the six months ended June 30, 2000 and the year ended December 31, 1999:
Six Months Ended Year Ended
June 30, 2000 December 31,1999
------------- ----------------
(Dollars In Thousands)
Balance at beginning of period $5,973 $5,357
Provision for loan losses 2,550 675
Charge-offs (2,123) (171)
Recoveries 52 112
------ ------
Balance at end of period $6,452 $5,973
====== ======
Allowance for loan losses to total non-performing loans
at end of period 58.94% 50.48%
Allowance for loan losses to total loans at end of period 0.61 0.62
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
This Form 10-Q contains certain forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995, and may be identified by
the use of such words as "believe," "expect," "anticipate," "should," "planned,"
"estimated" and "potential." Examples of forward-looking statements include, but
are not limited to, estimates with respect to the financial condition, results
of operations and business of the Company 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, loan demand, real estate values, and
competition; changes in accounting principles, policies, or guidelines; changes
in legislation or regulation; and other economic, competitive, governmental,
regulatory, and technological factors affecting the Company's operations,
pricing, products and services.
13
14
CHANGES IN FINANCIAL CONDITION
At June 30, 2000 the Company's total assets amounted to $1.7 billion or
approximately $83.3 million more than at December 31, 1999. The increase was a
result of changes in most major categories of earning assets and costing
liabilities. Net increases of $95.9 million in loans receivable, $19.2 million
in investment securities and mortgage related securities, and $7.1 million in
treasury stock were funded by a net decrease in cash and cash equivalents of
$43.9 million and a net increase in borrowed money of $47.9 million.
Cash and cash equivalents decreased from $95.8 million at December 31, 1999 to
$51.9 million at June 30, 2000. This $43.9 million decrease was used to fund new
loans and to fund stock purchases pursuant to the Company's announced repurchase
program.
Investment securities (available-for-sale and held-to-maturity) increased from
$209.4 million at December 31, 1999 to $254.5 million at June 30, 2000.
Mortgage-related securities (available-for-sale and held-to-maturity) decreased
from $400.1 million to $374.3 million at June 30, 2000. This overall increase of
$19.2 million was funded by new deposits and reductions of cash and cash
equivalents.
Loans receivable increased from $882.7 million at December 31, 1999 to $978.6
million at June 30, 2000. This net increase of $95.9 million was funded by a
decrease in cash and cash equivalents, increases in borrowed money and increases
in deposits.
Deposits increased from $925.0 million at December 31, 1999 to $955.8 million at
June 30, 2000. This increase of $30.8 million was primarily used to fund new
loan activity and investments. The Company has set rates to be competitive but
not overly aggressive.
Borrowings increased by $47.9 million during the first six months of 2000 from
$494.7 million at December 31, 1999 to $542.6 million at June 30, 2000. The
borrowed funds consist of advances from the Federal Home Loan Banks ("FHLB") of
Indianapolis and Chicago and reverse repurchase agreements. All borrowings are
secured. The increased borrowings were used primarily to fund new loans for the
six months ended June 30, 2000.
Stockholders' equity decreased by $4.6 million during the first six months of
2000 from $205.4 million at December 31, 1999 to $200.8 million at June 30,
2000. This decrease was primarily the result of the purchase of treasury stock
(803,300 shares).
14
15
AVERAGE BALANCES, NET INTEREST INCOME, YIELDS EARNED AND RATES PAID
The following table sets forth, for the periods indicated, information regarding
(i) the total dollar amount of interest income of the Company from
interest-earning assets and the resultant average yields; (ii) the total dollar
amount of interest expense on interest-bearing liabilities and the resultant
average rate; (iii) net interest income; (iv) interest rate spread; and (v) net
interest margin. Information is based on average monthly balances during the
indicated periods. The Company's management believes that the average monthly
balances do not differ materially from the average daily balances.
Three Months Ended June 30,
------------------------------------------------------------------------------
2000 1999
------------------------------------------------------------------------------
(Dollars in Thousands)
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------------------------------------------------------------------------------
Interest - earning assets:
Loans Receivable (1)
Real estate loans $ 942,520 $17,791 7.55% $ 747,268 $13,662 7.31%
Other loans 21,665 509 9.40% 13,719 290 8.46%
-------------------------- -----------------------------
Total loans 964,185 18,300 7.59% 760,987 13,952 7.33%
Securities: (2) 601,228 10,405 6.92% 651,103 10,948 6.73%
Other interest-earning assets (3) 59,136 979 6.62% 25,629 339 5.29%
-------------------------- -----------------------------
Total interest-earning assets 1,624,549 29,684 7.31% 1,437,719 25,239 7.02%
Non-interest earning assets 60,452 51,191
-------------- ---------------
Total assets $1,685,001 $1,488,910
============== ===============
Interest-bearing liabilities:
Deposits:
NOW and money market accounts $128,928 $ 837 2.60% $121,338 $ 677 2.23%
Passbook accounts 216,819 1,639 3.02% 236,801 1,680 2.84%
Certificates of deposit 583,881 8,426 5.77% 564,264 7,540 5.35%
-------------------------- -----------------------------
Total deposits 929,628 10,902 4.69% 922,403 9,897 4.29%
-------------------------- -----------------------------
Total borrowings 486,081 7,067 5.82% 271,213 3,611 5.33%
-------------------------- -----------------------------
Total interest-bearing liabilities 1,415,709 17,969 5.08% 1,193,616 13,508 4.53%
Non-interest bearing liabilities (4) 67,967 61,592
Total liabilities 1,483,676 1,255,208
Stockholders' equity 201,325 233,702
-------------- ---------------
Total liabilities and
stockholders' equity $1,685,001 $1,488,910
============== ===============
Net interest-earning assets $ 208,840 $244,103
============== ===============
Net interest income/interest rate spread $11,715 2.23% $11,731 2.49%
============ =========== =========================
Net interest margin 2.88% 3.26%
=========== ===========
Ratio of average interest-earning assets to
average interest-bearing liabilities 114.75% 120.45%
=========== ===========
(1) The average balance of loans receivable includes non-performing loans,
interest on which is recognized on a cash basis.
(2) Average balances of securities available for sale are based on
historical costs.
(3) Includes money market accounts, Federal Funds sold and interest-earning
bank deposits.
(4) Consists primarily of demand deposit accounts.
15
16
AVERAGE BALANCES, NET INTEREST INCOME, YIELDS EARNED AND RATES PAID
The following table sets forth, for the periods indicated, information regarding
(i) the total dollar amount of interest income of the Company from
interest-earning assets and the resultant average yields; (ii) the total dollar
amount of interest expense on interest-bearing liabilities and the resultant
average rate; (iii) net interest income; (iv) interest rate spread; and (v) net
interest margin. Information is based on average monthly balances during the
indicated periods. The Company's management believes that the average monthly
balances do not differ materially from the average daily balances.
Six Months Ended June 30,
------------------------------------------------------------------------------------
2000 1999
------------------------------------------------------------------------------------
(Dollars in Thousands)
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------------------------------------------------------------------------------------
Interest - earning assets:
Loans Receivable (1)
Real estate loans $ 918,932 $34,420 7.49% $ 736,913 $27,135 7.36%
Other loans 20,361 940 9.23% 13,295 686 10.32%
---------------------------- ----------------------------
Total loans 939,293 35,360 7.53% 750,208 27,821 7.42%
Securities: (2) 601,400 20,830 6.93% 660,280 22,286 6.75%
Other interest-earning assets (3) 63,882 2,018 6.32% 27,930 727 5.21%
---------------------------- ----------------------------
Total interest-earning assets 1,604,575 58,208 7.26% 1,438,418 50,834 7.07%
Non-interest earning assets 61,363 52,992
-------------- --------------
Total assets $1,665,938 $1,491,410
============== ==============
Interest-bearing liabilities:
Deposits:
NOW and money market accounts $ 127,182 $1,595 2.51% $ 120,947 $1,350 2.23%
Passbook accounts 217,335 3,295 3.03% 229,804 3,306 2.88%
Certificates of deposit 576,587 16,340 5.67% 576,366 15,603 5.41%
---------------------------- ----------------------------
Total deposits 921,104 21,230 4.61% 927,117 20,259 4.37%
---------------------------- ----------------------------
Total borrowings 478,688 13,691 5.72% 258,801 6,950 5.37%
---------------------------- ----------------------------
Total interest-bearing liabilities 1,399,792 34,921 4.99% 1,185,918 27,209 4.59%
Non-interest bearing liabilities (4) 63,434 61,034
Total liabilities 1,463,226 1,246,952
Stockholders' equity 202,712 244,458
-------------- --------------
Total liabilities and
stockholders' equity $1,665,938 $1,491,410
============== ==============
Net interest-earning assets $204,783 $252,500
============== ==============
Net interest income/interest rate
spread $23,287 2.27% $23,625 2.48%
============================ ============================
Net interest margin 2.90% 3.28%
============== ==============
Ratio of average interest-earning
assets to average interest-bearing
liabilities 114.63% 121.29%
============== ==============
(1) The average balance of loans receivable includes non-performing loans,
interest on which is recognized on a cash basis.
(2) Average balances of securities available for sale are based on
historical costs.
(3) Includes money market accounts, Federal Funds sold and interest-
earning bank deposits.
(4) Consists primarily of demand deposit accounts.
16
17
RATE /VOLUME ANALYSIS
The following table sets forth the effects of changing rates and volumes on net
interest income of the Company. Information is provided with respect to (i)
effects on interest income attributable to changes in volume (changes in volume
multiplied by prior rate); (ii) effects on interest income attributable to
changes in rate (changes in rate multiplied by prior volume); and (iii) changes
in rate/volume (changes in rate multiplied by changes in volume).
Three Months Ended June 30, 2000
compared to 1999 Increase (decrease) due to
--------------------------------------------
(Dollars in Thousands)
--------------------------------------------
Total Net
Increase/
Rate Volume Rate/Volume Decrease
--------------------------------------------
Interest-earning assets:
Loans receivable:
Real estate loans $ 444 $ 3,569 $ 116 $ 4,129
Other loans 32 168 19 219
-------------------------------------------
Total loans receivable 476 3,737 135 4,348
Securities 302 (838) (25) (543)
Other interest-earning assets 85 443 112 640
-------------------------------------------
Total net change in income on
interest-earning assets 881 3,342 222 4,445
Interest-bearing liabilities:
Deposits:
NOW and money markets 111 42 7 160
Passbook accounts 110 (142) (9) (41)
Certificates of deposit 603 262 21 886
-------------------------------------------
Total deposits 824 162 19 1,005
Borrowings 332 2,861 263 3,456
-------------------------------------------
Total net change in expense on
interest-bearing liabilities 1,156 3,023 282 4,461
-------------------------------------------
Net change in net interest income $ (275) $ 319 $ (60) $ (16)
===========================================
17
18
RATE/VOLUME ANALYSIS
The following table sets forth the effects of changing rates and volumes on net
interest income of the Company. Information is provided with respect to (i)
effects on interest income attributable to changes in volume (changes in volume
multiplied by prior rate); (ii) effects on interest income attributable to
changes in rate (changes in rate multiplied by prior volume); and (iii) changes
in rate/volume (changes in rate multiplied by changes in volume).
Six Months Ended June 30,
2000 compared to 1999 Increase (decrease) due to
------------------------------------------------------------
(Dollars in Thousands)
Total Net
Increase/
Rate Volume Rate/Volume Decrease
---- ------ ----------- -------
Interest-earning assets:
Loans receivable:
Real estate loans $ 467 $6,702 $ 116 $7,285
Other loans (72) 365 (39) 254
------------------------------------------------------------
Total loans receivable 395 7,067 77 7,539
Securities 584 (1,988) (52) (1,456)
Other interest-earning assets 155 936 200 1,291
------------------------------------------------------------
Total net change in income on
interest-earning assets 1,134 6,015 225 7,374
Interest-bearing liabilities:
Deposits:
NOW and money markets 166 70 9 245
Passbook accounts 178 (180) (9) (11)
Certificates of deposit 730 6 1 737
------------------------------------------------------------
Total deposits 1,074 (104) 1 971
Borrowings 452 5,905 384 6,741
------------------------------------------------------------
Total net change in expense on
interest-bearing liabilities 1,526 5,801 385 7,712
------------------------------------------------------------
Net change in net interest income $ (392) $ 214 $ (160) $ (338)
============================================================
18
19
RESULTS OF OPERATIONS
The Company reported net income of $3.0 million and $4.5 million for the three
and six months ended June 30, 2000, respectively, as compared to $3.7 million
and $6.9 million during the same periods in 1999. This represents a decrease in
net income of $.7 million and $2.4 million, respectively, for these three and
six month periods.
Interest income increased by $4.5 million or 17.6 percent to $29.7 million for
the three months ended June 30, 2000 compared to $25.2 million for the second
quarter of 1999. For the six month period ended June 30, 2000 interest income
was $58.2 million compared to $50.8 million for the similar period in 1999, a
$7.4 million or 14.5 percent increase. Increases in the average balances of
loans and the average rates earned were the primary reasons for the increases in
both three and six month periods when compared to the prior year. Such increases
were partially offset by a decline in the average balances of securities for
both the three and six months ended June 30, 2000. Increased average yields on
securities for the six months and the three months periods also contributed to
the increases.
Interest expense increased from $13.5 million for the three months ended June
30, 1999 to $18.0 million for the three months ended June 30, 2000, a $4.5
million or 33.0 percent increase. For the six month period ended June 30, 1999
interest expense was $27.2 million compared to $34.9 million for the same period
in 2000, a $7.7 million or 28.3 percent increase. The increases in interest
expense during the three and six month periods ended June 30, 2000 compared to
the similar periods in 1999 were due primarily to increases in the average
balance of borrowings as well as increases in the average rate paid on deposits.
The average balance of borrowings increased by 79.2% and 85.0% in the three and
six month periods ended June 30, 2000 compared to the comparable periods in
1999. The increase in the average balance of borrowings accounted for $2.9
million of the increased interest expense in the second quarter of 2000 compared
to the second quarter of 1999. Such increase reflects the Company's increased
utilization of borrowings as a source of funds in the efforts to leverage its
balance sheet by reinvesting borrowed funds in interest-earning assets, such as
loans, with spreads deemed acceptable by management. The average rate paid on
deposits was 4.69% for the three months ended June 30, 2000 compared to 4.29%
for the three months ended June 30, 1999, a 40 basis point increase which
accounted for $824,000 of the increase in interest expense during the second
quarter of 2000 compared to the second quarter of 1999. Such increase in rates
paid on deposits primarily reflects increases in market rates of interest as
well as management's efforts to attract more deposits by being slightly more
aggressive in its pricing. The increase in interest expense for the six months
ended June 30, 2000 compared to the six months ended June 30, 1999 also was due
primarily to the increase in the average balance of borrowings and, to a lesser
extent, an increase in the average rate paid on deposits.
The Company's provision for loan losses for the three months ended June 30, 2000
was $300,000 compared to $150,000 for the three months ended June 30, 1999. The
provision for loan losses for the six months ended June 30, 2000 was $2.6
million compared to $300,000 for the six months ended June 30, 1999. The Company
recorded higher provisions in the three months ended June 30, 2000 compared to
the same period in 1999 due to an overall increase in the Company's loan
portfolio as well as an increased amount of commercial real estate loans. The
provision for the six months ended June 30, 2000 was $2.3 million greater than
that for the six months ended June 30, 1999 as a result of the special provision
of $2.0 million recorded in the first quarter of 2000 related to a loan on an
office building acquired in the SubFed acquisition and described in the earnings
press release for the first quarter 2000 and in the Company's Quarterly Report
on Form 10-Q for the three months ended March 31, 2000. The Company has
commenced foreclosure on the subject property securing this loan and continues
to consider whether it has any other possible legal action with respect to this
loan. Management believes that as of June 30, 2000 the allowances for loan
losses was adequate; however, no assurances can be given that future charge-offs
and/or additional provisions will not be needed.
19
20
Non-interest income for the three months ended June 30, 2000 was $1.5 million,
the same amount reported for the similar period in 1999. Non-interest income for
the six months ended June 30, 2000 was $2.8 million which was also the amount
for the same period in 1999. Higher loan fees during the three months ended June
30, 2000 of approximately $70,000 were partially offset by approximately $50,000
less in gains on the sale of assets when compared to the three months ended June
30, 1999. For the six months ended June 30, 2000 compared to the same period of
1999, $300,000 more in loan fees were partially offset by $140,000 less in other
income items.
Non-interest expense was $8.0 million for the three months ended June 30, 2000
compared to $7.0 million for the same period of 1999. Non-interest expense was
$16.0 million for the first six months of 2000 compared to $14.5 million for the
first six months of 1999.
Some of the items accounting for the increases in the amount of non-interest
expense in the 2000 periods over those in 1999 were:
. The Company granted awards and began recognizing expenses under the
Recognition and Retention Plan ("RRP") in April of 1999. As a result,
non-interest expense included approximately $360,000 in RRP expenses
in the first quarter of 2000 which was not reflected in the first
quarter of 1999.
. The level of marketing expense in 2000 was approximately $250,000 more
in the first six months of 2000 compared to a similar period in 1999,
reflective of a general increase in marketing activities including
promotion of the opening of the new branch in Schererville, Indiana.
. The Schererville branch has added approximately $180,000 of direct
cost over the first six months of 2000 that are not reflected in 1999
numbers.
. Legal fees in 2000 included approximately $40,000 in the first quarter
and $150,000 in the second quarter paid to the law firm representing
the Company in the "Goodwill" suit against the U.S. Government. In
addition to the amounts already expensed in the first six months of
2000, the Company anticipates additional legal fees of approximately
$400,000 in the second six months of 2000 pertaining to this matter.
Income tax expense for the three months ended June 30, 2000 was $1.8 million or
38.0 percent of income before income taxes compared to $2.4 million or 39.2
percent of income before taxes for the three months ended June 30, 1999. For the
six months ended June 30, 2000 income tax expense was $3.0 million or 40.3
percent of income before income taxes. This compares to $4.6 million or 40.1
percent for a similar period in 1999. The Company is continuing to evaluate
various tax strategies. In its efforts to reduce taxes the Company continues to
invest in affordable housing related vehicles with Section 42 tax credits.
20
21
LIQUIDITY AND COMMITMENTS
The Company's liquidity, represented by cash and cash equivalents, is a product
of its operating, investing, and financing activities. The Company's primary
sources of funds are deposits, borrowings, amortization prepayments and
maturities of outstanding loans and mortgage-backed securities, maturities of
investment securities and other short-term investments and funds provided from
operations. While scheduled payments from the amortization of loans and mortgage
related securities and maturing investment securities and short-term investments
are relatively predictable sources of funds, deposit flows and loan prepayments
are greatly influenced by general interest rates. In addition, the Company
invests excess funds in federal funds sold and other short-term interest earning
assets which provide liquidity to meet lending requirements.
Liquidity management is both a daily and long term function of business
management. Excess liquidity is generally invested in short-term investments
such as federal funds. The Company uses its sources of funds primarily to meet
its ongoing commitments, to pay maturing certificates of deposit and savings
withdrawals, fund loan commitments and maintain a portfolio of mortgage-backed
and mortgage-related securities and investment securities. At June 30, 2000 the
total approved investment and loan origination commitments outstanding amounted
to $35.0 million. At the same date, the unadvanced portion of construction loans
amounted to $76.9 million. Investment securities scheduled to mature in one year
or less at June 30, 2000 totaled $249,000 while certificates of deposit
scheduled to mature in one year or less at such date totaled $423.2 million.
Based on historical experience, management believes that a significant portion
of maturing deposits will remain with the Company. The Company anticipates that
it will continue to have sufficient funds, together with borrowings, to meet its
current commitments.
At June 30, 2000 the regulatory capital of Citizens Financial Services, FSB, the
Company's wholly owned subsidiary (the "Bank") was significantly in excess of
regulatory limits set by the Office of Thrift Supervision ("OTS"). The current
requirements and the Bank's actual levels are set forth below (dollars in
thousands):
Required Capital Actual Capital Excess Capital
---------------- -------------- --------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Tangible capital $25,255 1.50% $140,826 8.36% $115,571 6.86%
Core capital 67,347 4.00 140,826 8.36 73,479 4.36
Risk-based capital 75,300 8.00 147,278 15.65 71,978 7.65
21
22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
For a discussion of the Company's asset and liability management policies as
well as the potential impact of interest rate changes upon the market value of
the Company's portfolio equity, see Management's Discussion and Analysis of
Financial Condition and Results of Operations in the Company's annual report for
the year ended December 31, 1999. There has been no material change in the
Company's assets and liability position or the market value of the Company's
portfolio equity since December 31, 1999.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits (filed herewith unless otherwise noted)
3.1 Certificate of Incorporation of CFS Bancorp, Inc.*
3.2 Bylaws of CFS Bancorp, Inc.*
4.0 Form of Stock Certificate of CFS Bancorp, Inc.*
10.1 Form of Employment Agreement entered into between Citizens Financial
Services, FSB and each of Thomas F. Prisby, James W. Prisby and
John T. Stephens*
10.2 Form of Employment Agreement entered into between CFS Bancorp, Inc. and
each of Thomas F. Prisby, James W. Prisby and John T. Stephens*
10.5 CFS Bancorp, Inc. 1998 Stock Option Plan**
10.6 CFS Bancorp, Inc. 1998 Recognition and Retention Plan and Trust
Agreement**
27.0 Financial Data Schedule
- ------------
* Incorporated by Reference from the Company's Registration Statement on
Form S-1 filed on March 26, 1998, as amended and declared effective on May
14, 1998.
** Incorporated by Reference from the Company's Definitive Proxy Statement
for a Special Meeting of Stockholders filed on December 29, 1998.
*** Incorporated by Reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1998 filed on March 31, 1999.
(b) Reports on Form 8-K None
22
23
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CFS BANCORP, INC.
Date: August 11, 2000 By: /s/ Thomas F. Prisby
---------------------------------------------------
Thomas F. Prisby, Chairman and
Chief Executive Officer
Date: August 11, 2000 By: /s/ John T. Stephens
---------------------------------------------------
John T. Stephens,
Executive Vice President
and Chief Financial Officer
23