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, 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: 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 16,082,600 shares of Common Stock issued and outstanding as
of July 25, 2001.
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CFS Bancorp, Inc.
INDEX
Page No.
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition
at June 30, 2001 and December 31, 2000 3
Consolidated Statements of Income for the
Three and Six Months Ended June 30, 2001
and 2000 4
Consolidated Statements of Changes in
Stockholders' Equity for the Six Months Ended
June 30, 2001 5
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2001 and 2000 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 20
PART II OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults upon Senior Securities 20
Item 4. Submission of Matters to a Vote of
Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 21
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CFS BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
(Dollars in thousands)
June 30, 2001 December 31, 2000
------------- -----------------
(Unaudited)
ASSETS
Cash and amounts due from depository institutions $ 25,870 $ 25,627
Interest-bearing deposits 122,895 18,829
Federal funds sold 90,500 14,800
------ ----------
Cash and cash equivalents 239,265 59,256
Investment securities available-for-sale 63,305 33,786
Investment securities held-to-maturity (fair value
at June 30, 2001 - $71,000; at December 31,
2000 - $169,131) 71,023 170,784
Mortgage-related securities available-for-sale 265,963 279,597
Mortgage-related securities held-to-maturity
(fair value at June 30, 2001 - $64,841; at
December 31, 2000 - $78,516) 64,789 78,857
Loans receivable, net 928,884 998,727
Investment in Federal Home Loan Bank stock, at cost 26,715 26,925
Office properties and equipment 15,774 16,358
Accrued interest receivable 8,151 10,615
Real estate owned 1,392 1,058
Investment in Bank-owned life insurance 23,110 22,976
Prepaid expenses and other assets 10,248 11,437
------ ----------
Total assets $1,718,619 $1,710,376
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $992,375 $934,012
Borrowed money 500,903 548,076
Advance payments by borrowers for taxes and insurance 5,512 5,853
Other liabilities 20,228 23,067
------ ----------
Total liabilities 1,519,018 1,511,008
--------- ----------
Stockholders' Equity:
Preferred stock, $.01 par value:
Authorized shares - 15,000,000
Issued and outstanding shares - 0
at June 30, 2001 and December 31, 2000 Common
stock, $.01 par value:
Authorized shares - 85,000,000
Issued shares - 23,421,556 and 23,376,385
at June 30, 2001 and December 31, 2000, respectively
Outstanding shares - 16,080,850 and 16,782,313
at June 30, 2001 and December 31, 2000, respectively 234 234
Additional paid-in capital 189,293 188,990
Retained earnings, substantially restricted 102,108 98,782
Treasury stock, at cost: 7,340,706 and 6,594,072 shares
at June 30, 2001 and December 31, 2000, respectively (77,169) (68,829)
Unearned common stock acquired by ESOP (10,766) (10,766)
Unearned common stock acquired by RRP (4,543) (6,019)
Accumulated other comprehensive income (loss), net of tax 444 (3,024)
---- ----------
Total stockholders' equity 199,601 199,368
------- ----------
Total liabilities and stockholders' equity $1,718,619 $1,710,376
========== ==========
See accompanying notes
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4
CFS BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except per share data)
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- ----------------------------
2001 2000 2001 2000
---- ---- ---- ----
Interest income:
Loans $ 18,015 $ 18,300 $ 37,266 $ 35,360
Mortgage-related securities 5,600 6,808 11,570 13,708
Other investment securities 2,608 3,597 5,902 7,122
Other 2,070 979 3,301 2,018
----------- ----------- ----------- -----------
Total interest income 28,293 29,684 58,039 58,208
Interest expense:
Deposits 10,961 10,902 21,857 21,230
Borrowings 7,432 7,067 15,099 13,691
----------- ----------- ----------- -----------
Total interest expense 18,393 17,969 36,956 34,921
Net interest income before
provision for losses on loans 9,900 11,715 21,083 23,287
Provision for losses on loans 450 300 900 2,550
----------- ----------- ----------- -----------
Net interest income after
provision for losses on loans 9,450 11,415 20,183 20,737
Non-interest income:
Loan fees 277 353 638 774
Insurance commissions 240 222 472 440
Investment commissions 221 378 466 747
Gain on sale of available-for-sale
investment securities - net 451 73 590 73
Income from Bank-owned life insurance 362 -- 750 --
Other income 800 424 1,446 800
----------- ----------- ----------- -----------
Total non-interest income 2,351 1,450 4,362 2,834
Non-interest expense:
Compensation and employee benefits 4,895 5,218 9,676 10,329
Net occupancy expense 551 600 1,255 1,220
Furniture and equipment expense 496 613 1,034 1,264
Federal deposit insurance premiums 45 48 91 98
Data processing 321 168 643 464
Marketing 252 214 399 461
Other general and administrative expenses 1,484 1,163 2,711 2,184
----------- ----------- ----------- =----------
Total non-interest expense 8,044 8,024 15,809 16,020
Income before income taxes 3,757 4,841 8,736 7,551
Income tax expense 1,094 1,839 2,750 3,042
----------- ----------- ----------- -----------
Net income $ 2,663 $ 3,002 $ 5,986 $ 4,509
=========== =========== =========== ===========
Per share data:
Basic earnings per share $ 0.18 $ 0.18 $ 0.40 $ 0.27
Diluted earnings per share 0.18 0.18 0.40 0.27
Cash dividends declared per share 0.09 0.09 0.18 0.18
Weighted average shares outstanding 14,653,346 16,377,538 14,812,600 16,475,221
Weighted average diluted shares outstanding 15,029,024 16,542,490 15,114,337 16,640,173
See accompanying notes
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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 Income (Loss) Total
------ ---------- -------- -------- --------- -------- ------------- --------
Balance January 1, 2001 $ 234 $ 188,990 $ 98,782 ($68,829) ($10,766) ($6,019) ($3,024) $199,368
Net income -- -- 5,986 -- -- -- -- 5,986
Other comprehensive income,
net of tax:
Change in unrealized appreciation
on available-for-sale securities,
net of reclassification adjustment -- -- -- -- -- -- 3,468 3,468
--------
Total comprehensive income 9,454
Purchase of treasury stock -- -- -- (8,340) -- -- -- (8,340)
Exercise of stock options -- 250 -- -- -- -- -- 250
Tax benefit related to
stock options exercised 105 105
Amortization of awards granted under
Recognition and Retention Plan -- (52) -- -- -- 1,476 -- 1,424
Dividends declared on common stock -- -- (2,660) -- -- -- -- (2,660)
-----------------------------------------------------------------------------------------
Balance June 30, 2001 $ 234 $ 189,293 $102,108 ($77,169) ($10,766) ($4,543) $ 444 $199,601
====== ========== ======== ======== ========= ======== ======= ========
See accompanying notes
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CFS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Six Months Ended June 30,
2001 2000
---- ----
Operating activities:
Net income $ 5,986 $ 4,509
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for losses on loans 900 2,550
Depreciation expense 1,006 1,071
Deferred income taxes (552) (153)
Amortization of cost of stock benefit plans 1,424 715
Change in deferred income 148 242
Increase in interest receivable 2,464 621
Decrease (increase) in accrued interest payable (679) 153
Proceeds from sale of loans held for sale 2,872 546
Origination of loans held for sale (2,741) (1,028)
Net gain on sale of available for sale securities (534) (73)
Decrease in prepaid expenses and other assets (1,151) (4,598)
Increase (decrease) in other liabilities (2,331) 7,377
---------- ----------
Net cash provided by operating activities 6,812 11,932
---------- ----------
Investing activities:
Available for sale investment securities:
Purchases (107,296) (45,391)
Repayments 70,750 --
Sales 8,957 606
Held to maturity investment securities:
Purchases -- --
Repayments and maturities 100,000 --
Available for sale mortgage-related securities:
Purchases (14,117) --
Repayments 18,413 13,400
Sales 14,102 --
Held to maturity mortgage-related securities:
Purchases -- --
Repayments 13,895 11,028
Purchase of Federal Home Loan Bank stock (56) (5,316)
Redemption of Federal Home Loan Bank stock 266 --
Loan originations and principal payments on loans 67,556 (99,039)
Additional costs on real estate owned (149) (53)
Proceeds from sale of real estate owned 924 619
Purchases of property and equipment (566) (1,085)
Disposals of property and equipment 144 21
---------- --
Net cash used in investing activities 172,823 (125,210)
---------- ----------
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CFS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in thousands)
(Unaudited)
Six Months Ended June 30,
2001 2000
---- ----
Financing activities:
Proceeds from exercise of stock options 355 389
Dividends paid on common stock (2,720) (3,111)
Purchase of treasury stock (8,340) (7,093)
Net increase in NOW, passbook and money
market accounts 16,264 8,881
Net increase in certificates of deposit 42,329 21,865
Net increase (decrease) in advance payments by
borrowers for taxes and insurance (341) 474
Net increase in borrowed funds (47,173) 47,943
---------- ------
Net cash flows provided by financing activities 374 69,348
--- ------
Increase (decrease) in cash and cash equivalents 180,009 (43,930)
Cash and cash equivalents at beginning of period 59,259 95,803
---------- ------
Cash and cash equivalents at end of period $ 239,265 $ 51,873
========== ==========
Supplemental disclosure of non-cash activities:
Transfer of loans to real estate owned $ 1,109 $ 757
See accompanying notes
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CFS Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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, 2000 contained in the CFS Bancorp, Inc. ("Company")
Annual Report to Stockholders. The results for the three and six months ended
June 30, 2001 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2001.
2. LOAN PORTFOLIO
The Company's loan portfolio consisted of the following at the dates indicated:
June 30, 2001 December 31, 2000
------------- -----------------
(Dollars in thousands)
Mortgage Loans: Amount Percent Amount Percent
-------- ------- ---------- -------
Single-family residential $630,289 65.18 % $ 700,790 66.62 %
Multi-family residential 47,104 4.87 41,903 3.98
Commercial real estate 128,641 13.30 124,477 11.83
Construction and land
development:
Single-family residential 25,013 2.59 29,889 2.84
Multi-family residential 27,379 2.83 43,689 4.16
Commercial and land development 61,724 6.38 70,486 6.70
Home equity 22,244 2.30 20,534 1.95
--------------------- -----------------------
Total mortgage loans 942,394 97.45 1,031,768 98.08
Other loans 24,686 2.55 20,230 1.92
--------------------- -----------------------
Total loans receivable 967,080 100.00 % 1,051,998 100.00 %
--------------------- -----------------------
Less:
Undisbursed portion of loan proceeds 29,674 45,022
Allowance for losses on loans 7,312 7,187
Deferred loan fees 1,210 1,062
-------- ----------
Loans receivable, net $928,884 $ 998,727
======== ==========
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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, 2001:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Callable agency securities and corporate bonds $ 46,028 $ 14 $ 3 $46,039
Trust preferred securities 4,927 -- 327 4,600
Equity securities 6,621 1,045 426 7,240
Money Market accounts 5,426 -- -- 5,426
--------- ---------- ---------- --------
$ 63,002 $ 1,059 $ 756 $ 63,305
========= ========== ========== ========
Available-for-Sale at December 31, 2000:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Callable agency securities and corporate bonds $ 20,017 $ 39 $ -- $20,056
Trust preferred securities 4,926 -- 360 4,566
Equity securities 9,763 522 1,121 9,164
--------- ---------- ---------- --------
$ 34,706 $ 561 $ 1,481 $ 33,786
========= ========== ========== ========
Held-to-Maturity at June 30, 2001:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Callable agency securities and corporate bonds $ 71,023 $ 93 $ 116 $ 71,000
========= ========== ========== ========
Held-to-Maturity at December 31, 2000: Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Callable agency securities and corporate bonds $ 170,784 $ -- $ 1,653 $169,131
========= ========== ========== ========
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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, 2001:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Participation certificates $ 53,442 $ 304 $ 330 $ 53,416
Real estate mortgage investment conduits
and collateralized mortgage obligations 211,891 2,070 1,414 212,547
--------- ---------- ---------- --------
$ 265,333 $ 2,347 $ 1,744 $265,963
========= ========== ========== ========
Available-for-Sale at December 31, 2000:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Participation certificates $ 54,227 $ 741 $ 508 $ 54,460
Real estate mortgage investment conduits
and collateralized mortgage obligations 229,535 306 4,704 225,137
--------- ---------- ---------- --------
$ 283,762 $ 1,047 $ 5,212 $279,597
========= ========== ========== ========
Held-to-Maturity at June 30, 2001:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Participation certificates $ 31,758 $ 98 $ 625 $ 31,231
Real estate mortgage investment conduits
and collateralized mortgage obligations 33,031 580 1 33,610
--------- ---------- ---------- --------
$ 64,789 $ 678 $ 626 $ 64,841
========= ========== ========== ========
Held-to-Maturity at December 31, 2000:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Participation certificates $ 34,349 $ 83 $ 358 $ 34,047
Real estate mortgage investment conduits
and collateralized mortgage obligations 44,508 143 209 44,442
--------- ---------- ---------- --------
$ 78,857 $ 226 $ 567 $ 78,516
========= ========== ========== ========
5. NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
---------------------
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
- ------------------------------------
December 15, 2001. Under the new rules, goodwill (and intangible assets deemed
to have indefinite lives) will no longer be amortized but will be subject to
annual impairment tests in accordance with the Statements. Other intangible
assets will continue to be amortized over their useful lives.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Application of the
non-amortization provisions of the Statement will not result in any changes to
reported earnings, as the Company currently has no goodwill.
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In September 2000, the FASB issued FAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," that
replaces, in its entirety, FAS No. 125. Although FAS 140 has changed many of the
rules regarding securitizations, it continues to require an entity to recognize
the financial and servicing assets it controls and the liabilities it has
incurred and to derecognize financial assets when control has been surrendered
in accordance with the criteria provided in the Statement. As required, the
Company has applied the new rules prospectively to transactions beginning in the
second quarter of 2001. The adoption of this statement did not have a material
impact on its financial statements.
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,
-------- --------
2001 2000 2001 2000
---- ---- ---- ----
Net income (000's omitted) $ 2,663 $ 3,002 $ 5,986 $ 4,509
Weighted average number of common shares outstanding 16,117,753 18,102,069 16,362,210 18,265,205
Average ESOP shares not committed to be released (1,031,757) (1,151,381) (1,046,710) (1,166,334)
Average RRP shares not vested (432,650) (573,150) (502,900) (623,650)
------------ ------------ ----------- -----------
Weighted average number of shares outstanding for
basic earnings per share computation purposes 14,653,346 16,377,538 14,812,600 16,475,221
Dilutive effect of stock options 375,678 164,952 301,737 164,952
------------ ------------ ----------- -----------
Weighted average shares and common share equivalents
outstanding for diluted earnings per share purposes 15,029,024 16,542,490 15,114,337 16,640,173
============ ============ =========== ===========
Basic earnings per share $ 0.18 $ 0.18 $ 0.40 $ 0.27
Diluted earnings per share $ 0.18 $ 0.18 $ 0.40 $ 0.27
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 for the periods
indicated (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2001 2000 2001 2000
---- ---- ---- ----
Net income $ 2,663 $ 3,002 $ 5,986 $ 4,509
Net change in unrealized gain or (loss) on
securities available-for-sale, net (680) (381) 3,468 (829)
------------ ------------ ----------- -----------
Comprehensive income $ 1,983 $ 2,621 $ 9,454 $ 3,680
============ ============ =========== ===========
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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, 2001 December 31, 2000
------------- -----------------
(Dollars in thousands)
Non-accrual loans:
Mortgage loans:
Construction and land development $ 3,290 $ 4,167
Single-family residential 6,688 5,230
Multi-family residential 36 --
Non-residential 1,751 1,330
Other loans 697 1,122
------------ ------------
Total non-performing loans 12,462 11,849
Other real estate owned 1,392 1,058
------------ ------------
Total non-performing assets 13,854 $ 12,907
============ ============
Non-performing assets to total assets 0.81 % 0.75 %
Non-performing loans to total loans 1.29 1.13
The following table is a summary of changes in the allowance for losses on loans
for the six months ended June 30, 2001 and the year ended December 31, 2000:
Six Months Ended Year Ended
June 30, 2001 December 31, 2000
------------- -----------------
(Dollars in thousands)
Balance at beginning of period $ 7,187 $ 5,973
Provision for loan losses 900 3,375
Charge-offs (813) (2,279)
Recoveries 38 118
------------ ------------
Balance at end of period $ 7,312 $ 7,187
============ ============
Allowance for loan losses to total non-performing
loans at end of period 58.67 % 60.65 %
Allowance for loan losses to total loans at
end of period 0.76 0.68
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, management's intentions, beliefs, or expectations, 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. Many of
such factors are not subject to the Company's control. Stockholders are
cautioned that any such forward-looking statements
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included herein are not guarantees of future performance and involve risks and
uncertainties and that actual results may differ materially from those
contemplated by such forward-looking statements. The Company undertakes no
obligation to update or revise any forward-looking statements to reflect changes
in assumptions, the occurrence of unanticipated events or changes to future
operating results that occur subsequently to the date such forward-looking
statements are made.
CHANGES IN FINANCIAL CONDITION
At June 30, 2001 the Company's total assets amounted to $1.7 billion or
approximately $8.2 million more than at December 31, 2000. Although the increase
was modest, several major categories of earning assets and costing liabilities
exhibited significant shifts as the Company implemented its strategy to increase
its investment in commercial and multi-family real estate and commercial
business loans. The changes in the asset composition from December 31, 2000 to
June 30, 2001 reflect the Company's strategy of reducing its emphasis on
originating single-family residential mortgage loans. While the Company is in
the process of implementing its loan strategy, it has invested its excess funds
into cash and cash equivalents until it can deploy such assets into higher
yielding commercial business, commercial, and multi-family real estate loans
with risk and other characteristics deemed appropriate by the Company.
Cash and cash equivalents increased from $59.3 million at December 31, 2000 to
$239.3 million at June 30, 2001 as a result of the combined effects of deposit
inflows as well as repayments of mortgage-related securities and loans,
partially offset by repayments of borrowed money and the funding of the
Company's stock repurchase program.
Investment securities (available-for-sale and held-to-maturity) decreased from
an aggregate of $204.6 million at December 31, 2000 to $134.3 million at June
30, 2001. Mortgage-related securities (available-for-sale and held-to-maturity)
decreased from an aggregate $358.5 million at December 31, 2000 to $330.8
million at June 30, 2001. The funds resulting from such repayments and
prepayments were used in part to repay borrowed money. The remaining funds were
invested in cash and cash equivalents pending deployment into higher yielding
assets in furtherance of the Company's business strategy.
Loans receivable decreased $69.8 million from $998.7 million at December 31,
2000 to $928.9 million at June 30, 2001 as the Company pursued implementation of
its business strategy. Most of such reduction was accounted for by a $70.5
million decrease in single-family residential mortgages as borrowers refinanced
their loans to take advantage of the lower rates currently available in the
market. Partially offsetting such decline was a $9.4 million increase in
commercial and multi-family mortgage loans as the Company focused on the
origination of such loans.
Deposits increased from $934.0 million at December 31, 2000 to $992.4 million at
June 30, 2001 with such funds being used in part to repay borrowings.
Borrowings decreased during the first six months of 2001 from $548.1 million at
December 31, 2000 to $500.9 million at June 30, 2001. The borrowed funds consist
of advances from the Federal Home Loan Banks ("FHLB") of Indianapolis and
Chicago and reverse repurchase agreements.
Stockholders' equity increased slightly during the first six months of 2001 from
$199.4 million at December 31, 2000 to $199.6 million at June 30, 2001 as a
result of net income and the increase in accumulated other comprehensive income
during the first six months of 2001, which was partially offset by the purchase
of 746,634 shares of common stock as part of the Company's ongoing stock
repurchase program.
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Average Balances, Net Interest Income, Yields Earned and Rates Paid
The following tables set 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) the interest rate spread; and (v)
the net interest margin. Information is based on average daily balances during
the indicated periods.
Three Months Ended June 30,
----------------------------------------------------------------------------------
2001 2000
----------------------------------------------------------------------------------
(Dollars in thousands)
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
----------------------------------------------------------------------------------
Interest - earning assets:
Loans Receivable: (1)
Real estate loans $ 935,611 $ 17,609 7.53% $ 942,520 $ 17,791 7.55%
Other loans 20,065 406 8.09 21,665 509 9.40
------------------------- -------------------------
Total loans 955,676 18,015 7.54 964,185 18,300 7.59
Securities (2) 496,639 8,208 6.61 601,228 10,405 6.92
Other interest-earning assets (3) 180,926 2,070 4.58 59,136 979 6.62
------------------------- -------------------------
Total interest-earning assets 1,633,241 28,293 6.93 1,624,549 29,684 7.31
Non-interest-earning assets 80,264 60,452
------------ ------------
Total assets $ 1,713,505 $ 1,685,001
============ ============
Interest-bearing liabilities:
Deposits:
NOW and money market accounts $ 144,776 885 2.45% $ 128,928 837 2.60%
Passbook accounts 203,312 1,284 2.53 216,819 1,639 3.02
Certificates of deposit 599,013 8,792 5.87 583,881 8,426 5.77
------------------------- -------------------------
Total deposits 947,101 10,961 4.63 929,628 10,902 4.69
------------------------- -------------------------
Total borrowings 501,645 7,432 5.93 486,081 7,067 5.82
------------------------- -------------------------
Total interest-bearing liabilities 1,448,746 18,393 5.08 1,415,709 17,969 5.08
Non-interest-bearing liabilities (4) 64,903 67,967
------------ ------------
Total liabilities 1,513,649 1,483,676
Stockholders' equity 199,856 201,325
------------ ------------
Total liabilities and
stockholders' equity $ 1,713,505 $ 1,685,001
============ ============
Net interest-earning assets $ 184,495 $ 208,840
============ ============
Net interest income/interest rate spread $ 9,900 1.85% $ 11,715 2.23%
===================== =====================
Net interest margin 2.42% 2.88%
=========== ===========
Ratio of average interest-earning assets to
average interest-bearing liabilities 112.73% 114.75%
=========== ===========
(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.
14
15
Six Months Ended June 30,
----------------------------------------------------------------------------------
2001 2000
----------------------------------------------------------------------------------
(Dollars in thousands)
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
----------------------------------------------------------------------------------
Interest - earning assets:
Loans Receivable: (1)
Real estate loans $ 954,349 $ 36,403 7.63% $ 918,932 $ 34,420 7.49%
Other loans 20,345 863 8.48 20,361 940 9.23
------------------------- -------------------------
Total loans 974,694 37,266 7.65 939,293 35,360 7.53
Securities (2) 518,529 17,472 6.74 601,400 20,830 6.93
Other interest-earning assets (3) 132,205 3,301 4.99 63,882 2,018 6.32
------------------------- -------------------------
Total interest-earning assets 1,625,428 58,039 7.14 1,604,575 58,208 7.26
Non-interest-earning assets 81,359 61,363
------------ ------------
Total assets $ 1,706,787 $ 1,665,938
============ ============
Interest-bearing liabilities:
Deposits:
NOW and money market accounts $ 137,596 1,688 2.45% $ 127,182 1,595 2.51%
Passbook accounts 204,809 2,678 2.62 217,335 3,295 3.03
Certificates of deposit 589,297 17,491 5.94 576,587 16,340 5.67
------------------------- -------------------------
Total deposits 931,702 21,857 4.69 921,104 21,230 4.61
------------------------- -------------------------
Total borrowings 511,253 15,099 5.91 478,688 13,691 5.72
------------------------- -------------------------
Total interest-bearing liabilities 1,442,955 36,956 5.12 1,399,792 34,921 4.99
Non-interest-bearing liabilities (4) 64,065 63,434
------------ ------------
Total liabilities 1,507,020 1,463,226
Stockholders' equity 199,767 202,712
------------ ------------
Total liabilities and stockholders' $ 1,706,787 $ 1,665,938
============ ============
Net interest-earning assets $ 182,473 $ 204,783
============ ============
Net interest income/interest rate spread $ 21,083 2.02% $ 23,287 2.27%
===================== =====================
Net interest margin 2.59% 2.90%
=========== ===========
Ratio of average interest-earning assets to
average interest-bearing liabilities 112.65% 114.63%
=========== ===========
(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.
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16
Rate /Volume Analysis
The following tables set 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,
2001 Compared to 2000
Increase (Decrease) due to
-------------------------------------------
Total Net
Increase/
Rate Volume Rate/Volume Decrease
----- ------ ----------- --------
(Dollars in thousands)
-------------------------------------------
Interest-earning assets:
Loans receivable:
Real estate loans ($52) ($131) $ 1 ($182)
Other loans (71) (37) 5 (103)
-------------------------------------------
Total loans receivable (123) (168) 6 (285)
Securities (469) (1,810) 82 (2,197)
Other interest-earning assets (302) 2,016 (623) 1,091
-------------------------------------------
Total net change in income from
interest-earning assets (894) 38 (535) (1,391)
Interest-bearing liabilities:
Deposits:
NOW and money markets (49) 103 (6) 48
Passbook accounts (270) (102) 17 (355)
Certificates of deposit 144 218 4 366
-------------------------------------------
Total deposits (175) 219 15 59
Borrowings 135 226 4 365
-------------------------------------------
Total net change in expense of
interest-bearing liabilities (40) 445 19 424
Net change in net interest income ($854) ($407) ($554) ($1,815)
===========================================
16
17
Six Months Ended June 30,
2001 Compared to 2000
Increase (Decrease) due to
-------------------------------------------
Total Net
Increase/
Rate Volume Rate/Volume Decrease
----- ------ ----------- --------
(Dollars in thousands)
-------------------------------------------
Interest-bearing assets:
Loans receivable:
Real estate loans $ 632 $ 1,326 $ 25 $ 1,983
Other loans (76) (1) -- (77)
-------------------------------------------
Total loans receivable 556 1,325 25 1,906
Securities (566) (2,870) 78 (3,358)
Other interest-earning assets (423) 2,159 (453) 1,283
-------------------------------------------
Total net change in income from
interest-earning assets (433) 614 (350) (169)
Interest-bearing liabilities:
Deposits:
NOW and money markets (35) 131 (3) 93
Passbook accounts (453) (190) 26 (617)
Certificates of deposit 774 360 17 1,151
-------------------------------------------
Total deposits 286 301 40 627
Borrowings 446 931 31 1,408
-------------------------------------------
Total net change in expense of
interest-bearing liabilities 732 1,232 71 2,035
Net change in net interest income ($1,165) ($618) ($421) ($2,204)
===========================================
RESULTS OF OPERATIONS
The Company reported net income of $2.7 million and $6.0 million for the three
and six months ended June 30, 2001, respectively, as compared to $3.0 million
and $4.5 million during the same periods in 2000.
Interest income decreased by $1.4 million or 4.7 percent to $28.3 million for
the three months ended June 30, 2001 compared to $29.7 million for the second
quarter of 2000. For the six month period ended June 30, 2001 interest income
was $58.0 million compared to $58.2 million for the same period in 2000, a
$169,000 or 0.3 percent decrease. For the three months ended June 30, 2001
compared to the three months ended June 30, 2000 the decrease in interest income
was the result of decreases in average yields earned on loans and securities as
well as a decline in the average balance of securities offset by the increased
average balance of other interest-earning assets. The changes in average
balances were accompanied by reductions in average yields in all categories
during the second quarter of 2001. The slight decline in interest income when
comparing the six months ended June 30, 2001 to the six months ended June 30,
2000 was the result of increases in the average balances of loans and other
interest-earning assets offset by a decline in the average balances of
securities as well as by declines in the average yields earned on all
interest-earning assets other than real estate loans. Average costs increased
for total loans
17
18
while average costs declined for securities and other interest-earnings assets
during these six month periods. The decline in the yields earned during the 2001
periods reflected the effect of declines in market rates of interest.
Interest expense increased from $18.0 million for the three months ended June
30, 2000 to $18.4 million for the three months ended June 30, 2001, a $424,000
or 2.4 percent increase. For the six month period ended June 30, 2000 interest
expense was $34.9 million compared to $37.0 million for the same period in 2001,
a $2.1 million or 5.8 percent increase. The increases in interest expense during
the three and six month periods ended June 30, 2001 compared to the similar
periods in 2000 were due primarily to increases in the average balances of
deposits and borrowings as well as increases in the average rates paid on such
liabilities for the six months ended June 30, 2000, while average rates paid on
deposits for the three months ended June 30, 2001 declined when compared to the
same period in 2000.
The Company's provision for loan losses for the three months ended June 30, 2001
was $450,000 compared to $300,000 for the three months ended June 30, 2000. This
increase reflected the Company's strategy of changing the composition of its
loan portfolio to include a greater proportion of commercial business and
commercial and multi-family real estate loans, which generally are considered to
involve more risk than single-family residential mortgage loans, as well as
current economic conditions. The provision for loan losses for the six months
ended June 30, 2001 was $900,000 compared to $2.6 million for the six months
ended June 30, 2000. A special loan loss provision of $2.0 million taken in the
first quarter of 2000 related to one office building accounted for this
difference. Management believes that as of June 30, 2000 the allowance for loan
losses was adequate; however, no assurances can be given that future charge-offs
and /or additional provisions will not be needed.
Non-interest income for the three months ended June 30, 2001 was $2.4 million
compared to $1.5 million for the three months ended June 30, 2000. Non-interest
income was $4.4 million for the six months ended June 30, 2001 compared to $2.8
million for the same period in 2000.
The increase of $900,000 in non-interest income for the three months ended June
30, 2001 was the result of three items of almost equal magnitude. These items
were as follows:
- - Income from BOLI, which is recorded as non-interest income, amounted to
$362,000 for the three months ended June 30, 2001 compared to zero for the
second quarter of 2000. The Company invested in BOLI in order to fund
various employee benefit plans while providing a tax exempt return to the
Company.
- - Gains on sale of investment securities available for sale were $378,000
greater for the three months ended June 30, 2001 when compared to the three
months ended June 30, 2000.
- - Other income (primarily fee income) was $376,000 greater in the three
months ended June 30, 2001 than it was in a similar period in 2000, due in
part to an increase in fees related to the increased base of the Company's
deposit and transaction accounts and implementation of the findings from
the current process improvements program.
These items were partially offset by reductions in loan fees and investment
commission income due to the Company's loan strategy and the state of the
investment markets during 2001, respectively.
When comparing the six months ended June 30, 2001 to June 30, 2000, the
following differences were noted:
- - BOLI income was $750,000 during the six months ended June 30, 2001
compared to zero for the first six months of 2000.
- - Gains on sale of investments available for sale were $517,000 greater
in 2001 than in 2000.
18
19
- - Other income was $646,000 more in 2001 than in 2000.
- - Loan fee income and insurance and investment commissions were
$385,000 less in 2001 compared to 2000.
Non-interest expense was $8.0 million for the three months ended June 30, 2001
and June 30, 2000. Non-interest expense was $15.8 million for the first six
months of 2001 compared to $16.0 million for the same period in 2000. For both
the three months and the six months ended June 30, 2001 compared to the same
periods in 2000, reductions in compensation and employee benefits were offset by
increases in professional fees, related primarily to expenses for outside
consultants retained to assist the Company in analyzing possible improvements in
operations and efficiency.
Legal fees and expenses incurred in 2001 included approximately $14,000 in the
first quarter and $141,000 in the second quarter paid to the law firm
representing the Company in the "Goodwill" suit against the U.S. Government.
This compares to $40,000 and $150,000 for the first quarter and second quarter
of 2000, respectively. In addition to the amounts already incurred in the first
six months of 2001, the Company anticipates additional legal fees and expenses
totaling approximately $250,000 during the remainder of 2001 pertaining to this
matter. For additional information regarding this suit, reference is made to
"Legal Proceedings" in the Company's Annual Report to Stockholder's filed on
Form 10-K for the year ended December 31, 2000.
Income tax expense for the three months ended June 30, 2001 was $1.1 million or
29.0 percent of income before income taxes compared to $1.8 million or 38.0
percent of income before income taxes for the three months ended June 30, 2000.
For the six months ended June 30, 2001 income tax expense was $2.8 million or
31.5 percent of income before income taxes. This compares to $3.0 million or
40.3 percent for the similar period in 2000. The decline in the Company's
effective tax rate is due to, among other things, a change in the Company's
asset mix, including the purchase of BOLI, as well as the implementation of
various tax reduction strategies. The Company estimates that its effective rate
for the remainder of 2001 will be approximately 32.5 percent.
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, 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, 2001 the
total approved investment and loan origination commitments outstanding amounted
to $24.9 million. At the same date, the unadvanced portion of construction loans
amounted to $29.6 million. Investment securities scheduled to mature in one year
or less at June 30, 2001 totaled $44.0 million. In addition, the Company has
agreed to sell two branch offices. This sale is expected to close in September
or October 2001 at which time the Company will fund the sale with approximately
$40.0 million.
19
20
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, 2001 the regulatory capital of Citizens Financial Services, FSB, the
Company's wholly owned subsidiary ("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 $25,002 1.50 % $136,830 8.21 % $111,828 6.71 %
Core capital 66,672 4.00 136,830 8.21 70,158 4.21
Risk-based capital 73,108 8.00 144,142 15.77 71,034 7.77
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 to
Stockholders for the year ended December 31, 2000. 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, 2000.
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
20
21
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. Amended and Restated 1998 Stock Option Plan**
10.6 CFS Bancorp, Inc. Amended and Restated 1998 Recognition and Retention
Plan and Trust Agreement**
- ------------
* 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 the Annual Meeting of Stockholders filed on March 23, 2001.
(b) Reports on Form 8-K
None
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 14, 2001 By: /s/ Thomas F. Prisby
-------------------------------------------
Thomas F. Prisby, Chairman and
Chief Executive Officer
Date: August 14, 2001 By: /s/ John T. Stephens
-------------------------------------------
John T. Stephens, Executive Vice
President and Chief Financial Officer
21