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 September 30, 2001.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
---------- ----------
Commission file number: 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 13,668,857 shares of Common Stock issued and outstanding as
of October 29, 2001.
CFS BANCORP, INC.
INDEX
PAGE NO.
--------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition at September 30,
2001 and December 31, 2000 3
Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 2001 and 2000 4
Consolidated Statements of Changes in Stockholders' Equity
for the Nine Months Ended September 30, 2001 5
Consolidated Statements of Cash Flows for the Nine
Months Ended September 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 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
PART II OTHER INFORMATION
Item 1. Legal Proceedings 21
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
CFS BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
(Unaudited)
September 30, 2001 December 31, 2000
------------------ -----------------
ASSETS
Cash and amounts due from depository institutions $ 20,990 $ 25,627
Interest-bearing deposits 95,305 18,829
Federal funds sold 115,500 14,800
----------- -----------
Cash and cash equivalents 231,795 59,256
Investment securities available-for-sale 64,175 33,786
Investment securities held-to-maturity (fair value at
September 30, 2001 - $20,033; at December 31, 2000 - $169,131) 20,000 170,784
Mortgage-related securities available-for-sale 258,512 279,597
Mortgage-related securities held-to-maturity (fair value at
September 30, 2001 - $45,263; at December 31, 2000 - $78,516) 43,967 78,857
Loans receivable, net 910,114 998,727
Investment in Federal Home Loan Bank stock, at cost 26,165 26,925
Office properties and equipment 15,517 16,358
Accrued interest receivable 7,828 10,615
Real estate owned 946 1,058
Investment in bank-owned life insurance 29,650 22,976
Prepaid expenses and other assets 8,092 11,437
----------- -----------
Total assets $ 1,616,761 $ 1,710,376
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 951,045 $ 934,012
Borrowed money 462,846 548,076
Advance payments by borrowers for taxes and insurance 7,039 5,853
Other liabilities 21,625 23,067
----------- -----------
Total liabilities 1,442,555 1,511,008
----------- -----------
Stockholders' Equity:
Preferred stock, $.01 par value:
Authorized shares - 15,000,000
Issued and outstanding shares - 0
at September 30, 2001 and December 31, 2000
Common stock, $.01 par value:
Authorized shares - 85,000,000
Issued shares - 23,423,306 and 23,376,385
at September 30, 2001 and December 31, 2000, respectively
Outstanding shares - 13,942,817 and 16,782,313
at September 30, 2001 and December 31, 2000, respectively 234 234
Additional paid-in capital 189,406 188,990
Retained earnings, substantially restricted 104,627 98,782
Treasury stock, at cost: 9,480,489 and 6,594,072 shares
at September 30, 2001 and December 31, 2000, respectively (107,943) (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 3,191 (3,024)
----------- -----------
Total stockholders' equity 174,206 199,368
----------- -----------
Total liabilities and stockholders' equity $ 1,616,761 $ 1,710,376
=========== ===========
See accompanying notes
3
CFS BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
For Three Months Ended For Nine Months Ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ----- ---- ----
Interest income:
Loans $ 17,440 $ 19,184 $ 54,706 $ 54,544
Mortgage-related securities 5,087 6,472 16,657 20,180
Other investment securities 1,646 3,852 7,548 10,974
Other 2,618 998 5,919 3,016
------------ ------------ ------------ ------------
Total interest income 26,791 30,506 84,830 88,714
Interest expense:
Deposits 10,304 10,959 32,161 32,189
Borrowings 7,389 8,007 22,488 21,698
------------ ------------ ------------ ------------
Total interest expense 17,693 18,966 54,649 53,887
------------ ------------ ------------ ------------
Net interest income before
provision for losses on loans 9,098 11,540 30,181 34,827
Provision for losses on loans 250 375 1,150 2,925
------------ ------------ ------------ ------------
Net interest income after
provision for losses on loans 8,848 11,165 29,031 31,902
Non-interest income:
Loan fees 294 330 932 1,104
Insurance commissions 272 220 744 660
Investment commissions 180 370 646 1,117
Gain (loss) on sale of available-for-sale
investment securities - net 3 (7) 593 66
Gain on sale of branches 2,014 -- 2,014 --
Income from bank-owned life insurance 348 90 1,098 90
Other income 857 550 2,303 1,350
------------ ------------ ------------ ------------
Total non-interest income 3,968 1,553 8,330 4,387
Non-interest expense:
Compensation and employee benefits 4,510 4,731 14,186 15,060
Net occupancy expense 632 589 1,887 1,809
Furniture and equipment expense 478 524 1,512 1,788
Federal deposit insurance premiums 46 50 137 148
Data processing 322 257 965 721
Marketing 149 122 548 583
Other general and administrative expenses 1,403 1,415 4,114 3,599
------------ ------------ ------------ ------------
Total non-interest expense 7,540 7,688 23,349 23,708
------------ ------------ ------------ ------------
Income before income taxes 5,276 5,030 14,012 12,581
Income tax expense 1,628 1,988 4,378 5,030
------------ ------------ ------------ ------------
Net income $ 3,648 $ 3,042 $ 9,634 $ 7,551
============ ============ ============ ============
Per share data:
Basic earnings per share $ 0.26 $ 0.19 $ 0.66 $ 0.46
Diluted earnings per share 0.25 0.19 0.64 0.46
Cash dividends declared per share 0.09 0.09 0.27 0.27
Weighted average shares outstanding 14,255,756 16,125,652 14,626,985 16,345,364
Weighted average diluted shares outstanding 14,811,103 16,318,539 15,103,259 16,527,631
See accompanying notes
4
CFS BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
Unearned
Common
Additional Stock
Common Paid-In Retained Treasury Acquired
Stock Capital Earnings Stock by ESOP
-------- --------- --------- --------- ---------
Balance January 1, 2000 $ 234 $ 188,990 $ 98,782 ($ 68,829) ($ 10,766)
Net income -- -- 9,634 -- --
Other comprehensive income, net of tax:
Change in unrealized appreciation on
available-for-sale securities, net of
reclassification adjustment -- -- -- -- --
Total comprehensive income
Purchase of treasury stock -- -- -- (39,114) --
Exercise of stock options -- 363 -- -- --
Tax benefit related to stock options exercised -- 105 -- -- --
Amoritization of awards granted under
Recognition and Retention Plan -- (52) -- -- --
Dividends declared on common stock -- -- (3,789) -- --
-----------------------------------------------------------
Balance September 30, 2001 $ 234 $ 189,406 $ 104,627 ($107,943) ($ 10,766)
======== ========= ========= ========= =========
Unearned
Common Accumulated
Stock Other
Acquired Comprehensive
by RRP Income (Loss) Total
------ ------------- -----
Balance January 1, 2000 ($ 6,019) ($ 3,024) $ 199,368
Net income -- -- 9,634
Other comprehensive income, net of tax:
Change in unrealized appreciation on
available-for-sale securities, net of
reclassification adjustment -- 6,215 6,215
---------
Total comprehensive income 15,849
Purchase of treasury stock -- -- (39,114)
Exercise of stock options -- -- 363
Tax benefit related to stock options exercised -- -- 105
Amoritization of awards granted under
Recognition and Retention Plan (1,476) -- 1,424
Dividends declared on common stock -- -- (3,789)
-----------------------------------
Balance September 30, 2001 ($ 4,543) $ 3,191 $ 174,206
========= ========= =========
See accompanying notes
5
CFS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
September 30,
2001 2000
---- ----
Operating activities:
Net income $ 9,634 $ 7,551
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for losses on loans 1,150 2,925
Depreciation expense 1,487 1,607
Decrease (increase) in deferred income taxes (838) 931
Amortization of cost of stock benefit plans 1,424 1,910
Change in deferred income 134 (130)
Decrease (increase) in interest receivable 2,787 (1,976)
Decrease (increase) in accrued interest payable (927) 40
Proceeds from sale of loans held for sale 4,889 982
Origination of loans held for sale (4,490) (1,351)
Net gain on sale of available for sale securities (593) (66)
Increase in prepaid expenses and other assets (1,443) (6,364)
Increase (decrease) in other liabilities (628) 4,543
--------- ---------
Net cash provided by operating activities 12,586 10,602
--------- ---------
Investing activities:
Available-for-sale investment securities:
Purchases (311,711) (45,887)
Repayments 264,527 45,000
Sales 18,530 626
Held to maturity investment securities:
Purchases -- --
Repayments and maturities 151,130 --
Available-for-sale mortgage-related securities:
Purchases (63,534) --
Repayments 58,618 20,258
Sales 36,125 --
Held to maturity mortgage-related securities:
Purchases -- --
Repayments 34,637 17,864
Purchase of Federal Home Loan Bank stock (77) (5,357)
Redemption of Federal Home Loan Bank stock 837 630
Loan originations and principal payments on loans, net 85,362 (113,186)
Construction costs on real estate owned (194) (56)
Proceeds from sale of real estate owned 1,874 707
Purchases of property and equipment (790) (1,300)
Disposals of property and equipment 144 21
Purchase of bank-owned life insurance (6,192) (22,569)
--------- ---------
Net cash provided by (used in) investing activities 269,286 (103,249)
--------- ---------
6
CFS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in thousands)
(Unaudited)
Nine Month Ended
September 30,
2001 2000
---- ----
Financing activities:
Proceeds from exercise of stock options 468 542
Dividends paid on common stock (4,042) (4,507)
Purchase of treasury stock (39,114) (11,308)
Net increase (decrease) in NOW, passbook and money
market accounts 21,124 (273)
Net increase in certificates of deposit 35,350 8,669
Decrease in NOW, passbook and money market account
in connection with sale of branches (10,823) --
Decrease in certificates of deposit in connection
with sale of branches (28,252) --
Net increase in advance payments by borrowers for
taxes and insurance 1,186 572
Net increase (decrease) in borrowed funds (85,230) 29,437
--------- ---------
Net cash flows provided by (used in) financing activities (109,333) 23,132
--------- ---------
Increase (decrease) in cash and cash equivalents 172,539 (69,515)
Cash and cash equivalents at beginning of period 59,256 95,803
--------- ---------
Cash and cash equivalents at end of period $ 231,795 $ 26,288
========= =========
Supplemental disclosure of non-cash activities:
Transfer of loans to real estate owned $ 1,568 $ 1,602
See accompanying notes
7
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 nine months ended
September 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:
September 30, 2001 December 31, 2000
------------------ -----------------
(Dollars in thousands)
Mortgage Loans: Amount Percent Amount Percent
------ ------- ------ -------
Single-family residential $592,781 63.15 % $700,790 66.62 %
Multi-family residential 46,622 4.96 41,903 3.98
Commercial real estate 136,138 14.50 124,477 11.83
Construction and land development:
Single-family residential 20,315 2.16 29,889 2.84
Multi-family residential 25,808 2.75 43,689 4.16
Commercial and land development 65,343 6.96 70,486 6.70
Home equity 25,291 2.69 20,534 1.95
-------------------- --------------------
Total mortgage loans 912,298 97.17 1,031,768 98.08
Other loans 26,260 2.83 20,230 1.92
-------------------- --------------------
Total loans receivable 938,558 100.00 % 1,051,998 100.00 %
-------------------- --------------------
Less:
Undisbursed portion of loan proceeds 19,745 45,022
Allowance for losses on loans 7,624 7,187
Deferred loan fees 1,075 1,062
-------- --------
Loans receivable, net $910,114 $998,727
======== ========
8
3. INVESTMENT SECURITIES
Amortized cost of investment securities and their fair values were as follows
(in thousands):
Available-for-Sale at September 30, 2001: Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
Callable agency securities and corporate bonds $ 47,833 $ 107 $ -- $ 47,940
Trust preferred securities 4,928 -- 453 4,475
Equity securities 7,395 760 527 7,628
Money Market accounts 766 -- -- 766
Asset-backed notes 3,348 18 -- 3,366
----------- ----------- ------- --------
$ 64,270 $ 885 $ 980 $ 64,175
=========== =========== ======= ========
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
=========== =========== ======= ========
Hold-to-Maturity at September 30, 2001: Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
Callable agency securities and corporate bonds $ 20,000 $ 33 $ -- $ 20,033
=========== =========== ======= ========
Hold-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
=========== =========== ======= ========
9
4. MORTGAGE-RELATED SECURITIES
The amortized cost of mortgage-related securities and their fair values are as
follows (in thousands):
Available-for-Sale at September 30, 2001:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
Participation certificates $ 28,119 $ 1,497 $ 135 $ 29,481
Real estate mortgage investment conduits
and collateralized mortgage obligations 225,412 3,657 38 229,031
----------- -------- -------- --------
$ 253,531 $ 5,154 $ 173 $258,512
=========== ======== ======== ========
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 September 30, 2001: Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
Participation certificates $ 29,723 $ 1,155 $ 93 $ 30,785
Real estate mortgage investment conduits
and collateralized mortgage obligations 14,244 234 -- 14,478
----------- -------- -------- --------
$ 43,967 $ 1,389 $ 93 $ 45,263
=========== ======== ======== ========
Held-to-Maturity at December 31, 2000: Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Participation certificates --------- ---------- ---------- -----
Real estate mortgage investment conduits $ 34,349 $ 83 $ 358 $ 34,047
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, (collectively the "Statements") 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 identified 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, since the Company currently has no goodwill.
10
On July 6, 2001, the Securities and Exchange Commission (the "SEC") issued Staff
Accounting Bulletin ("SAB") No. 102, Selected Loan Loss Allowance Methodology
and Documentation Issues. The guidance contained in the SAB is effective
immediately. This SAB expresses the views of the SEC staff regarding a
registrant's development, documentation, and application of a systematic
methodology for determining the allowance for loan and lease losses, as required
by SEC Financial Reporting Release No. 28. The guidance in SAB No. 102 focuses
on the documentation the SEC staff normally expects registrants to prepare and
maintain in support of the allowance for loans and lease losses.
Concurrent with the SEC's issuance of SAB No. 102, the federal banking agencies
(the Federal Deposit Insurance Corporation, the Board of Governors of the
Federal Reserve System, the Office of the Comptroller of the Currency and the
Office of Thrift Supervision represented by the Federal Financial Institutions
Examination Council issued an interagency policy statement entitled Allowance
for Loan and Lease Losses Methodologies and Documentation for Banks and Savings
Institutions (the "Policy Statement"). SAB No. 102 and the Policy Statement were
the result of an agreement between the SEC and the federal banking agencies in
March 1999 to provide guidance on allowance for loan and lease methodologies and
supporting documentation.
The guidance contained in SAB No. 102 does not prescribe specific allowance
estimation methodologies registrants should employ in estimating their allowance
for loan and lease losses, but rather emphasizes the need for a systematic
methodology that is properly designed and implemented by registrants.
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 Nine Months Ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
(Dollars in thousands, except per share data)
Net income $ 3,648 $ 3,042 $ 9,634 $ 7,551
Weighted average number of common shares outstanding 15,690,257 17,820,277 16,138,226 18,116,895
Average ESOP shares not committed to be released (1,001,851) (1,121,475) (1,031,757) (1,151,381)
Average RRP shares not vested (432,650) (573,150) (479,483) (620,150)
------------ ------------ ------------ ------------
Weighted average number of shares outstanding for
basic earnings per share computation purposes 14,255,756 16,125,652 14,626,986 16,345,364
Dilutive effects of stock options 555,347 192,887 386,273 182,267
------------ ------------ ------------ ------------
Weighted average shares and common share equivalents
outstanding for diluted earnings per share purposes 14,811,103 16,318,539 15,013,259 16,527,631
============ ============ ============ ============
Basic earnings per share $ 0.26 $ 0.19 $ 0.66 $ 0.46
Diluted earnings per share $ 0.25 $ 0.19 $ 0.64 $ 0.46
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.
11
The following table presents the Company's comprehensive income for the periods
indicated (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------- --------------
2001 2000 2001 2000
---- ---- ---- ----
Net income $ 3,648 $ 3,042 $ 9,634 $ 7,551
Net change in unrealized gain on
securities available-for-sale, net 2,747 2,122 6,215 1,293
------- ------- ------- -------
Comprehensive income $ 6,395 $ 5,164 $15,849 $ 8,844
======= ======= ======= =======
8. NON-PERFORMING ASSETS
The following table sets forth information with respect to non-performing assets
at the dates indicated:
<Table>
<Caption>
September 30, 2001 December 31, 2000
------------------ -----------------
(Dollars in thousands)
Non-accrual loans:
Mortgage loans:
Construction and land development $ 1,488 $ 4,167
Single-family residential 8,381 5,230
Multi-family residential 36 --
Non-residential 2,014 1,330
Other loans 1,087 1,122
------- -------
Total non-performing loans 13,006 11,849
Other real estate owned 946 1,058
------- -------
Total non-performing assets $13,952 $12,907
======= =======
Non-performing assets to total assets 0.86 % 0.75 %
Non-performing loans to total loans 1.39 1.13
</Table>
The following table is a summary of changes in the allowance for losses on loans
for the nine months ended September 30, 2001 and the year ended December 31,
2000:
Nine Months Ended Year Ended
September 30, 2001 December 31, 2000
------------------ -----------------
(Dollars in thousands)
Balance at beginning of period $ 7,187 $ 5,973
Provision for loan losses 1,150 3,375
Charge-offs (833) (2,279)
Recoveries 120 118
------- -------
Balance at end of period $ 7,624 $ 7,187
======= =======
Allowance for loan losses to total non-performing loans at end
of period 58.62 % 60.65 %
Allowance for loan losses to total loans at end of period 0.81 0.68
12
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 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 September 30, 2001 the Company's total assets amounted to $1.6 billion or
approximately $93.6 million less than at December 31, 2000. Several major
categories of earning assets and costing liabilities exhibited significant
shifts as the Company continued implementing its strategy to increase its
investment in commercial and multi-family real estate and commercial business
loans while de-emphasizing its investment in single-family residential mortgage
loans. While the Company is in the process of implementing its loan strategy, it
has invested excess funds into cash and cash equivalents until such assets can
be deployed into higher yielding commercial business, commercial, and
multi-family real estate loans with risk and other characteristics deemed
appropriate by the Company. In addition, during the quarter ended September 30,
2001, the Company completed the sale of its LaPorte County branches in Michigan
City and LaPorte Indiana, repaid its reverse repurchase agreements and continued
its stock repurchase program in order to further restructure the Company's
balance sheet.
Cash and cash equivalents increased from $59.3 million at December 31, 2000 to
$231.8 million at September 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, the funding of the Company's
stock repurchase program and the sale of the branch offices in LaPorte County.
Investment securities (available-for-sale and held-to-maturity) decreased from
an aggregate of $204.6 million at December 31, 2000 to $84.2 million at
September 30, 2001. Mortgage-related securities (available-for-sale and
held-to-maturity) decreased from an aggregate $358.5 million at December 31,
2000 to $302.5 million at September 30, 2001. The funds were mainly invested in
cash and cash equivalents pending deployment into higher yielding assets in
furtherance of the Company's business strategy.
Loans receivable decreased $88.6 million from $998.7 million at December 31,
2000 to $910.1 million at September 30, 2001 as the Company pursued
implementation of its business strategy. Most of such reduction was accounted
for by a $108.0 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 $16.4 million
increase in commercial and multi-family mortgage loans as the Company emphasized
on the origination of such loans.
13
Deposits increased from $934.0 million at December 31, 2000 to $951.0 million at
September 30, 2001. The September 30, 2001 balance reflects the reduction of
approximately $40.0 million of deposits sold with the LaPorte and Michigan City
branches.
Borrowings decreased during the first nine months of 2001 from $548.1 million at
December 31, 2000 to $462.8 million at September 30, 2001. The borrowed funds
primarily consist of advances from the Federal Home Loan Banks ("FHLB") of
Indianapolis and Chicago.
Stockholders' equity decreased during the first nine months of 2001 from $199.4
million at December 31, 2000 to $174.2 million at September 30, 2001. The
decrease was a result of net income and the increase in accumulated other
comprehensive income during the first nine months of 2001, being more than
offset by the repurchase of 2,899,874 shares (at an average cost of $13.50 per
share) of common stock as part of the Company's ongoing stock repurchase
program.
14
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 September 30,
----------------------------------------------------------------------------
2001 2000
----------------------------------------------------------------------------
(Dollars in
thousands)
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
----------------------------------------------------------------------------
Interest-earning assets:
Loans Receivable: (1)
Real estate loans $ 897,804 $16,988 7.57% $ 968,742 $18,647 7.70%
Other loans 23,454 452 7.71 22,396 537 9.59
----------------------- -----------------------
Total loans 921,258 17,440 7.57 991,138 19,184 7.74
Securities (2) 429,706 6,733 6.27 598,475 10,324 6.90
Other interest-earning assets (3) 281,701 2,618 3.71 56,721 998 7.04
----------------------- -----------------------
Total interest-earning assets 1,632,665 26,791 6.56 1,646,334 30,506 7.41
Non-interest-earning assets 84,975 69,934
---------- ----------
Total assets $1,717,640 $1,716,268
========== ==========
Interest-bearing liabilities:
Deposits:
NOW and money market accounts $152,275 789 2.07% $ 128,703 811 2.52%
Passbook accounts 204,468 1,038 2.03 214,395 1,638 3.06
Certificates of deposit 607,066 8,477 5.59 572,173 8,510 5.95
----------------------- -----------------------
Total deposits 963,809 10,304 4.28 915,271 10,959 4.79
Total borrowings 493,814 7,389 5.99 535,113 8,007 5.99
----------------------- -----------------------
Total interest-bearing liabilities 1,457,623 17,693 4.85 1,450,384 18,966 5.23
Non-interest bearing liabilities (4) 63,187 65,493
Total liabilities 1,520,810 1,515,877
Stockholders' equity 196,830 200,391
---------- ----------
Total liabilities and
stockholders' equity $1,717,640 $1,716,268
========== ==========
Net interest-earning assets $175,042 $195,950
========== ==========
Net interest income/interest rate spread $ 9,098 1.71% $11,540 2.18%
=================== ===================
Net interest margin 2.23% 2.80%
========== ==========
Ratio of average interest-earning assets to
average interest-bearing liabilities 112.01% 113.51%
========== ==========
(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
Nine Months Ended September 30,
------------------------------------------------------------------------
2001 2000
------------------------------------------------------------------------
(Dollars in thousands)
Average Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------------------------------------------------------------------------
Interest - earning assets:
Loans Receivable: (1)
Real estate loans $ 935,294 $53,391 7.61% $ 935,656 $53,067 7.56%
Other loans 21,393 1,315 8.20 21,045 1,477 9.36
--------------------- --------------------
Total loans 956,687 54,706 7.62 956,701 54,544 7.60
Securities (2) 487,596 24,205 6.62 598,230 31,154 6.94
Other interest-earning assets (3) 182,585 5,919 4.32 61,477 3,016 6.54
--------------------- --------------------
Total interest-earning assets 1,626,868 84,830 6.95 1,616,408 88,714 7.32
Non-interest earning assets 83,577 66,946
---------- ------------
Total assets $1,710,445 $1,683,354
========== ============
Interest-bearing liabilities (4)
Deposits:
NOW and money market accounts $ 142,543 2,477 2.32% $ 127,691 2,406 2.51%
Passbook accounts 204,693 3,716 2.42 216,348 4,933 3.04
Certificates of deposit 595,286 25,968 5.82 575,105 24,850 5.76
--------------------- --------------------
Total deposits 942,522 32,161 4.55 919,144 32,189 4.67
--------------------- --------------------
Total borrowings 505,376 22,488 5.93 497,634 21,698 5.81
------------------------ --------------------
Total interest-bearing liabilities 1,447,898 54,649 5.03 1,416,778 53,887 5.07
Non-interest bearing liabilities 63,770 65,005
Total liabilities 1,511,668 1,481,783
Stockholders' equity 198,777 201,571
------------- ----------
Total liabilities and stockholders'
equity $1,710,445 $1,683,354
========== ==========
Net interest-earning assets $ 178,970 $ 199,630
========== ==========
Net interest income/interest rate spread $30,181 1.92% $34,827 2.25%
=================== ===================
Net interest margin 2.47% 2.87%
=========== ===========
Ratio of average interest-earning assets to
average interest-bearing liabilities 112.36% 114.09%
=========== ===========
(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
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 and expense attributable to changes in volume
(changes in volume multiplied by prior rate); (ii) effects on interest income
and expense 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 September 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:
Mortgage loans ($317) ($1,365) $ 23 ($1,659)
Other loans (105) 25 (5) (85)
----------------------------------------------------------------------
Total loans receivable (422) (1,340) 18 (1,744)
Securities (947) (2,911) 267 (3,591)
Other interest-earning assets (472) 3,958 (1,873) 1,613
--------------------------------------------------------------------
Total net change in income on
interest-earning assets (1,841) (293) (1,588) (3,722)
Interest-bearing liabilities:
Deposits:
NOW and money markets (144) 149 (27) (22)
Passbook accounts (550) (76) 26 (600)
Certificates of deposit (520) 519 (32) (33)
--------------------------------------------------------------------
Total deposits (1,214) 592 (33) (655)
Borrowings -- (618) -- (618)
--------------------------------------------------------------------
Total net change in expense on
interest-bearing liabilities (1,214) (26) (33) (1,273)
Net change in net interest income ($627) ($267) ($1,555) ($2,449)
====================================================================
17
Nine Months Ended September 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:
Mortgage loans $344 ($20) -- $ 324
Other loans (184) 25 (3) (162)
--------------------------------------------------------------
Total loans receivable 160 5 (3) 162
Securities (1,457) (5,761) 269 (6,949)
Other interest-earning assets (1,025) 5,941 (2,020) 2,896
--------------------------------------------------------------
Total net change in income on
interest-earning assets (2,322) 185 ( 1,754) (3,891)
Interest-bearing liabilities:
Deposits:
NOW and money markets (187) 280 (22) 71
Passbook accounts (1,005) (266) 54 (1,217)
Certificates of deposit 238 872 8 1,118
--------------------------------------------------------------
Total deposits (954) 886 40 (28)
Borrowings 445 338 7 790
--------------------------------------------------------------
Total net change in expense on
interest-bearing liabilities (509) 1,224 47 762
Net change in net interest income ($1,813) ($1,039) ($1,801) ($4,653)
==============================================================
RESULTS OF OPERATIONS
The Company reported net income of $3.6 million and $9.6 million for the three
and nine months ended September 30, 2001, respectively, as compared to $3.0
million and $7.6 million during the same periods in 2000.
Interest income decreased by $3.7 million or 12.2 percent to $26.8 million for
the three months ended September 30, 2001 compared to $30.5 million for the
third quarter of 2000. For the nine month period ended September 30, 2001
interest income was $84.8 million compared to $88.7 million for the same period
in 2000, a $3.9 million or 4.4 percent decrease. For the three months ended
September 30, 2001 compared to the three months ended September 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 balances of loans
receivable and securities partially 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 third quarter of
2001. The decline in interest income when comparing the nine months ended
September 30, 2001 to the nine months ended September 30, 2000, was as well the
result primarily of declines in the average yields earned on all
interest-earning assets other than real estate loans combined with a decline in
the average balance of securities.
Interest expense decreased from $19.0 million for the three months ended
September 30, 2000 to $17.7 million for the three months ended September 30,
2001, a $1.3 million or 6.7 percent decrease. For the
18
nine month period ended September 30, 2001 interest expense was $54.6 million
compared to $53.9 million for the same period in 2000, a $762,000 or 1.4 percent
increase. The decrease in interest expense during the three month period ended
September 30, 2001 compared to the similar period in 2000 was due primarily to
declines in the average rates paid on deposits offset partially by an increase
in the average balance of deposits. The increase in the nine month period ended
September 30, 2001 compared to the nine month period ended September 30, 2000
was the result of increases in the average balances of deposits and borrowings
as well as an increase in the average rate paid on borrowings being partially
offset by a decline in the average rate paid on deposits.
The Company's provisions for loan losses for the three months ended September
30, 2001 and 2000 were $250,000 and $375,000, respectively, while the provisions
for the nine months ended September 30, 2001 and 2000 were $1.2 million and $2.9
million, respectively. In light of the Company's emphasis on increasing its
involvement in commercial real estate and business lending, and the inherent
increased risks attendant with such lending, the Company has in recent periods
substantially increased its allowance. However, the rate of growth of the
Company's allowance slowed in the 2001 periods in light of the slowing growth of
its loan portfolio, as its emphasis has shifted to commercial lending from
residential lending, with the current economic climate rendering it more
difficult to obtain commercial real estate and business loans that meet the
Company's underwriting criteria. The Company's provisions for the 2000 periods
were substantially higher than for the three and nine months ended September 30,
2001 due to the establishment of a $2.0 million provision in the first quarter
of 2000 to reflect the potential loss on an office building loan obtained in the
Company's 1998 merger with SuburbFed Financial Corp. The allowance for loan
losses as a percentage of net loans receivable was 0.81 percent and 0.68 percent
at September 30, 2001 and December 31, 2000, respectively.
The Company's non-interest income experienced substantial increases in the 2001
period, increasing to $4.0 million and $8.3 million for the three and nine
months ended September 30, 2001, respectively, compared to $1.6 million and $4.4
million for the same periods in 2000. Non-interest income for the three months
and the nine months ended September 30, 2001 was higher than the same periods in
2000 due to increases in insurance commissions, income from BOLI, and other
income. In addition, a gain of $2.0 million was recorded in September 2001
related to the sale of the Bank's LaPorte County branches in LaPorte and
Michigan City. Increased insurance commissions resulted mainly from the
additional commissions earned from business written by an insurance agency
acquired in June 2001. Increases in non-interest income from BOLI are reflective
of the fact that the original purchase of BOLI was made in September 2000 and
income from the investment of the funds used to purchase BOLI was recorded as
interest income. Other income reflects increases from the process improvement
program the Company recently completed. The increases in non-interest income
were partially offset by the declines in loan fees due to the lower volume of
originations in 2001 compared to 2000 and declines in investment commissions due
to general conditions affecting the equity markets.
Non-interest expense was $7.5 million for the three months ended September 30,
2001 compared to $7.7 million for the three months ended September 30, 2000.
Non-interest expense was $23.3 million for the first nine months of 2001
compared to $23.7 million for the same period in 2000. In both the three months
and nine months ended September 30, 2001, reductions in compensation resulting
from the recently completed process improvement program were partially offset by
increases in data processing and occupancy expenses as well as consulting
expenses for the process improvement program.
Income tax expense for the three months ended September 30, 2001 was $1.6
million or 30.9 percent of income before income taxes compared to $2.0 million
or 39.5 percent of income before income taxes for the three months ended
September 30, 2000. For the nine months ended September 30, 2001 income tax
expense was $4.4 million or 31.2 percent of income before income taxes. This
compares to $5.0 million or 40.0 percent for the similar period in 2000. The
decline in the Company's effective tax rate is due to the implementation of
various tax reduction strategies in fiscal 2001.
19
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-related 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 and economic conditions.
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 portfolios of mortgage-related
securities and investment securities. At September 30, 2001 the total approved
investment and loan origination commitments outstanding amounted to $45.6
million. At the same date, the unadvanced portion of construction loans amounted
to $19.7 million. Investment securities scheduled to mature in one year or less
at September 30, 2001 totaled $33.9 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.
CAPITAL
At September 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 $23,843 1.50 % $136,120 8.56 % $112,277 7.06 %
Core capital 63,581 4.00 136,120 8.56 72,539 4.56
Risk-based capital 72,756 8.00 143,744 15.81 70,988 7.81
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.
20
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
Exhibit
Number Description
- ------- -----------
(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
21
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: November 14, 2001 By: /s/ Thomas F. Prisby
----------------------------------------------
Thomas F. Prisby, Chairman and
Chief Executive Officer
Date: November 14, 2001 By: /s/ John T. Stephens
----------------------------------------------
John T. Stephens, Executive Vice President and
Chief Financial Officer
22