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 March 31, 2002.
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 13,384,548 shares of Common Stock issued and outstanding as
of May 5, 2002.
CFS BANCORP, INC.
INDEX
Page No.
--------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition at
March 31, 2002 and (Audited) December 31, 2001 3
Consolidated Statements of Income for the Three Months
Ended March 31, 2002 and 2001 4
Consolidated Statements of Changes in Stockholders' Equity
for the Three Months Ended March 31, 2002 5
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2002 and 2001 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 19
PART II OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
2
CFS BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
March 31, 2002 December 31, 2001
-------------- -----------------
(Unaudited)
-----------
ASSETS
Cash and amounts due from depository institutions $ 19,568 $ 28,250
Interest-bearing deposits 139,045 137,978
Federal funds sold 94,458 105,839
----------- -----------
Cash and cash equivalents 253,071 272,067
Investment securities available-for-sale 48,217 47,225
Mortgage-backed securities available-for-sale 279,953 276,158
Mortgage-backed securities held-to-maturity
(fair value 2002 - $32,777; 2001 - $37,744) 32,700 37,034
Loans receivable, net 881,188 883,352
Investment in Federal Home Loan Bank stock, at cost 26,165 26,165
Office properties and equipment 14,775 14,983
Accrued interest receivable 7,521 6,887
Real estate owned 1,416 1,128
Investment in bank-owned life insurance 30,400 30,052
Prepaid expenses and other assets 7,815 9,083
----------- -----------
Total assets $ 1,583,221 $ 1,604,134
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 929,850 $ 945,948
Borrowed money 462,630 462,658
Advance payments by borrowers for taxes and insurance 5,733 4,497
Other liabilities 17,717 19,747
----------- -----------
Total liabilities 1,415,930 1,432,850
----------- -----------
Stockholders' Equity:
Preferred stock, $.01 par value:
Authorized shares - 15,000,000
Issued and outstanding shares - 0
at March 31, 2002 and December 31, 2001
Common stock, $.01 par value:
Authorized shares - 85,000,000
Issued shares - 23,423,306
at March 31, 2002 and December 31, 2001
Outstanding shares - 13,401,696 and 13,626,146
at March 31, 2002 and December 31, 2001, respectively 234 234
Additional paid-in capital 189,547 189,547
Retained earnings, substantially restricted 105,431 105,064
Treasury stock, at cost: 10,021,610 and 9,797,160 shares
at March 31, 2002, and December 31, 2001, respectively (115,297) (112,167)
Unearned common stock acquired by ESOP (9,570) (9,570)
Unearned common stock acquired by RRP (4,543) (4,543)
Accumulated other comprehensive income, net of tax 1,489 2,719
----------- -----------
Total stockholders' equity 167,291 171,284
----------- -----------
Total liabilities and stockholders' equity $ 1,583,221 $ 1,604,134
=========== ===========
See accompanying notes
3
CFS BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
Three Months Ended March 31,
----------------------------
2002 2001
---- ----
Interest income:
Loans $ 15,588 $ 19,251
Mortgage-backed securities 4,666 5,970
Other investment securities 333 3,294
Other 1,391 1,231
----------- -----------
Total interest income 21,978 29,746
Interest expense:
Deposits 7,215 10,896
Borrowings 6,798 7,667
----------- -----------
Total interest expense 14,013 18,563
----------- -----------
Net interest income before
provision for losses on loans 7,965 11,183
Provision for losses on loans 200 450
----------- -----------
Net interest income after
provision for losses on loans 7,765 10,733
Non-interest income:
Loan fees 405 361
Fees on deposit accounts 538 489
Insurance commissions 288 232
Investment commissions 262 245
Net gain on sale of investment securities 247 139
Income from bank owned life insurance 348 388
Other income 158 157
----------- -----------
Total non-interest income 2,246 2,011
Non-interest expense:
Compensation and employee benefits 4,996 4,781
Net occupancy expense 595 704
Furniture and equipment expense 462 538
Data processing 352 322
Federal insurance premiums 44 46
Marketing 158 147
Other general and administrative expenses 1,179 1,227
----------- -----------
Total non-interest expense 7,786 7,765
----------- -----------
Income before income taxes 2,225 4,979
Income tax expense 661 1,656
----------- -----------
Net income $ 1,564 $ 3,323
=========== ===========
Per share data:
Basic earnings per share $ 0.13 $ 0.22
Diluted earnings per share 0.12 0.22
Cash dividends declared per share 0.10 0.09
Weighted average shares outstanding 12,175,537 14,971,854
Weighted average diluted shares outstanding 12,670,862 15,199,649
See accompanying notes
4
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, 2002 $ 234 $189,547 $105,064 ($112,167) ($9,570) ($4,543) $ 2,719 $171,284
Net income -- -- 1,564 -- -- -- -- 1,564
Other comprehensive income, net of tax:
Change in unrealized appreciation on
available-for-sale securities, net of
reclassification adjustment -- -- -- -- -- -- (1,230) (1,230)
--------
Total comprehensive income 334
Purchase of treasury stock -- -- -- (3,410) -- -- -- (3,410)
Exercise of stock options -- -- -- 280 -- -- -- 280
Dividends declared on common stock -- -- (1,197) -- -- -- -- (1,197)
---------------------------------------------------------------------------------------
Balance March 31, 2002 $ 234 $189,547 $105,431 ($115,297) ($9,507) ($4,543) $ 1,489 $167,291
====== ======== ======== ========= ======= ======= ======= ========
See accompanying notes
5
CFS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Three Months Ended March 31,
----------------------------
2002 2001
---- ----
Operating activities:
Net income $ 1,564 $ 3,323
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for losses on loans 200 450
Depreciation expense 471 507
Deferred income taxes (benefit) 813 (1,205)
Change in deferred income 349 140
(Increase) decrease in interest receivable (634) 103
Decrease in accrued interest payable (98) (516)
Proceeds from sale of loans held for sale 4,133 1,558
Origination of loans held for sale (2,889) (1,249)
Net gain on sale of available for sale securities (247) (139)
Decrease in prepaid expenses and other assets 843 2,989
Decrease in other liabilities (2,176) (2,065)
--------- ---------
Net cash provided by operating activities 2,329 3,896
--------- ---------
Investing activities:
Available for sale investment securities:
Purchases (110,115) (31,285)
Repayments 108,442 750
Sales 834 2,811
Held to maturity investment securities:
Repayments and maturities -- 50,000
Available for sale mortgage-related securities:
Purchases (41,861) (9,099)
Repayments 36,229 6,964
Sales -- 14,158
Held to maturity mortgage-related securities:
Repayments 4,298 6,166
Purchase of Federal Home Loan Bank stock (10) (56)
Redemption of FHLB stock 10 56
Loan originations and principal payments on loans - net (213) 22,500
Additional costs on real estate owned (54) (50)
Proceeds from sale of real estate owned 350 545
Purchases of property and equipment (542) (244)
Disposal of property and equipment 279 --
--------- ---------
Net cash provided by (used in) investing activities (2,353) 63,216
--------- ---------
6
CFS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in thousands)
(Unaudited)
Three Months Ended March 31,
----------------------------
2002 2001
---- ----
Financing activities:
Proceeds from exercise of stock options 280 233
Dividends paid on common stock (1,050) (1,383)
Purchase of treasury stock (3,410) (5,367)
Net increase in NOW, passbook and money
market accounts 33,120 7,817
Net increase (decrease) in certificates of deposit (49,120) 28,337
Net increase in advance payments by borrowers for
taxes and insurance 1,236 1,569
Net decrease in borrowed funds (28) (42,951)
--------- ---------
Net cash flows used by financing activities (18,972) (11,745)
--------- ---------
Increase (decrease) in cash and cash equivalents (18,996) 55,367
Cash and cash equivalents at beginning of period 272,067 59,256
--------- ---------
Cash and cash equivalents at end of period $ 253,071 $ 114,623
========= =========
See accompanying notes
7
CFS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF FINANCIAL STATEMENTS PRESENTATION
The accompanying consolidated financial statements were prepared in accordance
with instructions to Form 10-Q and therefore do not include all the information
or footnotes necessary for a complete presentation of financial position,
results of operations and cash flows in conformity with generally accepted
accounting principles. However, all normal recurring adjustments which, in the
opinion of management, are necessary for a fair presentation of financial
statements have been included. These financial statements should be read in
conjunction with the audited financial statements and the notes thereto for the
period ended December 31, 2001 contained in the CFS Bancorp, Inc. (the
"Company") annual report to the stockholders. The results for the three months
ended March 31, 2002 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2002.
2. LOAN PORTFOLIO
The Company's loan portfolio consisted of the following at the dates indicated:
March 31, 2002 December 31, 2001
-------------- -----------------
(Dollars in thousands)
Amount % Amount %
------ ----- ------ -----
Mortgage loans:
Single-family residential $ 497,943 56.01% $ 535,197 60.07%
Multi-family residential 72,337 8.14 51,635 5.80
Commercial real estate 157,350 17.70 142,663 16.01
Construction and land
development:
Single-family residential 15,678 1.76 17,208 1.93
Multi-family residential 28,705 3.23 26,443 2.97
Commercial and land development 71,039 7.99 76,168 8.55
Home equity 42,796 4.81 41,416 4.65
--------------------- --------------------------
Total mortgage loans 885,848 99.64 890,730 99.98
Other loans:
Commercial 27,171 3.06 23,996 2.69
Consumer 2,146 .24 2,066 .23
Undisbursed portion of
loan proceeds (24,429) (2.75) (24,454) (2.75)
Deferred loan fees (1,674) (.19) (1,324) (.15)
--------------------- --------------------------
Total loans receivable 889,062 100.00% 891,014 100.00%
--------------------- --------------------------
Less:
Allowance for losses on loans 7,874 7,662
--------- ---------
Loans receivable, net $ 881,188 $ 883,352
========= =========
8
3. INVESTMENT SECURITIES
Amortized cost of investment securities and their fair values were as follows
(in thousands):
Available-for-Sale at March 31, 2002:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Callable agency securities, corporate bonds, and
commercial paper $36,597 $ 10 $ 82 $36,525
Trust preferred securities 4,929 -- 566 4,363
Equity securities 6,372 632 518 6,486
Money Market account -- -- -- --
Asset-backed notes 840 3 -- 843
------- ---- ------ -------
$48,738 $645 $1,166 $48,217
======= ==== ====== =======
Available-for-Sale at December 31, 2001:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Callable agency securities, corporate bonds and
commercial paper $33,169 $ 12 $ 33 $33,148
Trust preferred securities 4,929 -- 534 4,395
Equity securities 7,489 611 454 7,646
Asset-backed notes 2,026 10 -- 2,036
------- ---- ------ -------
$47,613 $633 $1,021 $47,225
======= ==== ====== =======
9
4. MORTGAGE-BACKED SECURITIES
The amortized cost of mortgage-backed securities and their fair values are as
follows (in thousands):
Available-for-Sale at March 31, 2002:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Participation certificates $ 60,701 $1,016 $ 1 $ 61,716
Real estate mortgage investment conduits
and collateralized mortgage obligations 216,369 2,230 362 218,237
-------- ------ ---- --------
$277,070 $3,246 $363 $279,953
======== ====== ==== ========
Available-for-Sale at December 31, 2001:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Participation certificates $ 32,089 $1,215 $ 79 $ 33,225
Real estate mortgage investment conduits
and collateralized mortgage obligations 239,776 3,438 282 242,933
-------- ------ ---- --------
$271,865 $4,653 $361 $276,158
======== ====== ==== ========
Held-to-Maturity at March 31, 2002:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Participation certificates $ 27,710 $ 196 $ 63 $ 27,843
Real estate mortgage investment conduits
and collateralized mortgage obligations 4,990 15 71 4,934
-------- ------ ---- --------
$ 32,700 $ 211 $134 $ 32,777
======== ====== ==== ========
Held-to-Maturity at December 31, 2001:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Participation certificates $28,644 $659 $69 $29,234
Real estate mortgage investment conduits
and collateralized mortgage obligations 8,390 125 5 8,510
----- --- - -----
$37,034 $784 $74 $37,744
======= ==== === =======
10
5. DEPOSITS
The following table sets forth the dollar amount of deposits and the percentage
of total deposits in various types of deposits offered by the Bank at the dates
indicated.
March 31, 2002 December 31, 2001
-------------- -----------------
Amount Percentage Amount Percentage
------ ---------- ------ ----------
(Dollars in thousands)
NOW accounts:
Noninterest-bearing $ 28,696 3.09% $ 26,970 2.85%
Interest-bearing 85,865 9.24 81,217 8.59
Money market accounts 100,707 10.83 89,205 9.44
Saving accounts 218,408 23.50 203,165 21.49
Certificates of deposit:
$100,000 or less 383,987 41.31 416,675 44.07
Over $100,000 111,781 12.03 128,212 13.56
-------- ------ -------- ------
Deposits $929,444 100.00% $945,444 100.00%
Accrued interest 406 504
-------- --------
Total $929,850 $945,948
======== ========
6. 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 Intangibles 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 the useful lives.
The Company applied 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 did not result in any changes to
reported earnings since the Company currently has no goodwill.
FASB Statement No. 144, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of," (FAS No. 144) was issued in October
2001 and addresses how and when to measure impairment on long-lived assets and
how to account for long-lived assets that an entity plans to dispose of either
through sale, abandonment, exchange, or distribution to owners. The new
provisions supersede FAS No. 121, which addressed asset impairment, and certain
provisions of APB Opinion 30 related to reporting the effects of the disposal of
a business segment and requires expected future operating losses from
discontinued operations to be recorded in the period in which the losses are
incurred rather than the measurement date. Under FAS No. 144, more dispositions
may qualify for discontinued operations treatment in the income statement. The
provisions of FAS No. 144 became effective for the Company on January 1, 2002,
and did not have an impact on the Company's financial position or results of
operations.
11
7. 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
--------------------------------
March 31, 2002 March 31, 2001
-------------- --------------
(Dollars in thousands, except per share data)
Net income $ 1,564 $ 3,323
Weighted average number of common shares outstanding 13,550,226 16,606,667
Average ESOP shares not committed to be released (942,039) (1,061,663)
Average RRP shares not vested (432,650) (573,150)
------------ ------------
Weighted average number of shares outstanding for
basic earnings per share computation purposes 12,175,537 14,971,854
Dilutive effects of employee stock options 495,325 227,795
------------ ------------
Weighted average shares and common share equivalents
outstanding for diluted earnings per share purposes 12,670,862 15,199,649
============ ============
Basic earnings per share $ 0.13 $ 0.22
Diluted earnings per share $ 0.12 $ 0.22
8. 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:
Three Months Ended
------------------------------------
March 31, 2002 March 31, 2001
-------------- --------------
(Dollars in thousands)
Net income $ 1,564 $ 3,323
Net change in unrealized gain (loss) on
securities available-for-sale, net (1,230) 4,148
------- -------
Comprehensive income $ 334 $ 7,471
======= =======
12
9. NON-PERFORMING ASSETS
The following table sets forth information with respect to non-performing assets
at the dates indicated:
March 31, 2002 December 31, 2001
-------------- -----------------
(Dollars in thousands)
Non-accrual loans:
Mortgage loans:
Construction and land development $ 1,149 $ 1,361
Single-family residential 6,990 8,579
Multi-family residential 60 36
Non-residential 3,591 1,798
Home equity 378 692
------- -------
Other loans:
Commercial 1,107 1,117
Consumer 296 291
------- -------
Total non-performing loans 13,571 13,874
Real estate owned 1,416 1,128
------- -------
Total non-performing assets $14,987 $15,002
======= =======
Non-performing assets to total assets 0.95% 0.86%
Non-performing loans to total loans 1.53 1.56
The following table is a summary of changes in the allowance for loan losses for
the three months ended March 31, 2002 and the year ended December 31, 2001:
Three Months Ended Year Ended Three Months Ended
March 31, 2002 December 31, 2001 March 31, 2001
-------------- ----------------- --------------
(Dollars in thousands)
Balance at beginning of period $ 7,662 $ 7,187 $ 7,187
Provision for loan losses 200 1,150 450
Charge-offs (10) (855) (228)
Recoveries 22 180 13
------- ------- -------
Balance at end of period $ 7,874 $ 7,662 $ 7,422
======= ======= =======
Allowance for loan losses to total
non-performing loans at of period 58.02% 55.23% 81.66%
Allowance for loan losses to total loans 0.89 0.86 0.73
at end of period
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
This Form 10-Q contains certain forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995, and may be identified by
the use of such words as "believe," "expect," "anticipate," "should," "planned,"
"estimated" and "potential." Examples of forward-looking statements include, but
are not limited to, estimates with respect to the financial condition, results
of operations and business of the Company that are subject to various factors
which could cause actual results to differ materially from these estimates.
These factors include, but are not limited to, general economic conditions,
changes in interest rates, deposit flows, loan demand, real estate values, and
competition; changes in accounting principles, policies, or guidelines; changes
in legislation or regulation; and other economic, competitive, governmental,
regulatory, and technological factors affecting the Company's operations,
pricing, products and services.
CHANGES IN FINANCIAL CONDITION
Total assets were $1.6 billion at both March 31, 2002 and December 31, 2001
while total liabilities were $1.4 billion at both dates. Stockholders' equity
was $167.3 million at March 31, 2002 compared to $171.3 million at December 31,
2001.
Cash and cash equivalents decreased to $253.1 million at March 31, 2001 from
$272.1 million at December 31, 2001. This decrease was used primarily to fund
certificate of deposit withdrawals during the first quarter of 2002.
Investment securities available-for-sale were $48.2 million at March 31, 2002
compared to $47.2 million at December 31, 2001. Mortgage-backed securities
available-for-sale were $280.0 million at March 31, 2002 compared to $276.2
million at December 31, 2001, while mortgage-backed securities held-to-maturity
were $32.7 million at March 31, 2002 compared to $37.0 million at December 31,
2001.
Loans receivable were $881.2 million at March 31, 2002 compared to $883.4
million at December 31, 2001. While the balance remained relatively unchanged,
there was a shift in the composition of the loan portfolio. There was a
reduction of $37.3 million in single-family residential mortgage loans that was
redeployed into multi-family residential and commercial real estate mortgage
loans as the Company continued to implement its business strategy.
Deposits were $929.9 million at March 31, 2002 compared to $945.9 million at
December 31, 2001. The reduction of $16.0 million was the result of a $49.1
million reduction in certificates of deposit being partially offset by a $33.1
million increase in core deposits.
Borrowed money was $462.6 million at March 31, 2002 compared to $462.7 million
at December 31, 2001.
Stockholders' equity was $167.3 million at March 31, 2002 compared to $171.3
million at December 31, 2001. This $4.0 million reduction was the result
primarily of a $3.1 million increase in treasury stock due the repurchase by the
Company of 253,000 shares of its common stock and the $1.2 million reduction in
accumulated other comprehensive income during the first quarter of 2002 due to
declines in unrealized gains on securities available for sale.
14
AVERAGE BALANCES, NET INTEREST INCOME, YIELDS EARNED AND RATES PAID
The following table sets forth, for the periods indicated, information regarding
(i) the total dollar amount of interest income of the Company from
interest-earning assets and the resultant average yields; (ii) the total dollar
amount of interest expense on interest-bearing liabilities and the resultant
average rate; (iii) net interest income; (iv) interest rate spread; and (v) net
interest margin. Information is based on average daily balances.
Three Months Ended March 31,
------------------------------------------------------------------------
2002 2001
------------------------------------------------------------------------
(Dollars in thousands)
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------------------------------------------------------------------------
Interest - earning assets:
Loans Receivable (1)
Real estate loans $ 862,877 $15,194 7.04% $ 974,710 $18,794 7.71%
Other loans 27,341 394 5.76 19,211 457 9.52
--------------------- ---------------------
Total loans 890,218 15,588 7.00 993,921 19,251 7.75
Securities (2) 359,433 4,999 5.56 540,661 9,264 6.85
Other interest-earning assets (3) 265,347 1,391 2.10 82,944 1,231 5.94
--------------------- ---------------------
Total interest-earning assets 1,514,998 21,978 5.80 1,617,526 29,746 7.36
Non-interest earning assets 89,748 82,459
---------- ----------
Total assets $1,604,746 $1,699,985
========== ==========
Interest-bearing liabilities:
Deposits:
NOW and money market accounts $ 178,217 $ 675 1.52% $ 130,336 $ 803 2.46%
Passbook accounts 210,898 775 1.47 206,320 1,394 2.70
Certificates of deposit 518,904 5,765 4.44 579,475 8,699 6.00
--------------------- ---------------------
Total deposits 908,019 7,215 3.18 916,131 10,896 4.76
Total borrowings 462,635 6,798 5.88 520,967 7,667 5.89
--------------------- ---------------------
Total interest-bearing liabilities 1,370,654 14,013 4.09 1,437,098 18,563 5.17
Non-interest bearing liabilities (4) 63,343 63,209
---------- ----------
Total liabilities 1,433,997 1,500,307
Net worth 170,749 199,678
---------- ----------
Total liabilities and stockholders' equity $1,604,746 $1,699,985
========== ==========
Net interest-earning assets $ 144,344 $ 180,428
========== ==========
Net interest income/interest rate spread $ 7,965 1.71% $11,183 2.19%
================= ==================
Net interest margin 2.10% 2.77%
====== ======
Ratio of average interest-earning assets to
average interest-bearing liabilities 110.53% 112.56%
====== ======
(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
RATE /VOLUME ANALYSIS
The following table sets forth the effects of changing rates and volumes on net
interest income of the Company. Information is provided with respect to (i)
effects on interest income attributable to changes in volume (changes in volume
multiplied by prior rate); (ii) effects on interest income attributable to
changes in rate (changes in rate multiplied by prior volume); and (iii) changes
in rate/volume (changes in rate multiplied by changes in volume).
Three Months Ended March 31,
2002 compared to 2001
-----------------------------------------------
(Dollars in thousands)
Increase (decrease) due to
-----------------------------------------------
Total Net
Rate/ Increase
Rate Volume Volume (Decrease)
-----------------------------------------------
Interest-earning assets:
Loans receivable:
Real estate loans ($1,631) ($2,156) $ 187 ($3,600)
Other loans (180) 193 (76) (63)
-----------------------------------------------
(1,811) (1,963) 111 (3,663)
Securities (1,745) (3,105) 585 (4,265)
Other interest-earning assets (796) 2,707 (1,751) 160
-----------------------------------------------
Total net change in income on
interest-earning assets (4,352) (2,361) (1,055) (7,768)
Interest-bearing liabilities:
Deposits:
NOW and money markets accounts (309) 295 (114) (128)
Passbook accounts (636) 31 (14) (619)
Certificates of deposit (2,261) (909) 236 (2,934)
-----------------------------------------------
Total deposits (3,206) (583) 108 (3,681)
Borrowings (12) (858) 1 (869)
-----------------------------------------------
Total net change in expense on
interest-bearing liabilities (3,218) (1,441) 109 (4,550)
-----------------------------------------------
Net change in net interest income ($1,134) ($ 920) ($1,164) ($3,218)
===============================================
16
RESULTS OF OPERATIONS
The Company reported net income of $1.6 million or $0.12 per diluted share for
the three months ended March 31, 2002 compared to $3.3 million or $0.22 per
diluted share for the three months ended March 31, 2001.
Net interest income for the first quarter of 2002 was $8.0 million compared to
$11.2 million for the same period in 2001. The decrease in net interest income
primarily reflects the compression of interest rate spreads (from 2.19 percent
to 1.71 percent) and net interest margin (from 2.77 percent to 2.10 percent)
between the first quarter of 2001 and the first quarter of 2002 due primarily to
declines in the weighted average yields on interest-earning assets
The Company's total interest income was $22.0 million and $29.7 million for the
three months ended March 31, 2002 and 2001, respectively. The average balance of
net loans outstanding decreased substantially from the first quarter of 2001 to
the first quarter of 2002. This decrease in the average balance of net loans
outstanding of $103.7 million was accompanied by a decrease of 75 basis points
in the yields earned on these loans. Similarly, the average balance of
securities decreased by $181.2 million and the average yield earned on these
securities decreased by 129 basis points comparing the first quarter of 2001 to
the first quarter of 2002. Interest income from other interest-earning assets
provided a modest offset of $160,000 to this decline as the average balances of
other interest-earning assets increased by $182.4 million while the yield earned
on these assets decreased by 384 basis points from the first quarter of 2001 to
the first quarter of 2002.
Interest expense was $14.0 million and $18.6 million for the three months ended
March 31, 2002 and 2001, respectively. This decrease of $4.6 million was the
result primarily of a 158 basis point decline in the average cost of deposits
when comparing the first quarter of 2001 to the first quarter of 2002. A $8.1
million decrease in the average balance of deposits combined with a $58.3
million decrease in the average balances of borrowings also contributed to this
decrease.
The Company's provision for loan losses for the three months ended March 31,
2002 was $200,000 compared to $450,000 for the same period in 2001. The Company
continued to increase its allowance for losses on loans as a percentage of total
loans. The Company believes this to be prudent based on both the economic
climate and the Company's strategy of increasing the ratio of multi-family and
commercial real estate mortgage loans and commercial loans to total loans.
Non-interest income for the three months ended March 31, 2002 was $2.2 million
compared to $2.0 million for the same period in 2001. Income from loan fees,
insurance commissions, investment commissions and fees on deposit accounts all
increased when comparing the first quarter of 2002 to the first quarter of 2001.
Fee income from bank-owned life insurance declined during this same period
reflecting the lower interest rate environment existing during the first quarter
of 2002 when compared to the same period in 2001.
Non-interest expense was $7.8 million for both the three months ended March 31,
2002 and 2001. Reductions in occupancy, furniture and fixture expense and
consulting fees were offset by increases in compensation and employee benefit
expenses, resulting from increased pension and ESOP expense. After being fully
funded for several years, funding was resumed for the pension plan year ending
June 30, 2002. As a result, pension expense of $219,000 was recorded in the
first quarter of 2002 while there was no pension expense recorded during the
first quarter of 2001. ESOP expense is required to be recorded based on the
number of shares to be allocated for the year to participants in the plan
multiplied by the average share price of the Company's common stock for the
period. This resulted in ESOP expense for the three months ended March 31, 2002
of $405,000 compared to $323,000 for the
17
three months ended March 31, 2001 due to increases in the market price of the
Company's common stock.
Income tax expense was $661,000 for the three months ended March 31, 2002
compared to $1.7 million for the same period in 2001. This decrease was
primarily due to reduced income in the first quarter of 2002 compared to the
first quarter of 2001, combined with a reduction in the effective tax rate
(29.7%) in the first quarter of 2002 compared to the effective tax rate (33.3%)
in the first quarter of 2001 reflecting the implementation of certain tax
strategies.
LIQUIDITY AND COMMITMENTS
The Company's liquidity, represented by cash and cash equivalents, is a product
of its operating, investing, and financing activities. The Company's primary
sources of funds are deposits, borrowings, amortization prepayments and
maturities of outstanding loans and mortgage-backed securities, maturities of
investment securities and other short-term investments and funds provided from
operations. While scheduled payments from the amortization of loans and
mortgage-related securities and maturing investment securities and short-term
investments are relatively predictable sources of funds, deposit flows and loan
prepayments are greatly influenced by general interest rates. In addition, the
Company invests excess funds in federal funds sold and other short-term interest
earning assets which provide liquidity to meet lending requirements.
Liquidity management is both a daily and long term function of business
management. Excess liquidity is generally invested in short-term investments
such as federal funds. The Company uses its sources of funds primarily to meet
its ongoing commitments, 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 March 31, 2002 the
total approved investment and loan origination commitments outstanding amounted
to $106.4 million. At the same date, the unadvanced portion of construction
loans amounted to $24.4 million. Investment securities scheduled to mature in
one year or less at March 31, 2002 were $5.7 million.
Based on historical experience, the Company 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 March 31, 2002 the Bank's regulatory capital was significantly in excess of
regulatory limits set by the Office of Thrift Supervision. The current
requirements and the Bank's actual levels at March 31, 2002 are set forth below
(dollars in thousands):
Required Capital Actual Capital Excess Capital
---------------- -------------- --------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Tangible capital $23,389 1.50% $132,803 8.52% $109,414 7.02%
Core capital 62,372 4.00 132,803 8.52 70,431 4.52
Risk-based capital 73,552 8.00 140,677 15.30 67,125 7.30
18
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, 2001. 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, 2001.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. USE OF PROCEEDS FROM REGISTERED SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) An annual meeting of stockholders of the Company was held on April 30, 2002
("Annual Meeting").
(b) Not applicable.
(c) There were 13,465,646 shares of Common Stock of the Company eligible to be
voted at the Annual Meeting, and 11,888,367 shares were represented at the
meeting by the holders thereof, which constituted a quorum. The items voted
upon at the Annual Meeting and the vote for each proposal were as follows:
(1) Election of directors for a three-year term.
Sally A. Abbott FOR 10,699,804 WITHHELD 1,188,563
---------- ---------
Gregory W. Blaine FOR 10,831,923 WITHHELD 1,056,444
---------- ---------
Thomas J. Burns FOR 10,722,020 WITHHELD 1,166,347
---------- ---------
(2) To ratify the appointment by the Board of Directors of Ernst & Young
LLP as the Company's independent auditors for the fiscal year ending
December 31, 2002.
FOR 11,338,133 AGAINST 360,979 ABSTAIN 189,254
---------- ------- -------
(d) Not applicable.
19
ITEM 5.
OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits (filed herewith unless otherwise noted)
3.1 Certificate of Incorporation of CFS Bancorp, Inc.*
3.2 Bylaws of CFS Bancorp, Inc.*
4.0 Form of Stock Certificate of CFS Bancorp, Inc.*
10.1 Form of Employment Agreement entered into between Citizens Financial
Services, FSB and each of Thomas F. Prisby, James W. Prisby and John T.
Stephens*
10.2 Form of Employment Agreement entered into between CFS Bancorp, Inc. and
each of Thomas F. Prisby, James W. Prisby and John T. Stephens*
10.5 CFS Bancorp, Inc. 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.
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: May 14, 2002 By: /s/ THOMAS F. PRISBY
---------------------------------------------------
Thomas F. Prisby, Chairman and
Chief Executive Officer
Date: May 14, 2002 By: /s/ JOHN T. STEPHENS
---------------------------------------------------
John T. Stephens, Executive Vice President and
Chief Financial Officer
20