.
.
.
EXHIBIT 13
SELECTED CONSOLIDATED FINANCIAL DATA
CFS BANCORP, INC.
AT DECEMBER 31,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL CONDITION DATA
Total assets $1,584,762 $1,604,134 $1,710,376 $1,649,535 $1,470,617
Loans receivable, net 930,348 883,352 998,727 882,676 726,081
Mortgage-backed securities, 296,638 276,158 279,597 299,056 277,888
available-for-sale
Mortgage-backed securities, held-to-maturity 21,402 37,034 78,857 101,066 176,956
Investment securities, available-for-sale 39,064 47,225 33,786 32,693 34,720
Investment securities, held-to-maturity -- -- 170,784 176,737 166,500
Deposits 954,222 945,948 934,012 925,047 969,802
Borrowed money 449,431 462,658 548,076 494,699 215,271
Stockholders' equity 160,662 171,284 199,368 205,433 260,088
Non-performing assets to total assets 1.02% 0.94% 0.75% 0.75% 0.64%
Stockholders' equity to total assets 10.14 10.68 11.66 12.45 17.69
Stockholders' equity per outstanding share $ 12.68 $ 12.57 $ 11.88 $ 10.97 $ 11.13
Allowance for losses on loans to
non-performing loans 56.60% 55.23% 60.65% 50.48% 59.82%
Allowance for losses on loans to total loans 0.92 0.86 0.71 0.67 0.74
YEAR ENDED DECEMBER 31,
2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
SELECTED OPERATIONS DATA
Interest income $ 86,561 $ 108,107 $ 118,876 $104,609 $ 97,353
Interest expense 53,068 70,288 73,033 57,543 56,910
Net interest income 33,493 37,819 45,843 47,066 40,443
Provision for losses on loans(1) 1,956 1,150 3,375 675 1,630
Net interest income after provision for losses on 31,537 36,669 42,468 46,391 38,813
loans
Noninterest income 11,313 10,728 6,081 5,191 5,900
Noninterest expense(2) 32,674 31,433 31,035 30,210 39,004
Income before income taxes 10,176 15,964 17,514 21,372 5,709
Income tax expense 2,971 4,791 6,821 8,282 2,587
Net income 7,205 11,173 10,693 13,090 3,122
Earnings per share (basic) 0.60 0.80 0.66 0.69 0.15
Earnings per share (diluted) 0.58 0.77 0.66 0.68 0.14
Cash dividends declared per common share 0.40 0.36 0.36 0.34 0.16
SELECTED OPERATING RATIOS
Net interest margin 2.20% 2.36% 2.83% 3.18% 3.08%
Average interest-earning assets to average
interest-bearing liabilities 110.96 112.09 113.59 118.70 114.57
Ratio of general and administrative expenses
to average total assets (adjusted for
one-time charges)(3) 2.04 1.86 1.84 1.88 2.16
Return on average assets 0.45 0.66 0.63 0.85 0.23
Return on average equity 4.30 5.82 5.34 5.70 1.85
Efficiency ratio (adjusted for one-time charges)(3) 75.25 68.43 59.82 57.95 64.35
(1) The provision for losses on loans in 1998 reflects a $1,200 adjustment in
order to conform the credit policies of Suburban Financial Corp. to those
of the CFS Bancorp, Inc.
(2) Noninterest expense in 1998 includes one-time charges of $9,519 related to
the Merger and Conversion (as described in the General Section of
Management's Discussion and Analysis of Financial Condition and Results of
Operations).
(3) Calculated on a pro forma basis which excludes the effects of the special
charges referred to in (2) above.
13
SELECTED QUARTERLY RESULTS OF OPERATIONS
CFS BANCORP, INC.
2002
1ST 2ND 3RD 4TH
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) QUARTER QUARTER QUARTER QUARTER
- -------------------------------------------------------------------------------------------------------------------------------
Interest income $21,978 $22,128 $22,047 $20,408
Interest expense 14,013 12,978 13,291 12,786
Net interest income 7,965 9,150 8,756 7,622
Provisions for losses on loans 200 350 500 906
Noninterest income 2,246 2,494 2,639 3,934
Noninterest expense 7,786 8,452 8,324 8,112
Income before income taxes 2,225 2,842 2,571 2,538
Income taxes 661 859 755 696
Net income 1,564 1,983 1,816 1,842
Earnings per share - basic 0.13 0.16 0.15 0.16
Earnings per share - diluted 0.12 0.16 0.15 0.15
Dividends declared per share 0.10 0.10 0.10 0.10
2001
1ST 2ND 3RD 4TH
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) QUARTER QUARTER QUARTER QUARTER
- -------------------------------------------------------------------------------------------------------------------------------
Interest income $29,746 $28,293 $26,791 $23,277
Interest expense 18,563 18,393 17,693 15,639
Net interest income 11,183 9,900 9,098 7,638
Provisions for losses on loans 450 450 250 --
Noninterest income 2,011 2,351 3,968 2,398
Noninterest expense 7,765 8,044 7,540 8,084
Income before income taxes 4,979 3,757 5,276 1,952
Income taxes 1,656 1,094 1,628 413
Net income 3,323 2,663 3,648 1,539
Earnings per share - basic 0.22 0.18 0.26 0.14
Earnings per share - diluted 0.22 0.18 0.25 0.12
Dividends declared per share 0.09 0.09 0.09 0.09
14
CFS BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
CFS Bancorp, Inc. ("Company") was formed as the holding company for Citizens
Financial Services, FSB ("Bank") in connection with the Bank's conversion from a
federally-chartered mutual savings bank to a federally-chartered stock savings
bank ("Conversion"). The Conversion and the Company's initial public offering of
its common stock were completed on July 24, 1998. Concurrent with the
Conversion, the Company completed its merger with SuburbFed Financial Corp.
("SFC") ("Merger"), and SFC's subsidiary, Suburban Federal Savings, a Federal
Savings Bank, was merged into the Bank.
CHANGES IN FINANCIAL CONDITION
GENERAL
Total assets of the Company were $1.6 billion at both December 31, 2002 and
December 31, 2001. Assets decreased $19.4 million primarily as a result of the
decrease in cash and cash equivalents of $61.9 million offset partially by the
increase in loans receivable of $47.0 million. During the year ended December
31, 2002, the Company's total liabilities decreased by $8.8 million as a result
of a decrease in borrowed money of $13.2 million and a decrease in other
liabilities of $3.7 million, which were partially offset by an increase in
deposits of $8.3 million. During the year ended December 31, 2002, stockholders'
equity decreased by $10.6 million with the most significant portion of the
decrease being the utilization of $14.6 million in cash to repurchase 1,050,854
shares for treasury through the Company's share repurchase program. The Company
continues to maintain a strong capital structure. At December 31, 2002, the Bank
had tangible and core regulatory capital ratios of 8.42% and a risk-based
capital ratio of 13.97%. Liquidity, which was at historically high levels for
the Company at December 31, 2001 as a result of the continuing trend of
historically low market rates of interest and the resulting accelerated level of
repayments of mortgage loans, was reduced by about 23% during 2002 even though
interest rates were reduced further during the year and accelerated loan
repayments continued. The Company continued to implement its strategy during
2002 of restructuring its balance sheet to emphasize more commercial and
commercial real estate loans that have relatively higher rates of interest and
shorter durations than single-family mortgage loans.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents, which consist of cash, interest-bearing deposits at
other financial institutions and federal funds sold, amounted to $210.1 at
December 31, 2002 compared to $272.1 million at December 31, 2001. This $62.0
million decrease primarily was a result of the Company redeploying these funds
to fund new loan originations in line with the Company's business strategy of
having the Company's balance sheet contain more bank-like assets. This
redeployment of cash and cash equivalents was utilized to assist in increasing
loans receivable by $47.0 million, repaying $13.3 million in borrowed money and
repurchasing $14.6 million of shares of the Company's common stock on the open
market at an average price per share of $13.92.
INVESTMENT SECURITIES
At December 31, 2002 the Company had $39.1 million of investment securities
available-for-sale compared to $47.2 million of investment securities
available-for-sale at December 31, 2001.
MORTGAGE-BACKED SECURITIES
At December 31, 2002 the Company had $296.6 million in mortgage-backed
securities available-for-sale and $21.4 million in mortgage-backed securities
held-to-maturity, or an aggregate of $318.0 million, compared to $276.2 million
in mortgage-backed securities available-for-sale and $37.0 million in
mortgage-backed securities held-to-maturity, or an aggregate of $313.2 million
in mortgage-backed securities, at December 31, 2001. This net increase of $4.8
million in the aggregate from December 31, 2001 to December 31, 2002 was the
result of purchases of $225.6 in mortgage-backed securities, reduced by normal
15
CFS BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CONTINUED
repayments and increased prepayments as mortgage interest rates continued to
drop during 2002. At December 31, 2002 the Company had an unrealized loss, net
of taxes, on available-for-sale investment securities and mortgage-backed
securities of $.1 million.
LOANS RECEIVABLE
The net loan portfolio of the Company increased to $930.3 million at December
31, 2002 from $883.4 million at December 31, 2001. The 5.3% increase was the
result of the Company continuing its strategy of restructuring its loan
portfolio by redeploying assets into commercial and commercial real estate loans
even as accelerated loan repayments on single-family residential mortgage loans
continued in 2002.
INVESTMENT IN BANK-OWNED LIFE INSURANCE
The Company's investment in Bank-owned life insurance ("BOLI") was $31.0 million
at December 31, 2002 compared to $30.1 million at December 31, 2001. The
Company's original investment in BOLI was made in September 2000 and increased
by $6.2 million in September 2001. At this time the Company does not intend any
further purchase of BOLI. This investment provides tax-exempt earnings to help
defray the cost of employee benefits. The investment is represented by life
insurance contracts on approximately 300 Company employees issued by the
Hartford Life Insurance Company. All employees covered under these contracts
have agreed to be included in the program.
DEPOSITS
Deposits were $954.2 million at December 31, 2002 compared to $945.9 million at
December 31, 2001. This net increase of $8.3 million resulted primarily from the
Company's opening of two new branch offices in July 2002. When the two new
branch offices opened, a special promotion that paid higher interest rates
during the three months after the opening resulted in additional deposits of
approximately $80 million. At December 31, 2002 $47.1 million of these new
deposits have been retained. These deposit increases were partially offset by
reductions of deposits throughout other offices as the Company generally set its
interest rates offered on deposits at moderate levels compared to competitors
during 2002.
BORROWED MONEY
Borrowed money amounted to $449.4 million at December 31, 2002 compared to
$462.7 million at December 31, 2001. The decrease of $13.3 million reflects
principal repayments by the Company as certain borrowings matured.
STOCKHOLDERS' EQUITY
Total stockholders' equity of the Company amounted to $160.7 million, or 10.14%
of total assets, at December 31, 2002 compared to $171.3 million, or 10.68% of
total assets, at December 31, 2001. Total stockholders' equity included
unrealized losses on investment securities and mortgage-backed securities
available-for-sale, net of taxes of $123,000 at December 31, 2002 compared to
unrealized gains of $2.7 million at December 31, 2001. The decrease in
stockholders' equity for the year was primarily the result of the utilization of
cash to fund the Company's ongoing stock repurchase programs. Since its initial
public offering in July 1998, the Company has repurchased an aggregate of
10,871,062 shares of its common stock at an average price of $11.60 per share.
16
CFS BANCORP, INC.
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 during the
indicated periods.
YEARS ENDED DECEMBER 31,
2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
(DOLLARS IN THOUSANDS) BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST
- ------------------------------------------------------------------------------------------------------------------------------------
Interest - earning assets:
Loans receivable(1)
Real estate loans $ 883,265 $ 60,750 6.88% $ 920,461 $ 69,398 7.54% $ 948,159 $ 72,129 7.61%
Other loans 33,288 1,969 5.92 22,115 1,665 7.53 21,177 1,980 9.35
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans 916,553 62,719 6.84 942,576 71,063 7.54 969,336 74,109 7.65
Securities(2) 388,382 19,211 4.95 457,796 29,439 6.43 589,816 40,926 6.94
Other interest-
earning assets(3) 215,549 4,631 2.15 204,563 7,605 3.72 57,893 3,841 6.63
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-
earning assets 1,520,484 86,561 5.69 1,604,935 108,107 6.74 1,617,045 118,876 7.35
Noninterest-earning assets 80,628 82,640 70,690
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $1,601,112 $1,687,575 $1,687,735
====================================================================================================================================
Interest-bearing liabilities:
Deposits:
Checking and money
market accounts $ 193,812 2,735 1.41 $ 146,565 3,298 2.25 $ 127,502 $ 3,219 2.52
Passbook accounts 214,609 2,768 1.29 203,951 4,591 2.25 214,421 6,456 3.01
Certificates of deposit 502,970 20,214 4.02 586,677 32,958 5.62 572,144 33,420 5.84
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits 911,391 25,717 2.82 937,193 40,847 4.36 914,067 43,095 4.71
Borrowings 458,864 27,351 5.96 494,637 29,441 5.95 509,503 29,938 5.88
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-
bearing liabilities 1,370,255 53,068 3.87 1,431,830 70,288 4.91 1,423,570 73,033 5.13
Noninterest-bearing
liabilities(4) 63,200 63,869 63,830
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,433,455 1,495,699 1,487,400
Stockholders' equity 167,657 191,876 200,335
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $1,601,112 $1,687,575 $1,687,735
====================================================================================================================================
Net interest-earning assets $ 150,229 $ 173,105 $ 193,475
====================================================================================================================================
Net interest income/interest
rate spread $ 33,493 1.82% $ 37,819 1.83% $ 45,843 2.22%
====================================================================================================================================
Net interest margin 2.20% 2.36% 2.83%
====================================================================================================================================
Ratio of average interest-
earning assets to average
interest-bearing liabilities 110.96% 112.09% 113.59%
====================================================================================================================================
(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.
17
CFS BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CONTINUED
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 rate (changes in rate
multiplied by prior volume); (ii) effects on interest income attributable to
changes in volume (changes in volume multiplied by prior rate); and (iii)
changes in rate/volume (changes in rate multiplied by changes in volume).
YEARS ENDED DECEMBER 31,
2002 COMPARED TO 2001 2001 COMPARED TO 2000
- ------------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
- ------------------------------------------------------------------------------------------------------------------------------------
RATE/ TOTAL NET RATE/ TOTAL NET
(DOLLARS IN THOUSANDS) RATE VOLUME VOLUME INC./(DEC) RATE VOLUME VOLUME INC./(DEC)
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Loans receivable:
Real estate loans $ (6,090) $ (2,804) $ 246 $ (8,648) $ (643) $ (2,107) $ 19 $ (2,731)
Other loans (357) 841 (180) 304 (386) 88 (17) (315)
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans receivable (6,447) (1,963) 66 (8,344) (1,029) (2,019) 2 (3,046)
Securities (6,794) (4,464) 1,030 (10,228) (2,997) (9,161) 671 (11,487)
Other interest-earning assets (3,210) ,408 (172) (2,974) (1,689) 9,731 (4,278) 3,764
- ------------------------------------------------------------------------------------------------------------------------------------
Total net change in income on
interest-earning assets (16,451) (6,019) 924 (21,546) (5,715) (1,449) (3,605) (10,769)
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits:
Checking and money markets (1,230) 1,063 (396) (563) (350) 481 (52) 79
Passbook accounts (1,960) 240 (103) (1,823) 181 (449) (12) (280)
Certificates of deposit (9,380) (4,702) 1,338 (12,744) 2,496 617 51 3,164
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits (12,570) (3,399) 839 (15,130) 2,981 298 53 3,332
Borrowings 42 (2,129) (3) (2,090) 1,775 9,440 943 12,158
- ------------------------------------------------------------------------------------------------------------------------------------
Total net change in expense on
interest-bearing liabilities (12,528) (5,528) 836 (17,220) 4,756 9,738 996 15,490
- ------------------------------------------------------------------------------------------------------------------------------------
Net change in net interest income $ (3,923) $ (491) $ 88 $ (4,326) $ (1,408) $ 608 $ (423) $ (1,223)
====================================================================================================================================
18
CFS BANCORP, INC.
RESULTS OF OPERATIONS
GENERAL
The Company reported net income of $7.2 million for the year ended December 31,
2002 compared to net income of $11.2 million and $10.7 million for the years
ended December 31, 2001 and 2000, respectively. The Company's net interest
income for the year ended December 31, 2002 decreased $4.3 million from the year
ended December 31, 2001. Net interest income for the year ended December 31,
2001 decreased $8.0 million when compared to the year ended December 31, 2000.
During the year ended December 31, 2002, the Company's average balances of
interest-earning assets, which is comprised primarily of loans and securities,
decreased as the result of continued accelerated repayments on mortgage loans
and mortgage-backed securities in the low interest rate environment. The
Company's reinvestment of cash into interest-earning assets increased in 2002
compared to 2001 as the Company emphasized the origination of commercial and
multi-family real estate, construction and commercial loans. The Company's
results of operations during the year ended December 31, 2002 were positively
affected by a $1.1 million gain on the sale of the insurance agency operations.
The Company's results of operations were affected during the year ended December
31, 2001 by a $2.0 million gain on the sale of two La Porte County branches
while, during the year ended December 31, 2000, the Company recorded a loan loss
provision of $2.0 million related to the writedown of a non-performing loan on
an office building obtained in the July 1998 Merger with SFC.
NET INTEREST INCOME
Net interest income is determined by the Company's interest rate spread (i.e.,
the difference between the average yield earned on the Company's
interest-earning assets and the average rate paid on its interest-bearing
liabilities) and the relative amounts of interest-earning assets and
interest-bearing liabilities. The Company's average interest rate spreads were
1.82%, 1.83% and 2.22% for the years ended December 31, 2002, 2001 and 2000,
respectively. The Company's net interest margin (i.e., net interest income as a
percentage of average interest-earning assets) was 2.20%, 2.36% and 2.83% during
the years ended December 31, 2002, 2001 and 2000, respectively.
The Company's net interest income amounted to $33.5 million for the year ended
December 31, 2002 compared to $37.8 million and $45.8 million for the years
ended December 31, 2001 and 2000, respectively. The 11.4% decrease from 2001 to
2002 was a result of the compression of interest rate spreads as well as a
reduction in the ratio of average interest-earning assets to average
interest-bearing liabilities to 110.96% in 2002 from 112.1% in 2001. The 17.5%
decrease in net interest income from 2000 to 2001 was similarly a result of the
compression of interest rate spreads, as well as a reduction in the ratio of
average interest-earning assets to average interest-bearing liabilities to
112.1% in 2001 from 113.6% in 2000. The Company also utilized $14.6 million of
cash in 2002 and $43.6 million of cash in 2001 for the Company's stock
repurchase program, which affected net interest income, as the cash used for
such repurchases was not invested in interest-earning assets.
INTEREST INCOME
The Company reported total interest income of $86.6 million for the year ended
December 31, 2002 compared to $108.1 million and $118.9 million for the years
ended December 31, 2001 and 2000, respectively. The $21.5 million or 19.9%
decrease in interest income in 2002 compared to 2001 was primarily due to a
$69.4 million decrease in the average balances of securities from $457.8 million
in 2001 to $388.4 million in 2002 coupled with a reduction of 148 basis points
in the average yield earned on these securities. In addition, the average
balances of real estate loans decreased by $37.2 million to $883.3 million in
2002 from $920.5 million in 2001 in conjunction with a reduction of 66 basis
points in the yield earned on these loans. The $10.8 million or 9.1% decrease in
interest income in 2001 compared to 2000 was primarily due to a $132.0 million
decrease in the average balances of securities from $589.8 million in 2000 to
$457.8 million in 2001 coupled with a reduction of 51 basis points in the yield
earned on these securities.
19
CFS BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CONTINUED
INTEREST EXPENSE
Total interest expenses amounted to $53.1 million for the year ended December
31, 2002 compared to $70.3 million and $73.0 million in 2001 and 2000,
respectively. The $17.2 million or 24.5% reduction in interest expense during
2002 was primarily the result of a 154 basis point reduction in the rate paid on
total deposits coupled with a $25.8 million decrease in average balances of
total deposits. Total interest expense amounted to $70.3 million for the year
ended December 31, 2001 compared to $73.0 million in 2000. The $2.7 million or
3.8% reduction in interest expense during 2001, was primarily the result of a
$2.2 million decrease in interest on deposits. This was the result of a 35 basis
point decrease in the average rate paid on deposits, which was partially offset
by a $23.1 million increase in the average balance of deposits.
PROVISION FOR LOSSES ON LOANS
The Company establishes provisions for losses on loans, which are charged to
operations, in order to maintain the allowance for losses on loans at a level
which is deemed appropriate to absorb losses inherent in the portfolio. In
determining the appropriate level of the allowance for losses on loans,
management considers past and anticipated loss experience, evaluations of real
estate collateral, current and anticipated economic conditions, volume and type
of lending, and the levels of non-performing and other classified loans. The
amount of the allowance is based on estimates, and ultimate losses may vary from
such estimates. Management assesses the allowance for losses on loans on a
quarterly basis and makes appropriate provisions to maintain the adequacy of the
allowance. The actual determination of the total provision is the combination of
specific reserves, which may be established from time to time on individual
classified assets, and a general reserve that is based in part on certain ratios
applied to various loan pools as stratified by the Company, considering
historical charge-offs and delinquency levels. Additionally, the Company engages
an independent firm to perform a loan review every four to six months. The
results of this review are compared to the Company's classification of assets,
and adjustments are made as deemed appropriate by management. The Company's
provision for losses on loans was $2.0 million for the year ended December 31,
2002 compared to $1.2 million in 2001 and $3.4 million in 2000. The Company has
increased its emphasis in recent years on construction and land development
loans, multi-family residential real estate loans, commercial loans, and
commercial real estate loans, all of which are generally deemed to involve more
risk of loss than single-family residential real estate loans. This change in
emphasis has resulted in an increase in the allowance for losses. The Company's
allowance for losses on loans to total loans was 0.92% at December 31, 2002
compared to 0.86% and 0.71% at December 31, 2001 and 2000, respectively.
The Company's non-performing loans were $15.3 million at December 31, 2002
compared to $13.8 and $11.8 million at December 31, 2001 and 2000, respectively.
The primary changes in non-performing loans when comparing 2002 to 2001 were an
overall decrease in non-performing single-family-residential loans of
approximately $1.3 million and an increase in non-performing commercial real
estate loans. The increase in non-performing commercial real estate loans is
primarily due to one loan of approximately $3.9 million on a motel, which became
non-performing in the third quarter of 2002. The Company anticipates foreclosing
on this property in 2003. A motel management company has been appointed to run
the daily operations of the motel until occupancy levels can be improved and the
property offered for sale. The ratio of the Company's allowance for losses on
loans to non-performing loans was 56.6% at December 31, 2002 compared to 55.2%
and 60.7% at December 31, 2001 and 2000, respectively.
Although management believes that the Company's allowance for losses on loans
was adequate at December 31, 2002 based on available facts and circumstances,
there can be no assurances that additions will not be necessary in the future.
Such allowances would adversely affect the Company's results of operations. In
addition, various regulatory agencies, as an integral part of their examination
processes, periodically review the Bank's
20
CFS BANCORP, INC.
provision for losses on loans and the carrying value of its other non-performing
assets, based on information available to them at the time of their
examinations. Any of these agencies could require the Bank to make additional
provisions for losses on loans in the future.
NONINTEREST INCOME
The Company reported noninterest income of $11.3 million for the year ended
December 31, 2002 compared to $10.7 million and $6.1 million for the years ended
December 31, 2001 and 2000, respectively. The primary reasons for the increase
in noninterest income in 2002 compared to 2001 was the $1.1 million gain
recognized on the sale of the Company's insurance agency in December 2002
coupled with the $1.5 million increase in deposit fees in 2002 compared to 2001,
while 2001 noninterest income included a $2.0 million gain on the sale of two
branch offices. The increase in deposit fees in 2002 compared to 2001 was a
result of a re-evaluation of operations completed in 2001. One of the results of
this process improvement program was reflected in deposit fees earned of $4.1
million in 2002 compared to $2.6 million in 2001 and $1.4 million in 2000. In
addition to the sale of the insurance agency in December 2002, the Company
changed its method of delivery of investments in the third quarter of 2002 by
discontinuing delivering non-deposit products through its subsidiary and having
its subsidiary outsource this activity. Both the investment and insurance
subsidiaries have provided marginally incremental profit and loss results to the
Company over the years. Therefore, the outsourcing of investment services and
the sale of the insurance agency operations are expected to improve the
Company's operating results beginning in 2003.
The primary reasons for the increase in noninterest income in 2001 compared to
2000 was the $2.0 million gain recognized on the sale of two branch offices, a
$1.2 million increase in deposit fees and a $1.1 million increase in BOLI
income. Income from BOLI was $1.5 million in 2002 and in 2001, and $406,000 in
2000. The Company initially invested $22.7 million in BOLI in September 2000 and
made an additional investment of $6.2 million in September 2001. Prior to this
investment being made, the cash invested in BOLI had been invested primarily in
interest-earning assets. Noninterest income also included $299,000 from net
gains on the sale of investment securities in 2002, compared to $599,000 and
$42,000 for the years ending December 31, 2001 and 2000, respectively.
NONINTEREST EXPENSE
The Company reported noninterest expense of $32.7 million, $31.4 million and
$31.0 million for the years ended December 31, 2002, 2001 and 2000,
respectively. Compensation and employee benefits, the largest single component
of noninterest expense, was $20.0 million for the year ended December 31, 2002
compared to $19.0 million and $19.3 million for the years ended December 31,
2001 and 2000, respectively. Aggregate salary and wage expenses were unchanged
when comparing 2002 to 2001 while this expense was approximately 8.0% less in
2001 than it was in 2000, due primarily to the Company's process improvements
program undertaken in 2001 which resulted in reductions of the average number of
full-time equivalent employees to 343 for 2002 compared to 363 for 2001 and 416
for 2000. While the Company's salary expense was held flat in 2002 compared to
2001 and was reduced in 2001 compared to 2000, salary expense levels were offset
by increases in employee benefits expenses related to the Company's pension plan
and ESOP plan. After being fully funded for several years, funding was resumed
for the pension plan year beginning July 1, 2001 and ending June 30, 2002.
Pension expense was $889,000 for the calendar year ending December 31, 2002
compared to $134,000 for 2001 and $-0- for 2000, respectively. Due to the cost
of the numerous benefit plans offered by the Company, the Board of Directors in
December 2002 elected to freeze benefits under the pension plan as of March 1,
2003. ESOP expense is recorded based on the shares to be allocated for the year
to participants in the plan multiplied by the average share price for the year.
The average share price for 2002 increased to $14.07. As a result, $177,000 of
additional ESOP expense was recorded in 2002 compared to 2001. ESOP expense
increased by $412,000 in 2001 compared to 2000 due to the increase in the
Company's average
21
CFS BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CONTINUED
share price. Also included in compensation and employee benefits expense was
$1.5 million in 2002 compared to $1.4 million in both 2001 and 2000 from the
Company's Recognition and Retention Plan approved by the shareholders in
February 1999. Aggregate net occupancy expense was $4.3 million for the year
ended December 31, 2002 compared to $4.5 million and $4.8 million for the years
ended December 31, 2001 and 2000, respectively. Data processing expense amounted
to $1.7 million for the year ended December 31, 2002 compared to $1.4 million
and $1.0 million for the years ended December 31, 2001 and 2000, respectively.
Data processing expense for 2002 and 2001 included additional costs of
outsourcing some of the processing associated with a new proof of deposit system
implemented in 2001. Federal Deposit Insurance Corporation ("FDIC") insurance
premiums amounted to $164,000 for the year ended December 31, 2002 compared to
$183,000 and $197,000 for the years ended December 31, 2001 and 2000,
respectively. Marketing expenses were $904,000 for 2002 compared to $853,000 and
$715,000 for 2001 and 2000, respectively. Other general and administrative
expenses amounted to $5.5 million for the year ended December 31, 2002 compared
to $5.4 million and $5.0 million for the years ended December 31, 2001 and 2000,
respectively. Other general and administrative expenses for 2002 included
$258,000 compared to $436,000 and $550,000 in 2001 and 2000, respectively, for
fees and expenses paid to law firms representing the Company in the "Goodwill"
suit against the U.S. Government. See note 16 in the Consolidated Financial
Statements for additional information relating to this suit.
INCOME TAX EXPENSE
The Company's income tax expense amounted to $3.0 million, $4.8 million and $6.8
million for the years ended December 31, 2002, 2001 and 2000, respectively. The
Company's effective rates were 29.2%, 30.0%, and 38.9% for the years ended
December 31, 2002, 2001, and 2000, respectively. The Company has implemented
several tax strategies in the past few years that have resulted in the
significant reductions in its effective tax rates.
ASSET/LIABILITY MANAGEMENT
The Bank, like other financial institutions, is subject to interest rate risk to
the extent that its interest-bearing liabilities with short- and
intermediate-term maturities reprice more rapidly, or on a different basis, than
its interest-earning assets. Management attempts to moderate the effect of
changes in interest rates on the Bank's net portfolio value ("NPV"). The NPV
represents the excess of the present value of expected cash flows from assets
over the present value of expected cash flows for liabilities. On a quarterly
basis, management reviews the calculations of NPV as adjusted for expected cash
flows from off-balance sheets contracts, if any. Management of the Bank's assets
and liabilities is dependent, in part, on the market-place and customer
preferences. However, management attempts to maintain the mix on the Bank's
interest rate-sensitive assets and liabilities within limits established by the
Board of Directors on the amount of change in NPV which is acceptable assuming
certain interest rate changes.
In an attempt to manage its exposure to changes in interest rates, management
closely monitors the Bank's interest rate risk. The Bank has an asset/liability
management committee consisting of senior officers and an advisory director
which meets weekly to review the Bank's interest rate risk position and to make
recommendations for adjustments to the Bank's Board of Directors. In addition,
the Board reviews simulations of how the Company's earnings could be affected
under various interest rate scenarios.
In managing its asset/liability mix, the Bank, at times, depending on the
relationship between long- and short-term interest rates, market conditions and
consumer preference, places greater emphasis on maximizing its net interest
margin than on strictly matching the interest rate sensitivity of its assets and
liabilities. The Board believes that the increased net income resulting from a
difference in the maturity of its asset and liability portfolios can, during
periods of stable interest rates, provide high enough returns to justify the
increased exposure which can result from such a difference in maturities.
22
CFS BANCORP, INC.
While maintaining its interest rate spread objectives, the Bank attempts to
reduce interest rate risk with a variety of strategies designed to maintain what
the Bank believes to be an appropriate relationship between its assets and
liabilities. First, the Bank emphasizes real estate mortgage loans and
commercial loans with fixed rates of interest for an initial term of three or
five years, that convert to a rate based on the one, three and five-year
constant maturity of United States Treasury obligations as the index after the
initial terms and for subsequent adjustment periods. At December 31, 2002, the
Bank had approximately $613.6 million of adjustable-rate mortgage loans in its
portfolio. Second, the Bank's mortgage-backed securities portfolio is made up
primarily of securities that have expected average lives of five years or less
at time of purchase. Third, the Bank has a substantial amount of passbook
savings, demand deposit and money market accounts which the Bank believes may be
less sensitive to changes in interest rates than certificate accounts. At
December 31, 2002 the Bank had $456.3 million of these types of accounts.
Fourth, the Bank's liability management program seeks to lengthen the maturities
of customer deposits by aggressively pricing longer-term certificates of
deposit.
The following table presents, as of December 31, 2002 and 2001, an analysis of
the Bank's interest rate risk as measured by changes in NPV for instantaneous
and sustained parallel shifts in the yield curve in 100 basis point (1%)
increments, up 300 basis points and down 100 basis points in 2002 and 2001 in
accordance with Office of Thrift Supervision ("OTS") regulations. As illustrated
in the table, the Bank's NPV is more sensitive to, and may be more negatively
impacted by, declining rates than rising rates. This occurs principally because,
as rates rise, the market value of fixed-rate loans declines due to both the
rate increase and slowing prepayments. When rates decline, the Bank does not
experience a significant rise in market value for these loans because borrowers
prepay at relatively high rates. The value of the Bank's borrowings in a rising
rate environment decline by a greater percentage than loans resulting in a
greater NPV in a rising rate environment.
NET PORTFOLIO VALUE
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, 2002 YEAR ENDED DECEMBER 31, 2001
- --------------------------------------------------------------------------------------------------------------------
ASSUMED CHANGE IN
INTEREST RATES (BASIS POINTS) $ AMOUNT $ CHANGE % CHANGE $ AMOUNT $ CHANGE % CHANGE
- --------------------------------------------------------------------------------------------------------------------
+300 $ 127,883 $ 8,001 7% $ 103,298 $ (45,544) (31)%
+200 134,727 14,845 12 122,708 (26,134) (18)
+100 133,656 13,775 11 139,189 (9,654) (6)
0 119,882 - - 148,842 - -
- -100 104,896 (14,986) (13) 140,725 (8,118) (5)
As noted above, decreases in interest rates would have more of an effect on the
percentage change in the Bank's NPV than increases. For instance, at December
31, 2002 for a 200 basis point increase in interest rates, net portfolio value
is anticipated to rise by 12% with the remaining NPV at 8.37% of the Bank's
total assets. However, a 100 basis point decrease in rates will change the NPV
by (13)% with the remaining NPV still at 6.36% of the Bank's total assets.
The above analysis includes the assets and liabilities of the Bank only.
Inclusion of Holding Company assets and liabilities would increase NPV nominally
at all levels.
23
CFS BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CONTINUED
LIQUIDITY AND COMMITMENTS
The Company's liquidity, represented by cash and cash equivalents, is a product
of operating, investing and financing activities. The Company's primary
historical sources of funds are 1) deposits, 2) scheduled payments of amortizing
loans and mortgage-backed securities, 3) prepayments and maturities of
outstanding loans and mortgage-backed securities, 4) maturities of investment
securities and other short-term investments, 5) funds provided from operations,
and 6) borrowings from the Federal Home Loan Bank ("FHLB"). Scheduled payments
from the amortization of loans, mortgage-backed securities, maturing investment
securities, and short-term investments are relatively predictable sources of
funds, while deposit flows and loan prepayments are greatly influenced by market
rates of interest, economic conditions and competitive rate offerings. 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. At December 31, 2002 the Company had cash and cash equivalents of
$210.1 million.
Liquidity management is both a daily and long-term function. Excess liquidity is
generally invested in short-term investments such as federal funds sold. On a
longer-term basis, the Company invests funds not used for maintaining and
expanding the loan portfolio in mortgage-backed securities. 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 investment securities.
At December 31, 2002 total commitments to purchase or originate loans
outstanding were $57.7 million. Certificates of deposit scheduled to mature in
one year or less at December 31, 2002 totaled $377.2 million. Investment
securities scheduled to mature or permitted to be called for redemption in one
year or less at December 31, 2002 totaled $20.7 million. Based on historical
experience, management believes that a significant portion of maturing deposits
will remain with the Bank. The Company anticipates that it will continue to have
sufficient funds to meet its current commitments.
The liquidity needs of CFS Bancorp (the "parent company") consist primarily of
operating expenses, dividend payments to stockholders and stock repurchases. The
primary sources of liquidity for the parent company are securities
available-for-sale and dividends from the Bank. On a parent company only basis,
at December 31, 2002, the Company had $6.4 million in securities
available-for-sale and, for the year ended December 31, 2001 received $12.5
million in dividends from the Bank. However, these sources can also be
supplemented by fees assessed by the Company to the Bank. Under certain banking
regulations, the Bank is required to file a notice or, under certain
circumstances, an application with the OTS prior to paying any dividends to the
Company. In addition, the Bank is required to maintain certain regulatory
capital requirements. See note 10 to the Consolidated Financial Statements.
The Company has not used, and has no intention of using, any significant
off-balance sheet financing arrangements for liquidity purposes. The Company's
financial instruments with off-balance sheet risk are limited to obligations to
fund loans to customers and participation loans with other financial
institutions pursuant to existing commitments. In addition, the Company has not
had, and has no intention to have, any significant transactions, arrangements or
other relationships with any unconsolidated, limited purpose entities that could
materially affect our liquidity or capital resources. The Company has not traded
in and has no intention of trading in commodity contracts.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related financial data presented
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results generally in terms of historical dollars, without considering changes in
relative purchasing power over time due to inflation. Unlike most industrial
companies, virtually all of the Company's assets and liabilities are monetary in
nature. As a result, interest rates generally have a more significant impact on
a financial institution's performance than does the effect of inflation.
24
CFS BANCORP, INC.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The Company's consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States and follow general
practices within the banking industry. Application of these principles requires
management to make estimates, assumptions, and judgments that affect the amounts
reported in the financial statements and accompanying notes. These estimates,
assumptions, and judgments are based on information available as of the date of
the financial statements. Future changes in information may affect these
estimates, assumptions, and judgments, which, in turn, may affect amounts
reported in the financial statements.
Most accounting policies are not considered by management to be critical
accounting policies. All significant accounting policies are presented in Note 1
to the consolidated financial statements. These policies, along with the
disclosures presented in the other financial statement notes and in this
discussion, provide information on how significant assets and liabilities are
valued in the financial statements and how those values are determined.
Management has determined that its accounting policies with respect to the
allowance for loan losses is the accounting area requiring subjective or complex
judgments that is most important to the Company's financial position and results
of operations, and therefore, is its only critical accounting policy. The
allowance for loan losses represents management's estimate of probable credit
losses inherent in the loan portfolio. Determining the amount of the allowance
for loan losses is considered a critical accounting estimate because it requires
significant judgment and the use of estimates related to the amount and timing
of expected future cash flows on impaired loans, estimated losses on pools of
homogeneous loans based on historical loss experience, and consideration of
current economic trends and conditions, all of which may be susceptible to
significant change. The loan portfolio also represents the largest asset type on
the consolidated statement of condition. Note 1 to the consolidated financial
statements describes the methodology used to determine the allowance for loan
losses. In addition, a discussion of the factors driving changes in the amount
of the allowance for loan losses is included in the Provision for Losses for
Loans section on page 20.
FORWARD-LOOKING STATEMENTS
This Annual Report contains certain forward-looking statements and information
relating to the Company that are based on the beliefs of management as well as
assumptions made by and information currently available to management. These
forward-looking statements include, but are not limited to, statements regarding
the anticipated net earnings effect of the reconfiguration of the balance sheet
and the loan portfolio, tax strategies, general economic conditions, changes in
interest rate levels and maturities, marketing initiatives, the adequacy of loan
loss provisions, changes in liquidity levels, deposit retention rates,
bank-owned life insurance, asset liability management strategies, the
outsourcing of investment services, the sale of the insurance agency, and the
process improvement program. In addition, the words "anticipate," "believe,"
"estimate," "expect," "intend," "should" and similar expressions, or the
negative thereof, as they relate to the Company or the Company's management, are
intended to identify forward-looking statements. Such statements reflect the
current views of the Company with respect to future events and are subject to
certain risks, uncertainties and assumptions. Should one or more of these risks
or uncertainties materialize or should underlying assumptions prove incorrect,
actual results may vary materially from those described herein as anticipated,
believed, estimated, expected or intended. The Company does not intend to update
these forward-looking statements.
25
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
CFS Bancorp, Inc.
We have audited the accompanying consolidated statements of condition of CFS
Bancorp, Inc. (the Company) as of December 31, 2002 and 2001, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2002. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, based on our audits, the financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
CFS Bancorp, Inc. as of December 31, 2002 and 2001, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States.
/s/ Ernst & Young LLP
Chicago, Illinois
February 19, 2003
26
CONSOLIDATED STATEMENTS OF CONDITION
CFS BANCORP, INC.
DECEMBER 31
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) 2002 2001
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and amounts due from depository institutions $ 30,312 $ 28,250
Interest-bearing deposits 105,479 137,978
Federal funds sold 74,350 105,839
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 210,141 272,067
Investment securities available-for-sale 39,064 47,225
Mortgage-backed securities available-for-sale 296,638 276,158
Mortgage-backed securities held-to-maturity (fair value: 2002 - $21,977;
2001 - $37,744) 21,402 37,034
Loans receivable, net 930,348 883,352
Investment in FHLB stock, at cost 25,780 26,165
Office properties and equipment 13,835 14,983
Accrued interest receivable 6,597 6,887
Real estate owned 893 1,128
Investment in Bank-owned life insurance 31,009 30,052
Prepaid expenses and other assets 9,055 9,083
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,584,762 $ 1,604,134
===========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 954,222 $ 945,948
Borrowed money 449,431 462,658
Advance payments by borrowers for taxes and insurance 4,410 4,497
Other liabilities 16,037 19,747
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,424,100 1,432,850
Stockholders' equity:
Preferred stock, $.01 par value:
Authorized shares - 15,000,000
Issued and outstanding shares - none at December 31, 2002 and 2001 - -
Common stock, $.01 par value:
Authorized shares - 85,000,000
Issued shares -23,423,306 at December 31, 2002 and 2001
Outstanding shares - 12,674,597 and 13,626,146 at December 31, 2002
and 2001, respectively 234 234
Additional paid-in capital 189,786 189,547
Retained earnings, substantially restricted 107,598 105,064
Treasury stock, at cost: 10,748,709 and 9,797,160 shares at December 31, 2002
and 2001, respectively (125,650) (112,167)
Unearned common stock acquired by ESOP (8,356) (9,570)
Unearned common stock acquired by RRP (2,827) (4,543)
Accumulated other comprehensive income (loss), net of tax (123) 2,719
- ---------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 160,662 171,284
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 1,584,762 $ 1,604,134
===========================================================================================================================
See accompanying notes.
27
CFS BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------
Interest income:
Loans $ 62,719 $ 71,063 $ 74,109
Mortgage-backed securities 17,491 21,270 26,403
Investment securities 1,720 8,169 14,523
Other 4,631 7,605 3,841
- --------------------------------------------------------------------------------------------------------------------
Total interest income 86,561 108,107 118,876
Interest expense:
Deposits 25,717 40,847 43,095
Borrowed money 27,351 29,441 29,938
- --------------------------------------------------------------------------------------------------------------------
Total interest expense 53,068 70,288 73,033
- --------------------------------------------------------------------------------------------------------------------
Net interest income before provision for losses on loans 33,493 37,819 45,843
Provision for losses on loans 1,956 1,150 3,375
- --------------------------------------------------------------------------------------------------------------------
Net interest income after provision for losses on loans 31,537 36,669 42,468
Noninterest income:
Loan fees 1,393 1,319 1,426
Deposit fees 4,112 2,563 1,391
Insurance commissions 1,210 1,067 902
Investment commissions 770 873 1,442
Bank-owned life insurance income 1,524 1,500 406
Net gain on sale of investment securities 299 599 42
Net gain on sale of branches -- 2,014 --
Gain on sale of insurance agency 1,084 -- --
Other income 921 793 472
- --------------------------------------------------------------------------------------------------------------------
Total noninterest income 11,313 10,728 6,081
Noninterest expense:
Compensation and employee benefits 20,070 19,028 19,303
Net occupancy expense 2,362 2,471 2,430
Furniture and equipment expense 1,925 2,037 2,331
Data processing 1,743 1,448 1,013
Federal insurance premiums 164 183 197
Marketing 904 853 715
Other general and administrative expenses 5,506 5,413 5,046
- --------------------------------------------------------------------------------------------------------------------
Total noninterest expense 32,674 31,433 31,035
- --------------------------------------------------------------------------------------------------------------------
Income before income taxes 10,176 15,964 17,514
Income tax expense 2,971 4,791 6,821
- --------------------------------------------------------------------------------------------------------------------
Net income $ 7,205 $ 11,173 $ 10,693
====================================================================================================================
Per share data:
Basic earnings per share $ .60 $ .80 $ .66
Diluted earnings per share .58 .77 .66
Weighted-average shares outstanding 12,000,589 14,038,096 16,125,560
Weighted-average diluted shares outstanding 12,492,149 14,453,344 16,322,212
See accompanying notes.
28
CFS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
UNEARNED UNEARNED
COMMON COMMON ACCUMULATED
ADDITIONAL STOCK STOCK OTHER
COMMON PAID-IN RETAINED TREASURY ACQUIRED ACQUIRED COMPREHENSIVE
(DOLLARS IN THOUSANDS) STOCK CAPITAL EARNINGS STOCK BY ESOP BY RRP INCOME (LOSS) TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2000 $ 232 $ 187,138 $ 93,927 $ (48,079) $ (11,962) $ (6,389) $(9,434) $205,433
Net income for 2000 -- -- 10,693 -- -- -- -- 10,693
Other comprehensive income,
net of tax:
Change in unrealized appreciation
on available-for-sale securities,
net of reclassification adjustment -- -- -- -- -- -- 6,410 6,410
Total comprehensive income -- -- -- -- -- -- -- 17,103
Purchase of treasury stock -- -- -- (20,750) -- -- -- (20,750)
Shares earned under ESOP -- (72) -- -- 1,196 -- -- 1,124
Amortization of award under RRP -- (12) -- -- -- 370 -- 358
Exercise of stock options 2 812 -- -- -- -- -- 814
Tax benefit related to stock options -- 110 -- -- -- -- -- 110
exercised
Liability for common stock in
Rabbi Trust -- 1,014 -- -- -- -- -- 1,014
Dividends declared on common stock
($.34 per share) -- -- (5,838) -- -- -- -- (5,838)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 234 188,990 98,782 (68,829) (10,766) (6,019) (3,024) 199,368
Net income for 2001 -- -- 11,173 -- -- -- -- 11,173
Other comprehensive income, net of tax:
Change in unrealized appreciation on
available-for-sale securities, net of
reclassification adjustment -- -- -- -- -- -- 5,743 5,743
Total comprehensive income -- -- -- -- -- -- -- 16,916
Purchase of treasury stock -- -- -- (43,634) -- -- -- (43,634)
Shares earned under ESOP -- 340 -- -- 1,196 -- -- 1,536
Amortization of award under RRP -- (52) -- -- -- 1,476 -- 1,424
Exercise of stock options -- 136 -- 296 -- -- -- 432
Tax benefit related to stock options -- 133 -- -- -- -- -- 133
exercised
Dividends declared on common stock
($.36 per share) -- -- (4,891) -- -- -- -- (4,891)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 234 189,547 105,064 (112,167) (9,570) (4,543) 2,719 171,284
Net income for 2002 -- -- 7,205 -- -- -- -- 7,205
Other comprehensive income, net of tax:
Change in unrealized appreciation on
available-for-sale securities, net of
reclassification adjustment -- -- -- -- -- -- (2,842) (2,842)
Total comprehensive income -- -- -- -- -- -- -- 4,363
Purchase of treasury stock -- -- -- (14,626) -- -- (14,626)
Shares earned under ESOP -- 494 -- -- 1,214 -- -- 1,708
Amortization of award under RRP -- (62) -- -- -- 1,716 -- 1,654
Exercise of stock options -- (285) -- 1,143 -- -- -- 858
Tax benefit related to stock options -- 92 -- -- -- -- -- 92
exercised
Dividends declared on common stock
($.36 per share) -- -- (4,671) -- -- -- -- (4,671)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 $ 234 $ 189,786 $ 107,598 $(125,650) $ (8,356) $ (2,827) $ (123) $ 160,662
====================================================================================================================================
</Table>
See accompanying notes.
29
CFS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------
Operating activities
Net income $ 7,205 $ 11,173 $ 10,693
Adjustments to reconcile net income to net cash provided (used) by
operating activities:
Provision for losses on loans 1,956 1,150 3,375
Depreciation expense 1,787 1,944 2,135
Deferred income taxes (1,582) (254) (825)
Amortization of cost of stock benefit plans 3,362 2,960 2,538
Tax benefit from exercises of nonqualified stock options 92 133 110
Change in deferred income 1,327 263 (47)
Decrease (increase) in interest receivable 290 3,728 (937)
(Decrease) increase in accrued interest payable (184) (958) 204
Proceeds from sale of loans held-for-sale 12,128 5,873 1,327
Origination of loans held-for-sale (11,484) (6,229) (2,674)
Gain on sale of branches -- (2,014) --
Net gain on sale of securities available-for-sale (299) (599) (42)
Purchase of Bank-owned life insurance -- (6,192) (22,689)
Decrease (increase) in prepaid expenses and other assets 6,060 (1,345) (5,146)
(Decrease) increase in other liabilities (3,879) (2,545) 3,652
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 16,779 7,088 (8,326)
Investing activities
Available-for-sale investment securities:
Purchases $(443,023) $(453,709) $ (45,339)
Repayments 448,026 422,436 45,060
Sales 2,757 19,499 587
Held-to-maturity investment securities:
Repayments and maturities -- 171,130 6,000
Available-for-sale mortgage-backed securities:
Purchases (225,603) (83,058) --
Repayments 187,905 80,411 30,256
Sales 10,194 15,046 --
Held-to-maturity mortgage-backed securities:
Repayments 15,288 40,263 22,209
Purchase of Federal Home Loan Bank stock (27) (96) (5,357)
Redemption of Federal Home Loan Bank stock 412 856 880
Loan originations and principal payments on loans, net (53,291) 112,443 (118,989)
Additions to real estate owned (84) (264) (96)
Proceeds from sale of real estate owned 2,687 2,069 1,368
Purchases of properties and equipment (1,746) (1,262) (2,160)
Disposal of properties and equipment 1,107 693 890
- ------------------------------------------------------------------------------------------------------------------------
Net cash flows (used in) provided by investing activities (55,398) 326,457 (64,691)
30
CFS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEAR ENDED DECEMBER 31
2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from exercise of stock options 858 432 814
Dividends paid on common stock (4,642) (5,143) (5,966)
Purchase of treasury stock (14,626) (43,634) (20,750)
Net increase (decrease) in checking, passbook, and money
market accounts 55,729 46,766 (1,053)
Net (decrease) increase in certificates of deposit (47,312) 4,680 9,933
Net (decrease) increase in advance payments by borrowers for
taxes and insurance (87) (1,356) 115
Decrease in checking, passbook and money market accounts in
connection with sale of branches -- (10,823) --
Decrease in certificates of deposit in connection with sale of -- (28,252) --
branches
Premium on deposits received in connection with sale of branches -- 2,014 --
Net (decrease) increase of borrowed money (13,227) (85,418) 53,377
- ----------------------------------------------------------------------------------------------------------------------
Net cash flows (used in) provided by financing activities (23,307) (120,734) 36,470
- ----------------------------------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (61,926) 212,811 (36,547)
Cash and cash equivalents at beginning of year 272,067 59,256 95,803
- ----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 210,141 $ 272,067 $ 59,256
======================================================================================================================
Supplemental disclosure of noncash activities:
Loans transferred to real estate owned $ 2,368 $ 1,875 $ 1,721
See accompanying notes.
31
CFS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE
DATA) DECEMBER 31, 2002
-------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
CFS Bancorp, Inc. (the Company) is a Delaware corporation, incorporated in March
1998 for the purpose of becoming the holding company for Citizens Financial
Services, FSB (the Bank). The Company is headquartered in Munster, Indiana. The
Bank is a federal savings bank offering a full range of financial services to
customers who are primarily located in Northwest Indiana and the south and
southwest Chicagoland area. The Bank is principally engaged in the business of
attracting deposits from the general public and using such deposits to originate
residential and commercial mortgage loans.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts and transactions of
the Company and its wholly-owned subsidiary, the Bank. The Bank has the
following subsidiaries: CFS Insurance Agency, Inc., CFS Investment Services,
Inc., CFS Holdings, Ltd., and Suburban Mortgage Services, Inc. Significant
intercompany accounts and transactions have been eliminated in consolidation.
Certain reclassifications have been made to the 2001 and 2000 consolidated
financial statements to conform to the 2002 presentation.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include amounts due from depository banks and federal
funds sold. Generally, federal funds sold are purchased and sold for one-day
periods.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
Management determines the classification of securities at the time of purchase.
Debt securities are classified as held-to-maturity and carried at amortized cost
if management has the intent and ability to hold the securities to maturity.
Securities not classified as held-to-maturity are classified as
available-for-sale and are carried at fair value, with the unrealized gains and
losses, net of tax, included in Accumulated Other Comprehensive Income. The
Company has no trading account securities.
The amortized cost of debt securities is adjusted for amortization of premiums
and accretion of discounts to maturity, or in the case of mortgage-related
securities, over the estimated life of the security using the level-yield
method. Such amortization is included in interest income from securities. A
decline in the market value of any available-for-sale or held-to-maturity
security below amortized cost that is deemed to be other than temporary results
in a charge to earnings thereby establishing a new cost basis for such security.
Gains and losses on sales of securities are determined by specifically
identifying the carrying amount of the security sold.
LOANS
Loans are carried at the principal amount outstanding, net of unearned income,
including net deferred loan origination and commitment fees, and portions
charged off. Interest on loans is recorded as income as borrowers' monthly
payments become due. Interest on loans is not accrued on loans which are 90 days
or more past due, or for loans which management believes, after giving
consideration to economic and business conditions and collection efforts,
collection of interest is doubtful. Loans held-for-sale, if any, are carried at
the lower of aggregate cost or market value.
LOAN FEES AND COSTS
Loan origination and commitment fees and direct loan origination costs are
deferred and amortized as an adjustment of the related loan's yield. The Bank is
accreting these amounts over the contractual life of the related loans.
Remaining deferred loan fees are reflected in income upon sale or repayment of
the loan.
32
CFS BANCORP, INC.
ALLOWANCE FOR LOSSES ON LOANS
The allowance for losses on loans is maintained at a level believed adequate by
management to absorb losses inherent in the loan portfolio. Management's
determination of the adequacy of the allowance is based on an evaluation of the
portfolio and, among other things, the borrowers' ability to repay, estimated
collateral values, prior loss experience, growth and composition of the
portfolio, assessment of individual problem loans, and current economic events
in specific industries and regions including unemployment levels, regulatory
guidance and general economic conditions. Determination of the allowance for
losses on loans is inherently subjective as it requires significant estimates,
including the amounts and timing of expected future cash flows on impaired
loans, estimated losses on pools of homogeneous loans based on historical loss
experience, and consideration of current economic trends, all of which may be
susceptible to significant change. Loan losses are charged off against the
allowance, while recoveries of amounts previously charged off are credited to
the allowance. A provision for losses on loans is expensed based on management's
periodic evaluation of the factors previously mentioned. Future changes to the
allowance may be necessary based on changes in economic conditions, financial
condition of borrowers, and loan loss experience.
Management considers a loan to be impaired when it is probable that the Bank
will be unable to collect all amounts due according to the contractual terms of
the note agreement, including principal and interest. Loans subject to
impairment valuation are defined as nonaccrual and restructured loans exclusive
of homogeneous loans such as single-family residential and consumer loans.
Specific allowances are established for impaired loans for which the recorded
investment in the loan exceeds the value of the loan. The value of the loan is
determined based on the fair value of the collateral, if the loan is
collateral-dependent, at the present value of expected future cash flows
discounted at the loan's effective interest rate or at the observable market
price of the impaired loan. Interest income on impaired loans is recorded when
cash is received and only if principal is considered to be fully collectible.
Commercial loans and loans secured by real estate are generally charged off to
the extent principal and interest due exceed the net realizable value of the
collateral with the charge off occurring when the loss is reasonably
quantifiable. Consumer loans are subject to mandatory charge off at a specific
date, typically at the end of the month in which the loan becomes 120 days past
due.
REAL ESTATE OWNED
Real estate owned is comprised of property acquired through a foreclosure
proceeding or acceptance of a deed in lieu of foreclosure. Real estate owned is
recorded at fair value at the date of foreclosure. After foreclosure, valuations
are periodically performed by management, and the real estate is carried at the
lower of cost or fair value minus estimated costs to sell.
OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are stated at cost less accumulated
depreciation. Provisions for depreciation of office properties and equipment are
computed using the straight-line method over the estimated useful lives of the
related assets. Long-lived assets are periodically evaluated for impairment.
ADVERTISING COSTS
All advertising costs incurred by the Company are expensed in the period in
which they are incurred.
EARNINGS PER SHARE
Basic earnings per common share (EPS) is computed by dividing net income by the
weighted-average number of common shares outstanding for the period. Employee
Stock Ownership Plan (ESOP) shares not committed to be released and Recognition
and Retention Plan (RRP) shares which have not vested are not considered to be
outstanding. The basic EPS calculation excludes the dilutive effect of all
common stock equivalents. Diluted EPS reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock. The Company's potentially dilutive common shares
represent shares issuable under its
33
CFS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, 2002
stock option and RRP plans. Such common stock equivalents are computed based on
the treasury stock method using the average market price for the period.
STOCK BASED COMPENSATION
The Company accounts for its stock options in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB
No. 25). Under APB No. 25, as the exercise price of the Company's employees'
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized. Compensation expense for shares
granted under the RRP is ratably recognized over the period of service, usually
the vesting period, based on the fair value of the stock on the date of grant.
Pursuant to Financial Accounting Standards Board (FASB) Statement No. 123,
Accounting for Stock-Based Compensation (FAS No. 123), pro forma net income and
pro forma earnings per share are presented in the following table as if the fair
value method of accounting for stock-based compensation plans had been utilized.
YEAR ENDED DECEMBER 31
2002 2001 2000
- ---------------------------------------------------------------
Net income (as reported) $ 7,205 $11,173 $10,693
Pro forma net income 6,442 10,494 10,089
Diluted earnings per share
(as reported) .58 .77 .66
Pro forma diluted earnings
per share .52 .73 .62
The pro forma results above may not be representative of the effect reported in
net income for future years.
The fair value of the option grants for the years ended December 31, 2002, 2001,
and 2000 was estimated using the Black Scholes option value model, with the
following assumptions: dividend yield of approximately 2.8% in 2002, 3.6% in
2001, and 3.6% for 2000, expected volatility of 30.2% in 2002, 30.2% in 2001,
and 26.0% for 2000, risk-free interest of 3.6%, 5.03%, and 5.87% for 2002, 2001,
and 2000, respectively; and an original expected life of ten years for all
options granted.
For additional details on the Company's stock-based compensation plans, see Note
12 to the consolidated financial statements.
INCOME TAXES
The Company provides for deferred tax assets and liabilities, which represent
the difference between the financial statement and tax basis of assets and
liabilities and are measured using the enacted tax rates and laws applicable to
periods when the differences are expected to reverse. Deferred taxes arise
because certain transactions affect the determination of taxable income for tax
return purposes differently than for book purposes. Current tax expense is
provided based upon the actual tax liability incurred for tax return purposes.
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 included in net income. The Company includes unrealized gains or losses,
net of tax, on securities available-for-sale in other comprehensive income.
SEGMENT REPORTING
Operating segments are components of a business about which separate financial
information is available and that are evaluated regularly by the chief operating
decision-maker in deciding how to allocate resources and assessing performance.
Public companies are required to report certain financial information about
operating segments in interim and annual financial statements. Senior management
evaluates the operations of the Company as one operating segment, community
banking, due to the materiality of the banking operation to the Company's
financial condition and results of operations, taken as a whole. As a result,
separate segment disclosures are not required. The Company offers the following
products and services to external customers: deposits, loans, mortgage-related
services, investment and insurance services, and trust services. Revenues for
the significant products and services are disclosed separately in the
consolidated statements of income.
34
CFS BANCORP, INC.
DERIVATIVE FINANCIAL INSTRUMENTS
On January 1, 2002, the Company adopted FASB Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended (FAS No. 133). The
adoption of FAS No. 133 did not have a material impact on the financial position
or results of operations of the Company, as the Company does not utilize
derivatives.
NEW ACCOUNTING PRONOUNCEMENTS
GOODWILL AND OTHER INTANGIBLE ASSETS - Effective January 1, 2002, the Company
adopted FASB Statement No. 142, Goodwill and Other Intangible Assets (FAS No.
142), which addresses the accounting and reporting for acquired goodwill and
other intangible assets and supersedes APB Opinion 17. Under FAS No. 142,
goodwill and intangible assets deemed to have indefinite lives are no longer
amortized but reviewed for impairment annually, or more frequently if certain
indicators arise. In addition, the Statement requires intangible assets with
identifiable lives to be evaluated periodically and to continue to be amortized
over their useful lives. The Company had no goodwill and other intangible assets
as of December 31, 2002.
LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF - Effective January 1,
2002, the Company adopted FASB Statement No. 144, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of (FAS No. 144),
which 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
adoption of FAS No. 144 had no material impact on the Company's financial
position or results of operations.
ACQUISITIONS OF CERTAIN FINANCIAL INSTITUTIONS - In October 2002, the FASB
issued FASB Statement No. 147, Acquisitions of Certain Financial Institutions
(FAS No. 147), which provides guidance on the accounting for the acquisition of
a financial institution and supersedes the specialized accounting guidance
provided in FAS No. 72, Accounting for Certain Acquisitions of Banking or Thrift
Institutions. FAS No. 147 became effective upon issuance and requires companies
to cease amortization of unidentified intangible assets associated with certain
branch acquisitions and reclassify these assets to goodwill. FAS No. 147 also
modifies FAS No. 144 to include in its scope long-term customer-relationship
intangible assets and thus subject those intangible assets to the same
undiscounted cash flow recoverability test and impairment loss recognition and
measurement provisions required for other long-lived assets.
While FAS No. 147 may affect how future business combinations, if undertaken,
are accounted for and disclosed in the financial statements, the issuance of the
new guidance had no effect on the Company's results of operations, financial
position, or liquidity as the Company does not have any assets subject to the
specialized accounting guidance provided in FAS No. 72 or FAS No. 147.
ACCOUNTING FOR STOCK-BASED COMPENSATION - In December 2002, the FASB issued FASB
Statement No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure (FAS No. 148), which provides guidance on how to transition from the
intrinsic value method of accounting for stock-based employee compensation under
APB No. 25 to FAS No. 123's fair value method of accounting, if a company so
elects. The Statement also amends the disclosure provisions of FAS No. 123 and
APB No. 25 to require disclosure in the summary of significant accounting
policies of the effects of an entity's accounting policy with respect to
stock-based employee compensation on reported net income and earnings per share
in annual and interim financial statements. While FAS No. 148 does not amend FAS
No. 123 to require companies to account for employee stock options using the
fair value method, the disclosure provisions of FAS No. 148 are applicable to
all companies with stock-based employee compensation, regardless of
35
CFS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, 2002
whether they account for that compensation using the fair value method of FAS
No. 123 or the intrinsic value method of APB No. 25. Although the recognition
provisions of FAS No. 148 are not applicable to the Company at this time as it
continues to account for stock-based compensation using the intrinsic value
method, the Company has provided the required disclosures in Note 1 to the
consolidated financial statements.
GUARANTEES - In November 2002, the FASB issued FASB Interpretation No. 45 (FIN
45), Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others. This interpretation
expands the disclosures to be made by a guarantor in its financial statements
about its obligations under certain guarantees and requires the guarantor to
recognize a liability for the fair value of an obligation assumed under a
guarantee. FIN 45 clarifies that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The disclosure requirements of FIN 45 are
effective for the Company as of December 31, 2002 and require disclosure of the
nature of the guarantee, the maximum potential amount of future payments that
the guarantor could be required to make under the guarantee, and the current
amount of the liability, if any, for the guarantor's obligations under the
guarantee. The recognition requirements of FIN 45 are to be applied
prospectively to guarantees issued or modified after December 31, 2002.
Significant guarantees that have been entered into by the Company are disclosed
in Note 15 to the consolidated financial statements. The Company does not expect
the requirements of FIN 45 to have a material impact on its results of
operations, financial position, or liquidity.
CONSOLIDATION OF VARIABLE INTEREST ENTITIES - In January 2003 the FASB issued
FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest
Entities. The objective of this interpretation is to provide guidance on how to
identify a variable interest entity (VIE) and determine when the assets,
liabilities, noncontrolling interest, and results of operations of a VIE need to
be included in a company's consolidated financial statements. Because the
Company does not have interest in any VIE's, the Company does not expect the
adoption of FIN 46 to have a material impact on its results of operations,
financial position, or liquidity.
36
CFS BANCORP, INC.
2. INVESTMENT SECURITIES
The amortized cost of investment securities and their fair values are as
follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------------------------------------------
Available-for-sale at December 31, 2002:
Callable agency securities, corporate bonds, and commercial paper $ 30,767 $ 320 $ - $ 31,087
Trust preferred securities 4,931 - 531 4,400
Equity securities 4,400 83 906 3,577
- -----------------------------------------------------------------------------------------------------------------------------
$ 40,098 $ 403 $ 1,437 $ 39,064
===============================================
Available-for-sale at December 31, 2001:
Callable agency securities, corporate bonds, notes 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
===============================================
The callable agency securities at December 31, 2002 and 2001 have call features
at amounts not less than par and were not purchased with significant premiums or
discounts.
The amortized cost and fair value of investment securities at December 31, 2002,
by contractual maturity, are shown below:
AVAILABLE-FOR-SALE
---------------------
AMORTIZED FAIR
COST VALUE
- -----------------------------------------------------------
Due in one year or less $ 15,719 $ 15,719
Due after one year through
five years 10,050 10,327
Due after five years through
ten years 4,998 5,041
Due more than ten years 4,931 4,400
Equity securities with no stated
maturity 4,400 3,577
- -----------------------------------------------------------
$ 40,098 $ 39,064
=====================
For the year ended December 31, 2002, gross gains and gross losses of $506 ($358
net of taxes) and $441 ($312 net of taxes), respectively, were recorded from
sales of available-for-sale investment securities.
For the year ended December 31, 2001, gross gains and gross losses of $739 ($517
net of taxes) and $84 ($59 net of taxes), respectively, were recorded from sales
of available-for-sale investment securities.
For the year ended December 31, 2000, gross gains and gross losses of $74 ($46
net of taxes) and $32 ($20 net of taxes), respectively, were recorded from sales
of available-for-sale investment securities.
37
CFS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, 2002
3. MORTGAGE-BACKED SECURITIES
The amortized cost of mortgage-backed securities and their fair values are as
follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSSES VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
Available-for-sale at December 31, 2002:
Participation certificates and collateralized mortgage obligations $ 64,084 $ 820 $ 136 $ 64,768
Real estate mortgage investment conduits 231,752 862 744 231,870
- ----------------------------------------------------------------------------------------------------------------------------------
$295,836 $ 1,682 $ 880 $296,638
========================================================
Available-for-sale at December 31, 2001:
Participation certificates and collateralized mortgage obligations $ 32,089 $ 1,215 $ 79 $ 33,225
Real estate mortgage investment conduits 239,776 3,438 282 242,933
- ----------------------------------------------------------------------------------------------------------------------------------
$271,865 $ 4,653 $ 361 $276,158
========================================================
Held-to-maturity at December 31, 2002:
Participation certificates and collateralized mortgage obligations $ 20,651 $ 520 $ 10 $ 21,161
Real estate mortgage investment conduits 751 65 -- 816
- ----------------------------------------------------------------------------------------------------------------------------------
$ 21,402 $ 585 $ 10 $ 21,977
========================================================
Held-to-maturity at December 31, 2001:
Participation certificates and collateralized mortgage obligations $ 28,644 $ 659 $ 69 $ 29,234
Real estate mortgage investment conduits 8,390 125 5 8,510
- ----------------------------------------------------------------------------------------------------------------------------------
$ 37,034 $ 784 $ 74 $ 37,744
========================================================
The mortgage-backed securities have contractual maturities that range from 2003
to 2032. Expected maturities may differ from contractual maturities because the
underlying mortgages collateralizing the securities are subject to prepayment
without penalty.
For the year ended December 31, 2002, gross gains of $234 ($166 net of tax) were
recorded from sales of available-for-sale mortgage-backed securities. There were
no losses on sales of available-for-sale mortgage-backed securities.
For the year ended December 31, 2001 there were no gains on the sale of
available-for-sale mortgage-backed securities. There were gross losses of $56
($39 net of tax).
For the year ended December 31, 2000 there were no sales of available-for-sale
mortgage-backed securities.
38
CFS BANCORP, INC.
4. LOANS RECEIVABLE
Loans receivable consist of the following:
DECEMBER 31
2002 2001
- ---------------------------------------------------------------------------------------------------
First mortgage loans:
Single-family residential $ 386,050 $ 535,197
Multi-family residential 71,170 51,635
Commercial real estate 271,426 142,663
Construction and land development:
Single-family residential 12,118 17,208
Multi-family residential 63,893 26,443
Commercial real estate 88,951 76,168
Home equity loans 45,106 41,416
Other loans:
Commercial 40,034 23,996
Consumer 2,610 2,066
Undisbursed portion of loan proceeds (39,704) (24,454)
Net deferred yield adjustments (2,632) (1,324)
- ---------------------------------------------------------------------------------------------------
939,022 891,014
Allowance for losses on loans 8,674 7,662
- ---------------------------------------------------------------------------------------------------
Loans receivable, net $ 930,348 $ 883,352
===================================================================================================
The Bank's lending activities have been concentrated
primarily within its immediate geographic area. The Bank
generally requires collateral on loans and loan-to-value
ratios of no greater than 80%.
At December 31, 2002, 2001, and 2000, the Company
serviced $16,816, $21,125, and $27,665, respectively,
of loans for others.
Activity in the allowance for losses on loans is summarized
as follows:
2002 2001 2000
- --------------------------------------------------------------
Balance at beginning of year $ 7,662 $ 7,187 $ 5,973
Provision for losses on loans 1,956 1,150 3,375
Charge-offs (1,183) (855) (2,279)
Recoveries 239 180 118
- --------------------------------------------------------------
Balance at end of year $ 8,674 $ 7,662 $ 7,187
==============================================================
DECEMBER 31
2002 2001
- ----------------------------------------------------------------
Impaired loans:
With a valuation reserve $ 3,853 $ -
No valuation reserve required $ 2,460 $ -
- ----------------------------------------------------------------
Total impaired loans $ 6,313 $ 2,915
- ----------------------------------------------------------------
Valuation reserve relating to
impaired loans $ 150 $ -
Average impaired loans during year $ 3,949 $ 2,760
================================================================
39
CFS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, 2002
5. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized as follows:
DECEMBER 31
ESTIMATED
USEFUL LIVES 2002 2001
- ----------------------------------------------------------------------
Cost:
Land $ 1,921 $ 1,934
Buildings 30-40 years 15,341 14,890
Leasehold
improvements Over term of lease 2,310 2,402
Furniture and
equipment 3-15 years 12,844 13,582
Construction in progress 257 550
- ----------------------------------------------------------------------
32,673 33,358
Less: Accumulated
depreciation and
amortization 18,838 18,375
- ----------------------------------------------------------------------
$ 13,835 $ 14,983
OPERATING LEASES
At December 31, 2002, the Company and its subsidiaries were obligated under
certain noncancelable operating leases for premises and equipment, which expire
at various dates through the year 2007. Many of these leases contain renewal
options, and certain leases provide options to purchase the leased property
during or at the expiration of the lease period at specific prices. Some leases
contain escalation clauses calling for rentals to be adjusted for increased real
estate taxes and other operating expenses, or proportionately adjusted for
increases in the consumer or other price indices. The following summary reflects
the future minimum rental payments, by year, required under operating leases
that, as of December 31, 2002, have initial or remaining noncancelable lease
terms in excess of one year.
YEAR ENDED DECEMBER 31
- ----------------------------
2003 $349
2004 262
2005 151
2006 125
2007 75
2008 3
- ----------------------------
$965
============================
Rental expense charged to operations in 2002, 2001, and 2000, amounted to
approximately $605, $640, and $607, respectively, including amounts paid under
short-term cancelable leases.
6. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following:
DECEMBER 31
2002 2001
- ----------------------------------------------------------------------------------------------------------
Callable agency securities and other investments $ 349 $ 318
Participation certificates and collateralized mortgage obligations 525 793
Real estate mortgage investment conduits 1,187 775
Loans receivable 4,536 5,001
- ----------------------------------------------------------------------------------------------------------
$ 6,597 $ 6,887
=========================
40
CFS BANCORP, INC.
7. DEPOSITS
Deposits and interest rate data are summarized as follows:
DECEMBER 31
2002 2001
================================================================================
Checking accounts:
Noninterest-bearing $ 31,318 $ 26,970
Interest-bearing 90,905 81,217
- --------------------------------------------------------------------------------
Total checking accounts 122,223 108,187
Passbook accounts:
Savings accounts 197,530 187,997
Individual retirement accounts 14,840 15,168
- --------------------------------------------------------------------------------
Total passbook accounts 212,370 203,165
Money market accounts 121,693 89,205
Certificates of deposit accounts:
Less than one year 377,212 405,576
One to two years 57,119 68,027
Two to three years 34,367 29,746
Three to four years 12,248 24,846
Four to five years 13,980 11,913
Greater than five years 2,649 4,779
- --------------------------------------------------------------------------------
Total certificates of deposit accounts 497,575 544,887
Accrued interest payable 361 504
- --------------------------------------------------------------------------------
$ 954,222 $ 945,948
============================
Weighted-average cost of deposits 2.32% 3.43%
================================================================================
Interest expense on deposits consists of the following:
YEAR ENDED DECEMBER 31
2002 2001 2000
- --------------------------------------------------------------------------------
Checking accounts $ 562 $ 1,111 $ 1,290
Passbook accounts 2,768 4,591 6,456
Money market accounts 2,173 2,187 1,929
Certificates of deposit 20,214 32,958 33,420
- --------------------------------------------------------------------------------
$25,717 $40,847 $43,095
=============================================
The aggregate amount of deposits in denominations of greater than one hundred
thousand dollars was $214,978 and $198,602 at December 31, 2002 and 2001,
respectively. Deposits in excess of one hundred thousand dollars generally are
not federally insured.
Interest paid on deposits during 2002, 2001, and 2000 totaled $25,860, $41,282,
and $43,010, respectively.
41
CFS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, 2002
8. BORROWED MONEY
Borrowed money consists of the following:
DECEMBER 31
2002 2001
--------------------------------------------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
RATE AMOUNT RATE AMOUNT
- --------------------------------------------------------------------------------------------------------------------------
Secured advances from FHLB - Indianapolis:
Maturing in 2003 - fixed rate 5.22% $ 30,748 5.31% $ 36,095
Maturing in 2010 - fixed rate 5.92 400,000 5.92 400,000
Maturing in 2014 - fixed rate 6.71 1,259 6.71 1,274
Maturing in 2018 - fixed rate 5.54 2,954 5.54 2,994
Maturing in 2019 - fixed rate 6.32 7,970 6.32 8,095
Secured advances from FHLB - Chicago:
Maturing in 2002 - fixed rate - - 6.20 7,700
Maturing in 2008 - fixed rate 5.26 6,500 5.26 6,500
----------------------------------------
$ 449,431 $462,658
=========== ========
Weighted-average interest rate 5.87% 5.88%
==========================================================================================================================
Advances with unpaid balances totaling $400,000 and final maturities in 2010
contain call dates in 2003. Advances with unpaid balances totaling $6,500 and
final maturities in 2008 contain call dates in 2003.
Pursuant to collateral agreements with the Federal Home Loan Bank of
Indianapolis (FHLB-IN), advances are secured by the following assets:
DESCRIPTION OF COLLATERAL AMOUNT PLEDGED
- -----------------------------------------------------
FHLB-IN stock $ 25,455
First mortgage loans 378,261
Mortgage-backed securities 134,584
FHLB-IN time deposits 67,000
- -----------------------------------------------------
$ 605,300
==============
Pursuant to collateral agreements with the Federal Home Loan Bank of Chicago
(FHLB-C), advances are secured by stock in the FHLB-C and certain
mortgage-backed securities having a carrying value of $14,619.
The Company has a borrowing agreement with Bank One for a maximum of $5,000
federal funds borrowing line of credit at a rate quoted as the market rate by
ANB for the purchase of federal funds at the time the purchase is requested. The
advance is secured by certain mortgage-backed securities having a carrying value
of $4,854. The line was not used in 2002 or 2001.
The Bank enters into sales of securities under agreements to repurchase
(repurchase agreements). These repurchase agreements are treated as financings,
and the obligations to repurchase securities sold are reflected as borrowed
funds in the consolidated statements of condition. The securities underlying
these repurchase agreements continue to be reflected as assets of the Company.
There were no securities sold under agreements to repurchase at December 31,
2002 or December 31, 2001.
Interest expense on borrowed money is summarized as follows:
YEAR ENDED DECEMBER 31
2002 2001 2000
- ------------------------------------------------------------
Advances from FHLBs $27,351 $28,366 $26,705
Securities sold under
agreements to
repurchase - 1,075 3,233
- ------------------------------------------------------------
$27,351 $29,441 $29,938
===============================
Interest paid on borrowings during 2002, 2001, and 2000 was $27,392, $29,964,
and $29,818, respectively.
42
CFS BANCORP, INC.
9. INCOME TAXES
The income tax provision consists of the following:
YEAR ENDED DECEMBER 31
2002 2001 2000
- -----------------------------------------------------------------
Current tax expense:
Federal $ 4,236 $ 4,454 $ 6,782
State 317 591 864
Deferred tax expense
(benefit):
Federal (1,423) (262) (813)
State (159) 8 (12)
- -----------------------------------------------------------------
$ 2,971 $ 4,791 $ 6,821
=================================================================
A reconciliation of the statutory federal income tax rate to the effective
income tax rate is as follows:
YEAR ENDED DECEMBER 31
2002 2001 2000
- ---------------------------------------------------------------
Statutory rate 35.0% 35.0% 35.0%
State taxes 1.8 3.8 4.9
Bank-owned life insurance (5.2) (3.3) -
Other (2.4) (5.5) (1.0)
- ---------------------------------------------------------------
Effective rate 29.2% 30.0% 38.9%
===============================================================
Significant components of deferred tax assets and liabilities are as follows:
DECEMBER 31
2002 2001
- --------------------------------------------------------------------
Deferred tax assets:
Allowance for loan losses $ 3,558 $ 3,105
Deferred compensation 681 692
Loan fees deferred 1,129 397
Other 18 85
- --------------------------------------------------------------------
5,386 4,279
Deferred tax liabilities:
Excess tax accumulated provision
for losses over base year 300 651
Depreciation 210 250
Stock dividends on FHLB stock 182 182
Other 313 397
- --------------------------------------------------------------------
1,005 1,480
=====================
Net deferred tax asset 4,381 2,799
Tax effect of adjustment related to
unrealized depreciation (appreciation)
on available-for-sale securities 132 (1,185)
- --------------------------------------------------------------------
Net deferred tax assets including
adjustments $ 4,513 $ 1,614
====================================================================
The Bank has qualified under provisions of the Internal Revenue Code, which
permitted it to deduct from taxable income an allowance for bad debts, which
differs from the provision for such losses charged to income. Accordingly,
retained income at December 31, 2002 includes approximately $12,497, for which
no provision for income taxes has been made. If in the future this portion of
retained income is distributed, or the Bank no longer qualifies as a bank for
tax purposes, income taxes may be imposed at the then applicable rates. If
income taxes had been provided, the deferred tax liability would have been
approximately $4,499.
The Company made net federal and state income tax payments of $2,023, $5,679,
and $6,180 during 2002, 2001, and 2000, respectively.
43
CFS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, 2002
10. REGULATORY CAPITAL
The principal source of cash flow for the Company is dividends from the Bank.
Various federal banking regulations and capital guidelines limit the amount of
dividends that may be paid to the Company by the Bank. Future payment of
dividends by the Bank is dependent on individual regulatory capital requirements
and levels of profitability.
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum total requirements can
initiate certain mandatory and possible additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to quantitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios, set forth in the table
below of the total risk-based, tangible, and core capital, as defined in the
regulations. Management believes, as of December 31, 2002, that the Bank met all
capital adequacy requirements to which it is subject.
As of December 31, 2002, the most recent notification from the Office of Thrift
Supervision categorized the Bank as "well-capitalized" under the regulatory
framework for prompt corrective action. To be categorized as "well-capitalized,"
the Bank must maintain minimum total risk-based, tangible, and core ratios as
set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's category.
TO BE WELL-CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
-------------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ------------------------------------------------------------------------------------------------------------------------------------
As of December 31, 2002
Risk-based $140,233 13.97% $80,310 >8.00% $100,388 >10.00%
Tangible 131,559 8.42 23,435 >1.50 31,246 >2.00
Core 131,559 8.42 62,492 >4.00 78,116 >5.00
As of December 31, 2001
Risk-based $141,612 15.40% $73,606 >8.00% $ 92,008 >10.00%
Tangible 133,950 8.48 23,694 >1.50 31,599 >2.00
Core 133,950 8.48 63,184 >4.00 78,997 >5.00
At December 31, 2002, adjusted total assets were $1,562,312 and risk-weighted
assets were $1,003,878. A reconciliation of the Bank's equity capital in
accordance with generally accepted accounting principles to regulatory capital
is as follows:
DECEMBER 31
2002 2001
Total equity $ 132,289 $136,932
Intangibles - (283)
Unrealized gain on securities
available-for-sale, net of
equity securities losses (730) (2,699)
- -----------------------------------------------------------
Tangible and core capital 131,559 133,950
Allowance for loan losses 8,674 7,662
- -----------------------------------------------------------
Risk-based capital $140,233 $141,612
===========================================================
44
CFS BANCORP, INC.
11. EMPLOYEE BENEFIT PLANS
The Company participates in an industry-wide, multi-employer, defined-benefit
pension plan, which covers all full-time employees who have attained at least 21
years of age and completed one year of service. Calculations to determine
full-funding status are made annually as of June 30. Pension expense for the
years ended December 31, 2002, 2001 and 2000 was $889, $134, and $0,
respectively. Asset and plan benefit information is not available for
participating associations on an individual basis.
The Company also participates in a single-employer defined-contribution plan,
which qualifies under section 401(k) of the Internal Revenue Code. Participation
eligibility in this plan is substantially the same as in the aforementioned
defined-benefit pension plan. This plan called for a discretionary contribution
within specified limits and a matching Company contribution equal to a specified
percentage of employee contributions. Plan expense for the years ended December
31, 2002, 2001 and 2000 was approximately $252, $251, and $265, respectively.
The Company provides supplemental retirement benefits for certain senior
officers in the form of payments upon retirement, death, or disability. The
annual benefit is based on actuarial computations of existing plans without
imposing Internal Revenue Service limits. Expenses related to this plan for the
years ended December 31, 2002, 2001, and 2000, were $87, $97, and $84,
respectively.
12. STOCK-BASED BENEFIT PLANS
In 1998, the Company established an Employee Stock Ownership Plan (the ESOP) for
the employees of the Company and the Bank. The ESOP is a qualifying pension plan
under Internal Revenue Service guidelines. It covers all full-time employees who
have attained at least 21 years of age and completed one year of service. Upon
formation, the ESOP borrowed $14,283 from the Company and purchased 1,428,300
shares of common stock. Expense is recognized based on the fair value (average
stock price) of shares scheduled to be released from the ESOP trust. One-twelfth
of the shares are scheduled to be released each year as one-twelfth of the loan
(principal and interest) is scheduled to be repaid each year. Dividends on both
allocated and unallocated shares are used to pay down the loan. Expense related
to this ESOP for the years ended December 31, 2002, 2001, and 2000 was $1,713,
$1,536, and $1,124, respectively. ESOP shares not committed to be released are
not considered outstanding for purposes of computing EPS.
The following table summarizes shares of Company common stock held by the ESOP
at December 31, 2002 and 2001:
2002 2001
- ------------------------------------------------------------
Shares allocated to participants 533,565 433,095
Unallocated and unearned shares 835,645 956,992
- ------------------------------------------------------------
1,369,210 1,390,087
=======================
Fair value of unearned ESOP shares $ 11,950 $ 13,733
============================================================
The Company also provides supplemental retirement benefits for certain senior
officers under the ESOP. This benefit is also based on computations for the
existing plan exclusive of Internal Revenue Service limits. Expenses related to
this plan for the years ended December 31, 2002, 2001, and 2000, were $86, $59,
and $45, respectively.
In February 1999, the Company, with shareholder approval, established the RRP,
which is a stock-based incentive plan, and a stock option plan. The Bank
contributed $7,500 to the RRP to purchase a total of 714,150 shares of Company
common stock. On April 1, 1999, the Compensation Committee of the Board of
Directors granted 707,000 shares under this plan to 92 participants.
The following table summarizes shares of Company's common stock held by the RRP
at December 31, 2002:
Shares purchased by the plan 714,150
Shares granted in 1999 (707,000)
Shares forfeited in 1999 2,000
Shares forfeited in 2000 6,800
Shares forfeited in 2001 2,700
Shares forfeited in 2002 2,600
- ---------------------------------------------------------
Shares available for grant December 31, 2002 21,250
=========================================================
45
CFS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, 2002
The shares granted in the RRP vest to the participants at the rate of 20% per
year. As a result, expense for this plan is being recorded over a 60-month
period and is based on the market value of the Company's stock as of the date of
grant. The remaining unamortized cost of the RRP is reflected as a reduction in
stockholders' equity. Expenses under this plan for the years ended December 31,
2002, 2001, and 2000 were $1,542, $1,413, and $1,414, respectively.
The Company has stock option plans under which shares of Company common stock
are reserved for the grant of both incentive and nonincentive stock options to
directors, officers, and employees. The dates the options are first exercisable
and expire is determined by the Compensation Committee of the Board of
Directors. The exercise price of the options is equal to the fair market value
of the common stock on the grant date.
The following is a combined analysis of the stock option activity for each of
the three years ended December 31, 2002.
NUMBER EXERCISE PRICE
OF SHARES PER SHARE
- ---------------------------------------------------------------
(IN THOUSANDS)
Outstanding at January 1, 2000 1,661 $1.85 - $13.83
Granted 245 8.19 - 10.44
Exercised (178) 3.65 - 10.00
Forfeited (154) 8.44 - 13.09
- ----------------------------------------------------------------
Outstanding at December 31, 2000 1,574 1.85 - 13.83
Granted 308 11.00 - 14.46
Exercised (70) 1.85 - 13.09
Forfeited (40) 8.44 - 13.83
- ----------------------------------------------------------------
Outstanding at December 31, 2001 1,772 1.85 - 14.46
Granted 159 13.43 - 14.24
Exercised (99) 1.85 - 11.25
Forfeited (34) 8.44 - 14.24
- ----------------------------------------------------------------
Outstanding at December 31, 2002 1,798 $4.21 - $14.46
================================================================
At December 31, 2002, 948 options were exercisable with a range in exercise
price from $4.21 to $14.46. The weighted-average remaining contractual life of
outstanding options was 7.9 years at December 31, 2002. At December 31, 2002,
there were 29,815 shares available for future grants. At December 31, 2002, the
average exercise price on outstanding options was $10.21.
13. OTHER COMPREHENSIVE INCOME
The related income tax effect and reclassification adjustments to the components
of other comprehensive income for the years ended December 31, 2002, 2001, and
2000 is as follows:
2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------------
Unrealized holding gains (losses) arising during the period:
Unrealized net gains (losses) $ (3,838) $ 9,588 $ 10,820
Related tax (expense) benefit 1,230 (3,426) (4,384)
- --------------------------------------------------------------------------------------------------------------------------
Net (2,608) 6,162 6,436
Less: Reclassification adjustment for net gains realized during the period:
Realized net gains 299 599 42
Related tax expense (65) (180) (16)
- --------------------------------------------------------------------------------------------------------------------------
Net 234 419 26
- --------------------------------------------------------------------------------------------------------------------------
Total other comprehensive income (loss) $ (2,842) $ 5,743 $ 6,410
==========================================================================================================================
46
CFS BANCORP, INC.
14. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
YEAR ENDED DECEMBER 31
2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------------
Net income $ 7,205 $ 11,173 $ 10,693
==========================================================================================================================
Average common shares outstanding 12,000,589 14,038,096 16,125,560
Common share equivalents - assuming exercise of dilutive stock options 491,560 415,248 196,652
- --------------------------------------------------------------------------------------------------------------------------
Average common shares and common share equivalents outstanding 12,492,149 14,453,344 16,322,212
==========================================================================================================================
Basic earnings per share $ .60 $ .80 $ .66
Diluted earnings per share .58 .77 .66
15. COMMITMENTS
The Company had outstanding commitments as follows:
DECEMBER 31
TYPE OF COMMITMENT 2002 2001
- --------------------------------------------------------------------------------------------------
To originate loans on residential property:
Fixed rates (6.25% - 6.75% in 2002, 6.00% - 8.25% in 2001) $ 5,380 $10,616
Variable rates 5,762 5,656
To originate loans on nonresidential property:
Fixed rates (6.75% - 7.50% in 2002, 7.25% - 8.25% in 2001) 7,093 6,233
Variable rates 23,608 42,132
To purchase loans on nonresidential property:
Variable rates 2,500 25,500
To originate commercial loans:
Fixed rates (5.90-9.00% in 2002) 1,507 1,250
Variable rates 1,825 5,455
To purchase commercial loans:
Variable rates 10,000 3,000
Unused lines of credit 44,329 41,537
Letters of credit:
Secured by cash 1,406 ,750
Real estate 5,285 7,756
Other - Credit enhancements 49,486 50,692
47
CFS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, 2002
Credit enhancements are letter of credit facilities related to the issuance by
municipalities of taxable and nontaxable revenue bonds. The proceeds from the
sale of such bonds are loaned to for-profit and not-for-profit companies for
economic development projects. In order for the bonds to receive a triple-A
rating, and thus a lower interest rate, the FHLB-IN issues, in favor of the bond
trustee, an Irrevocable Direct Pay Letter of Credit (Letter of Credit) for the
account of the Bank. Since the Bank, in accordance with the terms and conditions
of a Reimbursement Agreement between the FHLB-IN and the Bank, would be required
to reimburse the FHLB-IN for draws against the Letter of Credit, these
facilities are analyzed, appraised, secured by real estate mortgages, and
monitored as if the Bank funded the project initially.
The Bank estimates that substantially all commitments will be funded or will
expire within one year. Letters of credit expire at various times through 2005.
16. LEGAL PROCEEDINGS
In 1983, with the assistance of the Federal Savings and Loan Insurance
Corporation (FSLIC) as set forth in an assistance agreement (Assistance
Agreement), the Bank acquired First Federal Savings and Loan Association of East
Chicago, Indiana (East Chicago Savings), and Gary Federal Savings and Loan
Association, Gary, Indiana (Gary Federal) through mergers. The FSLIC-assisted
supervisory acquisitions of East Chicago Savings and Gary Federal were accounted
for using the purchase method of accounting which resulted in supervisory
goodwill (the excess of cost over fair value of net assets acquired), an
intangible asset, of $52.9 million, compared to $40.2 million of goodwill as
reported on a generally accepted accounting principles basis. Such goodwill was
included in the Bank's regulatory capital. The Assistance Agreement relating to
the Bank's acquisitions of East Chicago Savings and Gary Federal provided for
the inclusion of goodwill as an asset on the Bank's balance sheet, to be
amortized over 35 years for regulatory purposes and includable in capital.
Pursuant to the regulations adopted by the Office of Thrift Supervision to
implement the Financial Institutions Reform, Recovery and Enforcement Act of
1989 (FIRREA), the regulatory capital requirement for federal savings banks was
increased and the amount of supervisory goodwill that could be included in
regulatory capital decreased significantly. At September 30, 1989, the Bank had
approximately $26.0 million of remaining supervisory goodwill but, even
excluding supervisory goodwill, the Bank exceeded the capital requirements of
FIRREA at such date.
On May 13, 1993, the Bank filed suit against the U.S. government seeking damages
and/or other appropriate relief on the grounds, among others, that the
government had breached the terms of the Assistance Agreement. The suit is
pending in the United States Court of Federal Claims and is titled Citizens
Financial Services, FSB v. United States (Case No. 93-306-C).
The Bank was granted summary judgment on its breach of contract claim, leaving
for trial the issue of damages. The Government has filed a motion for summary
judgment on the Bank's damages claims. Their motion is still pending. All
pre-trial discovery has been substantially completed. No trial date has been
set.
In its complaint, the Bank did not specify the amount of damages it is seeking
from the United States. The Bank has retained an expert in order to attempt to
quantify the amount of damages. The Bank is unable to predict the outcome of its
claim against the United States and the amount of damages that may be awarded to
the Bank, if any, in the event that a judgment is rendered in the Bank's favor.
Consequently, no assurances can be given as to the results of this claim or the
timing of any proceedings in relation thereto. The cost, including attorney's
fees and expenses, of the litigation were approximately $258, $436, and $550, in
2002, 2001, and 2000, respectively, which is included in other general and
administrative expenses in the Consolidated Statement of Income.
Other than the above-referenced litigation, the Company is involved in routine
legal proceedings occurring in the ordinary course of business, which, in the
aggregate, are believed to be immaterial to the financial condition of the
Company.
48
CFS BANCORP, INC.
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
Disclosure of fair value information about financial instruments, whether or not
recognized in the consolidated statement of condition, for which it is
practicable to estimate their value, is summarized below. In cases where quoted
market prices are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount rate and estimates of
future cash flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could not
be realized in immediate settlement of the instrument.
The fair value disclosure of certain financial instruments and all nonfinancial
instruments is not required. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company.
The carrying amounts and fair values of financial instruments consist of the
following:
DECEMBER 31
2002 2001
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 210,141 $ 210,141 $ 272,067 $ 272,067
Investment securities available-for-sale 39,064 39,064 47,225 47,225
Mortgage-backed securities available-for-sale 296,638 296,638 276,158 276,158
Mortgage-backed securities held-to-maturity 21,402 21,977 37,034 37,744
Loans receivable 930,348 970,158 883,352 901,116
Investment in Bank-owned life insurance 31,009 31,009 30,052 30,052
- -----------------------------------------------------------------------------------------------------------------
Total assets financial instruments $1,528,602 $1,568,987 $1,545,888 $1,564,362
=================================================================================================================
Liabilities
Deposits $ 954,222 $ 966,542 $ 945,948 $ 956,672
Borrowed money 449,431 520,821 462,658 502,726
- -----------------------------------------------------------------------------------------------------------------
Total liabilities financial instruments $1,403,653 $1,487,363 $1,408,606 $1,459,398
=================================================================================================================
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
CASH AND CASH EQUIVALENTS
For cash and interest-bearing deposits, the carrying amount is a reasonable
estimate of fair value.
INVESTMENT SECURITIES
Fair values for securities held-for-investment, sale, or trading account
purposes are based on quoted market prices as published in financial
publications or dealer quotes.
MORTGAGE-BACKED SECURITIES
Fair values for mortgage-backed securities are based on the lower of quotes
received from third-party brokers.
LOANS RECEIVABLE
The Company determined that for both variable-rate and fixed-rate loans, fair
values are estimated using discounted cash flow analyses, using interest rates
currently being offered for loans with similar terms and collateral to borrowers
of similar credit quality.
INVESTMENT IN BANK-OWNED LIFE INSURANCE
The fair value of Bank-owned life insurance is equal to its cash
surrender value.
49
CFS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, 2002
DEPOSIT LIABILITIES
The fair value of demand deposits, savings accounts, and money market deposits
is the amount payable on demand at the reporting date. The fair value of
fixed-maturity certificates of deposit is estimated by discounting the future
cash flows using the rates currently offered for deposits of similar remaining
maturities.
BORROWED MONEY
Rates currently available to the Company for debt with similar terms and
remaining maturities are used to estimate fair value of existing debt.
The fair value of the Company's off-balance sheet instruments is nominal.
18. CONDENSED PARENT COMPANY FINANCIAL STATEMENTS
The following represents the condensed statement of financial condition as of
December 31, 2002 and 2001 and condensed statement of income and cash flows for
the three years ended December 31, 2002 for CFS Bancorp, Inc., the parent
company.
CONDENSED STATEMENTS OF CONDITION (Parent Company Only)
DECEMBER 31
2002 2001
- --------------------------------------------------------------------------------------------
Assets
Cash on hand and in banks $ 11,527 $ 4,114
Securities available-for-sale 6,415 19,913
Investment in subsidiary 132,289 136,932
Mortgage loans 1,617
Loan receivable from ESOP 9,638 10,631
Accrued interest receivable 47 118
Prepaid expenses and other assets 2,178 ,982
- --------------------------------------------------------------------------------------------
Total assets $ 163,711 $ 172,690
============================================================================================
Liabilities and stockholders' equity Liabilities:
Accrued taxes and other liabilities $ 3,049 $ 1,406
Stockholders' equity:
Common stock 234 234
Additional paid-in capital 189,786 189,547
Retained earnings, substantially restricted 97,108 93,649
Treasury stock, at cost (125,650) (112,167)
Accumulated other comprehensive income (loss), net of tax (816) 21
- --------------------------------------------------------------------------------------------
Total stockholders' equity 160,662 171,284
- --------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 163,711 $ 172,690
============================================================================================
50
CONDENSED STATEMENTS OF INCOME (Parent Company Only)
YEAR ENDED DECEMBER 31
2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------
Dividends from subsidiary $ 12,500 $ 10,000 $ 22,774
Interest income 1,682 3,283 4,585
Dividend income 200 391 400
Net gain on sale of investments 299 599 40
Other income -- 61 --
Noninterest expense (1,190) (1,259) (1,214)
- --------------------------------------------------------------------------------------------------------------------
Net income before income taxes and equity in earnings of subsidiary 13,491 13,075 26,585
Income tax expense (288) (924) (1,544)
- --------------------------------------------------------------------------------------------------------------------
Net income before equity in undistributed earnings of subsidiary 13,203 12,151 25,041
Equity in undistributed dividends in excess of earnings of subsidiary (5,998) (978) (14,348)
- --------------------------------------------------------------------------------------------------------------------
Net income $ 7,205 $ 11,173 $ 10,693
====================================================================================================================
CONDENSED STATEMENTS OF CASH FLOWS (Parent Company Only)
YEAR ENDED DECEMBER 31
2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------
Operating activities:
Net income $ 7,205 $ 11,173 $ 10,693
Adjustments to reconcile net income to net cash used by operating
activities:
Amortization/accretion of premiums/discounts (710) (646) (708)
Equity in undistributed earnings of the Bank 5,998 978 14,348
Net gain on sale of available-for-sale investment securities (299) (599) (40)
Decrease in interest receivable 71 214 110
Decrease (increase) in prepaid expenses and other assets (1,196) 1,609 954
Increase (decrease) in other liabilities 2,221 (611) (1,278)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 13,290 12,118 24,079
Investing activities:
Available-for-sale investment securities:
Purchases (45) (24,173) (749)
Repayments 200 -- 60
Sales 2,808 26,224 602
Available-for-sale mortgage-backed securities:
Purchases -- -- --
Repayments -- 919 793
Sales 10,194 36,122 --
Net loan originations and principal payment on loans (624) 891 819
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 12,533 39,983 1,525
Financing activities:
Purchase of treasury stock (14,626) (43,634) (20,750)
Proceeds from exercise of stock options 858 432 814
Dividends paid on common stock (4,642) (5,143) (5,966)
- -------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (18,410) (48,345) (25,902)
- -------------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 7,413 3,756 (298)
Cash and cash equivalents at beginning of year 4,114 358 656
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 11,527 $ 4,114 $ 358
===================================================================================================================
51
CFS BANCORP, INC.
CFS BANCORP, INC. CORPORATE INFORMATION
BOARD OF DIRECTORS
CHAIRMAN OF THE BOARD
Thomas F. Prisby
Chairman and CEO
VICE CHAIRMAN
James W. Prisby
President and Chief Operating
Officer
Sally A. Abbott
Retired Vice President
Citizens Financial Services, FSB
Gregory W. Blaine
Retired Chairman
TN Technologies
Thomas J. Burns
President
Burns-Kish Funeral Homes
Gene Diamond
Regional Chief Operating Officer
St. Margaret Mercy Healthcare Centers
Frank D. Lester
President
Union Tank Car Company
Charles R. Webb
Retired Executive Vice President
Keefe, Bruyette and Woods, Inc.
SHAREHOLDER INFORMATION
CORPORATE HEADQUARTERS
CFS Bancorp, Inc.
707 Ridge Road
Munster, Indiana 46321
219-836-5500
INVESTOR INFORMATION
Investors and analysts interested
in additional information may
contact:
Michael P. Prisby
Assistant Treasurer
CFS Bancorp, Inc.
707 Ridge Road
Munster, Indiana 46321
219-836-9990
STOCK INFORMATION
CFS Bancorp, Inc. trades on the NASDAQ
under the ticker symbol CITZ.
DIVIDEND REINVESTMENT
Dividend reinvestment is available to registered shareholders with 100 or more
shares. For additional information, contact our transfer agent.
TRANSFER AGENT AND REGISTRAR
LaSalle National Bank
135 South LaSalle Street
Chicago, Illinois 60603
800-246-5761
INDEPENDENT AUDITORS
Ernst & Young LLP
Sears Tower
233 South Wacker Drive
Chicago, Illinois 60606
312-879-2000
SPECIAL COUNSEL
Elias, Matz, Tiernan and
Herrick LLP
734 Fifteenth Street, N.W.
Washington, D.C. 20005
SHAREHOLDER MEETING
The Annual Meeting of Shareholders will be held at 10:00 a.m. on April 29, 2003
CDT at The Center for Visual and Performing Arts, 1040 Ridge Road, Munster,
Indiana 46321.
FORM 10-K
A copy of the CFS Bancorp, Inc. Annual
Report on Form 10-K filed with the
Securities and Exchange Commission is
available without charge upon written
request to:
Monica F. Sullivan
Corporate Secretary
CFS Bancorp, Inc.
707 Ridge Road
Munster, Indiana 46321
As of December 31, 2002, there were 12,674,597 shares of common stock
outstanding, held by 2,445 stockholders of record.
RESEARCH
The following companies indicated that they provide a market in CFS Bancorp,
Inc. common stock:
RBL Dain Rauscher Inc.
Friedman Billings Ramsey & Co.
Howe Barnes Investments, Inc.
McDonald Investments/Trident Securities
Sandler O'Neill & Partners LP
Stifel, Nicolaus & Co. Inc.
QUARTERLY SHARE PRICE AND DIVIDEND INFORMATION
STOCK PRICE DIVIDEND
HIGH LOW PAID
- --------------------------------------------------------------
2001
First Quarter $ 11.44 $ 10.44 $ .09
Second Quarter 13.83 10.75 .09
Third Quarter 14.87 13.27 .09
Fourth Quarter 14.52 13.41 .09
2002
First Quarter $ 14.35 $ 13.34 $ .09
Second Quarter 15.46 13.43 .10
Third Quarter 14.70 13.42 .10
Fourth Quarter 14.95 13.05 .10
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