UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________.
Commission file number: 0-24611
CFS Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Delaware 35-2042093
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
707 Ridge Road, Munster, Indiana 46321
(Address of principal executive offices)
(219) 836-5500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b of the Exchange Act).
YES [X] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
The Registrant had 12,160,748 shares of Common Stock issued and outstanding as
of July 31, 2003.
CFS BANCORP, INC.
INDEX
Page No.
--------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition at
June 30, 2003 and (Audited) December 31, 2002 3
Consolidated Statements of Income for the Three and Six
Months Ended June 30, 2003 and 2002 4
Consolidated Statements of Changes in Stockholders' Equity
for the Six Months Ended June 30, 2003 5
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2003 and 2002 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
Item 4. Controls and Procedures 22
PART II OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities and Use of Proceeds 23
Item 3. Defaults upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
2
CFS BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
June 30, 2003 December 31, 2002
------------- -----------------
(Unaudited)
ASSETS
Cash and amounts due from depository institutions $ 15,942 $ 30,312
Interest-bearing deposits 85,805 105,479
Federal funds sold 108,887 74,350
------------- -----------------
Cash and cash equivalents 210,634 210,141
Investment securities available-for-sale 61,794 39,064
Mortgage-backed securities available-for-sale 201,261 296,638
Mortgage-backed securities held-to-maturity
(fair value 2003 - $21,397; 2002 - $21,977) 20,153 21,402
Loans receivable, net 971,303 930,348
Investment in Federal Home Loan Bank stock, at cost 26,117 25,780
Office properties and equipment 12,601 13,835
Accrued interest receivable 6,026 6,597
Real estate owned 286 893
Investment in Bank-owned life insurance 31,738 31,009
Prepaid expenses and other assets 9,827 9,055
------------- -----------------
Total assets $ 1,551,740 $ 1,584,762
============= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 923,299 $ 954,222
Borrowed money 449,377 449,431
Advance payments by borrowers for taxes and insurance 6,934 4,410
Other liabilities 18,089 16,037
------------- -----------------
Total liabilities 1,397,699 1,424,100
------------- -----------------
Stockholders' Equity:
Preferred stock, $.01 par value:
Authorized shares - 15,000,000
Issued and outstanding shares - 0
at June 30, 2003 and December 31, 2002
Common stock, $.01 par value:
Authorized shares - 85,000,000
Issued shares - 23,423,306
at June 30, 2003 and December 31, 2002
Outstanding shares - 12,142,948 and 12,674,597
at June 30, 2003 and December 31, 2002, respectively 234 234
Additional paid-in capital 189,605 189,786
Retained earnings, substantially restricted 106,515 107,598
Treasury stock, at cost: 11,280,358 and 10,748,709 shares
at June 30, 2003, and December 31, 2002, respectively (133,373) (125,650)
Unearned common stock acquired by ESOP (8,356) (8,356)
Unearned common stock acquired by RRP (1,525) (2,827)
Accumulated other comprehensive income (loss), net of tax 941 (123)
------------- -----------------
Total stockholders' equity 154,041 160,662
------------- -----------------
Total liabilities and stockholders' equity $ 1,551,740 $ 1,584,762
============= =================
See accompanying notes
3
CFS BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ---------------------------
2003 2002 2003 2002
----------- ------------ ------------ ------------
Interest income:
Loans $ 14,974 $ 15,748 $ 30,214 $ 31,336
Mortgage-related securities 1,385 4,696 3,432 9,362
Other investment securities 433 523 902 856
Other 891 1,161 1,738 2,552
----------- ------------ ------------ ------------
Total interest income 17,683 22,128 36,286 44,106
Interest expense:
Deposits 4,539 6,097 9,764 13,312
Borrowings 6,672 6,881 13,272 13,679
----------- ------------ ------------ ------------
Total interest expense 11,211 12,978 23,036 26,991
Net interest income before
provision for losses on loans 6,472 9,150 13,250 17,115
Provision for losses on loans 509 350 987 550
----------- ------------ ------------ ------------
Net interest income after
provision for losses on loans 5,963 8,800 12,263 16,565
Non-interest income:
Loan fees 452 290 813 695
Fees on deposit accounts 1,292 909 2,409 1,447
Insurance commissions -- 376 -- 664
Investment commissions 192 278 318 540
Gain (loss) on sale of available-for-sale
investment securities - net (1) 24 (1) 271
Net gain on sale of office properties 24 -- 24 --
Income from Bank-owned life insurance 367 392 729 740
Other income 322 225 606 383
----------- ------------ ------------ ------------
Total non-interest income 2,648 2,494 4,898 4,740
Non-interest expense:
Compensation and employee benefits 4,427 5,094 8,866 10,090
Net occupancy expense 578 616 1,200 1,211
Furniture and equipment expense 480 476 957 938
Federal deposit insurance premiums 51 42 93 86
Data processing 465 584 894 936
Marketing 227 253 426 411
Other general and administrative expenses 1,427 1,387 2,802 2,566
----------- ------------ ------------ ------------
Total non-interest expense 7,655 8,452 15,238 16,238
Income before income taxes 956 2,842 1,923 5,067
Income tax expense 258 859 571 1,520
----------- ------------ ------------ ------------
Net income $ 698 $ 1,983 $ 1,352 $ 3,547
=========== ============ ============ ============
Per share data:
Basic earnings per share $ 0.06 $ 0.16 $ 0.12 $ 0.29
Diluted earnings per share 0.06 0.16 0.12 0.28
Cash dividends declared per share 0.11 0.10 0.22 0.20
Weighted average shares outstanding 11,256,183 12,147,733 11,302,378 12,161,635
Weighted average diluted shares outstanding 11,644,232 12,669,255 11,729,637 12,670,059
See accompanying notes
4
CFS BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
Unearned
Common
Additional Stock
Common Paid-In Retained Treasury Acquired
Stock Capital Earnings Stock by ESOP
--------- ---------- --------- --------- ---------
Balance January 1, 2003 $ 234 $ 189,786 $ 107,598 ($125,650) ($ 8,356)
Net income -- -- 1,352 -- --
Other comprehensive income, net of tax:
Change in unrealized appreciation on available-for
for-sale securities, net of reclassification adjustment -- -- -- -- --
Total comprehensive income -- -- -- -- --
Purchase of treasury stock -- -- -- (8,993) --
Amortization of awards under RRP -- -- (47) -- --
Exercise of stock options -- (207) -- 1,270 --
Tax benefit related to stock options exercised -- 26 -- -- --
Cash dividends declared on common stock -- -- (2,388) -- --
--------- ---------- --------- --------- ---------
Balance at June 30, 2003 $ 234 $ 189,605 $ 106,515 ($133,373) ($ 8,356)
========= ========== ========= ========= =========
Unearned
Common Accumulated
Stock Other
Acquired Comprehensive
by RRP Income (Loss) Total
--------- ------------- ---------
Balance January 1, 2003 ($ 2,827) ($ 123) $ 160,662
Net income -- -- 1,352
Other comprehensive income, net of tax:
Change in unrealized appreciation on available-for
for-sale securities, net of reclassification adjustment -- 1,064 1,064
---------
Total comprehensive income -- -- 2,416
Purchase of treasury stock -- -- (8,993)
Amortization of awards under RRP 1,302 -- 1,255
Exercise of stock options -- -- 1,063
Tax benefit related to stock options exercised -- -- 26
Cash dividends declared on common stock -- -- (2,388)
---------------------------------------
Balance at June 30, 2003 ($ 1,525) $ 941 $ 154,041
========= ============= =========
See accompanying notes
5
CFS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Six Months Ended June 30,
-------------------------
2003 2002
--------- ---------
Net income $ 1,352 $ 3,547
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for losses on loans 987 550
Depreciation expense 844 920
Tax benefit from exercise of stock option 26 --
Deferred income taxes (benefit) (1,187) 1,351
Amortization of cost of stock benefit plans 1,255 1,609
Change in deferred income 493 904
(Increase) decrease in interest receivable 571 (398)
Decrease in accrued interest payable (113) (211)
Proceeds from sale of loans held for sale 6,580 5,246
Origination of loans held for sale (7,312) (4,261)
Net gain on sale of available-for-sale securities (1) (271)
(Increase) decrease in prepaid expenses and other assets 3,106 (2,777)
Increase (decrease) in other liabilities 2,247 (3,449)
--------- ---------
Net cash provided by operating activities 8,848 2,760
--------- ---------
Investing activities:
Available-for-sale investment securities:
Purchases (149,061) (169,338)
Repayments 127,145 167,183
Sales 55 1,011
Available-for-sale mortgage-related securities:
Purchases (66,855) (98,496)
Repayments 159,161 63,538
Held to maturity mortgage-related securities:
Repayments 1,198 6,388
Purchase of Federal Home Loan Bank stock (349) (19)
Redemption of Federal Home Loan Bank stock 12 159
Loan originations and principal payments on loans, net (42,541) (44,939)
Additional costs on real estate owned -- (81)
Proceeds from sale of real estate owned 1,445 1,008
Purchases of property and equipment (379) (874)
Disposals of property and equipment 769 435
--------- ---------
Net cash provided by (used in) investing activities 30,600 (74,025)
--------- ---------
6
CFS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in thousands)
(Unaudited)
Six Months Ended June 30,
-------------------------
2003 2002
--------- ---------
Financing activities:
Proceeds from exercise of stock options 1,063 527
Dividends paid on common stock (2,612) (1,188)
Purchase of treasury stock (8,993) (5,740)
Net increase in checking, passbook and money market accounts 32,046 41,278
Decrease in certificates of deposit (62,929) (92,477)
Net increase (decrease) in advance payments by borrowers for
taxes and insurance 2,524 (202)
Net decrease in borrowed funds (54) (2,850)
--------- ---------
Net cash flows used in financing activities (38,955) (60,652)
--------- ---------
Increase (decrease) in cash and cash equivalents 493 (131,917)
Cash and cash equivalents at beginning of period 210,141 272,067
--------- ---------
Cash and cash equivalents at end of period $ 210,634 $ 140,150
========= =========
Supplemental disclosure of non-cash activities:
Transfer of loans to real estate owned $ 838 $ 1,514
See accompanying notes
7
CFS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF FINANCIAL STATEMENTS PRESENTATION
The accompanying consolidated financial statements were prepared in accordance
with instructions to Form 10-Q and therefore do not include all the information
or footnotes necessary for a complete presentation of financial position,
results of operations and cash flows in conformity with generally accepted
accounting principles. However, all normal recurring adjustments which, in the
opinion of Management, are necessary for a fair presentation of financial
statements have been included. These financial statements should be read in
conjunction with the audited financial statements and the notes thereto for the
period ended December 31, 2002 contained in the CFS Bancorp, Inc. (the
"Company") annual report to the stockholders. The results for the three and six
months ended June 30, 2003 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2003.
2. STOCK BASED COMPENSATION
The Company accounts for its stock options in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued by Employees (APB
No. 25). Under APB No. 25, as the exercise price of the Company's employees'
stock options which have been granted 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 Recognition and Retention Plan ("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.
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- --------------------
(Dollars in thousands, except per share data)
2003 2002 2003 2002
---- ---- ---- ----
Net Income (as reported) $ 698 $ 1,983 $ 1,352 $ 3,547
Stock based compensation expense determined
using fair value method, net of tax (211) (233) (404) (422)
------- ------- ------- -------
Pro forma net income $ 487 $ 1,750 $ 948 $ 3,125
======= ======= ======= =======
Diluted earnings per share (as reported) 0.06 0.16 0.12 0.28
Pro forma diluted earnings per share 0.04 0.14 0.08 0.25
The fair value of the option grants for the three and six months ended June 30,
2003 and 2002 was estimated using the Black-Scholes option value model, with the
following assumptions: dividend yield 3.1% in 2003 and 2.9% in 2002, expected
volatility of 30.2% in both 2003 and 2002, risk free interest rate of 3.9% in
2003 and 5.1% in 2002, a contract term of ten years, and an original expected
life of seven years for all options granted.
8
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. Option valuation models such as the Black-Scholes require the
input of highly subjective assumptions including the expected stock price
volatility. The Company's stock options have characteristics significantly
different from traded options and, inasmuch as changes in the subjective input
assumptions can materially affect the fair value estimate, in Management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
3. LOAN PORTFOLIO
The Company's loan portfolio consisted of the following at the dates indicated:
June 30, 2003 December 31, 2002
------------- -----------------
(Dollars in thousands)
Amount Percent Amount Percent
-------- ------- -------- -------
Mortgage loans:
Single-family residential $349,753 35.66% $386,050 41.11%
Multi-family residential 77,980 7.95 71,170 7.58
Commercial real estate 321,892 32.82 271,426 28.91
Construction and land development:
Single-family residential 14,399 1.47 12,118 1.29
Multi-family residential 65,709 6.70 63,893 6.80
Commercial and land development 105,628 10.77 88,951 9.47
Home equity 59,528 6.07 45,106 4.81
-------- ------- -------- -------
Total mortgage loans 994,889 101.44 938,714 99.97
Other loans:
Commercial 42,938 4.37 40,034 4.26
Consumer 2,914 .30 2,610 .28
Undisbursed portion of
loan proceeds (56,817) (5.79) (39,704) (4.23)
Deferred loan fees (3,135) (.32) (2,632) (.28)
-------- ------- -------- -------
Total loans receivable 980,789 100.00% 939,022 100.00%
-------- ------- -------- -------
Less:
Allowance for losses on loans 9,486 8,674
-------- --------
Loans receivable, net $971,303 $930,348
======== ========
9
4. INVESTMENT SECURITIES
Amortized cost of investment securities and their fair values were as follows
(in thousands):
Available-for-sale at June 30, 2003:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -------
Callable agency securities, corporate bonds
and commercial paper $ 50,863 $ 324 $ -- $51,187
Trust preferred securities 4,933 -- 385 4,548
Equity securities 6,279 72 292 6,059
--------- ---------- ---------- -------
$ 62,075 $ 396 $ 677 $61,794
========= ========== ========== =======
Available-for-sale at December 31, 2002:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -------
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
========= ========== ========== =======
10
5. MORTGAGE-BACKED SECURITIES
The amortized cost of mortgage-backed securities and their fair values are as
follows (in thousands):
Available-for-sale at June 30, 2003:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
Participation certificates $ 71,569 $ 870 $ 63 $ 72,376
Real estate mortgage investment conduits
and collateralized mortgage obligations 127,991 916 22 128,885
--------- ---------- ---------- --------
$ 199,560 $ 1,786 $ 85 $201,261
========= ========== ========== ========
Available-for-sale at December 31, 2002:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
Participation certificates $ 64,084 $ 820 $ 136 $ 64,768
Real estate mortgage investment conduits
and collateralized mortgage obligations 231,752 862 744 231,870
--------- ---------- ---------- --------
$ 295,836 $ 1,682 $ 880 $296,638
========= ========== ========== ========
Held-to-maturity at June 30, 2003:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -------
Participation certificates $ 19,421 $ 1,194 $ -- $20,615
Real estate mortgage investment conduits
and collateralized mortgage obligations 732 50 -- 782
--------- ---------- ---------- -------
$ 20,153 $ 1,244 $ -- $21,397
========= ========== ========== =======
Held-to-maturity at December 31, 2002:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -------
Participation certificates $ 20,651 $ 520 $ 10 $21,161
Real estate mortgage investment conduits
and collateralized mortgage obligations 751 65 -- 816
--------- ---------- ---------- -------
$ 21,402 $ 585 $ 10 $21,977
========= ========== ========== =======
11
6. DEPOSITS
The following table sets forth the dollar amount of deposits and the percentage
of total deposits in various types of deposits offered by the Bank at the dates
indicated.
June 30, 2003 December 31, 2002
------------- -----------------
Amount Percent Amount Percent
-------- ------- ------ -------
(Dollars in thousands)
Checking accounts:
Noninterest-bearing $ 34,056 3.69% $ 31,318 3.28%
Interest-bearing 92,262 10.00 90,905 9.53
Money market accounts 146,605 15.88 121,693 12.76
Saving accounts 215,409 23.34 212,370 22.26
Certificates of deposit:
$100,000 or less 343,270 37.19 380,493 39.90
Over $100,000 91,376 9.90 117,082 12.27
-------- ------- -------- -------
Deposits 922,978 100.00% 953,861 100.00%
======= =======
Accrued interest 321 361
-------- --------
Total $923,299 $954,222
======== ========
7. RECENT ACCOUNTING PRONOUNCEMENTS
In May 2003, Statement of Financial Accounting Standards ("SFAS") No. 150,
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity" was issued, establishing standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. This statement requires that an issuer classify
certain financial instruments, which may previously have been classified as
equity, as a liability. This generally includes financial instruments which
either 1) require mandatory redemption at a specified time other than upon
liquidation or termination of the entity, 2) include an obligation to either
repurchase the issuer's equity shares or is indexed to such an obligation and
which may require settlement in cash or 3) require the issuance of a variable
number of the issuer's shares based on a monetary amount which is generally
unrelated to the value of those shares. The Statement was effective for the
Company as of July 1, 2003 and is not expected to have a material impact on the
Company's accounting and reporting.
12
8. EARNINGS PER SHARE
Set forth below is information with respect to calculation of basic and diluted
earnings per share for the periods indicated.
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2003 2002 2003 2002
---- ---- ---- ----
(Dollars in thousands, except per share data)
Net income $ 698 $ 1,983 $ 1,352 $ 3,547
Weighted average number of common shares outstanding 12,191,309 13,333,516 12,304,279 13,441,871
Average ESOP shares not committed to be released (790,726) (912,133) (805,701) (927,086)
Average RRP shares not vested (144,400) (273,650) (196,200) (353,150)
------------ ------------ ------------ ------------
Weighted average number of shares outstanding
for basic earnings per share computation purposes 11,256,183 12,147,733 11,302,378 12,161,635
Dilutive effects of employee stock options 388,049 521,522 427,259 508,424
------------ ------------ ------------ ------------
Weighted average shares and common share equivalents
outstanding for diluted earnings per share purposes 11,644,232 12,669,255 11,729,637 12,670,059
============ ============ ============ ============
Basic earnings per share $ 0.06 $ 0.16 $ 0.12 $ 0.29
Diluted earnings per share 0.06 0.16 0.12 0.28
9. COMPREHENSIVE INCOME
Comprehensive income is the total of reported net income and all other revenues,
expenses, gains and losses that under generally accepted accounting principles
are not includable in reported net income but are reflected in stockholders'
equity.
The following table presents the Company's comprehensive income:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2003 2002 2003 2002
------ ---- ------- ------
(Dollars in thousands)
Net income $ 698 $ 1,983 $ 1,352 $3,547
Net change in unrealized gain (loss) on
securities available-for-sale, net 151 1,774 1,064 544
------ ------- ------- ------
Comprehensive income $ 849 $ 3,757 $ 2,416 $4,091
====== ======= ======= ======
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
This Form 10-Q contains certain forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995, and may be identified by
the use of such words as "believe," "expect," "anticipate," "should," "planned,"
"estimated" and "potential." Examples of forward-looking statements include, but
are not limited to, estimates with respect to the financial condition, results
of operations and business of the Company that are subject to various factors
which could cause actual results to differ materially from these estimates.
These factors include, but are not limited to, 1) general economic
13
conditions, 2) changes in interest rates, deposit flows, loan demand, real
estate values, and competition; changes in accounting principles, policies, or
guidelines; changes in legislation or regulation and 3) other economic,
competitive, governmental, regulatory, and technological factors affecting the
Company's operations, pricing, products and services.
CHANGES IN FINANCIAL CONDITION
At June 30, 2003 the Company's total assets amounted to $1.6 billion or
approximately $33.0 million less than at December 31, 2002, while total
liabilities decreased $26.4 million and stockholders' equity decreased $6.6
million over this same period.
Cash and cash equivalents were $210.6 million at June 30, 2003 compared to
$210.1 million at December 31, 2002.
Investment securities available-for-sale were $61.8 million at June 30, 2003
compared to $39.1 million at December 31, 2002. Mortgage-backed securities
available-for-sale were $201.3 million at June 30, 2003 compared to $296.6
million at December 31, 2002, while mortgage-backed securities held-to-maturity
were $20.2 million at June 30, 2003 compared to $21.4 million at December 31,
2002. This aggregate net decrease of $73.9 million in investment and
mortgage-backed securities was used primarily to fund originations of new
commercial and multi-family real estate mortgage loans and deposit withdrawals.
Net loans receivable were $971.3 million at June 30, 2003 compared to $930.3
million at December 31, 2002. This net increase of $41.0 million resulted from
using maturities of investment and mortgage-backed securities to fund new loan
originations. While the Company's net loan portfolio increased during the six
months ended June 30, 2003, the portfolio of single-family residential mortgage
loans decreased. The net reduction of $36.3 million in single-family residential
mortgage loans reflected the continuing shift in the composition of the
Company's loan portfolio into higher levels of investment in commercial,
commercial real estate, multi-family real estate and home equity loans.
Deposits decreased $30.9 million to $923.3 at June 30, 2003 from $954.2 million
at December 31, 2002. The reduction was the result of a reduction of $62.9
million in certificates of deposit being partially offset by an increase in core
deposits of $32.0 million.
Borrowed money was $449.4 million at June 30, 2003 and December 31, 2002.
Borrowed funds consist primarily of advances from the Federal Home Loan Banks of
Indianapolis and Chicago. Of the Company's $430.7 million of FHLB advances at
June 30, 2003, $400.0 million were fixed-rate borrowings with maturities in
2010. Such advances generally include significant prepayment penalties.
Stockholders' equity was $154.0 million at June 30, 2003 compared to $160.7
million at December 31, 2002. The $6.6 million net reduction primarily was the
result of the repurchase of $9.0 million of the Company's common stock offset by
$1.1 million of options exercised during the first six months of 2003. This net
decrease of $7.7 million was partially offset by $1.3 million of shares held in
the RRP Trust becoming vested and issued to plan participants.
14
AVERAGE BALANCES, NET INTEREST INCOME, YIELDS EARNED AND RATES PAID
The following tables set forth, for the periods indicated, information regarding
1) the total dollar amount of interest income of the Company from
interest-earning assets and the resultant average yields, 2) the total dollar
amount of interest expense on interest-bearing liabilities and the resultant
average rate, 3) net interest income, 4) interest rate spread and 5) net
interest margin. Information is based on average daily balances.
Three Months Ended June 30,
----------------------------------------------------------------------------
2003 2002
----------------------------------------------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
----------------------------------------------------------------------------
(Dollars in thousands)
Interest - earning assets:
Loans Receivable (1)
Real estate loans $ 918,828 $ 14,348 6.25% $ 881,066 $ 15,325 6.96%
Other loans 40,511 626 6.18 29,317 423 5.77
---------- -------- ---------- --------
Total loans 959,339 14,974 6.24 910,383 15,748 6.92
Securities 329,916 1,818 2.20 378,340 5,219 5.52
Other interest-earning assets (2) 216,510 891 1.65 204,567 1,161 2.27
---------- -------- ---------- --------
Total interest-earning assets 1,505,765 17,683 4.70 1,493,290 22,128 5.93
Non-interest earning assets 77,462 79,037
---------- ----------
Total assets $1,583,227 $1,572,327
========== ==========
Interest-bearing liabilities:
Deposits:
Checking and money market accounts $ 262,165 663 1.01 $ 192,589 655 1.36
Passbook accounts 215,782 377 0.70 217,778 694 1.27
Certificates of deposit 451,729 3,499 3.10 468,350 4,748 4.06
---------- -------- ---------- --------
Total deposits 929,676 4,539 1.95 878,717 6,097 2.78
Total borrowings 449,380 6,672 5.94 462,180 6,881 5.96
---------- -------- ---------- --------
Total interest-bearing liabilities 1,379,056 11,211 3.25 1,340,897 12,978 3.87
Non-interest bearing liabilities (3) 49,082 62,964
---------- ----------
Total liabilities 1,428,138 1,403,861
Net worth 155,089 168,466
---------- ----------
Total liabilities and retained income $1,583,227 $1,572,327
========== ==========
Net interest-earning assets $ 126,709 $ 152,393
========== ==========
Net interest income/interest rate spread $ 6,472 1.45% $ 9,150 2.06%
======== ====== ======== ======
Net interest margin 1.72% 2.45%
====== ======
Ratio of average interest-earning assets to
average interest-bearing liabilities 109.19% 111.37%
====== ======
(1) The average balance of loans receivable includes non-performing loans,
interest on which is recognized on a cash basis.
(2) Includes money market accounts, federal funds sold and interest-earning bank
deposits.
(3) Consists primarily of demand deposit accounts.
15
Six Months Ended June 30,
----------------------------------------------------------------------------
2003 2002
----------------------------------------------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
----------------------------------------------------------------------------
(Dollars in thousands)
Interest - earning assets:
Loans Receivable (1)
Real estate loans $ 911,641 $ 29,041 6.37% $ 872,021 $ 30,519 7.00%
Other loans 40,386 1,173 5.81 28,335 817 5.77
---------- -------- ---------- --------
Total loans 952,027 30,214 6.35 900,356 31,336 6.96
Securities 348,022 4,334 2.49 368,938 10,218 5.54
Other interest-earning assets (2) 211,770 1,738 1.64 235,273 2,552 2.17
---------- -------- ---------- --------
Total interest-earning assets 1,511,819 36,286 4.80 1,504,567 44,106 5.86
Non-interest earning assets 77,600 83,676
---------- ----------
Total assets $1,589,419 $1,588,243
========== ==========
Interest-bearing liabilities:
Deposits:
Checking and money market accounts $ 243,325 1,358 1.12 $185,442 1,330 1.43
Passbook accounts 214,617 888 0.83 214,356 1,469 1.37
Certificates of deposit 469,474 7,518 3.20 493,489 10,513 4.26
---------- -------- ---------- --------
Total deposits 927,416 9,764 2.11 893,287 13,312 2.98
Total borrowings 449,393 13,272 5.91 462,406 13,679 5.92
---------- -------- ---------- --------
Total interest-bearing liabilities 1,376,809 23,036 3.35 1,355,693 26,991 3.98
Non-interest bearing liabilities (3) 56,263 62,949
---------- ----------
Total liabilities 1,433,072 1,418,642
Net worth 156,347 169,601
---------- ----------
Total liabilities and retained income $1,589,419 $1,588,243
========== ==========
Net interest-earning assets $ 135,010 $ 148,874
========== ==========
Net interest income/interest rate spread $ 13,250 1.45% $ 17,115 1.88%
======== ====== ======== ======
Net interest margin 1.75% 2.28%
====== ======
Ratio of average interest-earning assets to
average interest-bearing liabilities 109.81% 110.98%
====== ======
(1) The average balance of loans receivable includes non-performing loans,
interest on which is recognized on a cash basis.
(2) Includes money market accounts, federal funds sold and interest-earning bank
deposits.
(3) Consists primarily of demand deposit accounts.
16
RATE /VOLUME ANALYSIS
The following tables set forth the effects of changing rates and volumes on net
interest income of the Company. Information is provided with respect to 1)
effects on interest income attributable to changes in volume (changes in volume
multiplied by prior rate), 2) effects on interest income attributable to changes
in rate (changes in rate multiplied by prior volume) and 3) changes in
rate/volume (changes in rate multiplied by changes in volume).
Three Months Ended June 30, 2003
compared to Three Months Ended June 30, 2002
-------------------------------------------------
(Dollars in thousands)
Increase (decrease) due to
-------------------------------------------------
Total Net
Rate/ Increase
Rate Volume Volume (Decrease)
------- ------- ------- ---------
Interest-earning assets:
Loans receivable:
Real estate loans ($1,567) $ 657 ($ 67) ($ 977)
Other loans 30 161 12 203
------- ------- ------- -------
(1,537) 818 (55) (774)
Securities (3,134) (668) 401 (3,401)
Other interest-earning assets (319) 68 (19) (270)
------- ------- ------- -------
Total net change in income on
interest-earning assets (4,990) 218 327 (4,445)
Interest-bearing liabilities:
Deposits:
Checking and money markets accounts (168) 237 (61) 8
Passbook accounts (314) (6) 3 (317)
Certificates of deposit (1,120) (169) 40 (1,249)
------- ------- ------- -------
Total deposits (1,602) 62 (18) (1,558)
Borrowings (19) (191) 1 (209)
------- ------- ------- -------
Total net change in expense on
interest-bearing liabilities (1,621) (129) (17) (1,767)
------- ------- ------- -------
Net change in net interest income ($3,369) $ 347 $ 344 ($2,678)
======= ======= ======= =======
17
Six Months Ended June 30, 2003
compared to Six Months Ended June 30, 2002
-------------------------------------------------
(Dollars in thousands)
Increase (decrease) due to
-------------------------------------------------
Total Net
Rate/ Increase
Rate Volume Volume (Decrease)
------- ------- ------- ---------
Interest-earning assets:
Loans receivable:
Real estate loans ($2,740) $ 1,387 ($ 125) ($1,478)
Other loans 6 347 3 356
------- ------- ------- -------
(2,734) 1,734 (122) (1,122)
Securities (5,624) (579) 319 (5,884)
Other interest-earning assets (621) (255) 62 (814)
------- ------- ------- -------
Total net change in income on
interest-earning assets (8,979) 900 259 (7,820)
Interest-bearing liabilities:
Deposits:
Checking and money markets accounts (295) 415 (92) 28
Passbook accounts (582) 2 (1) (581)
Certificates of deposit (2,611) (512) 128 (2,995)
------- ------- ------- -------
Total deposits (3,488) (95) 35 (3,548)
Borrowings (23) (385) 1 (407)
------- ------- ------- -------
Total net change in expense on
interest-bearing liabilities (3,511) (480) 36 (3,955)
------- ------- ------- -------
Net change in net interest income ($5,468) $ 1,380 $ 223 ($3,865)
======= ======= ======= =======
18
RESULTS OF OPERATIONS
The Company reported net income of $698,000 or $0.06 per diluted share for the
three months ended June 30, 2003 compared to $2.0 million or $0.16 per diluted
share for the three months ended June 30, 2002. Net income for the six months
ended June 30, 2003 was $1.4 million or $0.12 per diluted share compared to $3.5
million or $0.28 per diluted share for the same period in 2002.
Net interest income for the second quarter of 2003 was $6.5 million compared to
$9.2 million for the second quarter of 2002. Net interest income for the first
six months of 2003 was $13.3 million compared to $17.1 million for the same
period in 2002. For the three months ended June 30, 2003 compared to the three
months ended June 30, 2002 the interest rate spread was 1.45 percent compared to
2.06 percent respectively, while the net interest margin was 1.72 percent
compared to 2.45 percent, respectively. For the six months ended June 30, 2003
compared to the same period in 2002, the interest rate spread was 1.45 percent
compared to 1.88 percent, respectively, while the net interest margin was 1.75
percent compared to 2.28 percent, respectively.
Interest income for the second quarter of 2003 was $17.7 million compared to
$22.1 million for the second quarter of 2002. Interest income for the first six
months of 2003 was $36.3 million compared to $44.1 million for the first six
months of 2002. The primary reason for the decreases in the 2003 periods was the
significant decline in the average yield on interest-earning assets,
particularly securities. When comparing the second quarter of 2003 to the second
quarter of 2002, the average yield on securities decreased by 332 basis points,
similarly, comparing the first six months of 2003 to the first six months of
2002, the average yield on securities decreased by 305 basis points. This
decline is attributed primarily to the accelerated amortization of premiums on
mortgage-backed securities resulting from the unprecedented high level of
mortgage loan refinancings due to the continuing low levels of market rates of
interest.
Interest expense for the three months ended June 30, 2003 was $11.2 million
compared to $13.0 million for the same periods in 2002. Interest expense for the
six months ended June 30, 2003 was $23.0 million compared to $27.0 million for
the six months ended June 30, 2002. The decreases in the three and six months
ended June 30, 2003 compared to the same periods in 2002 primarily were the
result of lower average rates paid on deposits, particularly certificates of
deposit, and lower average balances of certificates of deposit and borrowings,
which were partially offset by higher average balances on checking and money
market accounts.
The Company's provision for loan losses for the three months ended June 30, 2003
was $509,000 compared to $350,000 for the three months ended June 30, 2002. The
provision for loan losses for the six months ended June 30, 2003 was $987,000
compared to $550,000 for the six months ended June 30, 2002. The Company
establishes provisions for losses on loans, which are charged to operations, in
order to maintain the allowances for losses on loans at a level which is deemed
appropriate to absorb losses inherent in the portfolio. 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. As a result, the
Company continued to increase its allowance for losses on loans as a percentage
of total loans. Included in the 2003 provisions for loan losses is $59,000 and
$87,000 for the three and six months ended June 30, 2003, respectively, relating
to an overdraft on deposit product, a new program which began in the third
quarter of 2002. The Company `s total non-performing loans increased by $84,000
when comparing June 30, 2003 to December 31, 2002, while total non-performing
assets declined by $523,000 to $15.7 million at June 30, 2003 from $16.2 million
at December 31, 2002.
19
The following table sets forth information with respect to the Company's
non-performing assets at the dates indicated:
June 30, 2003 December 31, 2002
------------- -----------------
(Dollars in thousands)
Non-accrual loans:
Mortgage loans:
Construction and land development $ 1,693 $ 1,323
Single-family residential 6,649 7,294
Multi-family residential 1,278 36
Non-residential 4,143 5,621
Home equity 424 324
Other loans:
Commercial 1,188 692
Consumer 34 35
------------- -----------------
Total non-performing loans 15,409 15,325
Real estate owned 286 893
------------- -----------------
Total non-performing assets $ 15,695 $ 16,218
============= =================
Non-performing assets to total assets 1.01% 1.02%
Non-performing loans to total loans 1.57 1.63
The following table is a summary of changes in the allowance for loan losses for
the six months ended June 30, 2003 and the year ended December 31, 2002:
Six Months Ended Year Ended
June 30, 2003 December 31, 2002
---------------- -----------------
(Dollars in thousands)
Balance at beginning of period $ 8,674 $ 7,662
Provision for loan losses 987 1,956
Charge-offs (324) (1,183)
Recoveries 149 239
---------------- -----------------
Balance at end of period $ 9,486 $ 8,674
================ =================
Allowance for loan losses to total
non-performing loans at end of period 61.56% 56.60%
Allowance for loan losses to total
loans at end of period 0.97 0.92
20
Non-interest income for the three months ended June 30, 2003 was $2.6 million
compared to $2.5 million for the three months ended June 30, 2002 and amounted
to $4.9 million for the six months ended June 30, 2003 compared to $4.7 million
for the same period in 2002. The increases in non-interest income in both the
three and six month periods of 2003 compared to 2002 reflected increases in fee
income which was partially offset by reductions in both gains on the sale of
securities and commissions on insurance and investments. The combined decrease
in insurance and investment commissions was $462,000 for the three months ended
June 30, 2003 when compared to the three months ended June 30, 2002 and $886,000
for the six months ended June 30, 2003 when compared to the same period in 2002.
The decrease in insurance and investment commissions reflects the sale of the
Company's insurance agency assets in December 2002 and the outsourcing of its
securities brokerage activities in August 2002. However, corresponding
reductions in certain non-interest expense from the changes to insurance and
investment activities have, in large part, offset this reduction in non-interest
income.
Non-interest expense was $7.7 million for the three months ended June 30, 2003
compared to $8.5 million for three months ended June 30, 2002. Non-interest
expense was $15.2 million for the first six months of 2003 compared to $16.2
million for the same period in 2002. For both the three months and the six
months ended June 30, 2003, compared to the same periods in 2002, decreases
resulted primarily from decreases in compensation and employee benefits due to
reductions in the number of employees, as a result of the outsourcing of
securities brokerage activities and the sale of the insurance agency's assets,
previously described.
Income tax expense for the three months ended June 30, 2003 was $258,000 or 27.0
percent of income before income taxes compared to $859,000 or 30.2 percent of
income before income taxes for the three months ended June 30, 2002. For the six
months ended June 30, 2003 income tax expense was $571,000 or 29.7 percent of
income before income taxes compared to $1.5 million or 30.0 percent for the same
period in 2002. The decline in the Company's effective tax rate was primarily
due to implementation of various tax strategies over the past few years. The
Company estimates that its effective rate for the remainder of 2003 will be
approximately 29.0 percent.
LIQUIDITY AND COMMITMENTS
The Company's liquidity, represented by cash and cash equivalents, is a product
of its operating, investing, and financing activities. The Company's primary
sources of funds are deposits, borrowings, amortization, prepayments and
maturities of outstanding loans and mortgage-backed securities, maturities of
investment securities and other short-term investments, and funds provided from
operations. While scheduled payments from the amortization of loans and
mortgage-related securities and maturing investment securities and short-term
investments are relatively predictable sources of funds, deposit flows and loan
prepayments are greatly influenced by general interest rates. In addition, the
Company invests excess funds in federal funds sold and other short-term
interest-earning assets which provide liquidity to meet lending requirements.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as federal funds. The Company uses its sources of funds primarily to meet
its ongoing commitments, pay maturing certificates of deposit and savings
withdrawals, fund loan commitments, and maintain a portfolio of mortgage-backed
and mortgage-related securities and investment securities. At June 30, 2003 the
total approved investment and loan origination commitments outstanding amounted
to $93.5 million. At the same date, the unadvanced portion of construction loans
amounted to $56.6 million. Investment securities scheduled to mature in one year
or less at June 30, 2003 were $30.7 million.
21
Based on historical experience, the Company believes that a significant portion
of maturing deposits will remain with the Company. The Company anticipates that
it will continue to have sufficient funds, together with borrowings, to meet its
current commitments.
At June 30, 2003 the Bank's regulatory capital was significantly in excess of
regulatory limits set by the Office of Thrift Supervision. The current
requirements and the Bank's actual levels at June 30, 2003 are set forth below
(dollars in thousands):
Required Capital Actual Capital Excess Capital
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Tangible capital $23,077 1.50% $131,644 8.56% $108,567 7.06%
Core capital 61,538 4.00 131,644 8.56 70,106 4.56
Risk-based capital 86,679 8.00 141,131 13.03 54,452 5.03
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
For a discussion of the Company's asset and liability management policies as
well as the potential impact of interest rate changes upon the market value of
the Company's portfolio equity, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Company's annual report to
stockholders for the year ended December 31, 2002. There has been no material
change in the Company's assets and liability position or the market value of the
Company's portfolio equity since December 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES
Our Management evaluated, with the participation of our Chief Executive Officer
and Chief Financial Officer, the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities
Exchange Act of 1934) as of the end of the period covered by this report. Based
on such evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are designed to ensure
that information required to be disclosed by us in the reports that we file or
submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
regulations and are operating in an effective manner.
No change in our internal control over financial reporting (as defined in Rules
13a-15(f) or 15(d)-15(f) under the Securities Exchange Act of 1934) occurred
during the most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
22
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS FROM REGISTERED
SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits (filed herewith unless otherwise noted).
3.1 Certificate of Incorporation of CFS Bancorp, Inc.*
3.2 Bylaws of CFS Bancorp, Inc.*
4.0 Form of Stock Certificate of CFS Bancorp, Inc.*
10.1 Employment Agreement entered into between Citizens Financial Services, FSB and
Thomas F. Prisby
10.2 Employment Agreement entered into between Citizens Financial Services, FSB and
James W. Prisby
10.3 Employment Agreement entered into between Citizens Financial Services, FSB and
John T. Stephens
10.4 Employment Agreement entered into between CFS Bancorp, Inc. and Thomas F. Prisby
10.5 Employment Agreement entered into between CFS Bancorp, Inc. and James W. Prisby
10.6 Employment Agreement entered into between CFS Bancorp, Inc. and John T. Stephens
10.7 CFS Bancorp, Inc. Amended and Restated 1998 Stock Option Plan**
10.8 CFS Bancorp, Inc. Amended and Restated 1998 Recognition and Retention Plan and Trust Agreement**
10.9 CFS Bancorp, Inc. 2003 Stock Option Plan***
31.1 Certificate of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certificate of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant
to Section 906 of Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant
to Section 906 of Sarbanes-Oxley Act of 2002
23
- --------
* Incorporated by Reference from the Company's Registration Statement on
Form S-1 filed on March 26, 1998, as amended and declared effective on
May 14, 1998.
** Incorporated by Reference from the Company's Definitive Proxy Statement
for the Annual Meeting of Stockholders filed on March 23, 2001.
*** Incorporated by Reference from the Company's Definitive Proxy Statement
for the Annual Meeting of Stockholders filed on March 31, 2003.
(b) Reports filed on Form 8-K.
On April 20, 2003, the Company filed a Current Report on Form 8-K in
connection with its reporting of its earnings for the quarter ended March 31,
2003.
On June 2, 2003, the Company filed a Current Report on Form 8-K in
connection with the announcement that it had entered into a definitive agreement
to acquire the Bolingbook, Illinois branch of Family Bank and Trust Company of
Palos Hills, Illinois.
On June 20, 2003, the Company filed a Current Report on Form 8-K in
connection with the announcement of its quarterly dividend.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CFS BANCORP, INC.
Date: August 13, 2003 By: /s/ Thomas F. Prisby
----------------------------------------------
Thomas F. Prisby, Chairman and
Chief Executive Officer
Date: August 13, 2003 By: /s/ John T. Stephens
----------------------------------------------
John T. Stephens, Executive Vice President and
Chief Financial Officer
24