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, 1998
-----------------------------
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 33-2042093
( State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
707 Ridge Road, Munster, Indiana 46321
(Address of principal executive offices)
(219) 836-5500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
The Registrant had 22,394,413 shares of Common Stock issued and
outstanding as of August 7, 1998
CFS BANCORP, INC.
INDEX
Page No.
--------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited) 3
Consolidated Statements of Condition at June 30, 1998
and December 31, 1997 3
Consolidated Statements of Income - For the Three
and Six-Month Periods Ended June 30, 1998 4
Consolidated Statements of Changes in Equity for the
year Ended December 31, 1997 and the Six-Months Ended
June 30, 1998 5
Consolidated Statements of Cash Flows - For the Six-Months
Ended June 30, 1998 and 1997 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis 8
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 12
PART II OTHER INFORMATION
Item 1: Legal Proceedings 13
Item 2: Changes in Securities and Use of Proceeds 13
Item 3: Defaults upon Senior Securities 13
Item 4: Submission of Matters to a Vote of Security Holders 13
Item 5: Other Information 13
Item 6: Exhibits and Reports on Form 8-K 13
2
Citizens Financial Services, FSB
Consolidated Statements of Condition
(In Thousands)
June 30, 1998 December 31, 1997
------------------------ -----------------
Assets
Cash...................................................... $ 9,468 $ 8,290
Interest-bearing deposits................................. 72,328 3,370
Federal funds sold........................................ 78,000 1,000
------------- -----------
Cash and cash equivalents............................. 159,796 12,660
Investment securities available-for-sale.................. 23,946 24,714
Investment securities held-to-maturity (fair
value; 1998 - $513,167; 1997 - $385,618).............. 509,348 381,752
Loans receivable.......................................... 379,547 301,934
Investment in Federal Home Loan Bank stock
- at cost............................................. 3,234 2,836
Office properties and equipment........................... 11,898 11,398
Accrued interest receivable............................... 7,688 6,009
Real estate held for development and sale................. -- 1,071
Real estate owned......................................... 457 1,160
Other assets.............................................. 2,191 2,516
----------- ---------
Total assets.......................................... $1,098,105 $746,050
--------- -------
--------- -------
Liabilities and Equity
Liabilities:
Deposits.................................................. $ 710,655 $669,417
Borrowed money............................................ 105,326 --
Advance payments by borrowers for taxes and
insurance............................................. 3,453 2,290
Subscription proceeds..................................... 204,701 --
Other liabilities......................................... 5,325 8,654
-------------- -----------
Total liabilities..................................... 1,029,460 680,361
----------- ---------
Equity:
Retained income, substantially restricted................. 67,751 65,296
Unrealized appreciation on investment
securities available-for-sale, net of taxes........... 894 393
--------------- ------------
Total equity 68,645 65,689
------------- ----------
Total liabilities and equity....................... $1,098,105 $746,050
--------- -------
--------- -------
See accompanying notes
3
Citizens Financial Services, FSB
Consolidated Statements of Income
(In Thousands)
For the Three Months Ended For the Six Months Ended
June 30, June 30,
-------------------------------------- -------------------------------
1998 1997 1998 1997
------------------ ---------------- --------------- -------------
Interest income:
Loans............................................. $7,309 $6,520 $13,921 $12,896
Mortgage-related securities....................... 3,368 4,031 6,848 8,469
Other investment securities....................... 5,106 2,437 9,080 3,678
Other............................................. 468 149 657 508
-------- -------- ---------- ---------
Total interest income........................... 16,251 13,137 30,506 25,551
Interest expense:
Deposits....................................... 8,849 8,018 17,289 15,238
Borrowings..................................... 1,303 -- 1,429 --
------- ---------- --------- ---------
Net interest income............................. 6,099 5,119 11,788 10,313
Provision for losses on loans........................ 30 15 60 30
--------- --------- ----------- ---------
Net interest income after provision for losses
on loans..................................... 6,069 5,104 11,728 10,283
Noninterest income:
Loan fees......................................... 35 22 88 68
Insurance commissions............................. 178 142 329 268
Investment commissions............................ 226 87 390 181
Loss on real estate held for development
and sale........................................ -- (128) -- (254)
Net gain on sale of investment securities......... -- 115 -- 115
Other income...................................... 327 203 590 366
-------- -------- ---------- ---------
Total noninterest income........................ 766 441 1,397 744
Noninterest expense:
Compensation and employee benefits................ 3,107 2,384 5,780 4,715
Net occupancy expense............................. 315 255 662 524
Furniture and equipment expense................... 356 326 716 622
Federal insurance premiums........................ 104 93 209 185
Data processing................................... 138 124 318 239
Marketing......................................... 149 195 244 344
Other general and administrative
expenses........................................ 565 440 1,223 947
-------- -------- --------- ---------
Total noninterest expense....................... 4,734 3,817 9,152 7,576
------- ------- --------- ---------
Income before income taxes........................... 2,101 1,728 3,973 3,451
Income tax expense................................... 834 721 1,518 1,366
-------- -------- --------- ---------
Net income........................................... $1,267 $1,007 $ 2,455 $ 2,085
----- ----- ------- ------
----- ----- ------- ------
See accompanying notes
4
Citizens Financial Services, FSB
Consolidated Statements of Changes in Equity
(In Thousands)
Unrealized
Appreciation on
Retained Available-for-Sale
Income Securities, Net of Tax Total Equity
---------- ---------------------- --------------
Balance at January 1, 1997................... $63,520 $210 $63,730
Net income for 1997.......................... 1,776 -- 1,776
Change in unrealized appreciation
on available-for-sale securities,
net of tax................................ -- 183 183
------- ----- -------
Balance at December 31, 1997................. 65,296 393 65,689
------- ----- -------
Net income for six months ended
June 30, 1998............................. 2,455 -- 2,455
Change in unrealized appreciation
on available-for-sale securities,
net of tax................................ -- 501 501
------- ----- -------
Balance at June 30, 1998..................... $67,751 $894 $68,645
------ ---- ------
------ ---- ------
See accompanying notes
5
Citizens Financial Services, FSB
Consolidated Statements of Cash Flows
(In Thousands)
For the Six Months Ended June 30,
----------------------------------------
1998 1997
-------------------- --------------
Operating activities
Net income............................................................... $2,455 $2,085
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for losses on loans.......................................... 60 30
Depreciation expense................................................... 610 490
Deferred income taxes.................................................. (268) 218
Net gain on sale of available-for-sale investment securities........... -- (115)
Amortization of deferred loan fees..................................... (317) (211)
Increase in interest receivable........................................ (1,679) (1,683)
Increase in interest payable........................................... 1,339 1,147
Loss on real estate held for development ands sale..................... -- 254
Proceeds from sale of real estate held for development
and sale............................................................ 785 1,813
Construction costs of real estate held for development
and sale............................................................ - (690)
Decrease in other assets............................................... 611 519
Increase (Decrease) in other liabilities............................... (4,411) (3,991)
----------- ------------
Net cash (used) by operating activities........................ (815) (24)
Investing activities Available-for-sale investments:
Purchases.............................................................. -- --
Repayments............................................................. 1,568 806
Sales.................................................................. -- 10,908
Held-to-maturity investments:
Purchases.............................................................. (320,802) (140,984)
Repayments and maturities.............................................. 193,206 56,858
Purchase of FHLB stock................................................... (398) --
Loan originations and principal payments on loans........................ (77,382) (20,388)
Sale of real estate owned................................................ 815 131
Construction costs on real estate owned.................................. (86) --
Purchases or properties and equipment.................................... (1,339) (1,644)
Disposal of properties and equipment..................................... 229 21
------------ ------------
Net cash (used in) provided by investing activities................. (204,189) (94,292)
Financing activities
Net (decrease) increase in NOW, passbook and money market
accounts............................................................... 36,927 (1,318)
Net increase in certificates of deposit.................................. 4,023 80,028
Increase (decrease) in advance payments by borrowers for
taxes and insurance.................................................... 1,163 157
Receipt of Subscription proceeds....................................... 204,701 --
Receipt of borrowed funds.............................................. 105,326 --
------- ------
Net cash provided by financing activities............................ 352,140 78,867
------- ------
(Decrease) increase in cash and cash equivalents......................... 147,136 (15,449)
Cash and cash equivalents at beginning of period......................... 12,660 38,517
------------ ------------
Cash and cash equivalents at end of period............................... $159,796 $23,068
------- ------
------- ------
See accompanying notes
6
CITIZENS FINANCIAL SERVICES, FSB
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Mutual to Stock Conversion. On July 24, 1998, CFS Bancorp,
Inc. (the "Company") completed the mutual-to-stock conversion (the
"Conversion") of Citizens Financial Services, FSB ("Citizens
Financial" or the "Bank"), and the sale of 17,853,750 shares of
Company common stock, par value $0.01 per share ("Company Common
Stock") at $10.00 per share to total gross proceeds of $178.5
million. As an integral part of the Conversion and in furtherance of
Citizens Financial's commitment to the communities that it serves,
Citizens Financial and the Company have established a charitable
foundation known as The Citizens Savings Foundation (the
"Foundation") and have contributed 300,000 shares to the Foundation.
The Foundation will provide funding to support charitable causes and
community development activities which will complement Citizens
Financial's existing community activities. In addition, the Company
established an ESOP for the employees of the Company and the Bank
which became effective with the completion of the Conversion. The
Company will account for the ESOP in accordance with Statement of
Position 93-6, "Employer's Accounting for Employee Stock Ownership
Plans."
Acquisition. On July 24, 1998, immediately subsequent to
the Conversion, the Company consummated the previously announced
merger ("Merger") of SuburbFed Financial Corp. ("SFC") with and into
the Company. Upon consummation of the Merger, each former
stockholder of SFC became entitled to receive 3.6 shares of Company
Common Stock for each former share of common stock of SFC, par value
$0.01 per share ("SFC Common Stock"). Each outstanding option to
purchase SFC Common Stock was converted into an option to purchase
3.6 shares of the Company Common Stock. Up to 5,507,424 shares of
Company Common Stock will be issued upon exchange for former shares
of SFC Common Stock and options to acquire SFC Common Stock. Prior
to the date of the Merger, SFC was a savings and loan holding
company for Suburban Federal Savings, a Federal Savings Bank which
was principally engaged in the business of attracting deposits from
the general public and using such deposits, together with funds
generated from operations and borrowings, primarily to originate
one- to four-family residential loans in Illinois. As of March 31,
1998, SFC had total assets of $446.5 million, total deposits of
$321.0 million and stockholders' equity of $30.0 million.
Additional information regarding the Merger is included in the
Company's Registration Statement on Form S-1 filed on March 31, 1998,
as amended.
2. Loan Portfolio
The Bank's Loan Portfolio consisted of the following at the
dates indicated:
LOAN PORTFOLIO COMPOSITION
June 30, 1998 December 31, 1997
------------------------ ------------------------
Percent of Percent of
Amount Total Amount Total
------- ---------- ------- ----------
Mortgage loans:
Single-family residential $300,323 76.35% $241,910 76.85%
Multi-family residential 18,345 4.66 16,064 5.10
Commercial real estate 22,635 5.75 14,594 4.64
Construction and land development 33,048 8.40 30,025 9.54
Home equity 8,163 2.08 7,118 2.26
-------- ------ -------- ------
Total mortgage loans 382,514 97.24 309,711 98.39
Other loans 10,849 2.76 5,083 1.61
-------- ------ -------- ------
Total loans receivable 393,363 100.00% 314,794 100.00%
Less:
Undisbursed portion of loan proceeds 9,322 8,177
Allowance for losses on loans 3,117 3,094
Deferred loan fees 1,377 1,589
-------- --------
Loans receivable, net $379,547 $301,934
-------- --------
-------- --------
3. Investment Securities
The amortized cost of investment securities and their fair
values are as follows:
Available-for-Sale at June 30, 1998
------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Losses Value
------------ ---------- -------- ------------
Mortgage-backed securities $ 22,464 $ 1,482 $ - $ 23,946
------------ ---------- -------- ------------
------------ ---------- -------- ------------
Held-to-Maturity at June 30, 1998
------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Losses Value
------------ ---------- -------- ------------
Government agency securities $ 272,727 $ 1,162 $ 100 $ 273,789
Corporate bonds 93,112 59 - 93,171
Mortgage-backed securities 27,860 667 - 28,527
Real estate mortgage investment
conduits 115,649 2,198 167 117,680
------------ ---------- -------- ------------
$ 509,348 $ 4,086 $ 267 $ 513,167
------------ ---------- -------- ------------
------------ ---------- -------- ------------
Available-for-Sale at December 31, 1997
------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Losses Value
------------ ---------- -------- ------------
Mortgage-backed securities $ 24,030,756 $ 711,974 $ 28,974 $ 24,713,756
------------ ---------- -------- ------------
------------ ---------- -------- ------------
Held-to-Maturity at December 31, 1997
------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Losses Value
------------ ---------- -------- ------------
Callable agency securities and
corporate bonds $170,203,937 $1,180,107 $ 13,835 $171,370,209
Zero coupon agency securities 32,038,393 26,145 129,538 31,935,000
Mortgage-backed securities 34,974,592 104,929 54,236 35,025,285
Real estate mortgage investment
conduits 144,534,813 2,995,470 242,734 147,287,549
------------ ---------- -------- ------------
$381,751,735 $4,306,651 $440,343 $385,618,043
------------ ---------- -------- ------------
------------ ---------- -------- ------------
7
4. New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAB) No. 133 "Accounting for
Derivative Instruments and Hedging Activities". The statement is effective
for all fiscal quarters of all fiscal years beginning after June 15, 1999.
The statement established acocunting and reporting standards for derivative
instruments and for hedging activities. It requires that an entity recognizes
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value.
In management's opinion SFAS No. 133 when adopted will not have a
material effect on the Company's financial statements since at this time the
Company owns no derivative instruments affected by this statement.
5. Earnings Per Share
Earnings per share for the three and six months ended June 30, 1998
is not applicable, as the Bank's conversion from mutual-to-stock form and
reorganization into a holding company format was not completed as of June 30,
1998.
6. Basis of Financial Statement Presentation
The Company was incorporated under Delaware law in March, 1998 by
Citizens Financial in connection with the conversion of the Bank from a
federally-chartered mutual savings bank to a federally-chartered stock savings
bank. Upon consummation of the Conversion on July 24, 1998, the Company became
the holding company for the Bank.
For purposes of this Form 10-Q, the financial statements of the Company
have been omitted because the Company, as of June 30, 1998, had not yet issued
any stock, had no assets and no liabilities and had not yet conducted any
business other than of an organizational nature. Alternatively, the unaudited
consolidated financial statements and the Management's Discussion and Analysis
of Financial Condition and Results of Operations presented herein are for the
Bank, which became the subsidiary of the Company upon consummation of the
Conversion. No pro forma effect has been given to the sale of the Company's
Common Stock in the Conversion or for the Merger.
The accompanying consolidated financial statements were prepared in
accordance with instructions to Form 10-Q, and therefore, do not include
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, 1997 contained in the Company's
Prospectus dated May 14, 1998. The results for the six months ended June 30,
1998 are not necessarily indicative of the results that may be expected for
the year ended December 31, 1998. In particular, it is noted that during the
remainder of 1998, the Company will be recording substantial charges
resulting from the Conversion and the Merger as previously described in the
Company's registration statement on Form S-1, filed on March 26, 1998, as
amended. During the third quarter of 1998 the Company will record a
$3,000,000 contribution expense in conjunction with the forming of the
Foundation and will record estimated non-recurring charges net of tax of
approximately $4,000,000 in connection with the Merger of SFC.
This Form 10-Q 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. In addition, the words, "anticipate," "believe," "estimate,"
"expect," "intent," "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 looking 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.
Item 2. Management's Discussion and Analysis
Changes in Financial Condition
General. Total assets of Citizens Financial increased by $35.2 million
or 47.2% to $1,098.1 million at June 30, 1998 compared to $746.1 million at
December 31, 1997. This increase is reflected primarily as an increase of $147.1
million in cash and cash equivalents, an increase of $127.6 million in
investment securities, and an increase of $77.6 million in loans receivable. The
increases in assets were funded by increases of $41.2 million in savings, $105.3
million in borrowed money and $204.7 million of stock subscription proceeds.
Cash and cash equivalents. Cash and cash equivalents amounted to $159.8
million and $12.7 million at June 30, 1998 and December 31, 1997, respectively.
The substantial increase in cash and cash equivalents during the first six
months of 1998
8
was due primarily to the receipt of subscription funds in the Company's
initial public offering and the deposit thereof in interest-bearing deposit
of accounts and federal funds.
Investment securities. At June 30, 1998, Citizens Financial had
$23.9 million in investment securities available for sale and $509.3 million
in investment securities held to maturity or an aggregate of $533.2 million
in investment securities, compared to $24.7 million in investment securities
available for sale and $381.8 million held to maturity or an aggregate of
$406.5 million in investment securities at December 31, 1997. This increase
in investment securities of $126.7 million or 31.2% was primarily related to
the purchase of additional amounts of mortgage-backed securities and callable
agency securities during the first six months of 1998. At June 30, 1998
Citizens Financial had an unrealized gain, net of taxes on investment
securities available for sale of $894,000.
Loans Receivable. The net loan portfolio of Citizens Financial
increased from $301.9 million at December 31, 1997 to $379.0 million at June 30,
1998. The increase in the Bank's net loan portfolio during 1997 was due to the
Bank's efforts to increase its new loan originations as well as general economic
conditions which have facilitated the current residential mortgage loan
refinancing boom (which management attributes in large part to the relatively
low market rates of interest for mortgage loans in recent periods).
Real Estate. At December 31, 1997, Citizens had $1.2 million of real
estate owned and $1.1 million of real estate held for development and sale. Both
real estate owned and real estate held for development and sale consist almost
entirely of Citizens Financial's remaining interest in a planned 148 unit
residential townhome development in Munster, Indiana which was being developed
by a Bank subsidiary. The Bank began its involvement in the development in 1993
when a Bank subsidiary and a local developer formed a limited liability company
and agreed to purchase land in eight phases from a regional real estate company
and develop and build 148 upscale townhome units in 42 buildings. Construction
commenced during 1994, and, as of December 31, 1997, construction had been
completed on 67 units (58 of which had been sold and an additional six of which
were under contract for sale). As of the end of 1997, 25 lots had been purchased
(out of an anticipated total of 42 lots for the entire planned development), six
of which lots were vacant. Given a lack of sufficient demand, sale prices on
homes in the development were reduced in 1996 and again in 1997 which
reductions, together with cost overruns, led to significant losses in 1996 and
1997. As a result, during 1997, the developer's minor equity interest in the
limited liability company was extinguished, the Bank's subsidiary became the
sole owner of the limited liability company, and, in late 1997, notice was given
that the planned purchases of the final 17 lots, which were to be developed in
the final three phases, would not be consummated. At December 31, 1997, the $1.1
million of real estate held for development and sale consisted of six completed
townhome units on which the Bank had existing
9
contracts of sale, while $920,000 of Citizens Financial's real estate owned at
such date was the carrying value of three unsold townhouse units and six vacant
lots.
As of June 30, 1998, sales of all properties previously included in
real estate held for development and sale at December 31, 1997 have closed,
while one property related to the development with a balance of $201,000
remained in real estate owned. This last property was sold and closed in July
1998.
Equity. Total equity of Citizens Financial amounted to $68.6 million or
6.25% of assets at June 30, 1998 compared to $65.7 million or 8.8% of total
assets at December 31, 1997. Total equity of Citizens Financial included
$894,000 and $393,000 of unrealized gain, net of taxes on investment securities
available for sale at June 30, 1998 and December 31, 1997, respectively. The
increase in retained income from December 31, 1997 to June 30, 1998 reflects the
income for the six month period of $2.5 million.
Results of Operations
General - Net income for the three months and six month periods
ended June 30, 1998 was $1.3 million and $2.5 million, respectively. This
compares to net income of $1.0 million and $2.1 million for the same
respective periods of the prior year.
Net Interest Income - Net interest income increased during the three
and six months ended June 30, 1998 compared to the prior respective periods.
Net interest spreads decreased during each of the periods in 1998 while
balances increased significantly.
Interest Income - Interest income increased $3.1 million and $5.0
million for the three and six months ended June 30, 1998. These increases
resulted primarily from increases in balances of loans and investments.
Interest Expense - Interest expense on deposits increased $.8
million and $2.0 million, respectively, for the three and six month periods
ended June 30, 1998. This was a result, in part of a program initiated in
early 1997 to increase the Bank's savings base by agressively pricing its
deposit products compared to competitors in the Bank's market area. During
1998, management has continued to be competitive with interest rates paid on
deposits, but has not been pricing its certificate of deposit products as
agressively as it had during 1997. Also, savings balances increased during
the three months ended June 30, 1998 due to customers increasing their
deposits in anticipation of the Company's stock subscription offering.
Beginning in March of 1998 the Company began a program of investing
the anticipated Conversion proceeds by periodically arranging short term
10
borrowings and investing the proceeds. These borrowings had an average rate
of 5.59% during the six-months ended June 30, 1998 and will be repaid by
September 30, 1998.
Noninterest Income - Noninterest income increased $.3 million and $.7
million, respectively, for the three and six months ended June 30, 1998 as
compared to the same periods in 1997. This is due to an increase in the volume
of lending resulting in increased loan fees, increased commission levels in both
the insurance and investment divisions and increases in other income due
increases in ATM and checking fee income.
Reductions occurred in the area of real estate losses and gain on the
sale of investments available for sale. All losses on the former real estate
development were provided for in 1997 and no investments available for sale were
sold in 1998.
Noninterest Expense - Noninterest expense increased $.9 million and
$1.6 million, respectively, for the three and six months ended June 30, 1998
compared to the same periods in the prior year. Compensation expense
increased due to general increases in salary levels and employees at the
Bank, including the insurance and investment divisions. Office occupancy and
furniture and fixture expense increases are a result of managements efforts
to update all equipment and facilities. Data processing and federal insurance
premiums increased due to general increased levels of numbers of accounts and
account balances, respectively. Other general and administrative expenses
increased primarily due to an increase in ATM charges and the level of
contributions. Marketing expense decreased to managements's efforts to
utilize a more targeted approach to marketing.
The provisions for income taxes for the three and six month periods
ended June 30, 1998 increased from the comparable 1997 periods due to a slightly
higher level of net earnings.
Liquidity and Commitments
The Bank's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing, and financing activities. The Bank'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 Bank invests execess 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 Bank uses its sources of funds
primarily to meet its ongoing commitments, to pay maturing certificates of
deposit and savings withdrawals, fund loan commitments and maintain a
portfolio of mortgage backed and mortgage related securities and investment
securities. At June 30, 1998 the total approved investment and loan
origination commitments outstanding amounted to $83.7 million. At the same
date, the unadvanced portion of construction loans amounts to $9.3 million.
Certificates of deposit scheduled to mature in one year or less at June 30,
1998 totaled $298.9 million. Investment securities scheduled to mature in one
year or less at June 30, 1998 totaled $91.4 million. Based on historical
experience, management believes that a significant portion of maturing
deposits will remain with the Bank. The Bank anticipates that it will
continue to have sufficient funds, together with borrowings, to meet its
current commitments.
Capital
At June 30, 1998, the Bank had regulatory capital which was well in
excess of regulatory limits set by the Office of Thrift Supervision. The
current requirements and the Bank's actual levels are detailed below (dollars
in thousands):
Required Capital Actual Capital Excess Capital
---------------- -------------- --------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Tangible capital $16,449 1.50% $66,948 6.10% $50,499 4.60%
Core capital $43,865 4.00% $66,948 6.10% $23,083 2.10%
Risk-based capital $36,249 8.00% $70,065 15.46% $33,816 7.46%
Year 2000 Compliance
As the year 2000 approaches, significant concerns have been expressed
with respect to the ability of existing computer software programs and operating
systems to function properly with respect to data containing dates in the year
2000 and thereafter. Many existing application software products were designed
to accommodate only a two digit year (e.g., 1998 is reflected as "98"). The
Company's and Citizens Financial's, operating, processing and accounting
operations are computer reliant and could be affected by the Year 2000 issues.
Citizens Financial is reliant on third-party vendors for its data processing
needs as well as certain other significant functions and services (e.g.,
securities safekeeping services, securities pricing data, etc.). Citizens
Financial currently is working with its third-party vendors in order to assess
their Year 2000 readiness. While no assurance can be given that such third party
vendors will be Year 2000 compliant, management believes that such vendors are
taking appropriate steps to address the issues on a timely basis. Based on
certain preliminary estimates, the Company believes that its expenses related to
upgrading its systems and software for Year 2000 issues will not exceed $1.0
million. While the Company currently has no reason to believe that the cost of
addressing such issues will materially affect it or Citizens Financial's
product, services or ability to compete effectively, no assurance can be made
that the Company,
11
Citizens Financial or the third party vendors on which Citizens Financial relies
will become Year 2000 compliant in a successful and timely fashion.
Nevertheless, the Company does not believe that the cost of addressing the Year
2000 issues will be a material event or uncertainty that would cause reported
financial information not to be necessarily indicative of future operating
results or financial conditions, nor does it believe that the costs or the
consequences of incomplete or untimely resolution of its Year 2000 issues
represent a known material event or uncertainty that is reasonably likely to
affect its future financial results, or cause its reported financial information
not to be necessarily indicative of future operating results or future financial
condition.
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 Citizens Financial's portfolio equity, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Citizens Financial" in the Company's prospectus included in the registration
statement on Form S-1 filed with the Securities and Exchange Commission (the
"Commission") on March 26, 1998, as subsequently amended and as declared
effective by the Commission by order dated May 14, 1998.
12
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Use of Proceeds From Registered Securities
The Company's initial registration statement (No. 333-48689) on Form S-1 was
declared effective on May 14, 1998. The Offering commenced on May 14, 1998
and expired on June 18, 1998. Charles Webb & Co., a division of Keefe,
Bruyette & Woods, Inc., was the managing underwriter in the offering. The
sale in the offering of 17,853,750 shares of the Company's common stock, par
value $.01 per share ("Common Stock"), closed on July 24, 1998 for gross
proceeds of $178,537,500. Net of offering costs and expenses of $3,300,000,
the offering generated net proceeds of $175,237,500. Of such proceeds,
$14,283,000 was loaned to the Company's ESOP for the purchase by the ESOP of
1,428,300 shares of Common Stock, $80,477,250 was paid to the bank in
exchange for the common stock of the Bank issued in its conversion from a
federally-chartered mutual savings bank to a federally-chartered stock
savings bank, and $80,477,250 was invested in interest-bearing deposits as of
July 24, 1998. Of the $80,477,250 contributed to the Bank, $53,667,388 was
used to fund the repayment of borrowings, and $26,809,862 was invested in
federal funds and interest-bearing deposits in other banks.
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)
2.2 Agreement and Plan of Merger between Citizens Financial Services,
FSB and SuburbFed Financial Corp. (without exhibits)*
3.1 Certificate of Incorporation of CFS Bancorp, Inc.*
3.2 Bylaws of CFS Bancorp, Inc.*
4.0 Form of Stock Certificate of CFS Bancorp, Inc.*
10.1 Form of Employment Agreement to be entered into between Citizens
Financial Services, FSB and each of Thomas F. Prisby, James W. Prisby
and John T. Stephens*
10.2 Form of Employment Agreement to be entered into between CFS Bancorp,
Inc., Citizens Financial Services and each of Thomas F. Prisby,
James W. Prisby and John T. Stephens*
10.3 Form of Employment Agreement to be entered into between CFS Bancorp,
Inc, Citizens Financial Services, FSB and each of Daniel P. Ryan,
Steven E. Stock and Bryon G. Thoren*
27.0 Financial Data Schedule
- -------------
* 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.
(b) Not applicable
13
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CFS BANCORP, INC.
Date: August 14, 1998 By: /s/ Thomas F. Prisby
---------------------------------------------
Thomas F. Prisby, Chairman and
Chief Executive Officer
Date: August 14, 1998 By: /s/ John T. Stephens
---------------------------------------------
John T. Stephens, Executive Vice President and
Chief Financial Officer
14