SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
_______________________________________________________________________________
Form 10-QSB
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE EXCHANGE ACT
For the transition period from ____________ to ___________________.
Commission File Number: 0-24625
CFS Bancshares, Inc.
--------------------------------------------------
(Exact name of registrant as specified in charter)
Delaware 63-1207881
- ------------------------------- ----------------------
(State or other jurisdiction of IRS Employer
incorporation or organization) Identification Number
1700 3rd Avenue North
Birmingham, Alabama 35203
- ------------------------------- -----------
(Address of principal Zip Code
executive office)
Registrant's telephone number, including area code: (205) 328 - 2041
Indicate by check mark whether the registrant (1) has filed all the reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or 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
--- ---
Number of shares outstanding of common stock
as of June 30, 2002
$0.01 par value common stock 139,220 shares
- ---------------------------- --------------
Class Outstanding
CFS BANCSHARES, INC. AND SUBSIDIARY
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION: PAGE NO.
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets at June 30, 2002
and September 30, 2001 (unaudited) -3-
Condensed Consolidated Statements of Operations for the Three Months and
Nine Months Ended June 30, 2002 and 2001 (unaudited) -4-
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
June 30, 2002 and 2001 (unaudited) -6-
Condensed Consolidated Statements of Comprehensive Income for the Three
Months and Nine Months Ended June 30, 2002 and 2001 (unaudited) -8-
Notes to Condensed Consolidated Financial Statements -9-
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations -10-
PART II - OTHER INFORMATION -16-
SIGNATURES AND CERTIFICATION -17-
CFS Bancshares, Inc. and Subsidiary
Condensed Consolidated Balance Sheets
(Unaudited)
June 30, September 30,
2002 2001
---- ----
Assets
------
Cash and amounts due from depository
institutions $ 2,874,145 3,508,465
Federal funds sold and overnight deposits 504,541 2,610,541
------------------- --------------
Total cash and cash equivalents 3,378,686 6,119,006
Interest-bearing deposits 149,353 163,142
Investment securities held to maturity (fair value of
$793,769 and $1,244,186 respectively) 751,147 1,210,924
Investment securities available for sale, at fair value (cost of
$59,150,077 and $46,448,236, respectively) 59,908,235 47,260,024
Federal Home Loan Bank stock 947,500 747,500
Loans receivable, net of allowance 37,639,992 41,109,567
Premises and equipment, net 3,386,705 3,450,612
Real estate acquired by foreclosure 599,492 267,413
Accrued interest receivable on investment securities 299,208 299,271
Accrued interest receivable on loans 291,473 321,442
Other assets 271,177 2,379,392
------------------- --------------
Total assets $ 107,622,968 103,328,293
=================== ==============
Liabilities and Stockholders' Equity
- ------------------------------------
Interest-bearing deposits $ 77,268,340 76,945,341
Advance payments by borrowers for
taxes and insurance 175,949 270,788
Other liabilities 1,093,046 1,262,817
Employee Stock Ownership Plan debt 48,000 56,000
FHLB advances 18,950,000 14,950,000
------------------- --------------
Total liabilities 97,535,335 93,484,946
Common stock subject to put option (27,986 shares) 1,287,356 1,175,412
Stockholders' equity:
Common stock 1,392 1,392
Additional paid-in-capital 1,451,546 1,446,846
Retained earnings 6,890,055 6,739,788
Accumulated other comprehensive income 485,220 519,545
Unearned common stock held by ESOP (27,936) (39,636)
------------------- --------------
Total stockholders' equity 8,800,277 8,667,935
------------------- --------------
Total liabilities and stockholders' equity $ 107,622,968 103,328,293
=================== ==============
See accompanying notes to condensed consolidated financial statements
3
CFS Bancshares, Inc. and Subsidiary
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Interest Income:
Interest and fees on loans $ 814,818 976,610 2,597,212 3,146,365
Interest and dividend income
on investment securities 83,341 165,088 307,364 488,116
Interest income on
mortgage-backed securities 567,224 544,236 1,572,756 1,692,376
Other interest income 12,764 22,422 48,295 111,068
-------------- --------- --------- ---------
Total interest income 1,478,147 1,708,356 4,525,627 5,437,925
Interest Expense:
Interest on deposits 402,818 676,370 1,395,172 2,231,010
Interest on FHLB advances 230,871 204,067 667,955 639,031
-------------- --------- --------- ---------
Total interest expense 633,689 880,437 2,063,127 2,870,041
Net interest income 844,458 827,919 2,462,500 2,567,884
Provision for loan losses - - - -
-------------- --------- --------- ---------
Net interest income after
provision for loan losses 844,458 827,919 2,462,500 2,567,884
Other Income:
Service charges on deposits 121,852 80,983 301,150 279,128
Gain (loss) on sale of assets (22,843) (1,924) (27,049) 799
Gain on sale of securities - 55,288 128,667 69,502
Other 6,898 8,289 19,792 21,209
-------------- --------- --------- ---------
Total other Income 105,907 142,636 422,560 370,638
Other Expenses:
Salaries and employee benefits 439,530 370,637 1,176,103 1,104,740
Net occupancy expense 30,586 29,329 107,885 102,513
Federal insurance premium 11,831 11,400 31,568 33,831
Data processing expenses 54,007 53,293 165,492 162,726
Professional services 129,751 46,006 266,331 160,151
Depreciation and amortization 42,665 59,535 126,036 189,233
Advertising expense 25,065 13,110 54,210 45,015
Office supplies 12,867 24,000 45,625 52,796
Insurance expense 13,838 17,596 48,722 51,197
Other 86,422 110,897 286,501 382,526
-------------- --------- --------- ---------
Total other expense 846,562 735,803 2,308,473 2,284,728
-------------- --------- --------- ---------
Income before income taxes 103,803 234,752 576,587 653,794
See accompanying notes to condensed consolidated financial statements
4
CFS Bancshares, Inc. and Subsidiary
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Income tax expense 34,562 80,788 196,040 232,805
-------------- --------- --------- ---------
Net Income $ 69,241 153,964 380,547 420,989
============== ========= ========= =========
Basic earnings per common share $ 0.51 1.21 2.78 3.32
============== ========= ========= =========
Basic average shares outstanding 136,799 126,871 136,749 126,771
============== ========= ========= =========
Diluted earnings per common share $ 0.49 1.14 2.74 3.13
============== ========= ========= =========
Diluted average shares outstanding 141,643 134,671 139,068 134,571
============== ========= ========= =========
Dividends declared and paid
per common share $ - - 0.85 0.75
============== ========= ========= =========
See accompanying notes to condensed consolidated financial statements
5
CFS Bancshares, Inc. and Subsidiary
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
June 30,
2002 2001
---- ----
Cash flows from operating activities:
Net income $ 380,547 420,989
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 126,036 189,233
Compensation expense recognized on ESOP allocation 13,800 12,000
Net amortization of premium on investment securities 156,222 76,576
Gain on sale or call of investment securities available for sale (128,667) (69,502)
Loss on sale of real estate acquired by foreclosure 31,875 1,875
Decrease in deferred gain on sale of REO (4,826) (2,674)
Decrease in accrued interest receivable 30,032 34,453
Decrease (increase) in other assets 267,295 (101,687)
Decrease in accrued interest on deposits (53,787) (127,885)
Decrease in other liabilities (143,037) (17,965)
-------------- -----------
Net cash provided by operating activities 675,490 415,413
Cash flows from investing activities:
Proceeds from interest-bearing deposits 13,789 -
Purchase of FHLB stock (200,000) -
Purchase of investment securities available for sale (21,629,010) (17,065,225)
Proceeds from sale of investment securities available for sale 2,025,000 3,871,940
Proceeds from call of investment securities held to maturity - 500,000
Proceeds from call of investment securities available for sale 1,840,920 3,000,000
Proceeds from principal collected on
investment securities held to maturity 457,698 1,517,807
Proceeds from principal collected on
investment securities available for sale 6,876,691 2,750,000
Net change in loans 3,097,422 5,781,606
Purchase of premises and equipment (62,129) (46,905)
Improvements to real estate acquired by foreclosure (26,424) -
Proceeds from sale of real estate acquired by foreclosure 34,623 25,917
-------------- -----------
Net cash provided by (used in) investing activities (7,571,420) 335,140
See accompanying notes to condensed consolidated financial statements
6
CFS Bancshares, Inc. and Subsidiary
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
June 30,
2002 2001
---- ----
Cash flows from financing activities:
Net increase in interest-bearing deposits 376,786 2,056,471
Decrease in advance payments by
borrowers for taxes and insurance (94,839) (67,705)
Proceeds from FHLB advances 4,000,000 -
Repayment of ESOP debt (8,000) (8,000)
Cash dividends (118,337) (97,500)
-------------- -----------
Net cash provided by financing activities 4,155,610 1,883,266
Net increase (decrease) in cash and cash equivalents (2,740,320) 2,633,819
Cash and cash equivalents at beginning of period 6,119,006 3,594,355
-------------- -----------
Cash and cash equivalents at end of period $ 3,378,686 $ 6,228,174
============== ===========
Supplemental information on cash payments:
Interest paid $ 2,116,914 $ 2,997,926
Income taxes paid 370,924 206,000
Supplemental information on noncash transactions:
Loans transferred to real estate acquired by foreclosure $ 372,153 $ 38,256
See accompanying notes to condensed consolidated financial statements
7
CFS Bancshares, Inc. and Subsidiary
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
Three months ended Nine months ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Net income $ 69,241 153,964 380,547 420,989
Other comprehensive income, before tax:
Unrealized holding (losses) gains arising
during the period 673,872 (94,146) 75,037 1,176,839
Less reclassification adjustment for gains on
securities available for sale - 55,288 128,667 69,502
----------- -------- ------- ---------
Total other comprehensive income (loss), before tax 673,872 (149,434) (53,630) 1,107,337
Income tax expense (benefit) related to other
comprehensive income:
Unrealized holding gain (loss) on available
for sale securities 233,100 (33,887) 24,442 423,667
Less reclassification adjustment for gains on
securities available for sale - 19,909 43,747 25,026
----------- -------- ------- ---------
Total income tax expense (benefit) related to
other comprehensive income 233,100 (53,796) (19,305) 398,641
----------- -------- ------- ---------
Total other comprehensive income (loss), net of tax 440,772 (95,638) (34,325) 708,696
----------- -------- ------- ---------
Total comprehensive income $ 510,013 58,326 346,222 1,129,685
=========== ======== ======= =========
See accompanying notes to condensed consolidated financial statements
8
CFS BANCSHARES, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
In the opinion of management, the accompanying unaudited
condensed consolidated financial statements contain all
adjustments (none of which are other than normal recurring
accruals) necessary for a fair statement of financial
position of the Company and its subsidiary and the results
of operations for the three-month and nine-month periods
ended June 30, 2002 and 2001. The results contained in
these statements are not necessarily indicative of the
results that may be expected for the entire year. For
further information, refer to the consolidated financial
statements and notes included in the Company's annual report
on Form 10-KSB for the year ended September 30, 2001.
2. Reclassifications
Certain items in the 2001 consolidated financial statements
have been reclassified to conform to current year
classifications.
3. Net Income per Share
Presented below is a summary of the components used to
calculate diluted earnings per share for the three months
and nine months ended June 30, 2002 and 2001.
Three months ended Nine months ended
June 30, June 30,
2002 2001 2002 2001
---------------------------------------------
Weighted average common shares outstanding 136,899 126,871 136,799 126,771
Net effect of the assumed exercise of stock
options based on the treasury stock method
using average market price for the quarter 4,744 7,800 2,269 7,800
---------------------------------------------
Total weighted average common shares and
potential common stock outstanding 141,643 134,671 139,068 134,571
=============================================
4. Recent Accounting Pronouncements
In May 2002, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standard (SFAS) No.
145, "Recission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13 and Technical
Corrections". SFAS No. 145 rescinds SFAS No. 4, "Reporting
Gains and Losses from Extinguishment of Debt," SFAS No. 44,
"Accounting for Intangible Assets of Motor Carriers, and
SFAS No. 64, "Extinguishments of Debt Made to Satisfy
Sinking Fund Requirements. These recissions eliminate the
requirement to report gains and losses from the extinguishment
of debt as an extraordinary item, net of any related income tax
effect. This statement also amends SFAS No. 13, "Accounting for
Leases" to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and
9
the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback
transactions. This statement also amends other existing
authoritative pronouncements to make technical corrections,
clarify meanings, or describe their applicability under changed
conditions. The provisions of this statement are effective May
15, 2002. The Company does not expect the changes in the accounting
pronouncements described above to have a material impact on
its financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." This
statement requires the recognition of costs associated with
exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal
plan. The provisions of this statement are to be applied
prospectively to exit or disposal activities initiated for
fiscal years beginning after December 31, 2002. The Company
does not expect the adoption of SFAS No. 146 to have a
material impact on its financial statements.
Item 2. Management's Discussion and Analysis
CFS Bancshares, Inc. ("the Company") has no significant
assets other than the stock of Citizens Federal Savings Bank
("the Bank" or "Bank"). For that reason, substantially all
of the discussion in the Form 10-QSB relates to the
operations of the Bank. On May 30, 2002 the Company entered
into an Agreement and Plan of Merger with Citizens
Bancshares Corporation, a corporation organized and existing
under the laws of the State of Georgia, with its principal
office located in Atlanta, Georgia. Under the terms of the
agreement the shareholders of CFS Bancshares, Inc. are
entitled to receive $64.69 per share if the transaction
closes in September 2002 and an additional $0.07 per share
for each month beyond September. The expenses incurred to
date by the Company in negotiating the merger are included
in operating expenses in the appropriate category.
REVIEW OF RESULTS OF OPERATIONS
OVERVIEW
Net income for the nine months ended June 30, 2002 was
$380,547, a decrease of $40,442 or 9.61% when compared to
the nine months ended June 30, 2001. Earnings per diluted
share were $2.74 for the current nine-month period compared
to $3.13 per diluted share for the prior year. The decrease
in net income resulted from increases in expenses associated
with negotiating the merger agreement described above.
Expenses directly associated with the merger agreement
include salary expense of $52,250, legal expense of $84,625
and other professional services of $22,407 for both the
three-month and nine-month period ended June 30, 2002. Net
income for the three months ended June 30, 2002 was $69,241,
a decrease of $84,723 or 55.03% as compared to net income
during the three months ended June 30, 2001 of $153,964.
Earnings per diluted share for the quarter declined from
$1.14 for the three months ended June 30, 2001 to $0.49 for
the three months ended June 30, 2002.
NET INTEREST INCOME
Net interest income is the difference between the interest
and fees earned on loans, securities and other interest-
earning assets (interest income) and the interest paid on
deposits and FHLB advances (interest expense). The Company's
deposits and a portion of its FHLB advances are primarily short
term in nature and reprice faster than the Company's interest-
earning assets, consisting mainly of loans and mortgage-backed
securities, which generally have longer
10
maturities. The mix of the Company's interest- earning assets
and deposits and FHLB advances along with the trend of market
interest rates have a substantial impact on the change in net
interest margin. The cost of the Company's interest-bearing
liabilities decreased 125 basis points from 4.14% for the nine
month period ended June 30, 2001 to 2.89% during the nine-month
period ended June 30, 2002, while the yield on interest-earning
assets decreased 152 basis points from 7.69% for the nine month
period ended June 30, 2001 to 6.17% for the comparable period
in the current fiscal year.
The Company's net interest income decreased by $105,384 or
4.10% from $2,567,884 for the nine month period ended June
30, 2001 to $2,462,500 for the nine-month period in the
current fiscal year. Net interest income for the three
months ended June 30, 2002 increased by $16,539 or 2.00%
from $827,919 for the three months ended June 30, 2001 to
$844,458 for the three months ended June 30, 2002. The
decrease in net interest income for the nine-month period
ended June 30, 2002 resulted primarily from decreases in
interest and fees on loans and was caused by a decline in
the average balance of loans outstanding as well as a
decline in the average interest rates earned on loans and
securities.
OTHER INCOME
Other income increased from $370,638 for the nine month
period ended June 30, 2001 to $422,560 for the comparable
period in the current fiscal year as a result of an increase
in the gain on sales of securities. During the nine-month
period ended June 30, 2002 the Company recognized gains on
the sale of securities available for sale of $128,667 as
compared to gains during the nine-month period in the prior
fiscal year of $69,502. For the three-month period other
income decreased by $36,729 from $142,636 for the three
months ended June 30, 2001 to $105,907 for the three-month
period ended June 30, 2002, primarily as the result of a
decline in gains on the sale of securities. During the
three months ended June 30, 2001 the Company recognized
$55,288 from the sale of investment securities available for
sale while there were no such gains during the three-month
period ended June 30, 2002. Service charges on deposits
increased by $40,689 from $80,983 for the three months ended
June 30, 2001 to $121,852 for the comparable three-month
period in the current fiscal year. The increase resulted
primarily from across the board increases in transaction
account fees that became effective on April 01, 2002.
OTHER EXPENSE
During the nine-month period ended June 30, 2002 the
Company's other expense increased by 1.04% or $23,745 from
$2,284,728 for the nine-month period ended June 30, 2001 to
$2,308,473 for the comparable period in the current year. As
previously discussed the Company's expenses increased during
the current year as the result of merger negotiations that
resulted in a signed merger agreement on May 30, 2002. The
expenses associated with the merger include salaries in the
form of bonuses of $52,250 and legal expense and other
professional services totalling $107,032 and are responsible
for increases in those two categories of expenses. Expenses
which declined include depreciation and other expense which
declined $63,197 and $96,025, respectively when comparing
the nine month period ended June 30, 2002 to the nine month
period ended June 30, 2001. Much of the furniture and
equipment the Company purchased in 1996 upon moving to a new
main office headquarters became fully depreciated at the end
of the fiscal year ended September 30, 2001. As a result,
the Company's depreciation expense declined when comparing
the nine-month period ended June 30, 2002 to the same period
for the prior fiscal year. Other expense decreased as a
result of a recovery in March 2002 of an overpayment for
insurance of $18,610 which occurred during the prior fiscal
year and from declines in expenses associated with legal
matters which occurred during fiscal 2001. During the nine-month
11
period ended June 30, 2001 the Company expensed insurance
deductibles of approximately $45,000 related to a legal issue.
There were no such expenses during the current fiscal year.
For the three-month period other expense increased by $110,759
from $735,803 for the three-month period ended June 30, 2001 to
$846,562 for the three-period ended June 30, 2002 as the result
of merger expenses previously discussed. Declines occurred in
depreciation and other expense which decreased by $16,870 and
$24,475 when comparing the three-month period ended June 30,
2002 to the three-month period ended June 30, 2001. See the
discussion for the nine-month periods above for details.
REVIEW OF FINANCIAL CONDITION
Significant factors affecting the Company's financial
condition from September 30, 2001 to June 30, 2002 are
detailed below:
Assets
Total assets increased $4,294,675 or 4.16% from $103,328,293
at September 30, 2001 to $107,622,968 at June 30, 2002.
Significant changes in asset balances include investment
securities available for sale which increased by $12,648,211
or 26.76% from $47,260,024 at September 30, 2001 to
$59,908,235 at June 30, 2002 and decreases in net loans
receivable and other assets. Net loans receivable decreased
from $41,109,567 at September 30, 2001 to $37,639,992 at
June 30, 2002, a decrease of $3,469,575 or 8.44%. The
decrease in net loans receivable resulted from an increase
in the amount of prepayments on the existing portfolio due
to the decline in interest rates and from decreases in the
amount of loans originated. Other assets, which had a
balance of $2,379,392 at September 30, 2001, included a
receivable for securities with a par value of $1,840,000
that had been called by the issuer but not yet settled. The
Company received the funds for the security during the early
part of October 2001.
Liabilities
Total liabilities increased $4,050,389 or 4.33% between
September 30, 2001 and June 30, 2002. The increase resulted
from increases in Federal Home Loan Bank (FHLB) advances and
in the Company's interest-bearing deposits. FHLB advances
increased by $4,000,000 from $14,950,000 at September 30,
2001 to $18,950,000 at June 30, 2002. The increase in FHLB
advances was used to purchase mortgage-backed securities
which also serve as collateral for the $4,000,000 advance.
Interest-bearing deposits increased by $322,999 from
$76,945,341 at September 30, 2001 to $77,268,340 at June 30,
2002. The increase in deposits occurred in the Company's
transaction (checking and savings) accounts.
Liquidity
The Company's primary sources of liquidity are deposits,
loan payments, maturing investment securities, principal and
interest payments on investments, mortgage-backed securities
and CMOs, and advances from the Federal Home Loan Bank of
Atlanta. Additionally, the Company has short-term
investments that could be readily liquidated to meet funding
requirements and also maintains lines of credit with two
correspondent banks to meet any requirements caused by short-
term fluctuations in liquidity needs. Management believes
that the Company's various sources of funds are adequate to
meet its liquidity requirement in the ordinary course of
business.
12
Loan Quality
A key to long term earnings growth for the Company is
maintenance of a high quality loan portfolio. The Company's
directive in this regard is carried out through its policies
and procedures for review of loans. The goals and results
of these policies and procedures are to provide a sound
basis for new credit extensions and an early recognition of
problem assets to allow the most flexibility in their timely
disposition.
At June 30, 2002 the Company had $990,474 in assets
classified as substandard including assets acquired by
foreclosure or repossession of $599,492, no assets
classified as doubtful and $105,405 in assets classified as
loss. A specific loan loss allowance has been established
for all loans classified as a loss. At September 30, 2001
the Company had $935,215 in assets classified as substandard
including assets acquired by foreclosure or repossession of
$267,413, no assets classified as doubtful, and $155,475 in
assets classified as loss.
The allowance for loan losses was $367,201 at June 30, 2002.
Management believes that the current allowance for loan
losses is adequate to cover any potential future loan losses
which exist in the loan portfolio, although there can be no
assurance that further increases in the loan loss allowance
will not be required as circumstances warrant.
The following table summarizes the activity in the allowance
for loan losses for the nine month periods ended June 30:
2002 2001
------- -------
Provision charged to expense - -
Balance at beginning of year $396,768 342,156
Loans charged off (75,010) (32,153)
Recoveries 45,443 68,933
------- -------
Net (charge-offs) recoveries (29,567) 36,780
Balance at end of period $367,201 378,936
======== =======
At June 30, 2002 and 2001, the carrying amounts of
nonaccrual loans were $692,228 and $1,041,325, respectively.
Included in these nonaccrual loans at June 30, 2002 and
2001, are loans that are considered to be impaired, which
totaled $105,405 and $248,979, respectively. The specific
allowance related to these impaired loans was $105,405 and
$155,475, respectively. The average carrying amounts of
impaired loans during the second quarter of 2002 and 2001
were $177,192 and $248,979, respectively. No interest
income was recognized on impaired or nonaccrual loans for
the three-month periods ended June 30, 2002 and June 30,
2001.
CRITICAL ACCOUNTING POLICIES
Management has determined that the accounting for loan loss
allowances is a critical accounting policy with respect to
the determination of financial condition and reporting
results of operations.
Management determines the required allowances by classifying
loans according to credit quality and collateral security
and applying historical loss percentages to each category.
Additionally, as necessary, management determines specific
allowances related to impaired loans based on the present
value of expected future cash flows discounted at the loan's
effective interest rate, or the fair value of the collateral
if the loan is collateral dependent. A key component in the
accounting
13
policy is management's ability to timely identify changes in
credit quality which may impact the Company's financial results.
Management recognizes that in making loans, credit losses
will be experienced and that the risk of loss will vary
with, among other things, the type of loan being made, the
creditworthiness of the borrower over the term of the loan
and, in the case of a secured loan, the quality of the
security for the loan. Management's policy is to maintain
an appropriate allowance for estimated losses on the
portfolio as a whole. The allowances are based on estimates
of the historical loan loss experience, evaluation of
economic conditions and regular periodic reviews of the
Company's loan portfolio. The Company's loan portfolio
consists mostly of residential and non-residential real
estate. Management believes that the effects of any
reasonably likely changes in the economy would be limited
somewhat due to the fact that most of the loan portfolio is
backed by real estate.
Information about Forward-Looking Statements
Any statement contained in this report which is not a
historical fact, or which might otherwise be considered an
opinion or projection concerning the Company or its
business, whether expressed or implied, is meant as and
should be considered a forward-looking statement as that
term is defined in the Private Securities Litigation Reform
Act of 1995. Forward-looking statements are based on
assumptions and opinions concerning a variety of known and
unknown risks, including but not necessarily limited to,
changes in market conditions, natural disasters and other
catastrophic events, increased competition, changes in
availability and cost of reinsurance, changes in
governmental regulations, and general economic conditions,
as well as other risks more completely described in the
Company's filings with the Securities and Exchange
Commission, including the Annual Report on Form 10-KSB. If
any of these assumptions or opinions prove incorrect, any
forward-looking statement made on the basis of such
assumptions or opinions may also prove materially incorrect
in one or more respects.
CAPITAL ADEQUACY AND RESOURCES
Management is committed to maintaining capital at a level
sufficient to protect stockholders and depositors, provide
for reasonable growth, and fully comply with all regulatory
requirements. Management's strategy to maintain this goal
is to retain sufficient earnings while providing a
reasonable return to stockholders in the form of dividends
and return on equity.
14
The Office of Thrift Supervision has issued guidelines
identifying minimum regulatory "tangible" capital equal to
1.50% of adjusted total assets, a minimum 3.00% core capital
ratio and a minimum risk based capital of 8.00% of risk
weighted assets. The Bank has provided the majority of its
capital requirements through the retention of earnings.
At June 30, 2002 the Bank satisfied all regulatory
requirements. The Bank's compliance with the current
standards is as follows:
For capital Well
Actual adequacy purposes capitalized
------ ----------------- -----------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Total capital
(to risk weighted assets) $9,682,371 21.62% 3,582,248 8.00% 4,477,810 10.00%
Tier I capital
(to risk weighted assets) $9,531,027 21.29% 1,791,124 4.00% 2,686,686 6.00%
Tier I capital
(to average assets) $9,531,027 9.04% 4,219,025 4.00% 5,273,781 5.00%
Reconciliation of Bank capital: Risk Weighted Tier I Capital
Capital
Total stockholders' equity (GAAP) $8,800,277 $8,800,277
Stock subject to put option 1,287,356 1,287,356
Holding company equity (71,386) (71,386)
Unrealized gain on securities - AFS (485,220) (485,220)
Allowance for loan losses 261,796 -
Equity investments (110,452)
---------- ----------
Total $9,682,371 $9,531,027
========== ==========
15
CFS BANCSHARES, INC. AND SUBSIDIARY
PART II OTHER INFORMATION
Item 1: Legal Proceedings
The Company is defending various lawsuits and claims. In
the opinion of management the ultimate disposition of these
matters will not have a significant effect on the
consolidated financial position or operating results of the
Company.
Item 2: Change in Securities
Not Applicable
Item 3: Default upon Senior Securities
Not Applicable
Item 4: Submission of Matters to a Vote of Security Holders
None
Item 5: Other Information:
None
Item 6: Exhibits and Reports on Form 8-K
On May 31, 2002 the Company filed a Form 8-K pursuant to
"Item 5. Other Events" to report the execution of the
Agreement and Plan of Merger with Citizens Bancshares
Corporation on May 30, 2002. No financial statements were
required to be filed with the Form 8-K. A copy of the
Agreement and Plan of Merger was included as an exhibit to
the Form 8-K.
16
CFS BANCSHARES INC. AND SUBSIDIARY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CFS BANCSHARES, INC.
(Registrant)
Date: 08/12/02 By: /s/ Bunny Stokes, Jr.
------------------------- -------------------------------
Bunny Stokes, Jr.
Chairman/CEO (principal executive
officer)
Date: 08/12/02 By: /s/ W. Kent McGriff
------------------------- -------------------------------
W. Kent McGriff
Executive Vice President (principal
financial and accounting officer)
CERTIFICATION
The undersigned executive officers of the Registrant hereby certify that
this Form 10-QSB fully complies with the requirements of Section 13(a) of the
Securities Exchange Act of 1934 and that the information contained herein fairly
presents, in all material respects, the financial condition and results of
operations of the registrant.
By: /s/ Bunny Stokes, Jr.
-------------------------------
Bunny Stokes, Jr. Chairman/CEO
By: /s/ W. Kent McGriff
-------------------------------
W. Kent McGriff
Executive Vice President (principal
financial and accounting officer)
17