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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
- ----- SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
- ----- SECURITIES EXCHANGE ACT OF 1934
Commission File No.: 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 Number)
707 Ridge Road
Munster, Indiana 46321
- ------------------------------------------ ---------------------------
(Address of Principal (Zip Code)
Executive Offices)
Registrant's telephone number, including area code: (219) 836-5500
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (par value $0.01 per share)
- --------------------------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for
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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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 19, 1999, the aggregate value of the 20,931,162 shares of
Common Stock of the Registrant outstanding on such date, which excludes 941,334
shares held by all directors and executive officers of the Registrant as a
group, was approximately $217.2 million. This figure is based on the last known
trade price of $10.375 per share of the Registrant's Common Stock on March 19,
1999.
Number of shares of Common Stock outstanding as of March 19, 1999: 21,872,496
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and
the Part of the Form 10-K into which the document is incorporated:
(1) Portions of the Annual Report to Stockholders for the year ended December
31, 1998 are incorporated into Parts II and IV.
(2) Portions of the definitive proxy statement for the Annual Meeting of
Stockholders to be held on May 4, 1999 are incorporated into Part III.
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When used in this form 10-K or future filings by the Company with the
Securities and Exchange Commission ("SEC"), in the Company's press releases or
other public or stockholder communications, or in oral statements made with an
approval of an authorized executive officer, the words or phrases "would be",
"will allow", "intends to", "will likely result", "are expected to", "will
continue", "is anticipated", "estimate", "project", or similar expressions are
intended to identify "forward looking statements" within the meaning of the
Private Litigation Reform Act of 1995.
The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made, and
to advise readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risk of lending and investment activities and competitive and regulatory
factors, could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from those
anticipated or projected. The Company does not undertake, and specifically
disclaims any obligation, to update any forward-looking statements to reflect
occurrences or unanticipated events or circumstances after the date of such
statements.
PART I.
ITEM 1. BUSINESS
GENERAL
CFS Bancorp, Inc. (the "Company") was organized in March 1998 at the
direction of the Board of Directors of Citizens Financial Services, FSB (the
"Bank" or "Citizens Financial") for the purpose of holding all of the capital
stock of the Bank and in order to facilitate the conversion of the Bank from a
federally-chartered mutual savings bank to a federally-chartered stock savings
bank (the "Conversion"). (Unless the context otherwise requires, reference to
the Company includes the Bank and its other subsidiaries) In connection with the
Conversion, the Company was approved by the Office of Thrift Supervision (the
"OTS") to become a savings and loan holding company and as such is subject to
regulation by the OTS. The Company now conducts business as a unitary savings
and loan holding company. See "Regulation - Regulation of Savings and Loan
Holding Companies."
Simultaneously with the Conversion, SuburbFed Financial Corp., a
Delaware corporation with its principal place of business in Illinois ("SFC"),
merged with and into the Company (the "Merger"). In connection with the Merger,
each outstanding share of SFC common stock, par value $0.01 per share, was
converted into the right to receive 3.6 shares of the Company Common Stock based
on the purchase price of $10.00 per share. The Conversion and the Merger were
interdependent transactions. The merger was accounted for on a
pooling-of-interests basis and, as such, all financial data in this report
includes the assets and the liabilities of the Company and SFC and their
subsidiaries.
The Company's assets consist of the outstanding shares of common stock
of the Bank, investments made with the portion of the net proceeds from the
issuance of Company shares to the
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public (the "Offering") retained by the Company and the Company's loan to the
Bank for the employee stock ownership plan (the "ESOP"). The Company has no
significant liabilities. The management of the Company and the Bank are
substantially identical and the Company neither owns nor leases any property but
instead uses the premises, equipment and furniture of the Bank. The Company does
not employ any persons other than officers who are also officers of the Bank,
and the Company utilizes the support staff of the Bank from time to time.
Additional employees will be hired as appropriate to the extent the Company
expands or changes its business in the future.
Management believes that the holding company structure provides the
Company and the Bank with additional flexibility to diversify its business
activities through existing or newly-formed subsidiaries, or through
acquisitions of other entities, including potentially other financial
institutions and financial services related companies. Such expansion is subject
to regulatory limitations and the Company's financial position. The initial
activities of the Company have been funded by the proceeds retained by the
Company and earnings thereon, as well as dividends from the Bank.
The Bank is subject to examination and comprehensive regulation by the
OTS, which is the Bank's chartering authority and primary federal regulator. The
Bank is also regulated by the Federal Deposit Insurance Corporation (the
"FDIC"), administrator of the Savings Association Insurance Fund (the "SAIF").
The Bank is also subject to certain reserve requirements established by the
Federal Reserve Board (the "FRB") and is a member of the Federal Home Loan Bank
(the "FHLB") of Indianapolis, which is one of the 12 regional banks comprising
the FHLB System.
Citizens Financial is a federally-chartered stock savings bank that was
originally organized in 1934. The Bank conducts its business from its executive
offices and an insurance and investment center, both in Munster, Indiana, as
well as 23 banking centers in Lake, Porter and LaPorte Counties in northwest
Indiana and Cook, DuPage and Will Counties in Illinois. At December 31, 1998,
the Company had $1.5 billion in total assets, $969.8 million in deposits and
$260.1 million of stockholders' equity. The Bank is primarily engaged in
attracting deposits from the general public and using those funds to originate
loans and invest in securities. The Bank's primary lending emphasis has been,
and continues to be, loans secured by first liens on single-family (one- to
four-units) residential properties located in northwest Indiana and southeastern
Cook County, Illinois. The Bank also originates construction and land
development loans, multi-family residential real estate loans, commercial real
estate loans, home equity loans and other loans.
Total assets of the Company have increased by $556.8 million, or 60.9%,
from December 31, 1994 to December 31, 1998. In recent years, the Bank has
implemented policies and procedures designed to increase the Bank's growth in
asset size while maintaining the Bank's generally conservative operating
strategies. Such efforts have included an increased emphasis in developing and
expanding the Bank's insurance agency and securities brokerage activities as
well as its Trust Department, which commenced operations in April 1996. In
addition, Citizens Financial has created a team of business development officers
who actively solicit new loans and other business within the Bank's market area.
Citizens Financial plans to continue its efforts to increase its asset base
through, among other things, its loan origination efforts. Citizens Financial
has no specific plans,
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arrangements or understandings regarding any expansion or acquisitions at this
time, other than the new branch location in Schererville, Indiana.
MARKET AREA AND COMPETITION
Citizens Financial operates out of its headquarters in Munster,
Indiana, which is located in Lake County in northwest Indiana. Citizens
Financial also maintains an insurance and investment center in Munster and 23
banking centers in Lake, Porter and LaPorte Counties in northwest Indiana and in
Cook, DuPage and Will Counties in Illinois. The respective market areas served
by Citizens Financial are part of the Chicago Metropolitan Statistical Area.
Citizens Financial has historically concentrated its efforts in the
markets surrounding its offices. Citizens Financial's market area reflects
diverse socioeconomic factors. Traditionally, the market area in northwest
Indiana and the suburban areas south of Chicago were dependent on heavy
manufacturing. While manufacturing still is an important component of the local
economies, service-related industries have become increasingly significant to
the region in the last decade. Growth in the local economies can be expected to
occur largely as a result of the continued interrelation with Chicago as well as
suburban business centers in the area.
The Bank faces significant competition both in making loans and in
attracting deposits. The Chicago metropolitan area is one of the largest money
centers in the United States, and the market for deposit funds is highly
competitive. The Bank's competition for loans comes principally from commercial
banks, other savings banks, savings associations and mortgage-banking companies.
The Bank's most direct competition for deposits has historically come from
savings associations, other savings banks, commercial banks and credit unions.
The Bank faces additional competition for deposits from short-term money market
funds and other corporate and government securities funds and from other
non-depository financial institutions such as brokerage firms and insurance
companies. Competition for banking services may increase as a result of, among
other things, the elimination of restrictions on interstate operations of
financial institutions.
LENDING ACTIVITIES
GENERAL. At December 31, 1998, the Company's net loans amounted to
$726.1 million or 49.4% of the Company's total assets at such date. The Bank's
primary emphasis has been, and continues to be, the origination of loans secured
by first liens on single-family residences. In addition to loans secured by
single-family residential real estate, the Bank's mortgage loan portfolio at
December 31, 1998 includes loans secured by multi-family (over four units)
residential properties, which amounted to $21.1 million or 2.8% of the loan
portfolio, construction and land development loans, which totaled $51.2 million
or 6.9% of the loan portfolio, loans secured by commercial real estate, which
amounted to $39.0 million or 5.2% of the loan portfolio and home equity loans,
which totaled $19.6 million or 2.6% of the loan portfolio In addition to
mortgage loans, the Bank originates various other loans which, at December 31,
1998, amounted to $17.5 million, or 2.4% of the loan portfolio.
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The types of loans that the Bank may originate are subject to federal
and state law and regulations. Interest rates charged by the Bank on loans are
affected principally by the demand for such loans and the supply of money
available for lending purposes and the rates offered by its competitors. These
factors are, in turn, affected by general and economic conditions, the monetary
policy of the federal government, including the FRB, legislative tax policies
and governmental budgetary matters.
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<TABLE>
<CAPTION>
LOAN PORTFOLIO COMPOSITION. The following table sets forth the composition of the Bank's loans at the dates indicated.
December 31,
----------------------------------------------------------------------------------
1998 1997 1996
----------------------- ------------------------- -----------------------
Percent of Percent of Percent of
Amount Total Amount Total Amount Total
------ ---------- ------ ---------- ------ ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Single-family residential.......... $596,199 80.08% $493,133 80.78% $397,528 78.00%
Multi-family residential........... 21,050 2.83 29,660 4.86 27,541 5.40
Commercial real estate............. 38,999 5.24 18,093 2.96 14,792 2.90
Construction and land
development:
Single-family residential...... 31,516 4.23 27,744 4.55 25,578 5.02
Multi-family residential....... -- -- 1,538 0.25 4,540 0.89
Other.......................... 19,645 2.64 11,042 1.81 11,192 2.20
Home equity........................ 19,589 2.63 21,330 3.49 18,827 3.69
-------- ------ -------- ------ -------- ------
Total mortgage loans............. 726,998 97.65 602,540 98.70 499,998 98.10
Other loans.......................... 17,503 2.35 7,956 1.30 9,680 1.90
-------- ------ -------- ------ -------- ------
Total loans receivable........... 744,501 100.00% 610,496 100.00% 509,678 100.00%
====== ====== ======
Less:
Undisbursed portion of loan
proceeds.................... 13,068 11,219 15,585
Allowance for losses on loans.. 5,357 3,825 2,426
Net deferred yield adjustments. (5) (114) 794
-------- -------- --------
Loans receivable, net................ $726,081 $595,566 $490,873
======== ======== ========
<CAPTION>
December 31,
------------------------------------------------------
1995 1994
----------------------- -------------------------
Percent of Percent of
Amount Total Amount Total
------ ---------- ------ ----------
(Dollars in Thousands)
Mortgage loans:
Single-family residential.......... $321,024 78.80% $293,480 80.93%
Multi-family residential........... 20,667 5.07 13,634 3.76
Commercial real estate............. 11,980 2.94 10,503 2.89
Construction and land
development:
Single-family residential...... 19,393 4.76 16,633 4.59
Multi-family residential....... 2,130 0.52 3,150 0.87
Other.......................... 6,954 1.71 6,183 1.70
Home equity........................ 15,577 3.82 11,099 3.06
-------- ------ -------- --------
Total mortgage loans............. 397,725 97.62 354,682 97.80
Other loans.......................... 9,689 2.38 7,964 2.20
------- ------ -------- -------
Total loans receivable........... 407,414 100.00% 362,646 100.00%
====== ======
Less:
Undisbursed portion of loan
proceeds.................... 11,802 14,362
Allowance for losses on loans.. 2,221 2,087
Net deferred yield adjustments. 2,096 2,846
-------- --------
Loans receivable, net................ $391,295 $343,351
======== ========
</TABLE>
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CONTRACTUAL PRINCIPAL REPAYMENTS AND INTEREST RATES. The following
table sets forth scheduled contractual amortization of the Bank's loans at
December 31, 1998, as well as the dollar amount of such loans which are
scheduled to mature after one year which have fixed or adjustable interest
rates. Demand loans, loans having no schedule of repayments and no stated
maturity and overdraft loans are reported as due in one year or less.
<TABLE>
<CAPTION>
Principal Repayments Contractually Due
in Year(s) Ended December 31,
---------------------------------------------------------------------------
Total at
December 31, 2002- 2004- 2010- There-
1998 1999 2000 2001 2003 2009 2015 after
--------- -------- -------- -------- -------- -------- -------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Single-family residential $596,199 $ 10,072 $ 1,842 $ 3,037 $ 18,754 $ 48,144 $ 78,128 $436,222
Multi-family residential 21,050 -- -- 536 386 4,520 8,054 7,554
Commercial real estate .. 38,999 490 202 4,478 1,380 24,571 4,231 3,647
Construction and land
development .......... 51,161 20,788 4,159 3,627 499 1,784 3,175 17,129
Home equity ............. 19,589 2,603 3,398 3,246 6,264 3,610 468 --
Other loans ................... 17,503 7,324 1,523 1,713 1,553 5,390 -- --
-------- -------- -------- -------- -------- -------- -------- --------
Total(1) ............. $744,501 $ 41,277 $ 11,124 $ 16,637 $ 28,836 $ 88,019 $ 94,056 $464,552
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
- ------------------
(1) Of the $703.2 million of loan principal repayments contractually due after
December 31, 1999, $311.4 million have fixed rates of interest and $391.8
million have adjustable rates of interest.
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Scheduled contractual amortization of loans does not reflect the
expected term of the Bank's loan portfolio. The average life of loans is
substantially less than their contractual terms because of prepayments and
due-on-sale clauses, which give the Bank the right to declare a conventional
loan immediately due and payable in the event, among other things, that the
borrower sells the real property subject to the mortgage and the loan is not
repaid. The average life of mortgage loans tends to increase when current
mortgage loan rates are higher than rates on existing mortgage loans and,
conversely, decrease when rates on existing mortgage loans are lower than
current mortgage loan rates (due to refinancing of adjustable-rate and
fixed-rate loans at lower rates). Under the latter circumstance, the weighted
average yield on loans decreases as higher yielding loans are repaid or
refinanced at lower rates.
ACTIVITY IN LOANS. The following table shows the activity in the Bank's
loans during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
(In Thousands)
<S> <C> <C> <C>
Total loans held at beginning
of period ........................... $ 610,496 $ 509,678 $ 407,413
Originations of loans:
Mortgage loans:
Single-family residential ......... 240,158 164,857 146,025
Multi-family residential .......... 3,850 1,511 9,117
Commercial real estate ............ 26,320 3,911 6,499
Construction and land development:
Single-family residential ...... 37,682 25,026 25,879
Multi-family residential ....... 1,240 128 2,410
Other .......................... 12,801 4,788 5,780
Home equity ....................... 15,086 15,746 29,926
Other loans ......................... 37,023 16,075 29,013
--------- --------- ---------
Total originations ............. $ 374,160 $ 232,042 $ 254,649
--------- --------- ---------
Purchases of loans ............................. 807 -- 300
--------- --------- ---------
Total originations and purchases 374,967 232,042 254,949
--------- --------- ---------
Loans sold ..................................... (13,732) (5,001) (8,488)
Loans securitized into mortgage backed
securities ................................... (3,402) -- (1,597)
Transfers to real estate owned ................. (1,680) (1,447) (687)
Charge-offs .................................... (167) (451) (134)
Repayments ..................................... (221,981) (124,375) (141,778)
--------- --------- ---------
Net activity in loans .......................... 134,005 100,768 102,265
--------- --------- ---------
Gross loans held at end of period .............. $ 744,501 $ 610,496 $ 509,678
========= ========= =========
</TABLE>
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The lending activities of Citizens Financial are subject to
underwriting standards and loan origination procedures established by the Bank's
Board of Directors and management. Applications for mortgage and other loans are
taken at all of the Bank's branch offices. In addition, the Bank's business
development officers call on individuals in the Bank's market area in order to
solicit new loan originations as well as other banking relationships. All loan
applications are forwarded to the Bank's executive offices for underwriting and
approval. Generally, Citizens Financial requires that a property appraisal be
obtained in connection with new mortgage loans. On loan applications of $250,000
or less with a loan-to-value ratio of 60% or less and a strong credit rating
exhibited by the borrowers, a property evaluation may be completed by a Bank
employee in lieu of a formal appraisal. Citizens Financial requires that title
insurance and hazard insurance be maintained on all security properties (except
for home equity loans) and that flood insurance be maintained if the property is
within a designated flood plain.
Certain officers of the Bank have been authorized by the Board of
Directors to approve loans up to certain designated amounts. The Executive
Committee of the Citizens Financial Board of Directors meets weekly and reviews
all real estate mortgage loans. The full Board of Directors of Citizens
Financial is provided with a monthly report of all loans made in the period.
A federal savings bank generally may not make loans to one borrower and
related entities in an amount which exceeds 15% of its unimpaired capital and
surplus, although loans in an amount equal to an additional 10% of unimpaired
capital and surplus may be made to a borrower if the loans are fully secured by
readily marketable securities. However, with certain exceptions, Citizens
Financial's aggregate loans to one borrower and related entities has been well
below the regulatory limits. As of December 31, 1998, Citizens Financial's two
largest relationships with one borrower and related entities amounted to $16.8
million and $11.4 million, and all of the Bank's loans included in such
relationships were performing in accordance with their terms.
SINGLE-FAMILY RESIDENTIAL AND HOME EQUITY LOANS. Substantially all of
the Bank's single-family residential mortgage loans consist of conventional
loans. Conventional loans are loans that are neither insured by the Federal
Housing Administration ("FHA") or partially guaranteed by the Department of
Veterans Affairs ("VA"). The vast majority of the Bank's single-family
residential mortgage loans are secured by properties located in northwest
Indiana and Dupage, Will and Cook County, Illinois. Historically, the Bank has
retained virtually all mortgage loans which it has originated and has not
engaged in sales of residential mortgage loans. Beginning July 1, 1998, the Bank
instituted a new policy and began selling its newly originated 30 year
fixed-rate loans; such sales amounted to $13.7 million in 1998. As of December
31, 1998, $596.2 million, or 80.1%, of the Bank's total loans consisted of
single-family residential mortgage loans. Citizens Financial originated $240.2
million, $164.9 million and $146.0 million of single-family residential mortgage
loans in 1998, 1997 and 1996, respectively. The Bank anticipates that a
significant portion of its future new loan originations will continue to be
single-family residential mortgage loans.
Citizens Financial's residential mortgage loans have either fixed rates
of interest or interest rates which adjust periodically during the term of the
loan. Fixed-rate loans generally have
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maturities of 10, 15 or 30 years and are fully amortizing with monthly loan
payments sufficient to repay the total amount of the loan with interest by the
end of the loan term. The Bank's fixed-rate loans generally are originated under
terms, conditions and documentation which permit them to be sold to U.S.
Government-sponsored agencies, such as the Federal Home Loan Mortgage
Corporation ("Freddie Mac"), and other investors in the secondary market for
mortgages. At December 31, 1998, $231.4 million, or 38.8%, of the Bank's
single-family residential mortgage loans were fixed-rate loans. Substantially
all of the Bank's single-family residential mortgage loans contain due-on-sale
clauses, which permit the Bank to declare the unpaid balance to be due and
payable upon the sale or transfer of any interest in the property securing the
loan. The Bank enforces such due-on-sale clauses.
The adjustable-rate single-family residential mortgage ("ARM") loans
currently offered by the Bank have interest rates which are fixed for the
initial one, three, five or seven years and thereafter adjusted on an annual
basis in accordance with a designated index such as one-year U.S. Treasury
obligations adjusted to a constant maturity ("CMT"), plus a stipulated margin.
The Bank's adjustable-rate single-family residential real estate loans generally
have a cap of 2% on any increase or decrease in the interest rate at any
adjustment date, and include a specified cap on the maximum interest rate over
the life of the loan, which cap generally is 6% above the initial rate. From
time to time, based on prevailing market conditions, the Bank may offer ARM
loans with initial rates which are below the fully indexed rate. Such loans
generally are underwritten based on the fully indexed rate. The Bank's
adjustable-rate loans require that any payment adjustment resulting from a
change in the interest rate of an adjustable-rate loan be sufficient to result
in full amortization of the loan by the end of the loan term and, thus, do not
permit any of the increased payment to be added to the principal amount of the
loan, or so-called negative amortization. At December 31, 1998, $364.8 million
or 61.2% of the Bank's single-family residential mortgage loans were
adjustable-rate loans.
Adjustable-rate loans decrease the risks associated with changes in
interest rates but involve other risks, primarily because as interest rates
increase, the loan payment by the borrower increases to the extent permitted by
the terms of the loan, thereby increasing the potential for default. Moreover,
as with fixed-rate loans, as interest rates increase, the marketability of the
underlying collateral property may be adversely affected by higher interest
rates. The Bank believes that these risks, which have not had a material adverse
effect on the Bank to date, generally are less than the risks associated with
holding fixed-rate loans in an increasing interest rate environment.
The volume and types of ARMs originated by Citizens Financial are
affected by such market factors as the level of interest rates, competition,
consumer preferences and availability of funds. Accordingly, although the Bank
anticipates that it will continue to offer single-family ARMs, there can be no
assurance that in the future the Bank will be able to originate a sufficient
volume of single-family ARMs to increase or maintain the proportion that these
loans bear to total loans.
The Bank's single-family residential mortgage loans generally do not
exceed $250,000. In addition, the maximum loan-to-value ("LTV") ratio for the
Bank's single-family residential mortgage loans generally is 97% of the
appraised value of the security property, provided, however, that
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private mortgage insurance generally is obtained on the portion of the
principal amount that exceeds 80% of the appraised value.
At December 31, 1998, Citizens Financial's home equity loans amounted
to $19.6 million or 2.6% of the Bank's total loans. The preponderance of the
Bank's home equity loans are structured as adjustable-rate, fixed-term loans,
although the Bank also offers floating rate home equity lines of credit. Home
equity loans, like single-family residential mortgage loans, are secured by the
underlying equity in the borrower's residence. However, the Bank generally
obtains a second mortgage position to secure its home equity loans. The Bank's
home equity loans generally require LTV ratios of 80% or less after taking into
consideration any first mortgage loan.
MULTI-FAMILY RESIDENTIAL AND COMMERCIAL REAL ESTATE LOANS. At December
31, 1998, Citizens Financial's multi-family residential mortgage loans and
commercial real estate loans amounted to $21.1 million and $39.0 million,
respectively, or 2.8% and 5.2%, respectively, of the Bank's total loan
portfolio.
The Bank's multi-family residential real estate loans are concentrated
in northwest Indiana and Dupage, Will and Cook County, Illinois. The Bank
originated $3.9 million of multi-family residential real estate loans in 1998
compared to $1.5 million and $9.1 million in 1997 and 1996, respectively. The
Bank generally has not been a substantial originator of multi-family residential
real estate loans due to, among other factors, the relatively limited amount of
apartment and other multi-family properties in its market area.
The Bank's commercial real estate loans generally are secured by
churches, small office buildings, strip shopping centers and other commercial
uses located in the Bank's market area. The Bank's commercial real estate loans
seldom exceed $5.0 million and, as of December 31, 1998, the average size of the
Bank's commercial real estate loans was $943,000. The Bank originated $26.3
million of commercial real estate loans during the year ended December 31, 1998
compared to $3.9 million and $6.5 million, respectively, of commercial real
estate loan originations in 1997 and 1996.
The Bank's multi-family residential and commercial real estate loans
generally are five-year, fixed rate loans with an amortization period of up to
20 years. Citizens Financial also originates adjustable-rate multi-family
residential and commercial real estate loans. Generally, fees of between 1.0%
and 2.0% of the principal loan balance are charged to the borrower upon closing.
The Bank generally charges prepayment penalties on commercial real estate and
multi-family residential mortgage loans. Although terms for multi-family
residential and commercial real estate loans may vary, the Bank's underwriting
standards provide for terms of up to 30 years with amortization of principal
over the term of the loan and LTV ratios of not more than 75%. Generally, the
Bank obtains personal guarantees of the principals as additional security for
any commercial real estate and multi-family residential loans.
Citizens Financial evaluates various aspects of commercial and
multi-family residential real estate loan transactions in an effort to mitigate
credit risk to the extent possible. In underwriting
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these loans, consideration is given to the stability of the property's cash flow
history, future operating projections, current and projected occupancy, position
in the market, location and physical condition. The Bank has also generally
imposed a debt coverage ratio (the ratio of net cash from operations before
payment of debt service to debt service) of not less than 125%. The underwriting
analysis also includes credit checks and a review of the financial condition of
the borrower and guarantor, if applicable. An appraisal report is prepared by an
independent appraiser commissioned by the Bank to substantiate property values
for every commercial real estate and multi-family loan transaction. All
appraisal reports are reviewed by the Bank prior to the closing of the loan.
Commercial real estate and multi-family residential lending entails
substantially different risks when compared to single-family residential lending
because such loans often involve large loan balances to single borrowers and
because the payment experience on such loans is typically dependent on the
successful operation of the project or the borrower's business. These risks can
also be significantly affected by supply and demand conditions in the local
market for apartments, offices, warehouses, or other commercial space. The Bank
attempts to minimize its risk exposure by limiting such lending to proven
businesses, only considering properties with existing operating performance
which can be analyzed, requiring conservative debt coverage ratios, and
periodically monitoring the operation and physical condition of the collateral
as well as the business occupying the property.
As of December 31, 1998, $516,000, or 2.5%, of Citizens Financial's
multi-family residential real estate loans were considered non-performing loans
and $2.8 million, or 7.1% of its commercial real estate loans were considered
non-performing.
CONSTRUCTION AND LAND DEVELOPMENT LOANS. The Bank originates primarily
residential construction loans to local real estate builders, generally with
whom it has an established relationship. The Bank also originates such loans to
individuals who have a contract with a builder for the construction of their
residence. The Bank's construction and land development loans are secured by
property located primarily in the Bank's market area. At December 31, 1998,
construction and land development loans amounted to $51.2 million or 6.9% of the
Bank's net loan portfolio. At December 31, 1998, the Bank had $13.1 million of
undisbursed funds for construction loans in process. Of the Bank's construction
and land development loans at December 31, 1998, $30.9 million were
construction/permanent loans which loans, by their terms, convert to permanent
mortgage loans upon the completion of construction. The Bank originated $51.7
million of construction and land development loans during 1998, compared to
$29.9 million and $34.1 million of construction loans in 1997 and 1996,
respectively.
Citizens Financial's construction loans often are structured as
construction/permanent loans whereby there is one closing for both the
construction loan and the permanent financing. During the construction phase,
which typically lasts for four to six months, officers of the Bank make periodic
inspections of the construction site and loan proceeds are disbursed directly to
the contractors as construction progresses. Typically, disbursements are made in
three draws during the construction period. The Bank's construction loans
require payment of interest only during the construction phase
11
<PAGE> 14
and are structured to be converted to fixed-rate permanent loans at the end of
the construction phase. Prior to making a commitment to fund a construction
loan, the Bank requires an appraisal of the property by independent appraisers
approved by the Board of Directors. The Bank's staff, or a third-party
contractor retained by Citizens Financial, also reviews and inspects each
project at the commencement of construction and prior to every disbursement of
funds during the term of the construction loan. Loan proceeds are disbursed
after inspections of the project based on a percentage of completion.
The Bank originates land loans to local developers for the purpose of
developing the land (i.e., roads, sewer and water) for sale. Such loans are
secured by a lien on the property, are generally limited to 70% of the appraised
value of the secured property and are typically made for a period of up to two
years. The Bank requires monthly interest payments during the term of the loan.
The principal of the loan is reduced as lots are sold and released. All of the
Bank's land loans are secured by property located in its market area. In
addition, the Bank generally obtains personal guarantees from its borrowers.
Construction and land development lending generally is considered to
involve a higher level of risk as compared to permanent single-family
residential lending, due to the concentration of principal in a limited number
of loans and borrowers and the effects of general economic conditions on
developers and builders. Moreover, a construction loan can involve additional
risks because of the inherent difficulty in estimating both a property's value
at completion of the project and the estimated cost (including interest) of the
project. The nature of these loans is such that they are generally more
difficult to evaluate and monitor.
As of December 31, 1998, $469,000, or 0.9% of Citizens Financial's
construction and land development loans were considered non-performing.
Citizens Financial has attempted to minimize the foregoing risks by,
among other things, limiting the extent of its construction and land development
lending generally and by limiting its construction and land development lending
to primarily residential properties. In addition, the Bank generally limits the
geographic area in which it will do business to its existing market and by
working with builders with whom it has established relationships. It is also the
Bank's policy to obtain personal guarantees from the principals of its corporate
borrowers on its construction and land loans.
OTHER LOANS. Citizens Financial's other loans consist primarily of
commercial loans, consumer loans and loans secured by deposit accounts. Included
in the category of commercial loans are loans secured by business assets other
than real estate, unsecured loans, and secured and unsecured operating lines of
credit. As of December 31, 1998, Citizens Financial's other loans amounted to
$17.5 million compared to $8.0 million and $9.7 million at December 31, 1997 and
1996, respectively. The Bank is not actively marketing its other loans and
offers them primarily as a service to its existing customers.
12
<PAGE> 15
ASSET QUALITY
GENERAL. As a part of Citizens Financial's efforts to improve its asset
quality, it has developed and implemented an asset classification system. All of
the Bank's assets are subject to review under this classification system. Loans
are periodically reviewed and the classifications are reviewed by the Executive
Committee of the Board of Directors on at least a quarterly basis.
When a borrower fails to make a required payment on a loan, the Bank
attempts to cure the deficiency by contacting the borrower and seeking payment.
Contacts are generally made 30 days after a payment is due. In most cases,
deficiencies are cured promptly. If a delinquency continues, late charges are
assessed and additional efforts are made to collect the loan. While the Bank
generally prefers to work with borrowers to resolve such problems, when the
account becomes 90 days delinquent, the Bank institutes foreclosure or other
proceedings, as necessary, to minimize any potential loss.
Loans are placed on non-accrual status when, in the judgment of
management, the probability of collection of interest is deemed to be
insufficient to warrant further accrual. When a loan is placed on non-accrual
status, previously accrued but unpaid interest is deducted from interest income.
As a matter of policy, the Bank does not accrue interest on loans past due 90
days or more.
Real estate acquired by the Bank as a result of foreclosure or by
deed-in-lieu of foreclosure is classified as real estate owned until sold.
Pursuant to Statement of Position 92-3 ("SOP 92-3") issued by the AICPA, there
is a rebuttable presumption that foreclosed assets are held for sale and such
assets are recommended to be carried at the lower of fair value minus estimated
costs to sell the property, or cost (generally the balance of the loan on the
property at the date of acquisition with any resulting losses being charged to
the allowance for losses on loans). After the date of acquisition, all costs
incurred in maintaining the property are expensed and costs incurred for the
improvement or development of such property are capitalized up to the extent of
their net realizable value. The Bank's accounting for its real estate owned
complies with the guidance set forth in SOP 92-3.
13
<PAGE> 16
DELINQUENT LOANS. The following table sets forth information concerning
delinquent loans at the dates indicated, in dollar amounts and as a percentage
of each category of the Bank's loan portfolio. The amounts presented represent
the total outstanding principal balances of the related loans.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------------------
1998 1997 1996
----------------------- --------------------- ---------------------
60-89 Days Delinquent 60-89 Days Delinquent 60-89 Days Delinquent
----------------------- --------------------- ---------------------
Percent of Percent of Percent of
Loan Loan Loan
Amount Category Amount Category Amount Category
-------- ---------- ------- ----------- ------ ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Residential:
Single-family .............. $7,172 1.20% $3,769 0.76% $4,457 1.12%
Multi-family ............... -- -- 79 0.26 63 0.23
Commercial real estate ........ 85 0.22 2,700 14.92 1,064 7.19
Construction and land
development ................ 1,449 2.83 191 0.47 -- --
Home equity ................... 704 4.02 147 0.69 87 0.46
Other ......................... 311 1.78 98 1.23 53 0.55
------ ------ ------
Total .................... $9,721 1.31% $6,984 1.14% $5,724 1.12%
====== ====== ======
</TABLE>
14
<PAGE> 17
NON-PERFORMING AND UNDER-PERFORMING ASSETS. The following table sets
forth information with respect to non-performing and certain under-performing
assets identified by Citizens Financial, including non-accrual loans and other
real estate owned. Citizens Financial had no accruing loans 90 days or more past
due as to principal or interest at any of the below-referenced dates.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
Mortgage loans:
Single-family residential ............ $5,137 $4,579 $1,827 $1,096 $1,484
Multi-family residential ............. 516 405 -- -- 359
Commercial real estate ............... 2,754 173 41 -- --
Construction and land
development ........................ 469 792 498 494 645
Home equity .......................... 1 80 403 331 --
Other loans ............................ 76 118 43 29 11
------ ------ ------ ------ ------
Total non-accruing loans ............. 8,953 6,147 2,812 1,950 2,499
------ ------ ------ ------ ------
Total non-performing loans ........... 8,953 6,147 2,812 1,950 2,499
Other real estate owned, net ......... 435 1,295 14 109 114
------ ------ ------ ------ ------
Total non-performing
assets ............................. 9,388 7,442 2,826 2,059 2,613
------ ------ ------ ------ ------
Investment in real estate held
for sale ........................... -- 1,071 -- -- --
Investment in and advances to
a limited liability company ........ -- -- 6,457 3,699 2,102
------ ------ ------ ------ ------
Total non-performing
assets and investment in
real estate held for sale
and investment in and
advances to a limited
liability company ..................... $9,388 $8,513 $9,283 $5,758 $4,715
====== ====== ====== ====== ======
Performing troubled debt
restructuring ......................... $ 916 $1,286 $1,260 $1,346 $1,435
====== ====== ====== ====== ======
Non-performing assets to total
assets ................................ 0.64% 0.63% 0.27% 0.21% 0.29%
Non-performing loans to total
loans ................................. 1.20 1.01 0.56 0.49 0.70
Total non-performing assets and
investment in and advances to a limited
liability company to total assets ..... 0.64 0.72 0.88 0.60 0.52
Total non-performing assets and troubled
debt restructurings to total assets ... 0.70 0.74 0.39 0.35 0.44
</TABLE>
The primary reason for the $1.9 million increase in non-performing
assets at December 31, 1998 was a $2.6 million increase in commercial real
estate. Of the $2.6 million increase, $2.3 million is represented by one office
building which SFC placed in non-accrual at March 31, 1998, single-family loans
in non-accrual also increased by $558,000 during 1998. The increase in
non-performing commercial real estate and single-family residential mortgage
loans during 1998 was partially offset by an $860,000 reduction in real estate
owned reflecting the sale of property which the Bank developed in prior years
and a $323,000 reduction in construction and land development loans.
15
<PAGE> 18
The interest income that would have been recorded during the year ended
December 31, 1998, if all of the Bank's non-performing loans at the end of such
period had been current in accordance with their terms during such periods was
$891,000. The actual amount of interest recorded as income (on a cash basis) on
such loans during the period amounted to $381,000.
CLASSIFIED AND CRITICIZED ASSETS. Federal regulations require that each
insured institution classify its assets on a regular basis. Furthermore, in
connection with examinations of insured institutions, federal examiners have
authority to identify problem assets and, if appropriate, classify them. There
are three classifications for problem assets: "substandard," "doubtful" and
"loss." Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
probability of loss. An asset classified loss is considered uncollectible and of
such little value that continuance as an asset of the institution is not
warranted. Another category designated "special mention" also must be
established and maintained for assets which have some identified weaknesses but
do not currently expose an insured institution to a sufficient degree of risk to
warrant classification as substandard, doubtful or loss. At December 31, 1998,
Citizens Financial had an aggregate of $10.3 million of classified assets, 94.7%
of which were classified substandard and 5.3% of which were classified as
doubtful.
ALLOWANCE FOR LOSSES ON LOANS. The Bank's policy is to establish
allowances for estimated losses on delinquent loans when it determines that
losses are expected to be incurred on such loans. The allowance for losses on
loans is maintained at a level believed adequate by management to absorb losses
inherent in the portfolio. Management's determination of the adequacy of the
allowance is based on an evaluation of the portfolio, past loss experience,
current economic conditions, volume, growth and composition of the portfolio,
and other relevant factors. The allowance is increased by provisions for loan
losses which are charged against income. As shown in the table below, at
December 31, 1998, the Bank's allowance for losses on loans amounted to $5.4
million or 59.8% and 0.7% of the Bank's non-performing loans and total loans
receivable, respectively. The Bank's provision to the allowance for losses on
loans amounted to $1.6 million for the year ended December 31, 1998 and $1.8
million during 1997. Among other factors, Citizens Financial considers the
amount of non-performing assets when establishing the appropriate amount of the
provisions to the allowance for losses on loans. While no assurance can be given
that future charge-offs and/or additional provisions will not be necessary,
management of Citizens Financial believes that, as of December 31, 1998, the
allowance for losses on loans was adequate.
Effective December 21, 1993, the OTS, in conjunction with the Office of
the Comptroller of the Currency, the FDIC and the FRB, issued a Policy Statement
regarding an institution's allowance for loan and lease losses. The Policy
Statement, which reflects the position of the issuing regulatory agencies and
does not necessarily constitute generally accepted accounting principles
("GAAP"), includes guidance (i) on the responsibilities of management for the
assessment and
16
<PAGE> 19
establishment of an adequate allowance and (ii) for the agencies' examiners to
use in evaluating the adequacy of such allowance and the policies utilized to
determine such allowance. The Policy Statement also sets forth quantitative
measures for the allowance with respect to assets classified substandard and
doubtful and with respect to the remaining portion of an institution's loan
portfolio. Specifically, the Policy Statement sets forth the following
quantitative measures which examiners may use to determine the reasonableness of
an allowance: (i) 50% of the portfolio that is classified doubtful; (ii) 15% of
the portfolio that is classified substandard; and (iii) for the portions of the
portfolio that have not been classified (including loans designated special
mention), estimated credit losses over the upcoming 12 months based on facts and
circumstances available on the evaluation date. While the Policy Statement sets
forth this quantitative measure, such guidance is not intended as a "floor" or
"ceiling." Citizens Financial's policy for establishing loan losses is not
inconsistent with the Policy Statement.
The following table sets forth the activity in the Bank's allowance for
loan losses during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------
1998 1997 1996 1995 1994
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance at beginning of period ........... $3,825 $2,426 $2,221 $2,087 $1,910
------ ------ ------ ------ ------
Provisions ................................. 1,630 1,840 253 197 178
Charge-offs:
Mortgage loans:
Single-family residential ........... (49) (8) (24) (2) (33)
Multi-family residential ............ -- -- -- -- --
Commercial real estate .............. -- -- -- (6) --
Construction and land
development ........................ (13) (182) -- -- --
Other loans ......................... (63) (263) (110) (64) (51)
------ ------ ------ ------ ------
Total charge-offs ................... (125) (453) (134) (72) (84)
Recoveries:
Mortgage loans:
Single-family residential............ 25 -- 16 9 7
Multi-family residential............. -- -- -- -- --
Commercial real estate............... -- -- -- -- --
Construction and land
development ........................ -- -- -- -- --
Other loans ......................... 2 12 70 -- 76
------ ------ ------ ------ ------
Total recoveries .................... 27 12 86 9 83
------ ------ ------ ------ ------
Net loans charged-off to
allowance for losses
on loans .......................... (98) (441) (48) (63) (1)
------ ------ ------ ------ ------
Allowance at end of period........... $5,357 $3,825 $2,426 $2,221 $2,087
====== ====== ====== ====== ======
Allowance for losses on loans to total
nonperforming loans at end of period ..... 59.84% 62.22% 86.27% 113.90% 83.51%
===== ===== ===== ====== =====
Allowance for losses on loans to total
loans at end of period ................... 0.72% 0.63% 0 .48 0.55% 0.58%
==== ==== ===== ==== ====
Net charge offs to average
loans outstanding ........................ 0.02% 0.08% 0.01% 0.02% --
==== ==== ==== ==== ====
</TABLE>
ALLOCATION OF THE ALLOWANCE FOR LOSSES ON LOANS. Historically, Citizens
Financial has not allocated its allowance for loan losses by category of loans.
Management of the Bank has determined the sufficiency of the allowance for
losses on loans based upon its periodic assessment of the risk elements in its
loan portfolio. Management of Citizens Financial utilizes analytical data
17
<PAGE> 20
as well as anticipated borrower performance in light of general economic
conditions existing in the Bank's market area.
The determination of the adequacy of the allowance at December 31, 1998
specifically considered various factors, including the fact that the outstanding
balance of the Bank's commercial real estate, construction and land development,
and multi-family residential loans continued to increase during the year. Such
loans generally are considered to constitute a higher risk of loss than other
components of the portfolio. At December 31, 1998, non-performing loans exceeded
1.2% of outstanding loans. In addition, although anticipated losses on the sale
of foreclosed properties are charged to the allowance at the time of the
foreclosure, the unsold properties continue to expose the Bank to risk from
declines in market value pending sale.
With respect to fiscal years prior to 1998, management of Citizens
Financial considered similar factors and utilized a substantially identical
analytical process in determining the level of its allowance. Management
currently anticipates that the level of loan charge-offs by category expected to
be experienced during 1999 should approximate the levels of charge-offs
experienced in 1998, 1997 and 1996.
Citizens Financial will continue to monitor and modify its allowance
for losses on loans as conditions dictate. While management believes that, based
on information currently available, the Bank's allowance for loan losses is
sufficient to cover losses inherent in its loan portfolio at this time, no
assurance will be given that the Bank's level of allowance for losses on loans
will be sufficient to absorb future loan losses incurred by the Bank or that
future adjustments to the allowance for losses on loans will not be necessary if
economic and other conditions differ substantially from the economic and other
conditions used by management to determine the current level of the allowance
for losses on loans. In addition, the OTS, as an integral part of its
examination process, periodically reviews the Bank's allowance for loan losses.
Such agency may require the Bank to make additional provisions for estimated
loan losses based upon judgments different from those of management.
The Bank allocates allowance for losses on loans by loan category based
on a percentage of balances in a particular loan category. Various percentages
are assigned to the loan categories based on management's analysis of their
relative risks. At December 31, 1998, the allowance for losses on loans was
allocated as follows:
<TABLE>
<CAPTION>
ALLOWANCE
CATEGORY PERCENTAGE COMPONENT
<S> <C> <C>
Residential real estate:
Single-family-owner occupied 0.50% $3,052
Single-family-non-owner
occupied.................. 0.75% 229
Multi-family................ 1.00% 203
Business/Commercial........... 2.00% 884
Land.......................... 1.75% 82
Developed lots................ 1.25% 121
Other......................... 2.50% 406
------
4,977
Unallocated 380
------
Total $5,357
======
</TABLE>
18
<PAGE> 21
INVESTMENT SECURITIES ACTIVITIES
GENERAL. As of December 31, 1998, the Company had an aggregate of
$201.2 million of investment securities, or 13.7% of its total assets at such
date. At such date, the unrealized loss on the Company's investment securities
available for sale amounted to $251,000, net of income taxes.
The Company's investment securities consist primarily of callable
agency securities , which amounted to $167.5 million at December 31, 1998. The
Company attempts to maintain a high degree of liquidity in its other securities
and generally does not invest in debt securities with estimated average lives in
excess of 10 years. In recent periods, the Company has purchased substantial
amounts of callable agency securities, which are U.S. Government agency debt
obligations, generally having a contractual term to maturity of 10 years. These
securities may be called for redemption at predetermined dates (generally every
three months) throughout their terms. During 1998 and 1997, virtually all of the
Company's callable agency securities were called within one year of purchase. As
of December 31, 1998, the contractual weighted average lives of the Company's
investment securities were 8.8 years.
At December 31, 1998, $34.7 million of the Company's investment
securities were classified as available for sale and $166.5 million were held to
maturity. Securities classified as available for sale are carried at fair value.
Unrealized gains and losses on available for sale securities are recognized as
direct increases or decreases in equity, net of applicable income taxes.
Securities which are held to maturity are carried at cost, adjusted for the
amortization of premiums and the accretion of discounts using a method which
approximates a level yield.
The investment policy of the Company, which has been established by the
Board of Directors, is designed, among other things, to assist the Company in
its asset/liability management policies. The Company's investment policy
emphasizes principal preservation, favorable returns on investment, liquidity
within designated guidelines, minimal credit risk, and flexibility. The
Company's current securities investment policy permits investments in various
types of securities including obligations of the U.S. Treasury and federal
agencies, investment grade corporate obligations ("A" rated or better), trust
preferred stocks, other equity securities, commercial paper, certificates of
deposit, and federal funds sold to financial institutions approved by the Board
of Directors.
The Company currently does not participate in hedging programs,
interest rate swaps, or other activities involving the use of off-balance sheet
derivative instruments.
19
<PAGE> 22
The following table sets forth information regarding the carrying and fair
value of the Company's investment securities at the dates indicated.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------
1998 1997 1996
--------------------- -------------------- ----------------------
Carrying Fair Carrying Fair Carrying Fair
Value Value Value Value Value Value
-------- -------- -------- -------- -------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Available for sale (at fair value):
Callable agency securities and corporate
bonds.......................................... $ 2,011 $ 2,011 $ 1,028 $ 1,028 $ 102 $ 102
Trust preferred stock............................ 24,699 24,699 -- -- -- --
Equity securities................................ 8,010 8,010 2,668 2,668 4,690 4,690
-------- -------- -------- -------- -------- --------
$ 34,720 $ 34,720 $ 3,696 $ 3,696 $ 4,792 $ 4,792
======== ======== ======== ======== ======== ========
Held to maturity:
Callable agency securities and
corporate bonds................................ $166,500 $169,263 $174,194 $175,367 $ 59,876 $ 59,118
Zero coupon agency securities.................... -- -- 32,028 31,935 -- --
-------- -------- -------- -------- -------- --------
$166,500 $169,263 $206,232 $207,302 $ 59,876 $ 59,118
======== ======== ======== ======== ======== ========
</TABLE>
At December 31, 1998, $25.2 million or 12.52% of the Company's
investment securities portfolio consisted of adjustable rate securities. None of
the investment securities held at December 31, 1997 or 1996 had adjustable
rates.
The following table sets forth certain information regarding the
maturities of the Company's other securities (all of which were classified as
held to maturity) at December 31, 1998.
<TABLE>
<CAPTION>
Contractually Maturing
-----------------------------------------------------------------------------------------
Weighted Weighted Weighted Over Weighted
Under 1 Average 1-5 Average 6-10 Average 10 Average
Year Yield Years Yield Years Yield Years Yield
-------- -------- -------- -------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Callable agency securities... $ -- --% $2,011 6.87% $162,997 6.65% $2,003 7.10%
Corporate bonds.............. 1,500 8.70 -- -- -- -- -- --
</TABLE>
MORTGAGE-BACKED SECURITIES
GENERAL. At December 31, 1998, the Company's mortgage-backed securities
included $205.0 million of mortgage participation certificates (which are also
known as mortgage-backed securities), collateralized mortgage obligations
investment, and including securities which have qualified as real estate
mortgage investment conduits ("REMICs"). At such date, the unrealized loss on
the Company's mortgage-backed securities available for sale amounted to $38,000,
net of income taxes. At December 31, 1998, $277.9 million of the Company's
mortgage-backed securities were classified as available for sale and $177.0
million were held to maturity. Securities classified as available for sale are
carried at fair value. Unrealized gains and losses on available for sale
securities are recognized as direct increases or decreases in equity, net of
applicable income taxes. Securities which are held to maturity are carried at
cost, adjusted for the amortization of premiums and the accretion of discounts
using a method which approximates a level yield.
The following table sets forth information regarding the carrying and
fair value of the Company's mortgage-backed securities at the dates indicated.
20
<PAGE> 23
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------
1998 1997 1996
---------------------- ---------------------- ----------------------
Carrying Fair Carrying Fair Carrying Fair
Value Value Value Value Value Value
--------- --------- --------- --------- --------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Available for sale (at fair value):
Participation certificates and collateralized
mortgage obligations....................... $121,514 $121,514 $ 56,150 $ 56,150 $ 75,400 $ 75,400
REMICs....................................... 156,374 156,374 3,560 3,560 7,924 7,924
Adjustable rate mutual funds................. -- -- 2,431 2,431 2,429 2,429
-------- -------- -------- -------- -------- --------
$277,888 $277,888 $ 62,141 $ 62,141 $ 85,753 $ 85,753
======== ======== ======== ======== ======== ========
Held to maturity:
Participation certificates and collateralized
mortgage obligations....................... $ 83,469 $ 83,084 $102,094 $102,428 $ 86,370 $ 87,234
REMICs....................................... 93,487 95,610 154,576 157,086 240,060 241,725
-------- -------- -------- -------- -------- --------
$176,956 $178,694 $256,670 $259,514 $326,430 $328,959
======== ======== ======== ======== ======== ========
</TABLE>
At December 31, 1998, $26.0 million, or 5.72%, of the Company's
mortgage-backed securities portfolio consisted of adjustable-rate securities, as
compared to $41.1 million, or 12.89%, and $46.2 million, or 11.21%, at December
31, 1997 and 1996, respectively.
Participation certificates represent a participation interest in a pool
of single-family or multi-family mortgages. The principal and interest payments
on mortgage-backed securities are passed from the mortgage originators, as
servicer, through intermediaries (generally U.S. Government agencies and
government-sponsored enterprises) that pool and repackage the participation
interests in the form of securities, to investors such as the Company. Such U.S.
Government agencies and government sponsored enterprises, which guarantee the
payment of principal and interest to investors, primarily include the Freddie
Mac, the Federal National Mortgage Association ("Fannie Mae") and the Government
National Mortgage Association ("Ginnie Mae").
SOURCES OF FUNDS.
GENERAL. Deposits are the primary source of the Bank's funds for
lending and other investment purposes. In addition to deposits, the Bank derives
funds from loan principal repayments and prepayments and borrowings. Loan
repayments are a relatively stable source of funds, while deposit inflows and
outflows are significantly influenced by general interest rates and money market
conditions. While Citizens Financial generally has not used borrowings as a
source of funds; however, during 1998, given the Bank's asset size and interest
rate environment, management used borrowing to a greater extent.
DEPOSITS. Citizens Financial's deposit products include a broad
selection of deposit instruments, including negotiable order of withdrawal
("NOW") accounts, money market accounts, non-interest bearing checking accounts,
passbook accounts and term certificate accounts. Deposit
21
<PAGE> 24
account terms vary, with the principal differences being the minimum balance
required, the time periods the funds must remain on deposit and the interest
rate.
Citizens Financial utilizes traditional marketing methods to attract
new customers and savings deposits. The Bank does not advertise for deposits
outside of its market area. The Bank does not utilize the services of deposit
brokers. The Bank traditionally has relied on customer service and convenience
in marketing its deposit products. In addition, Citizens Financial generally has
been competitive in the types of accounts and interest rates offered and often
it has been among the leaders in its market area on the rates paid on its
deposits. In recent years, many depository institutions have experienced
disintermediation of their deposits due, in part, to higher returns provided by
competing investment products offered by non-depository institutions. However,
Citizens Financial experienced a net decrease in deposits before interest
credited of $58.4 million in 1998. However, $29.0 million of the net decrease in
1998 reflected customers' use of deposits to purchase Common Stock in the
Conversion.
The following table sets forth the activity in the Bank's deposits
during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1998 1997 1996
---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C>
Beginning balance................... $985,447 $882,821 $819,504
Net increase (decrease) before
interest credited................. (58,353) 61,332 28,917
Interest credited................... 41,064 41,294 34,400
-------- -------- --------
Net increase (decrease) in deposits. (17,289) 102,626 63,317
-------- ------- --------
Ending balance...................... $969,158 $985,447 $882,821
======== ======== ========
</TABLE>
The following table sets forth by various interest rate categories of
certificates of deposit of the Bank at the dates indicated.
<TABLE>
December 31,
-----------------------------------------------
1998 1997 1996
---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C>
0.00% to 2.99%...................... $ 157 $ 160 $ 276
3.00% to 3.99%...................... 52 96 238
4.00% to 4.99%...................... 117,024 18,128 11,345
5.00% to 6.99%...................... 475,163 617,417 507,898
7.00% to 8.99%...................... 9,772 10,957 11,351
9.00% to 10.99%..................... 231 353 494
-------- -------- --------
Total........................... $602,399 $647,111 $531,602
======== ======== ========
</TABLE>
22
<PAGE> 25
The following table sets forth the amount and remaining maturities of
the Bank's certificates of deposit at December 31, 1998.
<TABLE>
<CAPTION>
Over Six Months Over One Year Over Two Years
Six Months Through One Through Two Through Three Over Three
and Less Year Years Years Years
------------ --------------- ------------- -------------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
2.00% to 2.99%..................... $ 157 $ -- $ -- $ -- $ --
3.00% to 3.99%..................... 52 -- -- -- --
4.00% to 4.99%..................... 71,054 32,458 10,828 2,109 575
5.00% to 6.99%..................... 197,919 112,064 120,208 21,094 23,878
7.00% to 8.99%..................... 1,166 827 1,490 402 5,887
9.00% to 10.99%.................... 231 -- -- -- --
-------- -------- -------- -------- --------
Total........................... $270,579 $145,349 $132,526 $ 23,605 $ 30,340
======== ======== ======== ======== ========
</TABLE>
As of December 31, 1998, the aggregate amount of outstanding time
certificates of deposit in amounts greater than or equal to $100,000, was
approximately $99.5 million. The following table presents the maturity of these
time certificates of deposit at such dates.
<TABLE>
<CAPTION>
December 31, 1998
-----------------
(In Thousands)
<S> <C>
3 months or less ................................. $23,408
Over 3 months through 6 months.................... 18,272
Over 6 months through 12 months................... 26,505
Over 12 months ................................... 31,280
-------
$99,465
=======
</TABLE>
The following table sets forth the dollar amount of deposits in various
types of deposits offered by the Bank at the dates indicated.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------------------
1998 1997 1996
------------------------- ------------------------- ------------------------
Amount Percentage Amount Percentage Amount Percentage
-------- ---------- -------- ---------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts ............... $219,984 22.64% $206,383 20.94% $214,595 24.31%
Certificates of deposit ......... 602,399 62.16 647,111 65.67 531,602 60.22
Money market accounts ........... 45,622 4.71 42,313 4.29 48,743 5.52
NOW accounts .................... 101,654 10.49 89,640 9.10 87,881 9.95
-------- ------ -------- ------ -------- ------
Total ....................... $969,158 100.00% $985,447 100.00% $882,821 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
23
<PAGE> 26
BORROWED MONEY
The Company utilized borrowed money more extensively during 1998 than
it did in prior years.
The following table sets forth certain information as to the Bank's
FHLB advances and other borrowings at the dates indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1998 1997 1996
-------- -------- --------
(Dollars In Thousands)
<S> <C> <C> <C>
FHLB advances..................................... $145,000 $76,200 $55,500
Securities sold under agreements to repurchase.... 70,271 3,844 7,438
Other borrowings.................................. -- 5,000 --
-------- ------- -------
Total borrowings.................................. $215,271 $85,044 $62,938
======== ======= =======
Weighted average interest rate of borrowings...... 5.53% 6.03% 5.89%
</TABLE>
TRUST ACTIVITIES
The Company also provides a full range of trust services through the
Bank's Trust Department which commenced operations in April 1996. Services
offered include fiduciary services for trusts and estates, money management,
land trusts, custodial services and pension and employee benefits consulting. As
of December 31, 1998, the Trust Department maintained approximately 60
trust/fiduciary accounts, with an aggregate principal balance of $1.4 million at
such date. Revenues from the Trust Department amounted to $36,000 in the year
ended December 31, 1998.
The accounts maintained by the Trust Department consist of "managed"
and "non-managed" accounts. "Managed accounts" are those accounts under custody
for which the Bank has responsibility for administration and investment
management and/or investment advice. "Non-managed" accounts are those accounts
for which the Bank merely acts as a custodian. The Company receives fees
dependent upon the level and type of service provided. The Trust Department
administers various trust accounts (revocable and irrevocable trusts, and trusts
under wills), estates and guardianships. One trust operations officer and
related staff are assigned to the Trust Department.
SUBSIDIARIES
The Bank currently has two active subsidiaries, CFS Insurance Agency,
Inc. and CFS Investment Services, Inc.
CFS Insurance Agency, Inc. ("CFS Insurance") is an independent
insurance brokerage subsidiary which offers a full line of insurance products to
the general public. CFS Insurance operates out of the Bank's Insurance/
Investment Center in Munster, Indiana. While the Bank has owned CFS Insurance
since 1972, in recent periods it has significantly increased its efforts to
expand insurance
24
<PAGE> 27
brokerage activities. At December 31, 1998, CFS Insurance had 14 licensed
insurance agents on its staff. While CFS Insurance has primarily sold property,
casualty and life insurance products to individuals in the Bank's market area,
CFS has recently increased its efforts with respect to commercial products
(which generally have higher premiums). Revenues of CFS Insurance were $856,000,
$619,000 and $546,000 in 1998, 1997 and 1996, respectively.
CFS Investments, Inc. ("CFS Investments") is primarily involved in the
sale of mutual funds and other securities to members of the general public in
the Bank's market area. CFS Investments commenced full service securities
brokerage activities in 1994. At December 31, 1998, CFS Investments had 16
licensed securities brokers on its staff. CFS Investments is affiliated with a
registered securities broker-dealer which is responsible for supervision of CFS
Investments and for execution of securities transactions. CFS Investments also
offers fixed and variable annuities. In addition to its presence in the CFS
Insurance/Investments Center, CFS Investments maintains offices in eight of the
Bank's branches. CFS Investments had total commission revenue of $874,000,
$891,000 and $677,000 for 1998, 1997 and 1996, respectively.
EMPLOYEES
Citizens Financial had 444 full-time equivalent employees at December
31, 1998. None of these employees is represented by a collective bargaining
agent, and the Bank believes that it enjoys good relations with its personnel.
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<PAGE> 28
REGULATION
REGULATION OF SAVINGS AND LOAN HOLDING COMPANIES
The Company is a registered savings and loan holding company. The Home
Owners' Loan Act, as amended ("HOLA"), and OTS regulations generally prohibit a
savings and loan holding company, without prior OTS approval, from acquiring,
directly or indirectly, the ownership or control of any other savings
association or savings and loan holding company, or all, or substantially all,
of the assets or more than 5% of the voting shares thereof. These provisions
also prohibit, among other things, any director or officer of a savings and loan
holding company, or any individual who owns or controls more than 25% of the
voting shares of such holding company, from acquiring control of any savings
association not a subsidiary of such savings and loan holding company, unless
the acquisition is approved by the OTS.
Holding Company Activities. The Company currently operates as a unitary
savings and loan holding company. Generally, there are limited restrictions on
the activities of a unitary savings and loan holding company and its non-savings
association subsidiaries. If the Company ceases to be a unitary savings and loan
holding company, the activities of the Company and its non-savings association
subsidiaries would thereafter be subject to substantial restrictions.
The HOLA requires every savings association subsidiary of a savings and
loan holding company to give the OTS at least 30 days' advance notice of any
proposed dividends to be made on its guarantee, permanent or other
non-withdrawable stock, or else such dividend will be invalid.
Affiliate Restrictions. Transactions between a savings association and
its "affiliates" are subject to quantitative and qualitative restrictions under
Sections 23A and 23B of the Federal Reserve Act. Affiliates of a savings
association include, among other entities, the savings association's holding
company and companies that are under common control with the savings
association.
In general, Sections 23A and 23B and OTS regulations issued in
connection therewith limit the extent to which a savings association or its
subsidiaries may engage in certain "covered transactions" with affiliates to an
amount equal to 10% of the association's capital and surplus, in the case of
covered transactions with any one affiliate, and to an amount equal to 20% of
such capital and surplus, in the case of covered transactions with all
affiliates. In addition, a savings association and its subsidiaries may engage
in covered transactions and certain other transactions only on terms and under
circumstances that are substantially the same, or at least as favorable to the
savings association or its subsidiary, as those prevailing at the time for
comparable transactions with nonaffiliated companies. A "covered transaction" is
defined to include a loan or extension of credit to an affiliate; a purchase of
investment securities issued by an affiliate; a purchase of assets from an
affiliate, with certain exceptions; the acceptance of securities issued by an
affiliate as collateral for a loan or extension of credit to any party; or the
issuance of a guarantee, acceptance or letter of credit on behalf of an
affiliate.
26
<PAGE> 29
In addition, under the OTS regulations, a savings association may not
make a loan or extension of credit to an affiliate unless the affiliate is
engaged only in activities permissible for bank holding companies; a savings
association may not purchase or invest in securities of an affiliate other than
shares of a subsidiary; a savings association and its subsidiaries may not
purchase a low-quality asset from an affiliate; and covered transactions and
certain other transactions between a savings association or its subsidiaries and
an affiliate must be on terms and conditions that are consistent with safe and
sound banking practices. With certain exceptions, each loan or extension of
credit by a savings association to an affiliate must be secured by collateral
with a market value ranging from 100% to 130% (depending on the type of
collateral) of the amount of the loan or extension of credit.
The OTS regulation generally excludes all non-bank and non-savings
association subsidiaries of savings associations from treatment as affiliates,
except to the extent that the OTS or the Federal Reserve Board decides to treat
such subsidiaries as affiliates. The regulation also requires savings
associations to make and retain records that reflect affiliate transactions in
reasonable detail, and provides that certain classes of savings associations may
be required to give the OTS prior notice of transactions with affiliates.
REGULATION OF FEDERAL SAVINGS BANKS
As a federally insured savings bank, lending activities and other
investments of the Bank must comply with various statutory and regulatory
requirements. The Bank is regularly examined by the OTS and must file periodic
reports concerning its activities and financial condition.
Although the OTS is the Bank's primary regulator, the FDIC has "backup
enforcement authority" over the Bank. The Bank's eligible deposit accounts are
insured by the FDIC under the SAIF, up to applicable limits.
Federal Home Loan Banks. The Bank is a member of the FHLB System. Among
other benefits, FHLB membership provides the Bank with a central credit
facility. The Bank is required to own capital stock in an FHLB in an amount
equal at least 1% of its aggregate unpaid residential mortgage loans, home
purchase contracts and similar obligations at the beginning of each calendar
year or 5% of its advances from the FHLB, whichever is greater.
Liquid Assets. Under OTS regulations, for each calendar month, a
savings bank is required to maintain an average daily balance of liquid assets
(including cash, certain time deposits and savings accounts, bankers'
acceptances, certain government obligations and certain other investments) not
less than a specified percentage of the average daily balance of its net
withdrawable deposit accounts and borrowings payable in one year or less. This
liquidity requirement, which is currently at 4.0%, may be changed from time to
time by the OTS to any amount between 4.0% to 10.0%, depending upon certain
factors. The Bank maintains liquid assets in compliance with these regulations.
27
<PAGE> 30
Regulatory Capital Requirements. OTS capital regulations require
savings banks to satisfy minimum capital standards: risk-based capital
requirements, a leverage requirement and a tangible capital requirement. Savings
banks must meet each of these standards in order to be deemed in compliance with
OTS capital requirements. In addition, the OTS may require a savings association
to maintain capital above the minimum capital levels.
All savings banks are required to meet a minimum risk-based capital
requirement of total capital (core capital plus supplementary capital) equal to
8% of risk-weighted assets (which includes the credit risk equivalents of
certain off-balance sheet items). In calculating total capital for purposes of
the risk-based requirement, supplementary capital may not exceed 100% of core
capital. Under the leverage requirement, a savings bank is required to maintain
core capital equal to a minimum of 3% of adjusted total assets. (In addition,
under the prompt corrective action provisions of the OTS regulations, all but
the most highly-rated institutions must maintain a minimum leverage ratio of 4%
in order to be adequately capitalized.) A savings bank is also required to
maintain tangible capital in an amount at least equal to 1.5% of its adjusted
total assets.
These capital requirements are viewed as minimum standards by the OTS,
and most institutions are expected to maintain capital levels well above the
minimum. In addition, the OTS regulations provide that minimum capital levels
higher than those provided in the regulations may be established by the OTS for
individual savings associations, upon a determination that the savings
association's capital is or may become inadequate in view of its circumstances.
The OTS regulations provide that higher individual minimum regulatory capital
requirements may be appropriate in circumstances where, among others: (1) a
savings association has a high degree of exposure to interest rate risk,
prepayment risk, credit risk, concentration of credit risk, certain risks
arising from nontraditional activities, or similar risks or a high proportion of
off-balance sheet risk; (2) a savings association is growing, either internally
or through acquisitions, at such a rate that supervisory problems are presented
that are not dealt with adequately by OTS regulations; and (3) a savings
association may be adversely affected by activities or condition of its holding
company, affiliates, subsidiaries or other persons or savings associations with
which it has significant business relationships. The Bank is not subject to any
such individual minimum regulatory capital requirement.
The Bank's tier-1 risk-based capital ratio was 27.9%, its leverage
capital ratio was 11.5% and its total risk-based capital ratio was 27.9% at
December 31, 1998.
Certain Consequences of Failure to Comply with Regulatory Capital
Requirements. A savings bank's failure to maintain capital at or above the
minimum capital requirements may be deemed an unsafe and unsound practice and
may subject the savings bank to enforcement actions and other proceedings. Any
savings bank not in compliance with all of its capital requirements is required
to submit a capital plan that addresses the bank's need for additional capital
and meets certain additional requirements. While the capital plan is being
reviewed by the OTS, the savings bank must certify, among other things, that it
will not, without the approval of its appropriate OTS Regional Director, grow
beyond net interest credited or make capital distributions. If a savings
28
<PAGE> 31
bank's capital plan is not approved, the bank will become subject to additional
growth and other restrictions. In addition, the OTS, through a capital directive
or otherwise, may restrict the ability of a savings bank not in compliance with
the capital requirements to pay dividends and compensation, and may require such
a bank to take one or more of certain corrective actions, including, without
limitation: (i) increasing its capital to specified levels, (ii) reducing the
rate of interest that may be paid on savings accounts, (iii) limiting receipt of
deposits to those made to existing accounts, (iv) ceasing issuance of new
accounts of any or all classes or categories except in exchange for existing
accounts, (v) ceasing or limiting the purchase of loans or the making of other
specified investments, and (vi) limiting operational expenditures to specified
levels.
The HOLA permits savings banks not in compliance with the OTS capital
standards to seek an exemption from certain penalties or sanctions for
noncompliance. Such an exemption will be granted only if certain strict
requirements are met, and must be denied under certain circumstances. If an
exemption is granted by the OTS, the savings bank still may be subject to
enforcement actions for other violations of law or unsafe or unsound practices
or conditions.
Prompt Corrective Action. The prompt corrective action regulation of
the OTS, promulgated under the Federal Deposit Insurance Corporation Improvement
Act of 1991, requires certain mandatory actions and authorizes certain other
discretionary actions to be taken by the OTS against a savings bank that falls
within certain undercapitalized capital categories specified in the regulation.
The regulation establishes five categories of capital classification: "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized." Under the regulation, the
ratio of total capital to risk-weighted assets, core capital to risk-weighted
assets and the leverage ratio are used to determine an institution's capital
classification. At December 31, 1998, the Bank met the capital requirements of a
"well capitalized" institution under applicable OTS regulations.
Enforcement Powers. The OTS and, under certain circumstances, the FDIC,
have substantial enforcement authority with respect to savings associations,
including authority to bring various enforcement actions against a savings
association and any of its "institution-affiliated parties" (a term defined to
include, among other persons, directors, officers, employees, controlling
stockholders, agents and stockholders who participate in the conduct of the
affairs of the institution). This enforcement authority includes, without
limitation: (i) the ability to terminate a savings association's deposit
insurance, (ii) institute cease-and-desist proceedings, (iii) bring suspension,
removal, prohibition and criminal proceedings against institution-affiliated
parties, and (iv) assess substantial civil money penalties. As part of a
cease-and-desist order, the agencies may require a savings association or an
institution-affiliated party to take affirmative action to correct conditions
resulting from that party's actions, including to make restitution or provide
reimbursement, indemnification or guarantee against loss restrict the growth of
the institution and rescind agreements and contracts.
Capital Distribution Regulation. In January 1999, the OTS amended its
capital distribution regulation to bring such regulations into greater
conformity with the other bank regulatory agencies.
29
<PAGE> 32
Under the regulation, certain savings associations would not be required to file
with the OTS. Specifically, savings associations that would be well capitalized
following a capital distribution would not be subject to any requirement for
notice or application unless the total amount of all capital distributions,
including any proposed capital distribution, for the applicable calendar year
would exceed an amount equal to the savings association's net income for that
year to date plus the savings association's retained net income for the
preceding two years. However, because the Bank is a subsidiary of a savings and
loan holding company, the Bank is required to give the OTS at least 30 days
notice prior to any capital distribution.
Qualified Thrift Lender Test. In general, savings associations are
required to maintain at least 65% of their portfolio assets in certain qualified
thrift investments (which consist primarily of loans and other investments
related to residential real estate and certain other assets). A savings
association that fails the qualified thrift lender test is subject to
substantial restrictions on activities and to other significant penalties. A
savings association may qualify as a qualified thrift lender not only by
maintaining 65% of portfolio assets in qualified thrift investments but also, in
the alternative, by qualifying under the Internal Revenue Code as a "domestic
building and loan association." The Bank is a domestic building and loan
association as defined in the Code.
FDIC Assessments. The deposits of the Bank are insured to the maximum
extent permitted by the SAIF, which is administered by the FDIC, and are backed
by the full faith and credit of the U.S. Government. As insurer, the FDIC is
authorized to conduct examinations of, and to require reporting by, FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging in
any activity the FDIC determines by regulation or order to pose a serious threat
to the FDIC. The FDIC also has the authority to initiate enforcement actions
against savings institutions, after giving the OTS an opportunity to take such
action.
Under FDIC regulations, institutions are assigned to one of three
capital groups for insurance premium purposes -- "well capitalized," "adequately
capitalized" and undercapitalized" -- which are defined in the same manner as
the regulations establishing the prompt corrective action system, as discussed
above. These three groups are then divided into subgroups which are based on
supervisory evaluations by the institution's primary federal regulator,
resulting in nine assessment classifications. Effective January 1, 1997,
assessment rates for both SAIF-insured institutions and BIF-insured institutions
ranged from 0% of insured deposits for well-capitalized institutions with minor
supervisory concerns to .27% of insured deposits for undercapitalized
institutions with substantial supervisory concerns. In addition, an additional
assessment of 6.4 basis points and 1.3 basis points is added to the regular
SAIF-assessment and the regular BIF-assessment, respectively, until December 31,
1999 in order to cover Financing Corporation debt service payments.
Both the SAIF and the BIF are required by law to attain and thereafter
maintain a reserve ratio of 1.25% of insured deposits. The BIF has achieved the
required reserve ratio, and as a result, the FDIC reduced the average deposit
insurance premium paid by BIF-insured banks to a level substantially below the
average premium previously paid by savings institutions. Banking legislation was
enacted on September 30, 1996 to eliminate the premium differential between
SAIF-
30
<PAGE> 33
insured institutions and BIF-insured institutions. The legislation provided that
all insured depository institutions with SAIF-assessable deposits as of March
31, 1995 pay a special one-time assessment to recapitalize the SAIF. Pursuant to
this legislation, the FDIC promulgated a rule that established the special
assessment necessary to recapitalize the SAIF at 65.7 basis points of
SAIF-assessable deposits held by affected institutions as of March 31, 1995.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. There are no pending proceedings to terminate the deposit insurance of
the Bank.
Community Reinvestment Act and the Fair Lending Laws. Savings
institutions have a responsibility under the CRA, and related regulations of the
OTS to help meet the credit needs of their communities, including low-and
moderate-income neighborhoods. In addition, the Equal Credit Opportunity Act and
the Fair Housing Act (together, the "Fair Lending Laws") prohibit lenders from
discriminating in their lending practices on the basis of characteristics
specified in those statutes. An institution's failure to comply with the
provisions of CRA could, at a minimum, result in regulatory restrictions on its
activities, and failure to comply with the Fair Lending Laws could result in
enforcement actions by the OTS, as well as other federal regulatory agencies and
the Department of Justice.
New Safety and Soundness Guidelines. The OTS and the other federal
banking agencies have established guidelines for safety and soundness,
addressing operational and managerial, as well as compensation matters for
insured financial institutions. Institutions failing to meet these standards are
required to submit compliance plans to their appropriate federal regulators. The
OTS and the other agencies have also established guidelines regarding asset
quality and earnings standards for insured institutions.
Change of Control. Subject to certain limited exceptions, no company
can acquire control of a savings association without the prior approval of the
OTS, and no individual may acquire control of a savings association if the OTS
objects. Any company that acquires control of a savings association becomes a
savings and loan holding company subject to extensive registration, examination
and regulation by the OTS. Conclusive control exists, among other ways, when an
acquiring party acquires more than 25% of any class of voting stock of a savings
association or savings and loan holding company, or controls in any manner the
election of a majority of the directors of the company. In addition, a
rebuttable presumption of control exists if, among other things, a person
acquires more than 10% of any class of a savings association or savings and loan
31
<PAGE> 34
holding company's voting stock (or 25% of any class of stock) and, in either
case, any of certain additional control factors exist.
Under recent legislation, companies subject to the Bank Holding Company
Act of 1956, as amended, that acquire or own savings associations are no longer
defined as savings and loan holding companies under the HOLA and, therefore, are
not generally subject to supervision and regulation by the OTS. OTS approval is
no longer required for a bank holding company to acquire control of a savings
association, although the OTS has a consultative role with the FRB in
examination, enforcement and acquisition matters.
TAXATION
FEDERAL TAXATION
GENERAL. The Company and Citizens Financial are subject to federal
income taxation in the same general manner as other corporations with some
exceptions discussed below. The following discussion of federal taxation is
intended only to summarize certain pertinent federal income tax matters and is
not a comprehensive description of the tax rules applicable to the Bank. The
Bank's federal income tax returns have been closed without audit by the IRS
through 1993.
The Company will file consolidated tax returns with Citizens Financial.
Accordingly, it is anticipated that any cash distributions made by the Company
to its stockholders will be treated as cash dividends and not as a non-taxable
return of capital to stockholders for federal and state tax purposes.
METHOD OF ACCOUNTING. For federal income tax purposes, Citizens
Financial reports its income and expenses on the accrual method of accounting
and use a tax year ending December 31 for filing its consolidated federal income
tax returns. The Small Business Protection Act of 1996 (the "1996 Act")
eliminated the use of the reserve method of accounting for bad debt reserves by
savings institutions, effective for taxable years beginning after 1995.
BAD DEBT RESERVES. Prior to the 1996 Act, the Bank was permitted to
establish a reserve for bad debts and to make annual additions to the reserve.
These additions could, within specified formula limits, be deducted in arriving
at taxable income. As a result of the 1996 Act, savings associations must use
the specific chargeoff method in computing its bad debt deduction beginning with
their 1996 Federal tax return. In addition, the federal legislation requires the
recapture (over a six year period) of the excess of tax bad debt reserves at
December 31, 1995 over those established as of December 31, 1987. The amount of
such reserve subject to recapture as of December 31, 1998 is approximately $5.0
million for Citizens Financial.
TAXABLE DISTRIBUTIONS AND RECAPTURE. Prior to the 1996 Act, bad debt
reserves created prior to January 1, 1988 were subject to recapture into taxable
income should the Bank fail to meet certain thrift asset and definitional tests.
New federal legislation eliminated these thrift related
32
<PAGE> 35
recapture rules. However, under current law, pre-1988 reserves remain subject to
recapture should the Bank make certain non-dividend distributions or cease to
maintain a bank charter.
At December 31, 1998 the total federal pre-1988 reserve was
approximately $12.5 million for Citizens Financial. This reserve reflects the
cumulative effects of federal tax deductions by the Bank for which no Federal
income tax provision has been made.
MINIMUM TAX. The Code imposes an alternative minimum tax ("AMT") at a
rate of 20% on a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI"). The AMT is payable to the
extent such AMTI is in excess of an exemption amount. Net operating losses can
offset no more than 90% of AMTI. Certain payments of alternative minimum tax may
be used as credits against regular tax liabilities in future years. Citizens
Financial has not been subject to the alternative minimum tax, nor does it have
any such amounts available as credits for carryover.
NET OPERATING LOSS CARRYOVERS. A financial institution may carry back
net operating losses to the preceding three taxable years and forward to the
succeeding 15 taxable years. This provision applies to losses incurred in
taxable years beginning after 1986. At December 31, 1998, Citizens Financial had
no net operating loss carryforwards for federal income tax purposes.
CORPORATE DIVIDENDS-RECEIVED DEDUCTION. The Company may exclude from
its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends-received deduction is
80% in the case of dividends received from corporations with which a corporate
recipient does not file a consolidated tax return, and corporations which own
less than 20% of the stock of a corporation distributing a dividend may deduct
only 70% of dividends received or accrued on their behalf.
STATE AND LOCAL TAXATION
INDIANA STATE TAXATION. The Company and the Bank will be subject to an
8.5% franchise tax, imposed by the State of Indiana, on the net income of
financial (including thrift) institutions, exempting them from the current gross
income, supplemental net income and intangible taxes. Net income for franchise
tax purposes will constitute federal taxable income before net operating loss
deductions and special deductions, adjusted for certain items, including Indiana
income taxes, property taxes, charitable contributions, tax exempt interest and
bad debts. Other applicable Indiana taxes include sales, use and property taxes.
DELAWARE STATE TAXATION. As a Delaware holding company not earning
income in Delaware, the Company is exempt from Delaware corporate income tax but
is required to file an annual report with and pay an annual franchise tax to the
State of Delaware. The tax is imposed as a percentage of the capital base of the
Company with an annual maximum of $150,000.
33
<PAGE> 36
ILLINOIS TAXATION. For Illinois income tax purposes, the Company and
the Bank are taxed at an effective rate equal to 4.7% of Illinois taxable
income. For these purposes, "Illinois Taxable Income" generally means federal
taxable income, subject to certain adjustments (including the addition of
interest income on state and municipal obligations and the exclusion of interest
income on United States Treasury obligations). The exclusion of income on United
States Treasury obligations has the effect of reducing the Illinois taxable
income of the Bank.
34
<PAGE> 37
ITEM 2. PROPERTIES
OFFICES AND PROPERTIES
The following table sets forth certain information relating to Citizens
Financial's offices at December 31, 1998. In addition, the Bank maintains 33
ATMs, with 12 of such ATMs at the Bank's branch offices.
<TABLE>
<CAPTION>
Net Book Value of
Property and
Lease Leasehold
Owned or Expiration Improvements at Deposits at
Location(1) Leased Date December 31, 1998 December 31, 1998
------------------------------ -------- ---------- ----------------- -----------------
(In Thousands)
<S> <C> <C> <C> <C>
EXECUTIVE OFFICE:
707 Ridge Road Owned -- $1,795 $130,626
Munster, IN 46321
BRANCH OFFICES:
5311 Hohman Avenue Owned -- 573 106,464
Hammond, IN 46320
155 N. Main Street Owned -- 534 91,354
Crown Point, IN 46307
1720 45th Street Owned -- 744 105,399
Munster, IN 46321
4740 Indianapolis Blvd. Owned -- 328 55,628
East Chicago, IN 46312
2121 East Columbus Leased 2003 420 25,472
East Chicago, IN 46312
803 W 57th Avenue Leased 2003 3 32,530
Merrillville, IN 46410
855 Thornapple Way Owned -- 347 31,441
Valparaiso, IN 46383
4005 Franklin Leased 1999 -- 28,992
Marquette Mall
Michigan City, IN 46360
714 Lincolnway Owned -- 182 19,535
La Porte, IN 46350
3853 45th Street Owned -- 963 22,276
Highland, IN 46322
2600 Roosevelt Road Leased 2003 59 2,589
Valparaiso, IN 46383
</TABLE>
(Table continued on next page) (Footnotes on following page)
35
<PAGE> 38
<TABLE>
<CAPTION>
Net Book Value of
Property and
Lease Leasehold
Owned or Expiration Improvements at Deposits at
Location Leased Date December 31, 1998 December 31, 1998
- -------------------------------- -------- ---------- ----------------- -----------------
(In Thousands)
<S> <C> <C> <C> <C>
3301 West Vollmer Road Leased 2007 159 43,806
Flossmoor, Illinois
154th at Broadway Owned -- 96 49,272
Harvey, Illinois
13323 S. Baltimore Avenue Owned -- 267 29,555
Chicago, Illinois
162nd & School Streets Owned -- 343 55,543
South Holland, Illinois
7101 W. 127th Street Owned -- 284 51,913
Palos Heights, Illinois
170th at South Park Avenue Owned -- 363 --
South Holland, Illinois
16145 S. State Street Leased 2003(2) 58 9,596
South Holland, Illinois
16039 S. Harlem Leased 2003(2) 54 23,930
Tinley Park, Illinois
2345 W. 183rd Street Leased 2003(2) 56 20,118
Homewood, Illinois
1111 E. Exchange Road Leased 2003(2) 53 13,853
Crete, Illinois
1218 Sheffield Avenue Leased 2002(2) 109 9,082
Dyer, Indiana
10S660 State Route 83 Owned -- 803 10,184
Hinsdale, Illinois
Route 30 at Harvest Acre Drive Owned(3) -- 376 --
Schererville, Indiana 46375
OTHER PROPERTY:
1730 45th Street(4) Owned -- 1,136 --
Munster, IN 46321
8149 Kennedy(5) Leased 2003 144 --
Highland, IN 46322
</TABLE>
- ---------------
(1) Branch opened on March 2, 1998.
(2) Full service branch facilities located in a local grocery
store chain.
(3) Land only - branch to open in late 1999.
(4) Insurance and investment center.
(5) Operations center.
36
<PAGE> 39
ITEM 3. LEGAL PROCEEDINGS
In 1983, with the assistance of the Federal Savings and Loan Insurance
Corporation ("FSLIC") as set forth in an assistance agreement ("Assistance
Agreement"), Citizens Financial acquired through mergers First Federal Savings
and Loan Association of East Chicago, East Chicago, Indiana ("East Chicago
Savings"), and Gary Federal Savings and Loan Association, Gary, Indiana ("Gary
Federal"). The FSLIC-assisted supervisory acquisitions of East Chicago Savings
and Gary Federal were accounted for using the purchase method of accounting
which resulted in supervisory goodwill (the excess of cost over fair value of
net assets acquired), an intangible asset, of $52.9 million, compared to $40.2
million of goodwill as reported on a GAAP basis. Such goodwill was included in
the Bank's regulatory capital. The Assistance Agreement relating to Citizens
Financial's acquisitions of East Chicago Savings and Gary Federal provided for
the inclusion of goodwill as an asset on Citizens Financial's balance sheet, to
be amortized over 35 years for regulatory purposes and includable in capital.
Pursuant to the regulations adopted by the OTS to implement the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), the
regulatory capital requirement for federal savings banks was increased and the
amount of supervisory goodwill that could be included in regulatory capital
decreased significantly. At September 30, 1989, Citizens Financial had
approximately $26.0 million of remaining supervisory goodwill but, even
excluding supervisory goodwill, Citizens Financial exceeded the capital
requirements of FIRREA at such date.
On May 13, 1993, Citizens Financial filed suit against the US
government seeking damages and/or other appropriate relief on the grounds, among
others, that the government had breached the terms of the Assistance Agreement.
The suit is pending before Chief Judge Loren Smith in the United States Court of
Federal Claims and is entitled Citizens Financial Services, FSB, et al. v.
United States (Case No. 93-306-C). The case stayed pending disposition by the
United States Supreme Court of three related supervisory goodwill cases ("the
Winstar cases"). On July 1, 1996 the Supreme Court ruled in the Winstar cases
the government had breached its contract with the Winstar parties and was liable
in damages for those breaches.
Thereafter, the stay applicable to the Bank's case and other
Winstar-related cases was lifted. The Bank has filed a motion for summary
judgment which is presently pending before the Court. Due to the volume of cases
before the Court on Winstar-related issues, the government petitioned the Court
for a stay on motions for summary judgment which were not involved in cases
immediately proceeding to trial. The Court granted the government's motion, and
a stay is in place upon the Bank's motion for summary judgment until April 5,
1999. On April 1, 1999, the Bank's case enters case-specific discovery with the
government in preparation for trial. It is anticipated that the stay on the
Bank's motion for summary judgment will be dissolved. Case-specific discovery is
scheduled to last one year. It is estimated that the trial will be scheduled
thereafter and should commence at some time after April during the year 2000. It
must be stressed that this is an estimate and subject to change at the Court's
discretion.
37
<PAGE> 40
In its complaint, Citizens Financial did not specify the amount of
damages it is seeking from the United States. The Bank has yet to retain an
expert in order to attempt to quantify the amount of damages. An expert will be
retained during the case-specific discovery period. The Court has scheduled its
first decision on damages in a Winstar-related case to be issued on March 30,
1999. The Bank is unable to predict the outcome of its claim against the United
States and the amount of damages that may be awarded to the Bank, if any, in the
event that judgment is rendered in the Bank's favor. Consequently, no assurances
can be given as to the results of this claim or the timing of any proceedings in
relation thereto.
Except with respect to the above discussion, neither the Company nor
the Bank is involved in any legal proceedings which are material to the Company.
The Bank is involved in routine legal proceedings from time to time which arise
in the normal course of its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required herein is incorporated by reference from page
46 of the Registrant's 1998 Annual Report.
ITEM 6. SELECTED FINANCIAL DATA
The information required herein is incorporated by reference from pages
12 to 13 of the Registrant's 1998 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required herein is incorporated by reference from pages
14 to 24 of the Registrant's 1998 Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required herein is incorporated by reference from pages
14 to 15 of the Registrant's 1998 Annual Report.
38
<PAGE> 41
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required herein is incorporated by reference from pages
25 to 45 of the Registrant's 1998 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required herein is incorporated by reference from pages
3 to 6 of the Registrant's Proxy Statement dated April 2, 1999 ("Proxy
Statement").
ITEM 11. EXECUTIVE COMPENSATION.
The information required herein is incorporated by reference from pages
6 to 13 of the Registrant's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required herein is incorporated by reference from pages
14 to 15 of the Registrant's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required herein is incorporated by reference from pages
12 to 13 of the Registrant's Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Document filed as part of this Report.
(1) The following documents are filed as part of this report and
are incorporated herein by reference from the Registrant's 1998 Annual Report.
Independent Auditors' Report.
Consolidated Statements of Financial Condition as of December 31, 1998
and 1997.
39
<PAGE> 42
Consolidated Statements of Income for the Years Ended December 31,
1998, 1997 and 1996.
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended December 31, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996.
Notes to Consolidated Financial Statements.
(2) All schedules for which provision is made in the applicable
accounting regulation of the SEC are omitted because they are not applicable or
the required information is included in the Consolidated Financial Statements or
notes thereto.
(3)(a) The following exhibits are filed as part of this Form
10-K, and this list includes the Exhibit Index.
3.1 Certificate of Incorporation of CFS Bancorp, Inc.*
3.2 Bylaws of CFS Bancorp, Inc.*
4.0 Form of Stock Certificate of CFS Bancorp, Inc.*
10.1 Form of Employment Agreement entered into between Citizens
Financial Services, FSB and each of Thomas F. Prisby, James W.
Prisby and John T. Stephens*
10.2 Form of Employment Agreement entered into between CFS Bancorp,
Inc. and each of Thomas F. Prisby, James W. Prisby and John T.
Stephens*
10.3 Form of Employment Agreement entered into between CFS Bancorp,
Inc, Citizens Financial Services, FSB and each of Steven E.
Stock and Byron G. Thoren*
10.4 Severance and Release Agreement entered into between CFS
Bancorp, Inc., Citizens Financial Services, FSB and Daniel P.
Ryan, dated as of March 1, 1999
10.5 CFS Bancorp, Inc. 1998 Stock Option Plan**
10.6 CFS Bancorp, Inc. 1998 Recognition and Retention Plan and Trust
Agreement**
13.0 1998 Annual Report to Stockholders specified portion (pp.12 to
46) of the Registrant's Annual Report to Stockholders for the
year ended December 31, 1998.
21.0 Subsidiaries of the Registrant - Reference is made to Item 1.
"Business" for the Required information.
23.1 Consent of Independent Auditors - Ernst & Young LLP
23.2 Consent of Independent Auditors - Cobitz, Vandenberg & Fennessy
27.0 Financial Data Schedule
99.0 Independent Auditors' Report for SuburbFed Financial Corp.
- -------------
* Incorporated by Reference from the Company's Registration Statement on Form
S-1 filed on March 31, 1998, as amended and declared effective on May 14,
1998.
**Incorporated by Reference from the Company's Definitive Proxy Statement for a
Special Meeting of Stockholders filed on December 29, 1998.
40
<PAGE> 43
(3)(b) Reports filed on Form 8-K.
None.
41
<PAGE> 44
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) 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 BANCORP, INC.
By: /s/ Thomas F. Prisby
-------------------------------------
Thomas F. Prisby
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
- ---------------------- ------------------------------- ---------------
<S> <C> <C>
/s/ Thomas F. Prisby Chairman of the Board and Chief
- ----------------------------- Executive Officer March 30, 1999
Thomas F. Prisby (principal executive officer)
/s/ James W. Prisby Vice Chairman, President and Chief March 30, 1999
- ----------------------------- Operating Officer
James W. Prisby
/s/ John T. Stephens Executive Vice President and March 30, 1999
- ----------------------------- Chief Financial Officer
John T. Stephens (principal financial and accounting
officer)
/s/ Sally A. Abbott Director March 30, 1999
- -----------------------------
Sally A. Abbott
/s/ Gregory W. Blaine Director March 30, 1999
- -----------------------------
Gregory W. Blaine
</TABLE>
<PAGE> 45
<TABLE>
<CAPTION>
Name Title Date
- ---------------------- ------------------------------- ---------------
<S> <C> <C>
/s/ Thomas J. Burns Director March 30, 1999
- -----------------------------
Thomas J. Burns
/s/ Daniel P. Ryan Director March 30, 1999
- -----------------------------
Daniel P. Ryan
/s/ Gene Diamond Director March 30, 1999
- -----------------------------
Gene Diamond
</TABLE>
<PAGE> 1
EXHIBIT 10.4
SEVERANCE AND RELEASE AGREEMENT
This Severance and Release Agreement (the "Agreement") is made as of
March 1, 1999, by and between CFS Bancorp, Inc. (the "Company"), Citizens
Financial Services, FSB (the "Bank") (the Company and the Bank are sometimes
collectively referred to herein as the "Employers") and Daniel P. Ryan (the
"Executive").
WITNESSETH
WHEREAS, the Executive previously was employed as Senior Executive Vice
President of the Employers pursuant to the provisions of the employment
agreement dated July 24, 1998 between the Employers and the Executive (the
"Employment Agreement") (any capitalized terms included in this Agreement which
are not defined herein shall have the same meaning as set forth in the
Employment Agreement);
WHEREAS, the Employers and the Executive previously have agreed that
the Executive's employment would be terminated as of October 1, 1998 for other
than Cause, Disability, Retirement or the Executive's death pursuant to Section
5(c) of the Employment Agreement; and
WHEREAS, the Employers and the Executive wish to enter into this
Agreement in order to satisfy all of the Employers' obligations under the
Employment Agreement in consideration for the covenants, payments and other
benefits specified in this Agreement.
NOW, THEREFORE, in consideration of the mutual premises and covenants
contained herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and intending to be legally bound,
the parties hereto agree as follows:
1. Termination of Employment. The Employment Agreement shall be deemed
to have been terminated effective as of October 1, 1998 (the "Termination
Date"). On and after the Termination Date, none of the provisions of the
Employment Agreement shall be effective, and all of the rights and
responsibilities of each of the Employers and Executive with respect to the
Employment Agreement shall be superseded by those that are provided in this
Agreement.
2. Payments and Benefits to the Executive. In consideration of the
covenants and the other terms and conditions of this Agreement for the benefit
of the Employers, subject to the provision of Section 8 hereof, the Employers
agree and covenant to provide the following to the Executive:
A. The Employers agree to pay to the Executive an aggregate of
$317,958.98 in severance payments (the "Severance Payments"),
such amount to be paid in substantially equal monthly
payments in such manner and at such time as
<PAGE> 2
Executive's salary would have been paid to Executive if he
had continued to be employed through December 31, 1999.
Executive acknowledges that he has previously received
$82,493.20 of such Severance Payments. During the period that
the Executive is receiving the Severance Payments, he shall
not be entitled to receive any fees for his services as a
director or advisory director of the Employers.
B. Executive will be entitled to participate in the Employers'
employee stock ownership plan (the "ESOP") for the ESOP plan
years ended December 31, 1998 and 1999.
C. Executive will be entitled to participate in a supplemental
executive retirement plan (which will entitle Executive to
cash payments equal to the difference between the benefits
actually received under the ESOP and the amount of benefits
that would have been received based upon the amount of
"compensation" (as defined in the ESOP) received from the
Employers (which amounted to $107,246.60 for 1998) absent the
limitations imposed by Section 415 of the Internal Revenue
Code of 1986 without regard to any additional tax liability
incurred by Executive as a result thereof (the "Differential
Amount")) with respect to the ESOP (referred to hereinafter
as the "ESOP SERP") for the ESOP plan year ended December 31,
1998 or, if such ESOP SERP is not established by the
Employers for the plan year ended December 31, 1998, the
Employers will otherwise provide Executive with an amount
equal to the Differential Amount.
D. Executive will be entitled to participate in the Employers'
defined benefit pension plan (the "Pension Plan") for the
Pension Plan years ended December 31, 1998 and 1999 to the
extent benefits are not being accrued for Executive for such
plan years in the defined benefit pension plan established
previously by SuburbFed Financial Corp. or its wholly owned
subsidiary, Suburban Federal Bank, a Federal Savings Bank
("Suburban Federal") (collectively "SuburbFed").
E. Executive will be entitled to participate in Employers'
401(k) defined contribution plan (the "401(k) Plan") for the
401(k) Plan's plan years ended December 31, 1998 and 1999 and
the Employers shall make contributions to the 401(k) Plan on
his behalf (provided that such matching contributions for any
year will be subject to the provisions of the 401(k) Plan and
will not exceed 3.0% of the taxable income paid to the
Executive by the Employers for such year) to the extent that
Executive is not afforded benefits under the 401(k) plan of
SuburbFed for such plan years.
2
<PAGE> 3
F. Executive's participation in the ESOP, the Pension Plan and
the 401(k) Plan (collectively, the "Plans") shall, in all
cases, be subject to the provisions of the Plans, provided,
however, that for the purposes of determining the amount of
Executive's benefits thereunder, if any, the Severance
Payments to be made pursuant to the provisions of Section 2.A
hereof shall be deemed to be salary payments and provided
that the Executive shall receive credit for his years of
service with SuburbFed for eligibility and vesting purposes
(but not for purposes of benefit accrual).
G. Employers will pay Executive's membership dues at the
Flossmoor Country Club through the period ending December 31,
1999.
H. Executive will continue to participate, on the same basis as
the Employer's executive officers, in all life, health,
disability and accident plans that provide benefits to any of
the executive officers of the Employers through December 31,
1999. After such date, the Executive shall receive the same
post-retirement health insurance benefits on the same basis
as are being afforded to other retired executive officers of
the Employers as of such date. The Employers shall provide to
the Executive a written description of their policy regarding
post-retirement health insurance benefits as of the date
hereof and shall promptly provide to the Executive a
reasonably detailed written description of any change to such
policy which is effective on or before December 31, 1999. The
Employers undertake to use their best efforts to provide
Executive with notice of any anticipated change in its post-
retirement health insurance policy sufficiently in advance of
such change to permit Executive to apply for alternative or
additional coverage if desired.
I. In the event that subsequent hereto Executive is determined
by Employers to be unable to participate in the various
benefit plans described in Sections 2.B through 2.H hereof,
Employers and Executive shall negotiate in good faith a
mutually acceptable cash settlement representing the present
value of such benefit(s).
J. Subject to the receipt of applicable shareholder approval at
a meeting expected to occur not later than August 31, 1999,
the Company shall grant Executive a ten year non-qualified
stock option to purchase 26,000 shares of the common stock of
CFS (the "CFS Options") at the fair market value thereof on
the date of grant, which shall be the date that options are
granted to the other directors and executive officers of the
Company (but in no event later than three months from the
date hereof). The number of shares underlying such stock
option and the exercise price thereof shall be subject to
adjustment to reflect any special dividend, stock dividend,
stock split, recapitalization, merger or similar transaction
to the extent provided for under
3
<PAGE> 4
the terms of the stock option plan pursuant to which the CFS
Options are granted. The CFS Options shall vest over a period
of not more than five years from the date of grant. The
Employers will use their best efforts to ensure that (i) the
Executive shall become vested in the 26,000 CFS Options on
the applicable vesting dates (regardless of whether the
Executive serves on the board of directors on any such
vesting date) and (ii) that such options shall remain
exercisable for a period of at least five years following the
grant date. In order to accomplish the objectives of the
immediately preceding sentence, the Employers agree that, if
appropriate, they will appoint the Executive to an advisory
board to one or more of the Employers or a subsidiary
thereof. In the event the Executive is appointed to an
advisory board, he shall not be required to attend more than
one meeting per quarter and shall be paid fees for attendance
in accordance with Employers' policies, provided that
Executive is no longer receiving Severance Payments pursuant
to the terms hereof.
K. Within 30 days of the date hereof, Employers shall transfer
to Executive title to the 1997 Buick Le Sabre automobile
currently provided to the Executive.
L. Employers shall use their best efforts to preserve
Executive's rights to exercise certain options (the
"SuburbFed Options") to acquire the common stock of the
Company that were granted by SuburbFed and which were assumed
by the Company pursuant to the terms of Section 2.7 of the
Agreement and Plan of Merger dated December 27, 1997, among
the Employers and SuburbFed (the "Merger Agreement"), to the
extent permitted by the SuburbFed plans under which such
SuburbFed Options were issued, until the earlier of (i) the
date such options expire or (ii) the date all of the options
granted pursuant to Section 2.J above are vested; provided
however, nothing shall require Employers to amend the terms
of any of the plans pursuant to which such SuburbFed Options
were issued to permit exercise of such options until the
expiration of the periods set forth in this Section 2.L.
M. Nothing in this Agreement shall affect Executive's rights to
indemnification as provided in Section 5.9 of the Merger
Agreement.
3. Release of Employers and Related Parties.
A. In consideration of the covenants and the other terms and
conditions of this Agreement and release for the benefit of
Executive, Executive agrees and covenants, on behalf of
himself, his heirs and personal representatives, to release
completely and forever discharge the Employers from any and
all charges, claims and actions relating to Employers'
performance under the Employment Agreement or otherwise
arising out of Executive's employment
4
<PAGE> 5
by, or the termination of his employment with, the Employers
for all periods of time up to and including 12:00 p.m.,
September 30, 1998. Executive has not brought any such
charges, claims or actions against Employers before signing
this Agreement, and Executive covenants not bring any such
charges, claims or actions against the Employers in the
future, other than charges, claims or actions relating to the
Employers' obligations under this Agreement. If Executive
violates the provisions of this Section 3.A. by filing or
bringing any such charges, claims or actions (other than
charges, claims or actions relating to Employers' obligations
under this Agreement) in a court of competent jurisdiction
contrary to this Section 3.A, in addition to any other rights
and remedies the Employers may have, Executive agrees to pay
all actual and direct costs of the Employers in defending
against such charges, claims or actions brought by the
Executive or on his behalf, including reasonable attorney's
fees. As referred to in this Section 3.A (as well as for
purposes of Section 3.B below), the term "Employers"
includes, in addition to the Company and the Bank, the
subsidiaries and affiliates of each of them, their respective
successors and assigns, and all of their respective past and
present directors, officers, representatives, shareholders,
agents, employees, and their respective heirs and personal
representatives or any of them.
B. Executive hereby specifically and unconditionally releases
the Employers from any and all claims which the Employee may
have against any of them and which arose on or before the
date of this Agreement under the Age Discrimination in
Employment Act (the "ADEA"), including, but not limited to,
any claim attributable to the Employers' solicitation of the
Employee's consent to the terms of this Agreement, and
further acknowledges and represents that:
i. Executive waives the Executive's claims under ADEA
knowingly and voluntarily in exchange for the
commitments made herein by the Employers, and that
certain of the benefits provided thereby constitute
consideration of value to which the Executive would
not otherwise have been entitled;
ii. the Executive consulted an attorney in connection
with this Agreement;
iii. the Executive has been given a period of 21 days
within which to consider the terms hereof;
iv. the Executive may revoke the waiver of ADEA claims
set forth in this Section 3.B for a period of seven
(7) days following the execution of this Agreement
and the Employee's
5
<PAGE> 6
waiver of ADEA claims hereunder shall not become
effective until the revocation period has expired;
v. if the Executive revokes the waiver of ADEA claims
in accordance with subsection 4 above, the
Executive shall cease to receive the payments and
benefits specified in Section 2 hereof, but such
revocation shall not be effective with respect to
the remainder of this Agreement and the
consideration received by the Employee prior to the
revocation shall be valid and adequate
consideration with respect to the remainder of this
Agreement; and
vi. this Agreement complies in all respects with
Section 7(f) of ADEA, the waiver provisions of the
Older Worker Benefit Protection Act.
4. Confidentiality. Executive agrees that he will, to the extent
permitted by law, keep the terms and conditions of this Agreement confidential,
and that all discussions and announcements that the Executive has with
employees, shareholders, and any and all other persons or parties shall be
wholly consistent with the terms of the mutually agreed upon press release which
is attached hereto as Exhibit A. Executive shall support the current management
of the Employers in efficiently and effectively integrating the operations,
employees, and officers of the former SuburbFed and its affiliates within the
Employers. Executive shall refrain, to the extent permitted by law, from taking
or assisting others in taking any actions which could reasonably be expected to
diminish the perceived market value of the Employers or undermine the efforts of
the Employers' management to manage Employers' operations.
5. Certain Actions. Executive hereby agrees and covenants that from the
date of this Agreement until December 31, 1999:
A. Executive shall not directly or indirectly solicit or
encourage any person who is an associate or affiliate of
Executive to solicit proxies or consents in opposition to any
proposal submitted by the Company's Board of Directors to a
vote of the Company's shareholders.
B. Except as may be required by his fiduciary duties as a
director or advisory director of the Company or any of its
subsidiaries, the Executive shall not, nor shall he encourage
any person who is an associate or affiliate of Executive to
(i) join with or assist any person or entity, directly or
indirectly, in opposing, or make any statement in opposition
to, any proposal submitted by the Company's management to a
vote of the Company's shareholders, or (ii) join with or
assist any person or entity, directory or indirectly, in
6
<PAGE> 7
supporting or endorsing, or make any statement in favor of,
any proposal submitted to a vote of the Company's
shareholders that is opposed by Company's Board of Directors.
C. Except as may be required by his fiduciary duties as a
director or advisory director of the Company or any of its
subsidiaries, the Executive shall not contact employees of
the Employers regarding the business or operations of
Employers, provided, however, that nothing in this Agreement
shall affect Executive's ability to (i) contact employees of
the Employers with respect to issues regarding his personal
deposit or loan accounts maintained at the Bank or (ii)
converse with any of Messrs. Thomas F. Prisby, James W.
Prisby or John T. Stephens.
6. Binding Agreement; Termination. This Agreement shall be binding upon
and inure to the benefit of any successor to the Company and the Bank (whether
direct or indirect, by purchase, merger or consolidation, by operation of law,
or otherwise) or any person which acquires all or substantially all of the
assets of the Company or the Bank or any assignee of the Company or the Bank
(collectively "Successor"), and the Company and the Bank will require any
Successor to expressly assume and agree to perform and carry out the obligations
of this Agreement and any instrument executed by the Company and/or the Bank
hereunder in the same manner and to the same extent as the Company and the Bank.
This Agreement shall also be binding on and inure to the benefit of Executive.
This Agreement shall terminate upon the death of Executive and his heirs and
beneficiaries shall have no right to compensation or other benefits hereunder
for any period after the date of Executive's death except as to any payments or
benefits earned pursuant to the terms hereof prior to such date but not received
as of the date of death.
7. Withholding. All payments required to be made by the Employers
hereunder to the Executive shall be subject to the withholding of such amounts,
if any, relating to tax and other payroll deductions as the Employers may
reasonably determine should be withheld pursuant to any applicable law and
regulation.
8. Mitigation. The Executive shall not be required to mitigate the
amount of any payments or other benefits hereunder by seeking other employment
or otherwise, nor shall the amount of any such benefits be reduced by any
compensation earned by the Executive as a result of employment by another
employer; provided, however, notwithstanding anything to the contrary herein the
benefits provided by Sections 2.B through 2.I shall only be required to be
provided until the earlier to occur of December 31, 1999 or the date of
Executive's full-time employment by another employer (provided Executive is
entitled under the terms of such employment to benefits substantially similar to
those provided by Employers).
9. Representation. Employers and Executive represent that they have
reviewed this Agreement, and that each of them is fully aware of the content of
this Agreement and of its legal effect, and acknowledge that this is a legally
valid and binding obligation of the parties.
7
<PAGE> 8
10. Amendment and Waiver. The terms of this Agreement may not be
modified other than in a writing signed by the parties. No term or condition of
this Agreement shall be deemed to have been waived, nor shall there be any
estoppel against enforcement of any provision of this Agreement, except by
written instrument of the party charged with such waiver or estoppel. No such
written waiver shall be deemed a continuing waiver unless specifically stated
therein, and each such waiver shall operate only as to the specific term or
condition for the future or as to any act other than that specifically waived.
11. Legal Fees.
A. Legal fees and expenses up to $5,000 incurred by Executive in
negotiating the terms of this Agreement will be paid for by
Employers provided written documentation providing reasonable
detail with respect to such fees and expenses is provided to
Employers.
B. All reasonable legal fees and costs paid or incurred by
Executive on the one hand or the Employers on the other hand
pursuant to any dispute or question of interpretation
relating to this Agreement shall be paid or reimbursed by the
Employers to the Executive if the Executive is successful on
the merits pursuant to a legal judgment, arbitration or
settlement and shall be paid or reimbursed by the Executive
to the Employers if the Employers are successful on the
merits pursuant to a legal judgment, arbitration or
settlement.
12. Notices. All notices, demands, consents or other communication
required or permitted hereunder shall be in writing and shall be deemed to have
been given when: (i) personally delivered, or (ii) sent postage prepaid by
registered or certified mail, return receipt requested, such receipt showing
delivery to have been made, or (iii) sent overnight by prepaid receipt courier
addressed as follows:
If to Executive: Daniel P. Ryan
1014 Douglas
Flossmoor, Illinois 60422
If to Employers: CFS Bancorp, Inc.
Citizens Financial Services, FSB
707 Ridge Road
Munster, Indiana 46321
Attention: Thomas F. Prisby
Chairman and Chief Executive Officer
13. Entire Agreement. This Agreement incorporates the entire
understanding among the parties relating to the subject matter hereof, recites
the sole consideration for the promises exchanged
8
<PAGE> 9
and supercedes any prior agreements between the Employers and Executive with
respect to the subject matter hereof, including without limitation, as of the
date hereof, the Employment Agreement. In reaching this Agreement, no party has
relied upon any representation or promise except those set forth herein.
14. Invalid Provisions: If any provision of this Agreement is held to
be illegal, invalid, or unenforceable under present or future laws effective
during the term of this Agreement, such provision shall be fully severable and
this Agreement shall be construed and enforced as if such illegal, invalid or
unenforceable provision had never compromised a part of this Agreement, and the
remaining provisions of this Agreement shall remain in full force and effect and
shall not be affected by the illegal, invalid or unenforceable provision or by
its severance from this Agreement.
15. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Indiana, except to the extent that
applicable federal law preempts the laws of the State of Indiana.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement and
Release as of the day and year first above written.
WITNESSES: CFS BANCORP, INC.
/s/January R. Halls_______ By: /s/Thomas F. Prisby________
Title Chairman____________________
CITIZENS FINANCIAL SERVICES, FSB
/s/January R. Halls_______ By: /s/Thomas F. Prisby_________
Title: Chairman__________________
DANIEL P. RYAN
/s/January R. Halls______ /s/ Daniel P. Ryan__________________
9
<PAGE> 1
CFS BANCORP, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AT DECEMBER 31
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA
Total assets $1,470,617 $1,184,512 $1,051,085 $967,004 $ 913,864
- ------------------------------------------------------------------------------------------------------------------
Loans receivable, net 726,081 595,566 490,873 389,170 343,351
- ------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities, available for sale 277,888 62,141 85,753 77,479 42,853
- ------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities, held to maturity 176,956 256,670 326,430 397,060 464,734
- ------------------------------------------------------------------------------------------------------------------
Investment securities, available for sale 34,720 3,696 3,430 2,345 2,942
- ------------------------------------------------------------------------------------------------------------------
Investment securities, held to maturity 166,500 206,232 59,875 27,955 14,927
- ------------------------------------------------------------------------------------------------------------------
Deposits 969,802 986,073 883,309 819,988 780,355
- ------------------------------------------------------------------------------------------------------------------
Total borrowings 215,271 85,044 62,938 43,427 39,623
- ------------------------------------------------------------------------------------------------------------------
Stockholders' equity 260,088 95,196 89,983 89,306 81,230
- ------------------------------------------------------------------------------------------------------------------
Non-performing assets to total assets at end of
period 0.64% 0.63% 0.27% 0.21% 0.29%
- ------------------------------------------------------------------------------------------------------------------
Stockholders' equity to total assets at end of
period 17.69 8.04 8.56 9.24 8.89
- ------------------------------------------------------------------------------------------------------------------
Stockholders' equity per outstanding share $11.33 $4.19 $3.97 $3.92 $3.53
- ------------------------------------------------------------------------------------------------------------------
Allowance for losses on loans to non-performing
loans at end of period 59.82% 62.23% 86.27% 113.90% 83.51%
- ------------------------------------------------------------------------------------------------------------------
Allowance for losses on loans to total loans at end
of period 0.74 0.64 0.48 0.48 0.69
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED OPERATIONS DATA
Interest income $ 97,353 $ 83,252 $ 71,755 $ 66,999 $ 56,916
- ------------------------------------------------------------------------------------------------------------------
Interest expense 56,910 50,858 41,718 38,694 30,352
- ------------------------------------------------------------------------------------------------------------------
Net interest income 40,443 32,394 30,037 28,305 26,564
- ------------------------------------------------------------------------------------------------------------------
Provision for losses on loans(1) 1,630 1,840 253 197 178
- ------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 38,813 30,554 29,784 28,108 26,386
- ------------------------------------------------------------------------------------------------------------------
Non-interest income 5,900 4,872 4,262 3,986 3,405
- ------------------------------------------------------------------------------------------------------------------
Non-interest expense(2) 39,004 28,146 29,940 23,217 20,877
- ------------------------------------------------------------------------------------------------------------------
Income before income taxes 5,709 7,280 4,106 8,877 8,914
- ------------------------------------------------------------------------------------------------------------------
Income tax expense 2,587 2,714 1,560 3,382 3,477
- ------------------------------------------------------------------------------------------------------------------
Net income 3,122 4,566 2,546 5,495 5,437
- ------------------------------------------------------------------------------------------------------------------
Earnings per share (basic) 0.15 0.20 0.11 0.24 0.23
- ------------------------------------------------------------------------------------------------------------------
Earnings per share (diluted) 0.14 0.20 0.11 0.24 0.23
- ------------------------------------------------------------------------------------------------------------------
SELECTED OPERATING RATIOS
Net interest margin 3.08% 2.92% 3.12% 3.12% 3.10%
- ------------------------------------------------------------------------------------------------------------------
Average interest-earning assets to average
interest-bearing liabilities 114.57 108.20 108.43 109.56 109.21
- ------------------------------------------------------------------------------------------------------------------
Ratio of general and administrative expense to
average total assets (adjusted for one time
charges)(3) 2.16 2.44 2.45 2.46 2.32
- ------------------------------------------------------------------------------------------------------------------
Return on average assets 0.23 0.40 0.25 0.58 0.60
- ------------------------------------------------------------------------------------------------------------------
Return on average equity 1.85 4.83 2.81 6.37 6.65
- ------------------------------------------------------------------------------------------------------------------
Efficiency ratio (adjusted for one time charges)(3) 64.35 71.85 71.69 72.75 73.82
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The provision for losses on loans in 1998 reflects a $1,200 adjustment in
order to conform the credit policies of SFC to those of the Company. See
Note 2 to the Consolidated Financial Statements.
(2) Non-interest expense in 1998 includes one-time charges of $9,519 related to
the Merger and Conversion. See Note 2 to the Consolidated Financial
Statements.
(3) Calculated on a pro forma basis which excludes the effects of the special
charges referred to in (1) and (2) above.
- --------------------------------------------------------------------------------
12
<PAGE> 2
QUARTERLY
RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1998
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest income $8,466 $8,951 $11,323 $11,703
- --------------------------------------------------------------------------------------------------------------------
Provision for loan losses 90 105 1,285(1) 150
- --------------------------------------------------------------------------------------------------------------------
Non-interest income 1,544 1,699 901 1,756
- --------------------------------------------------------------------------------------------------------------------
Non-interest expense 7,133 7,517 17,334(2) 7,020
- --------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 2,787 3,028 (6,395) 6,289
- --------------------------------------------------------------------------------------------------------------------
Income (loss) taxes 1,013 1,162 (1,914) 2,326
- --------------------------------------------------------------------------------------------------------------------
Net income (loss) 1,774 1,866 (4,481) 3,963
- --------------------------------------------------------------------------------------------------------------------
Earnings (loss) per share - basic 0.08 0.08 (0.19) 0.18
- --------------------------------------------------------------------------------------------------------------------
Earnings (loss) per share - diluted 0.08 0.08 (0.20) 0.18
- --------------------------------------------------------------------------------------------------------------------
Dividends paid(3) N/A N/A 0.08 0.08
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1997 (3)
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest income $8,011 $8,031 $ 8,390 $ 7,962
- --------------------------------------------------------------------------------------------------------------------
Provision for loan losses 60 60 60 1,660
- --------------------------------------------------------------------------------------------------------------------
Non-interest income 1,064 1,338 1,501 969
- --------------------------------------------------------------------------------------------------------------------
Non-interest expense 6,288 6,495 6,737 8,626
- --------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 2,727 2,814 3,094 (1,355)
- --------------------------------------------------------------------------------------------------------------------
Income taxes (benefit) 1,001 1,107 1,127 (521)
- --------------------------------------------------------------------------------------------------------------------
Net income (loss) 1,726 1,707 1,967 (834)
- --------------------------------------------------------------------------------------------------------------------
Earnings (loss) per share - basic 0.08 0.07 0.09 (0.04)
- --------------------------------------------------------------------------------------------------------------------
Earnings (loss) per share - diluted 0.08 0.07 0.09 (0.04)
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The provision for losses on loans, in the third quarter of 1998, reflected a
$1,200 adjustment in order to conform the credit policies of SFC to those of
the Company. See Note 2 to the Consolidated Financial Statements.
(2) Non-interest expense, in the third quarter of 1998, included one-time
charges of $9,519 related to the Merger and Conversion. See Note 2 to the
Consolidated Financial Statements.
(3) Dividends paid by SFC for all quarters prior to Merger have been excluded.
- --------------------------------------------------------------------------------
13
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
CFS Bancorp, Inc. (the "Company") was formed as the holding company for
Citizens Financial Services, FSB (the "Bank") in connection with the Bank's
conversion from a federally chartered mutual savings bank to a federally
chartered stock savings bank (the "Conversion"). The Conversion was completed on
July 24, 1998. Concurrent with the Conversion, the Company completed its merger
with SuburbFed Financial Corp. ("SFC") (the "Merger"). In accordance with the
merger agreement the Company issued 3.6 shares of CFS Bancorp stock for each
share of SFC stock. SFC was then merged into the Company and SFC's subsidiary,
Suburban Federal Savings, a Federal Savings Bank, was merged into the Bank. This
merger was accounted for as a pooling-of-interests, and as such, all financial
data presented in this annual report includes the combined assets and
liabilities and results of operations of the Company and SFC for all periods
presented.
OUR MISSION
- - To fulfill customers' specific needs by offering high-quality banking,
insurance, investment and trust services, provided through coordinated,
comprehensive and caring service delivered in a profitable, efficient and
personalized manner.
- - To maintain a strong and consistent commitment to the communities we serve.
- - To maximize long-term value for our many shareholders.
ASSET/LIABILITY MANAGEMENT
The Bank, like other financial institutions, is subject to interest rate
risk to the extent that its interest-bearing liabilities with short- and
intermediate-term maturities reprice more rapidly, or on a different basis, than
its interest-earning assets. Management attempts to moderate the effect of
changes in interest rates on the Bank's net portfolio value ("NPV"). The NPV
represents the excess of the present value of expected cash flows from assets
over the present value of expected cash flows from liabilities. This approach
calculates the difference between the present value of expected cash flows from
assets and the present value of expected cash flows from liabilities, as well as
cash flows from off-balance sheet contracts. Management of the Bank's assets and
liabilities is done within the context of the marketplace, but also within
limits established by the Board of Directors on the amount of change in NPV
which is acceptable given certain interest rate changes.
In an attempt to manage its exposure to changes in interest rates,
management closely monitors the Bank's interest rate risk. The Bank has an
asset/liability management committee consisting of senior officers and one
outside director which meets monthly to review the Bank's interest rate risk
position and to make recommendations for adjustments to the Bank's Board of
Directors. In addition, the Board reviews simulations of various interest rate
scenarios which could affect the Bank's earnings.
In managing its asset/liability mix, the Bank, at times, depending on the
relationship between long- and short-term interest rates, market conditions and
consumer preference, places greater emphasis on maximizing its net interest
margin than on strictly matching the interest rate sensitivity of its assets and
liabilities. The Board believes that the increased net income resulting from a
mismatch in the maturity of its asset and liability portfolios can, during
periods of stable interest rates, provide high enough returns to justify the
increased exposure which can result from such a mismatch.
While maintaining its interest rate spread objectives, the Bank attempts to
reduce its interest rate risk with a variety of strategies designed to maintain
the proper relationship between its assets and liabilities. First, the Bank
focuses on mortgage loans with an initial fixed term of one, three, five or
seven years that convert to an annually adjusting rate using the one-year
constant maturity of United States Treasury Obligations as the index. At
December 31, 1998, the Company had approximately $368.9 million of adjustable
rate mortgage loans in its portfolio. Second, the Company's mortgage-backed
securities portfolio is made up primarily of securities that have expected
average lives of five years or less at time of purchase. Third, the Company has
a substantial amount of passbook savings, demand deposit and money market
accounts which may be less sensitive to changes in interest rates than
certificate accounts. At December 31, 1998 the Company had $366.8 million of
these types of accounts. Fourth, the Bank's liability management program seeks
to lengthen the maturities of customer deposits by aggressively pricing
certificates up to 10 years in term.
Presented below, as of December 31, 1998 and 1997, are analyses of the
Bank's interest rate risk as measured by changes in NPV for instantaneous and
sustained parallel shifts in the yield curve, in 100 basis point (1%)
increments, up and down 400 basis points in accordance with Office of Thrift
Supervision ("OTS") regulations. As illustrated in the table, NPV is more
sensitive to and may be more negatively impacted by rising rates than declining
rates. This occurs principally because as rates rise, the market value of
fixed-rate
14
<PAGE> 4
loans declines due to both the rate increase and slowing prepayments. When rates
decline, the Bank does not experience a significant rise in market value for
these loans because borrowers prepay at relatively high rates. The value of the
Bank's deposits and borrowings change in approximately the same proportion in
rising or falling rate scenarios.
<TABLE>
<CAPTION>
NET PORTFOLIO VALUE
---------------------------------------------------------------
$ AMOUNT $ CHANGE % CHANGE $ AMOUNT $ CHANGE % CHANGE
ASSUMED CHANGE -------- -------- -------- -------- -------- --------
IN INTEREST RATES 1998 1997
------------------------------ ------------------------------
(BASIS POINTS) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
+400 120,699 (47,773) (28)% 72,548 (55,007) (43)%
+300 136,269 (32,203) (19) 87,091 (40,464) (32)
+200 149,861 (18,611) (11) 101,675 (25,880) (20)
+100 160,172 (8,300) (5) 115,518 (12,037) (9)
0 168,472 127,555
-100 173,382 4,910 3 138,526 10,971 9
-200 177,992 9,520 6 151,725 24,170 19
-300 185,481 17,009 10 169,096 41,541 33
-400 192,357 23,885 14 192,009 64,454 51
</TABLE>
As noted above, increases in interest rates normally effect a decrease in
the market value of the Bank's net assets. For instance, as of December 31,
1998, in the event of a 200 basis point increase in interest rates, NPV is
anticipated to fall by $18.6 million or 11%. The remaining NPV, after the effect
of the 200 basis point increase, is still 11% of the Bank's total assets. On the
other hand, in a decreasing interest rate environment, the NPV is anticipated to
increase.
In comparing the change in the Bank's interest rate risk exposure from 1997
to 1998, smaller dollar amounts of decrease in NPV are associated with each rate
increase increment. The percentage change in NPV was also affected by the $80.5
million of capital raised by the Bank in the conversion to a stock charter.
The above analysis includes the assets and liabilities of the Bank only.
Inclusion of Holding Company assets and liabilities would have a minimal effect
for 1997, as Holding Company's assets and liabilities were immaterial in
relation to the consolidated totals of the Company at that date. Holding Company
totals for 1998 were larger as fifty percent of the conversion proceeds were
retained at the Holding Company level. Thus for 1998, NPV would be increased at
all interest rate levels while percentage changes would be decreased.
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 historical sources of funds are 1) deposits, 2) scheduled payments of
amortizing loans and mortgage-backed securities, 3) prepayments and maturities
of outstanding loans and mortgage-backed securities, 4) maturities of investment
securities and other short-term investments, and 5) funds provided from
operations. During 1998 the Bank began leveraging its capital base with
borrowings to provide additional funds for lending and investing activities.
Given the Bank's asset size and the current interest rate environment,
management determined that the use of borrowings as leverage was a prudent
strategy. Scheduled payments from the amortization of loans, mortgage-backed
securities, maturing investment securities, and short-term investments are
relatively predictable sources of funds, while deposit flows and loan
prepayments are greatly influenced by market interest rates, economic conditions
and competitive rate offerings. In addition, the Company invests excess funds in
federal funds sold and other short-term interest-earning assets which provide
liquidity to meet lending requirements.
Liquidity management is both a daily and long-term function. Excess
liquidity is generally invested in short-term investments such as federal funds
sold. On a longer-term basis the Company invests funds not used for maintaining
and expanding the loan portfolio in mortgage-backed securities. The Company uses
its sources of funds primarily to meet its ongoing commitments, pay maturing
certificates of deposit and savings withdrawals, fund loan commitments, and
maintain a portfolio of mortgage-backed and investment securities.
At December 31, 1998 total loan origination commitments outstanding were
$60.8 million. Certificates of deposit scheduled to mature in one year or less
at December 31, 1998 totaled $415.9 million. Investment securities scheduled to
mature or permitted to be called for redemption in one year or less at December
31, 1998 totaled $112.9 million. Based on historical experience, management
believes that a significant portion of maturing deposits will remain with the
Company. The Company anticipates that it will continue to have sufficient funds
to meet its current commitments.
On February 3, 1999 the stockholders approved the Stock Option Plan and the
Recognition and Retention Plan. The Board of Directors, on February 16, 1999,
approved the repurchase of 714,150 shares to fund the Recognition and Retention
Plan. The Board also approved a buy-back of 5% of the shares outstanding
(1,150,000 shares). Based on the market value on February 1, 1999 of $10.50 per
share, approximately $19.6 million will be needed to acquire shares under these
two plans. The Company anticipates it will have sufficient liquidity to fund
these repurchases.
The liquidity needs of CFS Bancorp (the parent company) consist primarily
of operating expenses and
15
<PAGE> 5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
dividend payments to stockholders. In addition to securities available for sale,
the primary source of liquidity for the parent company is dividends from the
Bank. However, this source can also be supplemented by fees assessed to the
Bank. Under certain banking regulations, regulatory approval is required before
dividends declared by the Bank can exceed defined levels. In addition, the Bank
is required to maintain certain capital requirements. See note 12 to the
Consolidated Financial Statements.
CHANGES IN FINANCIAL CONDITION
GENERAL. Total assets of the Company increased by $286.1 million, or 24.2%, to
$1.5 billion at December 31, 1998 compared to $1.2 billion at December 31, 1997.
This increase was due primarily to an increase of $136.0 million in
mortgage-backed securities, a $130.5 million increase in loans receivable and a
$29.0 million increase in cash and cash equivalents. These increases were
partially offset by an $8.7 million decrease in investment securities. The net
increase was funded primarily by the $161.0 million of proceeds from the
Conversion and a $130.2 million increase in borrowed money.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents, which consist of cash,
interest-bearing deposits at other institutions and federal funds sold, amounted
to $49.8 million at December 31, 1998 and $20.8 million at December 31, 1997.
The 139.2% increase from December 31, 1997 to December 31, 1998 primarily
reflects accumulation of funds for loan commitments outstanding at December 31,
1998.
INVESTMENT SECURITIES. At December 31, 1998 the Company had $34.7 million of
investment securities available for sale and $166.5 million in investment
securities held to maturity, or an aggregate of $201.2 million of investment
securities, compared to $3.7 million in investment securities available for
sale, $1.7 million of investments held for trade and $206.2 million held to
maturity, or an aggregate of $211.6 million in investment securities, at
December 31, 1997. During 1998 this decrease of $10.4 million resulted from
increased loan origination activity.
MORTGAGE-BACKED SECURITIES. At December 31, 1998 the Company had $277.9 million
in mortgage-backed securities available for sale and $177.0 million in
mortgage-backed securities held to maturity, or an aggregate of $454.9 million
in mortgage-backed securities, compared to $62.1 million in mortgage-backed
securities available for sale and $256.7 million held to maturity, or an
aggregate of $318.8 million in mortgage-backed securities at December 31, 1997.
This increase of $136.0 million and a similar increase in loans receivable were
funded with the proceeds of the Conversion and increases in borrowed money. The
decision to increase loans receivable as a percentage of total assets and the
increased asset base as a result of the Conversion and Merger, enabled
management to classify all purchases of investment securities and
mortgage-backed securities as available for sale effective July 1, 1998. At
December 31, 1998 the Company had an unrealized loss, net of taxes, on available
for sale investment securities and mortgage-backed securities of $289,000.
LOANS RECEIVABLE. The net loan portfolio of the Company increased from $595.6
million at December 31, 1997 to $726.1 million at December 31, 1998. The
increase in net loan portfolio during 1998 was due to the Company's efforts to
increase new loan originations through existing loan programs, continued strong
refinancing activity, and the addition of commercial real estate lending to the
loan program menu.
REAL ESTATE. At December 31, 1997 the Bank had $1.3 million of real estate owned
and $1.1 million of real estate held for development and sale. The real estate
held for development and sale and most of the real estate owned at December 31,
1997 consisted of the Bank's remaining interest in a planned 148 unit
residential townhome development in Munster, Indiana, which was being developed
by a Bank subsidiary. Significant losses were recorded in 1996 and 1997 due to
cost overruns, price increases, and a slowdown in projected sales volume. During
1998 the remaining properties in this development were sold, and no additional
losses were recorded. The Bank maintains reserves to complete warranty work on
the units sold in 1998.
DEPOSITS. Deposits decreased from $986.1 million to $969.8 million from December
31, 1997 to December 31, 1998. The use of deposits by customers to purchase
common stock in the Conversion process was the primary reason for this decrease.
BORROWED MONEY. Borrowed money increased from $85.0 million at December 31, 1997
to $215.3 million at December 31, 1998. The $130.3 million increase funded the
purchase of mortgage-backed securities and the origination of new mortgage
loans.
16
<PAGE> 6
STOCKHOLDERS' EQUITY. Total stockholders' equity of the Company amounted to
$260.1 million, or 17.7% of total assets, at December 31, 1998 compared to $95.2
million, or 8.0% of total assets, at December 31, 1997. Total stockholders'
equity includes the components of unrealized gains and losses on investment
securities and mortgage-backed securities available for sale, net of taxes, at
December 31, 1998 and 1997. This component was a gain of $560,000 at December
31, 1997 and a loss of $289,000 at December 31, 1998. The increase in
stockholders' equity for the year is primarily due to the successful completion
of the Conversion on July 24, 1998.
AVERAGE BALANCES, NET INTEREST INCOME, YIELDS EARNED AND RATES PAID
The following table sets forth, for the periods indicated, information
regarding (i) the Company's total dollar amount of interest income from
interest-earning assets and the resultant average yields; (ii) the total dollar
amount of interest expense on interest-bearing liabilities and the resultant
average rate; (iii) net interest income; (iv) interest rate spread; and (v) net
interest margin. Information is based on average monthly balances during the
indicated periods. Management believes that the average monthly balances do not
differ materially from the average daily balances.
17
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1998 1997
---------------------------------- ----------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST
- --------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable:(1)
Real estate loans $ 643,035 $49,447 7.69% $ 528,951 $41,778 7.90%
Other loans 25,045 2,364 9.44 21,083 2,015 9.56
--------------------- ---------------------
TOTAL LOANS 668,080 51,811 7.76% 550,034 43,793 7.96%
Securities:(2)
Mortgage-backed securities 346,567 24,146 6.97 370,309 26,866 7.26
Other investment securities 266,132 19,388 7.29 168,952 11,167 6.61
Other interest-earning assets(3) 33,285 2,008 6.03 18,805 1,426 7.58
--------------------- ---------------------
TOTAL INTEREST-EARNING ASSETS 1,314,064 97,353 7.41% 1,108,100 83,252 7.51%
Non-interest earning assets 52,777 46,455
---------- ----------
TOTAL ASSETS $1,366,841 $1,154,555
- --------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits:
NOW and money market accounts $ 120,701 $ 2,846 2.36% $ 116,145 $ 2,927 2.52%
Passbook accounts 209,151 6,816 3.26 187,474 7,163 3.82
Certificates of deposit 644,042 37,194 5.78 651,550 36,577 5.61
--------------------- ---------------------
TOTAL DEPOSITS 973,894 46,856 4.81% 955,169 46,667 4.89%
--------------------- ---------------------
Borrowings 173,015 10,054 5.81% 68,954 4,191 6.08%
--------------------- ---------------------
TOTAL INTEREST-BEARING
LIABILITIES 1,146,909 56,910 4.96% 1,024,123 50,858 4.97%
Non-interest bearing liabilities(4) 51,522 35,863
TOTAL LIABILITIES 1,198,431 1,059,986
Stockholders' equity 168,410 94,569
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $1,366,841 $1,154,555
- --------------------------------------------------------------------------------------------------------------
Net interest-earning assets $ 167,155 $ 83,977
- --------------------------------------------------------------------------------------------------------------
Net interest income/interest rate
spread $40,443 2.45% $32,394 2.54%
- --------------------------------------------------------------------------------------------------------------
Net interest margin 3.08% 2.92%
- --------------------------------------------------------------------------------------------------------------
Ratio of average interest-earning
assets to average interest-bearing
liabilities 114.57% 108.20%
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996
----------------------------------
AVERAGE AVERAGE
BALANCE INTEREST YIELD/COST
- ------------------------------------- ----------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable:(1)
Real estate loans $ 421,417 $34,871 8.27%
Other loans 20,327 1,903 9.36
---------------------
TOTAL LOANS 441,744 36,774 8.32%
Securities:(2)
Mortgage-backed securities 429,356 28,781 6.70
Other investment securities 59,088 4,247 7.19
Other interest-earning assets(3) 31,720 1,953 6.16
---------------------
TOTAL INTEREST-EARNING ASSETS 961,908 71,755 7.46%
Non-interest earning assets 48,690
----------
TOTAL ASSETS $1,010,598
- ------------------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits:
NOW and money market accounts $ 121,022 $ 2,973 2.46%
Passbook accounts 195,274 7,348 3.76
Certificates of deposit 526,349 28,767 5.47
---------------------
TOTAL DEPOSITS 842,645 39,088 4.64%
---------------------
Borrowings 44,492 2,630 5.91%
---------------------
TOTAL INTEREST-BEARING
LIABILITIES 887,137 41,718 4.70%
Non-interest bearing liabilities(4) 32,980
TOTAL LIABILITIES 920,117
Stockholders' equity 90,481
----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $1,010,598
- ------------------------------------------------------------------------------------------------
Net interest-earning assets $ 74,771
- ------------------------------------------------------------------------------------------------------------
Net interest income/interest rate
spread $30,037 2.76%
- --------------------------------------------------------------------------------------------------------------
Net interest margin 3.12%
- --------------------------------------------------------------------------------------------------------------
Ratio of average interest-earning
assets to average interest-bearing
liabilities 108.43%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The average balance of loans receivable includes non-performing loans,
interest on which is recognized on a cash basis.
(2) Average balances of securities available for sale are based on historical
costs.
(3) Includes money market accounts, federal funds sold and interest-earning bank
deposits.
(4) Consists primarily of demand deposit accounts.
RATE/VOLUME ANALYSIS
The following table sets forth the effects of changing rates and volumes on
net interest income of the Company. Information is provided with respect to (i)
effects on interest income attributable to changes in volume (changes in volume
multiplied by prior rate); (ii) effects on interest income attributable to
changes in rate (changes in rate multiplied by prior volume); and (iii) changes
in rate/volume (changes in rate multiplied by changes in volume).
18
<PAGE> 8
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
1998 COMPARED TO 1997 1997 COMPARED TO 1996
---------------------------------------- ------------------------------------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
--------------------------- TOTAL ----------------------------- TOTAL
RATE/ NET RATE/ NET
RATE VOLUME VOLUME INC/(DEC) RATE VOLUME VOLUME INC/(DEC)
- ---------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable:
Real estate loans $(1,100) $9,006 $ (237) $ 7,669 $(1,589) $ 8,901 $ (405) $ 6,907
Other loans (25) 379 (5) 349 40 71 1 112
----------------------------------------------------------------------------------------
TOTAL LOANS RECEIVABLE (1,125) 9,385 (242) 8,018 (1,549) 8,972 (404) 7,019
Securities:
Mortgage-backed securities (1,066) (1,722) 68 (2,720) 2,370 (3,959) (326) (1,915)
Other investment securities 1,140 6,425 656 8,221 (342) 7,897 (635) 6,920
Other interest-earning assets (291) 1,097 (224) 582 452 (795) (184) (527)
----------------------------------------------------------------------------------------
TOTAL NET CHANGE IN INCOME ON
INTEREST-EARNING ASSETS (1,342) 15,185 258 14,101 931 12,115 (1,549) 11,497
Interest-bearing liabilities:
Deposits:
NOW and money markets (189) 115 (7) (81) 76 (119) (3) (46)
Passbook accounts (1,054) 829 (122) (347) 113 (293) (5) (185)
Certificates of deposit 1,050 (421) (12) 617 784 6,839 187 7,810
----------------------------------------------------------------------------------------
TOTAL DEPOSITS (193) 523 (141) 189 973 6,427 179 7,579
Borrowings (184) 6,325 (278) 5,863 74 1,446 41 1,561
----------------------------------------------------------------------------------------
TOTAL NET CHANGE IN EXPENSE ON
INTEREST-BEARING LIABILITIES (377) 6,848 (419) 6,052 1,047 7,873 220 9,140
----------------------------------------------------------------------------------------
Net change in net interest income $ (965) $8,337 $ 677 $ 8,049 $ (116) $ 4,242 $(1,769) $ 2,357
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
RESULTS OF OPERATIONS
GENERAL. The Company reported net income of $3.1 million for the year ended
December 31, 1998 compared to net income of $4.6 million and $2.5 million for
the years ended December 31, 1997 and 1996, respectively. While the Company's
net interest income increased each of the three years ended December 31, 1998,
1997 and 1996, the results of operations were adversely affected by the
following:
- - In the year ended December 31, 1998, one-time charges in connection with the
Merger with SFC and establishment of the Foundation were $10.7 million (See
Note 2 to the Consolidated Financial Statements for further details);
- - In the years ended December 31, 1997 and 1996, losses and operating expenses
totaling $2.5 million and $606,000, respectively were incurred from real
estate development activities; and
- - In the year ended December 31, 1996, Savings Association Insurance Fund
("SAIF") levied a one-time special assessment of $5.2 million.
NET INTEREST INCOME. Net interest income is determined by the Company's interest
rate spread (i.e., the difference between the yield earned on the Company's
interest-earning assets and the rate paid on its interest-bearing liabilities)
and the relative amounts of interest-earning assets and interest-bearing
liabilities. The Company's average interest rate spreads were 2.45%, 2.54% and
2.76% during the years ended December 31, 1998, 1997 and 1996, respectively. The
Company's net interest margins (i.e., net interest income as a percentage of
average interest-earning assets) were 3.08%, 2.92% and 3.12% during the years
ended December 31, 1998, 1997 and 1996, respectively.
The Company's net interest income amounted to $40.4 million for the year
ended December 31, 1998 compared to $32.4 million and $30.0 million for the
years ended December 31, 1997 and 1996, respectively. The $8.0 million, or 24.7%
increase, in net interest income in 1998 compared to 1997 was due to an increase
in interest income due to the significantly higher average balance of
interest-earning assets as a result of the investment of Conversion proceeds and
borrowed money into real estate loans and investment securities. The $2.4
million, or 8.0%, increase in net interest income in 1997 compared to 1996 was
primarily
19
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
due to a larger average balance of interest-earning
assets, particularly real estate loans.
INTEREST INCOME. The Company reported total interest income of $97.4 million for
the year ended December 31, 1998 compared to $83.3 million and $71.8 million for
the years ended December 31, 1997 and 1996, respectively. The $14.1 million, or
16.9%, increase in interest income in 1998 compared to 1997 was due primarily to
a $7.7 million increase in interest income from real estate loans and an $8.2
million increase in interest income from other investment securities. The
increase in interest income from real estate loans in 1998 compared to 1997 was
due to an increase in the average balance of $114.1 million which more than
offset a 21 basis point decrease (with 100 basis points being equal to 1.0%) in
the yield earned thereon.
The increase in interest income from other investment securities in 1998
compared to 1997 was due to an increase in the average balance of such
securities of $97.2 million together with a 68 basis point increase in the yield
earned on other investment securities.
Total interest income increased by $11.5 million, or 16.0%, to $83.3
million for the year ended December 31, 1997 compared to 1996. The increase was
due primarily to a $6.9 million increase in interest income on real estate loans
and a $6.9 million increase in interest on other investment securities, which
more than offset a $1.9 million decrease in interest on mortgage-backed
securities. The average balance of real estate loans increased $107.5 million,
or 25.5%, in 1997 compared to 1996, while the average balance of other
investment securities rose by $109.9 million and the average balance of
mortgage-backed securities fell $59.0 million, or 13.8%, for the same period.
INTEREST EXPENSE. Total interest expense amounted to $56.9 million for the year
ended December 31, 1998 compared to $50.9 million and $41.7 million in 1997 and
1996, respectively. The increase in interest expense during 1998 was due
primarily to the Company's increased use of borrowed money. The average balance
of borrowed money increased by $104.1 million, while the average rate decreased
by 27 basis points. Total interest on borrowed money increased by $5.9 million.
The increase in interest expense during 1997 was due primarily to a $7.8
million increase in the cost of the Bank's certificates of deposit. The average
balance of certificates of deposit increased by $125.2 million, or 23.8%, and
the average rate paid on certificates was 5.61% for 1997 compared to 5.47% in
1996.
PROVISION FOR LOSSES ON LOANS. The Company establishes provisions for losses on
loans, which are charged to operations, in order to maintain the allowance for
losses on loans at a level which is deemed appropriate to absorb losses inherent
in the portfolio. In determining the appropriate level of the allowance for
losses on loans, management considers past and anticipated loss experience,
evaluations of real estate collateral, current and anticipated economic
conditions, volume and type of lending, and the levels of non-performing and
other classified loans. The amount of the allowance is based on estimates, and
ultimate losses may vary from such estimates. Management assesses the allowance
for losses on loans on a quarterly basis and will make appropriate provisions to
maintain the adequacy of the allowance. The Company's provision for losses on
loans was $1.6 million for the year ended December 31, 1998 compared to $1.8
million in 1997 and $253,000 in 1996. The Company significantly increased its
provisions for losses on loans in 1997 compared to 1996 for three main reasons:
1) total non-performing loans increased $3.3 million, or 118.6%, at December 31,
1997, 2) total loan portfolio has grown, and 3) increasing emphasis in recent
years has been shifted to construction and land development loans, multi-family
residential real estate loans and commercial real estate loans, all of which
generally are deemed to involve more risk than single-family residential real
estate loans.
In the third quarter of 1998, management deemed it necessary to increase
the loss provision by $1.2 million to conform SFC's loss provision methodology
to that of the Company.
Non-performing loans increased to $9.0 million at December 31, 1998. The
primary reason for the $2.8 million increase from December 31, 1997 to December
31, 1998, reflects the addition of a $3.0 million loan secured by an office
building deemed non-performing by Suburban in early 1998.
The primary reason for the increase in non-performing loans at December 31,
1997 was a $2.8 million increase in non-accrual single-family residential
mortgage loans. At December 31, 1997, the Company's non-accrual single-family
residential mortgage loans totaled $4.6 million. Management believes that the
increase in this type of loan during 1997 was, to a certain extent, an
aberration. The total amount of these loans had already decreased to $4.0
million as of December 31, 1998.
Although management believes that the Company's allowance for losses on
loans was adequate at December 31, 1998 based on available facts and
circumstances, there can be no assurances that additions will not be necessary
in the future. Such allowances would adversely affect the Bank's results of
operations. In addition, various regulatory agencies, as an integral
20
<PAGE> 10
part of their examination processes, periodically review the Bank's provision
for losses on loans and the carrying value of its other non-performing assets,
based on information available to them at the time of their examinations. Any of
these agencies could require the Bank to make additional provisions for losses
on loans in the future.
NON-INTEREST INCOME. The Company reported non-interest income of $5.9 million
for the year ended December 31, 1998 compared to $4.9 million and $4.3 million
for the years ended December 31, 1997 and 1996, respectively. Non-interest
income improved, in part, in 1998, due to the absence of losses on real estate
held for development and sale, which amounted to $1.2 million for 1997 and
$606,000 for 1996. As previously described, all development property has been
sold and no losses were recorded on this property in 1998. Loan fees increased
to $1.2 million during the year ended December 31, 1998 compared to $1.1 million
each year in both 1997 and 1996. This increase is reflective of increased loan
volume. Income from insurance commissions amounted to $856,000 in the year ended
December 31, 1998 compared to $619,000 and $546,000 in 1997 and 1996,
respectively. Income from investment commissions from the Bank's securities
brokerage subsidiary was $874,000 in 1998 compared to $891,000 and $677,000 in
1997 and 1996, respectively. While both the insurance agency and securities
brokerage subsidiaries have produced operating losses, the Bank believes the
infrastructure and personnel are in place to permit them to continue their
growth and ultimately become profitable. Net gain on the sale of loans and
securities was $452,000 in 1998 which compares to $637,000 and $221,000 in 1997
and 1996, respectively. Unrealized gains on securities held for trade were
$460,000 in 1997 and $197,000 in 1996. There was no activity in this account in
1998 as the Company's policy beginning July 1, 1998 was to treat all newly
acquired securities as available for sale. During the year ended December 31,
1998, net profit on sale of office properties was $161,000. There was no such
profit in either 1997 or 1996. The profit in 1998 represents the sale of land
SFC had held for a number of years for future expansion. Other non-interest
income amounted to $2.4 million, $2.4 million and $2.1 million in 1998, 1997 and
1996, respectively. The increase in other non-interest income during 1997 was
due primarily to increased automated teller machine ("ATM") fees as the result
of the imposition of a surcharge on certain ATM transactions.
NON-INTEREST EXPENSE. The Company reported non-interest expense of $39.0
million, $28.1 million and $29.9 million for the years ended December 31, 1998,
1997 and 1996, respectively. The $10.9 million increase in non-interest expense
from 1997 to 1998 consists mainly of $9.5 million in one-time charges related to
the Merger and Conversion, as well as the funding of the Citizens Savings
Foundation. Compensation and employee benefits, the largest single component of
non-interest expense, increased to $18.5 million for the year ended December 31,
1998 compared to $16.0 million and $14.4 million in 1997 and 1996, respectively.
The $2.5 million increase from 1997 to 1998 results primarily from the $1.2
million in ESOP expense in 1998. Other increases are reflective of increases in
the number of employees and normal salary increases.
On February 3, 1999, in accordance with provisions contained in the
Conversion filing, the Company held a special shareholders' meeting for the
purpose of approving two additional stock-based benefit plans. Both plans
received approval from the shareholders and accordingly, the 1998 Recognition
and Retention Plan and the 1998 Stock Option Plan were formed.
The Recognition and Retention Plan will consist of 714,150 common shares.
Awards under this program will be made by the Compensation Committee of the
Board of Directors whose members also comprise the trustees for administering
this plan. Common stock for this plan will be purchased in the open market and
will be reported as a reduction of stockholders' equity until earned. Awards
under the plan vest over a five-year period and will be expensed as they vest.
Non-interest expense will increase beginning with the month the awards are made.
At December 31, 1998, no common stock had been purchased and no awards had been
made under this Plan.
The Stock Option Plan will consist of 1,785,375 common shares which will
also be awarded by the Compensation Committee of the Board of Directors of the
Company. The exercise price of the options will be the fair market value of the
stock at the grant date; accordingly, no expense will be recorded as a result of
the options. The options will expire in ten years. Stock may be purchased in the
open market and held as treasury stock to be reissued as options are exercised.
At December 31, 1998, no common stock had been purchased and no awards had been
made under this plan.
Aggregate net occupancy and furniture and equipment expense was $4.9
million for the year ended December 31, 1998 compared to $4.5 million and $3.8
million for 1997 and 1996, respectively. Increases resulted primarily from the
remodeling and renovation of existing offices and expenses related to
improvements made in the Bank's data processing and on-line computer network.
Federal Deposit Insurance Corporation ("FDIC") insurance premiums amounted
21
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
to $620,000 for the year ended December 31, 1998 compared to $586,000 and $1.8
million for the years ended December 31, 1997 and 1996, respectively. The
decrease in insurance premium in 1997 was due to FDIC's reduction in rates paid
by SAIF members from 23 basis points to 6.4 basis points on their deposits. In
addition to insurance premiums, non-interest expense for 1996 includes a
one-time special SAIF assessment of $5.2 million. Data processing expenses
amounted to $966,000 for the year ended December 31, 1998 compared to $978,000
and $860,000 for the years ended December 31, 1997 and 1996, respectively. The
increase in 1997 fees primarily reflect the increased volume of transactions
during the period. Data processing systems from the former SFC offices will be
combined with those of the Company in April 1999.
The Company's non-interest expense for 1997 includes $1.3 million of real
estate operations expenses incurred by the real estate development previously
discussed. No such expenses were reflected in 1996 as the project was accounted
for on the equity method during that year. No such expenses are reflected in
1998 as all such expenses were recorded in 1997 and all remaining properties
were sold in 1998 with no additional loss or expense. Other general and
administrative expenses amounted to $3.8 million for the year ended December 31,
1998 compared to $3.9 million and $3.1 million for the years ended December 31,
1997 and 1996, respectively. The primary reason for the $824,000 increase in
other general and administrative expenses in 1997 compared to 1996 was a
$181,000 increase in other professional fees due to increased utilization of
third-party consultants. Additionally, telephone, postage, stationery and office
supplies reflected the Bank's increased marketing and business generation
efforts in 1997. Marketing expenses were reduced to $673,000 in 1998 after the
increase in 1997 to $882,000 from $790,000 in 1996.
INCOME TAX EXPENSE. The Company's income tax expense amounted to $2.6 million,
$2.7 million and $1.6 million for the years ended December 31, 1998, 1997 and
1996, respectively. The Company's effective rates were 45.3%, 37.3% and 38.0%
for the years ended December 31, 1998, 1997 and 1996, respectively. The 45.3%
rate in 1998 is primarily the result of professional fees of approximately
$910,000 incurred in connection with the Merger which are deemed
non-tax-deductible by the Internal Revenue Service.
YEAR 2000 CONSIDERATIONS
In preparation for the year 2000 (the "Year 2000 Issue"), the Bank has
developed a Year 2000 Plan (the "Plan") which has been presented to the Board of
Directors. The Plan was developed using the guidelines outlined in a report by
the Federal Financial Institutions Examination Council (FFIEC), "The Effect of
2000 on Computer Systems". The Bank assigned responsibility for the Plan to the
Year 2000 Committee which reports to the Board of Directors. The Plan recognizes
that the Bank's operating, processing and accounting operations are
computer-reliant and could be affected by the Year 2000 Issue.
The Bank relies on third-party vendors for its computer output and
processing, as well as other significant functions and services (i.e.,
securities safekeeping services, securities pricing information, etc.). The Year
2000 Committee is currently working with those third-party vendors to assess
their Year 2000 readiness. The Committee has completed an inventory and
assessment of its mission-critical systems, has nearly completed its renovation
phase, and is now well into the testing phase of the project. Management
presently believes that the Bank's third-party vendors are taking appropriate
steps to modify existing software and hardware to ensure that critical systems
will function properly. The most significant hurdle the Bank has encountered in
verifying and testing all mission-critical third parties is the limited ability
the Bank has to document or test the preparedness of its telephone system and
electric power providers.
The Bank has identified 46 mission-critical (without which it cannot
operate) and critical (necessary applications that the Bank can use for a
moderate amount of time without requiring Year 2000 compliance) applications
operated by third-party vendors. The list is reviewed regularly to include new
applications or remove unnecessary applications. Of such mission-critical and
critical applications, the Bank has been informed that a majority are already
Year 2000 compliant. The Bank's primary data service processor has completed
initial testing of its systems (in which the Bank has been involved), with
substantially all systems evidencing Year 2000 compliance. The Bank will be
participating in further testing in March 1999, and then again after the
conversion of the Suburban Federal offices to the Bank's current system
scheduled for April 1999. Most of the Bank's mission-critical and critical
applications vendors have provided written assurances that their products and
services will be Year 2000 compliant by March 31, 1999. While the Bank has
received assurances from these vendors as to compliance, their assurances are
not guarantees and may not be enforceable.
The Bank's existing older contracts with the vendors do not include Year
2000 certifications or warranties. Thus, in the event such vendors' products
and/or services are not Year 2000 compliant, the Bank's
22
<PAGE> 12
recourse may be limited. If the required modifications and conversions are not
made, or are not completed on a timely basis, there can be no assurance that
potential system interruptions or unanticipated additional expense incurred to
obtain Year 2000 compliance would not have a material adverse effect on the
Bank's business, financial condition, results of operations and business
prospects. Nevertheless, the Bank does not 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 indicative of future operating results or future financial condition.
The Year 2000 Issue also affects a certain limited number of the Bank's
customers, particularly in the areas of access to funds and additional expense
incurred to achieve compliance. The Bank has adopted a plan for evaluating and
assessing the level of Year 2000 preparedness of its large or commercial credit
customers. While no assurance can be given that the Bank's customers will be
Year 2000 compliant, management has taken steps to verify that they are
adequately addressing or that they are not faced with material Year 2000 issues.
The Bank's credit risk related to the Year 2000 Issue is mitigated by the fact
that only a few of such borrowers use networked computer systems or data centers
to conduct their operations. In addition, in substantially all cases the credit
extended to such borrowers is collateralized by real estate which inherently
minimizes the Bank's exposure in the event that some borrowers do experience
problems or delays in becoming Year 2000 compliant.
The Bank has completed its own company-wide Year 2000 contingency plan. The
Bank has had a comprehensive business interruption and disaster recovery
contingency plan for many years which is continually updated. The Bank has
developed even more specific contingency plans which address operational
policies and procedures in the event of data processing, electric power supply
and/or telephone service failures associated with the Year 2000. Such
contingency plans are designed to provide documented actions to allow the Bank
to maintain and/or resume normal operations in the event of any failure in
mission-critical or critical applications. Such plans identify participants,
processes and equipment that will be necessary to permit the Bank to continue
operations. Such plans may include providing off-line system processing, back-up
electrical and telephone systems, and other methods to ensure the Bank's ability
to continue to operate.
The OTS has set target dates by which all thrift institutions, their
vendors and their service bureaus should have Year 2000 upgrades largely
completed. These guidelines provide sufficient time for testing to ensure that
all systems are working properly and to correct any problems detected by the
testing. The OTS also recommends the Bank employ independent agencies to
evaluate the level of preparedness of the Bank and its service bureau.
Management understands the importance of these recommendations and believes the
Bank is making reasonable progress toward meeting them. The most extensive
renovation is needed on many of the Illinois ATMs acquired from Suburban Federal
to upgrade the existing software. In addition, significant testing will need to
be done when the original Citizens ATMs are converted from the MAC network to
the Cash Station network system.
Management retained an independent consulting firm to review all Year 2000
compliance efforts. The results of their review were discussed with the Board of
Directors. Likewise, the Bank's primary service bureau has retained an
independent consulting firm to perform a review of its functions. We have been
provided complete copies of their report. Finally, the Bank and its primary
service bureau are subject to examination by the OTS pursuant to FFIEC
guidelines with respect to the Year 2000 Issue.
The cost of modifications to the existing software is being absorbed for
the most part by the third-party vendors. However, the Bank recognizes the need
to purchase new hardware and software. Based upon current estimates, the Bank
has budgeted up to $600,000 in direct costs, including hardware, software,
staffing, customer awareness and other issues, for completing the Year 2000
project. The Bank expects that the total direct and indirect costs of addressing
the Year 2000 Issue will not exceed $1.0 million and estimates that
approximately $200,000 has been spent on direct costs of addressing the Year
2000 Issue to date. It is estimated that testing costs will eventually account
for almost half of the direct costs incurred. These costs will be funded through
normal operations.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related financial data presented
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars, without considering changes in relative
purchasing power over time due to inflation. Unlike most industrial companies,
virtually all of the Bank's assets and liabilities are monetary in nature. As a
result, interest rates generally have a more significant impact on a financial
institution's performance than does the effect of inflation.
23
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
FORWARD-LOOKING STATEMENTS
This Annual Report contains certain forward-looking statements and
information relating to the Company that are based on the beliefs of management
as well as assumptions made by and information currently available to
management. 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.
24
<PAGE> 14
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
CFS Bancorp, Inc.
We have audited the accompanying consolidated statements of condition of CFS
Bancorp, Inc. (the Company) as of December 31, 1998 and 1997, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the 1997 and 1996 financial statements of SuburbFed
Financial Corp., which statements reflect total assets constituting 37% of the
consolidated financial statement totals as of December 31, 1997, and which
reflect net income constituting 61% and 41% of the consolidated financial
statement totals for the two years in the period ended December 31, 1997. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to data included for SuburbFed Financial
Corp., is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and, for 1997 and 1996, the report of other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audits and, for 1997 and 1996, the report of other
auditors, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of CFS Bancorp, Inc. as
of December 31, 1998 and 1997, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
March 3, 1999
25
<PAGE> 15
CFS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CONDITION
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
- --------------------------------------------------------------------------------------
Cash and amounts due from depository institutions $ 19,067 $ 12,556
- --------------------------------------------------------------------------------------
Interest-bearing deposits 25,201 7,281
- --------------------------------------------------------------------------------------
Federal funds sold 5,575 1,000
- --------------------------------------------------------------------------------------
Cash and cash equivalents 49,843 20,837
- --------------------------------------------------------------------------------------
Investment securities available-for-sale 34,720 3,696
- --------------------------------------------------------------------------------------
Investment securities held-to-maturity (fair value:
1998--$169,263; 1997--$207,302) 166,500 206,232
- --------------------------------------------------------------------------------------
Investment securities held for trade -- 1,741
- --------------------------------------------------------------------------------------
Mortgage-backed securities available-for-sale 277,888 62,141
- --------------------------------------------------------------------------------------
Mortgage-backed securities held-to-maturity (fair value:
1998--$178,694; 1997--$259,514) 176,956 256,670
- --------------------------------------------------------------------------------------
Loans receivable 726,081 595,566
- --------------------------------------------------------------------------------------
Investment in FHLB stock, at cost 8,183 6,681
- --------------------------------------------------------------------------------------
Office properties and equipment 16,328 16,442
- --------------------------------------------------------------------------------------
Accrued interest receivable 9,729 8,607
- --------------------------------------------------------------------------------------
Real estate held for development and sale -- 1,071
- --------------------------------------------------------------------------------------
Real estate owned 435 1,295
- --------------------------------------------------------------------------------------
Prepaid expenses and other assets 3,954 3,533
- --------------------------------------------------------------------------------------
Total assets $1,470,617 $1,184,512
- --------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------------
Deposits $ 969,802 $ 986,073
- --------------------------------------------------------------------------------------
Borrowed money 215,271 85,044
- --------------------------------------------------------------------------------------
Advance payments by borrowers for taxes and insurance 6,057 5,343
- --------------------------------------------------------------------------------------
Other liabilities 19,399 12,856
- --------------------------------------------------------------------------------------
Total liabilities 1,210,529 1,089,316
- --------------------------------------------------------------------------------------
Stockholders' equity:
- --------------------------------------------------------------------------------------
Common stock, $.01 par value:
Authorized shares--85,000,000
Issued shares--22,959,251 and 4,936,183 at December 31,
1998 and 1997, respectively
Outstanding shares--22,959,251 and 4,556,452 at
December 31, 1998 and 1997, respectively 230 14
- --------------------------------------------------------------------------------------
Additional paid-in capital 186,062 8,605
- --------------------------------------------------------------------------------------
Retained earnings, substantially restricted 87,178 87,703
- --------------------------------------------------------------------------------------
Treasury stock, at cost: no shares and 379,731 shares at
December 31, 1998 and 1997, respectively -- (1,605)
- --------------------------------------------------------------------------------------
Unearned common stock acquired by ESOP (13,093) (81)
- --------------------------------------------------------------------------------------
Accumulated other comprehensive income, net of tax (289) 560
- --------------------------------------------------------------------------------------
Total stockholders' equity 260,088 95,196
- --------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,470,617 $1,184,512
- --------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
26
<PAGE> 16
CFS BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
- -----------------------------------------------------------------------------------------
Loans $51,811 $43,793 $36,774
- -----------------------------------------------------------------------------------------
Mortgage-backed securities 24,146 26,866 28,781
- -----------------------------------------------------------------------------------------
Other investments securities 19,388 11,167 4,247
- -----------------------------------------------------------------------------------------
Other 2,008 1,426 1,953
- -----------------------------------------------------------------------------------------
Total interest income 97,353 83,252 71,755
- -----------------------------------------------------------------------------------------
Interest expense:
- -----------------------------------------------------------------------------------------
Deposits 46,856 46,667 39,088
- -----------------------------------------------------------------------------------------
Borrowings 9,353 4,191 2,630
- -----------------------------------------------------------------------------------------
Subscription deposits 701 -- --
- -----------------------------------------------------------------------------------------
Total interest expense 56,910 50,858 41,718
- -----------------------------------------------------------------------------------------
Net interest income before provision for loan losses 40,443 32,394 30,037
- -----------------------------------------------------------------------------------------
Provision for losses on loans 1,630 1,840 253
- -----------------------------------------------------------------------------------------
Net interest income after provision for losses on loans 38,813 30,554 29,784
- -----------------------------------------------------------------------------------------
Noninterest income:
- -----------------------------------------------------------------------------------------
Loan fees 1,209 1,085 1,108
- -----------------------------------------------------------------------------------------
Insurance commissions 856 619 546
- -----------------------------------------------------------------------------------------
Investment commissions 874 891 677
- -----------------------------------------------------------------------------------------
Loss on real estate held for development and sale -- (1,178) (606)
- -----------------------------------------------------------------------------------------
Net gain on sale of investment securities 328 596 207
- -----------------------------------------------------------------------------------------
Net gain on sale of loans 124 41 14
- -----------------------------------------------------------------------------------------
Unrealized gain on securities held for trade -- Net -- 460 197
- -----------------------------------------------------------------------------------------
Gain (loss) on sale of real estate owned (44) (6) 28
- -----------------------------------------------------------------------------------------
Net gain on sale of office properties 161 -- --
- -----------------------------------------------------------------------------------------
Other income 2,392 2,364 2,091
- -----------------------------------------------------------------------------------------
Total noninterest income 5,900 4,872 4,262
- -----------------------------------------------------------------------------------------
Noninterest expense:
- -----------------------------------------------------------------------------------------
Compensation and employee benefits 18,480 16,026 14,371
- -----------------------------------------------------------------------------------------
Net occupancy expense 2,769 2,732 2,405
- -----------------------------------------------------------------------------------------
Furniture and equipment expense 2,141 1,726 1,411
- -----------------------------------------------------------------------------------------
Data processing 966 978 860
- -----------------------------------------------------------------------------------------
Federal insurance premiums 620 586 1,804
- -----------------------------------------------------------------------------------------
Special SAIF assessment -- -- 5,216
- -----------------------------------------------------------------------------------------
Marketing 673 882 790
- -----------------------------------------------------------------------------------------
Real estate operations 5 1,309 --
- -----------------------------------------------------------------------------------------
Merger-related expense 6,503 -- --
- -----------------------------------------------------------------------------------------
Contribution to The Citizens Savings Foundation 3,016 -- --
- -----------------------------------------------------------------------------------------
Other general and administrative expenses 3,831 3,907 3,083
- -----------------------------------------------------------------------------------------
Total noninterest expense 39,004 28,146 29,940
- -----------------------------------------------------------------------------------------
Income before income taxes 5,709 7,280 4,106
- -----------------------------------------------------------------------------------------
Income tax expense 2,587 2,714 1,560
- -----------------------------------------------------------------------------------------
Net income $ 3,122 $ 4,566 $ 2,546
- -----------------------------------------------------------------------------------------
Per share data:
- -----------------------------------------------------------------------------------------
Basic earnings per share $.15 $.20 $.11
- -----------------------------------------------------------------------------------------
Diluted earnings per share .14 .20 .11
- -----------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
27
<PAGE> 17
CFS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
UNEARNED STOCK
COMMON AWARDED ACCUMULATED
ADDITIONAL STOCK BY BANK OTHER
COMMON PAID-IN RETAINED TREASURY ACQUIRED INCENTIVE COMPREHENSIVE
STOCK CAPITAL EARNINGS STOCK BY ESOP PLAN INCOME TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $ 14 $ 8,225 $81,397 $(1,033) $ (260) $(66) $ 112 $ 88,389
Net income for 1996 -- -- 2,546 -- -- -- -- 2,546
Other comprehensive income, net of
tax:
Change in unrealized appreciation
on available-for-sale
securities, net of
reclassification adjustment -- -- -- -- -- -- (242) (242)
--------
Total comprehensive income 2,304
Purchase of treasury stock -- -- -- (649) -- -- -- (649)
Contribution to fund ESOP loan -- -- -- -- 90 -- -- 90
Exercise of stock options -- 122 -- -- -- -- -- 122
Tax benefit related to stock options
exercised -- 44 -- -- -- -- -- 44
Tax benefit related to Bank
Incentive Plan -- 29 -- -- -- -- -- 29
Amortization of award of Bank
Incentive Plan stock -- -- -- -- -- 57 -- 57
Dividends declared on common stock -- -- (402) -- -- -- -- (402)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 14 8,420 83,541 (1,682) (170) (9) (130) 89,984
Net income for 1997 -- 4,566 -- -- -- -- 4,566
Other comprehensive income, net of
tax:
Change in unrealized appreciation
on available-for-sale
securities, net of
reclassification adjustment -- -- -- -- -- -- 690 690
--------
Total comprehensive income 5,256
Purchase of treasury stock by
employee benefit plan -- 42 -- 77 -- -- -- 119
Contribution to fund ESOP loan -- -- -- -- 89 -- -- 89
Exercise of stock options -- 83 -- -- -- -- -- 83
Tax benefit related to stock options
exercised -- 13 -- -- -- -- -- 13
Tax benefit related to Bank
Incentive Plan -- 47 -- -- -- -- -- 47
Amortization of award of Bank
Incentive Plan stock -- -- -- -- -- 9 -- 9
Dividends declared on common stock -- -- (404) -- -- -- -- (404)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 14 8,605 87,703 (1,605) (81) -- 560 95,196
Net income for 1998 -- -- 3,122 -- -- -- -- 3,122
Other comprehensive income, net of
tax:
Change in unrealized appreciation
on available-for-sale
securities, net of
reclassification adjustment -- -- -- -- -- -- (849) (849)
--------
Total comprehensive income 2,273
Proceeds of stock conversion, net 226 175,011 -- -- (14,283) -- -- 160,954
Contribution of stock to The
Citizens Savings Foundation 3 2,997 -- -- -- -- -- 3,000
Cancellation of SuburbFed Financial
Corp. stock (14) 14 -- -- -- -- -- --
Purchase of treasury stock by
employee benefit plan -- 37 -- 32 -- -- -- 69
Contribution to fund ESOP loan -- (25) -- (37) 1,271 -- -- 1,209
Exercise of stock options 2 755 -- -- -- -- -- 757
Tax benefit related to stock options
exercised -- 228 -- -- -- -- 228
Retirement of treasury stock (1) (1,609) -- 1,610 -- -- -- --
Tax benefit related to Bank
Incentive Plan -- 49 -- -- -- -- -- 49
Dividends declared on common stock -- -- (3,647) -- -- -- -- (3,647)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $230 $186,062 $87,178 $ -- $(13,093) $ -- $(289) $260,088
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
28
<PAGE> 18
CFS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
- ---------------------------------------------------------------------------------------------------
Net income $ 3,122 $ 4,566 $ 2,546
- ---------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash provided
by operating activities:
- ---------------------------------------------------------------------------------------------------
Contribution of stock to The Citizens Savings Foundation 3,000 -- --
- ---------------------------------------------------------------------------------------------------
Provision for losses on loans 1,630 1,840 253
- ---------------------------------------------------------------------------------------------------
Depreciation expense 1,991 1,834 1,508
- ---------------------------------------------------------------------------------------------------
Deferred income taxes (1,813) (132) 395
- ---------------------------------------------------------------------------------------------------
Amortization of cost of stock benefit plans 1,246 99 146
- ---------------------------------------------------------------------------------------------------
Change in deferred income 109 (1,100) (1,519)
- ---------------------------------------------------------------------------------------------------
Increase in interest receivable (1,122) (2,129) (860)
- ---------------------------------------------------------------------------------------------------
Increase in accrued interest payable 568 236 74
- ---------------------------------------------------------------------------------------------------
Proceeds from sale of loans held for sale 13,752 5,012 8,488
- ---------------------------------------------------------------------------------------------------
Origination of loans held for sale (13,677) (5,172) (8,011)
- ---------------------------------------------------------------------------------------------------
Net gain on sale of securities held for trade (32) (309) (108)
- ---------------------------------------------------------------------------------------------------
Unrealized gain on securities held for trade -- (460) (197)
- ---------------------------------------------------------------------------------------------------
Net gain on sale of available for sale securities (296) (288) (126)
- ---------------------------------------------------------------------------------------------------
Net gain on sale of loans (124) (41) (14)
- ---------------------------------------------------------------------------------------------------
Gain on sale of office property (161) -- --
- ---------------------------------------------------------------------------------------------------
Proceeds from sales of securities held for trade 409 1,375 756
- ---------------------------------------------------------------------------------------------------
Purchase of securities held for trade (456) (888) (498)
- ---------------------------------------------------------------------------------------------------
Loss on real estate held for development and sale -- 1,178 606
- ---------------------------------------------------------------------------------------------------
Net loss (gain) on sale of real estate owned 44 (6) (28)
- ---------------------------------------------------------------------------------------------------
Proceeds from sale of real estate held for development
and sale 1,071 4,738 --
- ---------------------------------------------------------------------------------------------------
Construction costs of real estate held for development
and sale -- (1,529) --
- ---------------------------------------------------------------------------------------------------
Cash received in acquisition of 50% ownership interest
of LLC -- 110 --
- ---------------------------------------------------------------------------------------------------
Increase in prepaid expenses and other assets (421) (830) (333)
- ---------------------------------------------------------------------------------------------------
Increase in other liabilities 8,657 2,573 1,874
- ---------------------------------------------------------------------------------------------------
Net cash provided by operating activities 17,497 10,677 4,952
- ---------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
- ---------------------------------------------------------------------------------------------------
Available-for-sale investment securities:
- ---------------------------------------------------------------------------------------------------
Purchases (30,638) (1,335) (1,375)
- ---------------------------------------------------------------------------------------------------
Repayments -- 4 10
- ---------------------------------------------------------------------------------------------------
Sales 949 1,293 200
- ---------------------------------------------------------------------------------------------------
Held-to-maturity investment securities:
- ---------------------------------------------------------------------------------------------------
Purchases (333,930) (238,154) (36,826)
- ---------------------------------------------------------------------------------------------------
Repayments and maturities 373,662 91,875 5,953
- ---------------------------------------------------------------------------------------------------
Available-for-sale mortgage-backed securities:
- ---------------------------------------------------------------------------------------------------
Purchases (229,595) (7,022) (57,666)
- ---------------------------------------------------------------------------------------------------
Repayments 12,284 6,944 6,126
- ---------------------------------------------------------------------------------------------------
Sales 4,311 24,696 44,312
- ---------------------------------------------------------------------------------------------------
Held-to-maturity mortgage-backed securities:
- ---------------------------------------------------------------------------------------------------
Purchases (81,702) (34,658) (53,479)
- ---------------------------------------------------------------------------------------------------
Repayments 161,416 104,127 122,643
- ---------------------------------------------------------------------------------------------------
Purchase of Federal Home Loan Bank stock (2,202) (545) (1,255)
- ---------------------------------------------------------------------------------------------------
Redemption of Federal Home Loan Bank stock 700 -- --
- ---------------------------------------------------------------------------------------------------
Increase in advances to LLC -- -- (1,482)
- ---------------------------------------------------------------------------------------------------
Loans originations and principal payments on loans (137,311) (105,760) (102,127)
- ---------------------------------------------------------------------------------------------------
Construction cost on real estate owned (86) -- --
- ---------------------------------------------------------------------------------------------------
Proceeds from sale of real estate owned 2,582 135 --
- ---------------------------------------------------------------------------------------------------
Purchases of properties and equipment (3,178) (3,742) (5,533)
- ---------------------------------------------------------------------------------------------------
Disposal of properties and equipment 1,462 30 1,969
- ---------------------------------------------------------------------------------------------------
Net cash flows used in investing activities (261,276) (162,112) (78,530)
- ---------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE> 19
CFS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FINANCING ACTIVITIES
- ---------------------------------------------------------------------------------------------------
Proceeds from exercise of stock options $ 757 $ 83 $ 122
- ---------------------------------------------------------------------------------------------------
Dividends paid on common stock (3,647) (404) (402)
- ---------------------------------------------------------------------------------------------------
Proceeds from sale of treasury stock 69 119 --
- ---------------------------------------------------------------------------------------------------
Purchase of treasury stock -- -- (649)
- ---------------------------------------------------------------------------------------------------
Net increase (decrease) in NOW, passbook, and money market
accounts 28,423 (11,429) 3,752
- ---------------------------------------------------------------------------------------------------
Net increase (decrease) in certificates of deposit (44,712) 114,055 59,565
- ---------------------------------------------------------------------------------------------------
Net increase (decrease) in advance payments by borrowers
for taxes and insurance 714 373 (882)
- ---------------------------------------------------------------------------------------------------
Proceeds of stock conversion, net 160,954 -- --
- ---------------------------------------------------------------------------------------------------
Net increase of borrowed funds 130,227 22,106 19,511
- ---------------------------------------------------------------------------------------------------
Net cash flows provided by financing activities 272,785 124,903 81,017
- ---------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 29,006 (26,532) 7,439
- ---------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 20,837 47,369 39,930
- ---------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 49,843 $ 20,837 $ 47,369
- ---------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
- ---------------------------------------------------------------------------------------------------
Loans transferred to real estate owned $ 1,680 $ 1,447 $ 687
- ---------------------------------------------------------------------------------------------------
Loans securitized into mortgage-backed securities 3,402 -- 1,597
- ---------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
30
<PAGE> 20
CFS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
CFS Bancorp, Inc. (the Company) is a Delaware corporation, incorporated in
March 1998 for the purpose of becoming the holding company for Citizens
Financial Services, FSB (the Bank). On July 24, 1998, the Bank converted from a
mutual to a stock form of ownership. With a portion of the proceeds from the
initial public offering, the Company acquired all of the issued and outstanding
capital stock of the Bank. Immediately following the conversion, the Company
merged with SuburbFed Financial Corp. (SFC). See Note 2 for further discussion.
The Bank is a federal savings bank offering a full range of financial
services to customers who are primarily located in Northwest Indiana and the
south and southwest Chicagoland area. The Bank is principally engaged in the
business of attracting deposits from the general public and using such deposits
to originate residential and commercial mortgage loans.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts and transactions
of the Company and its wholly owned subsidiary, the Bank. The Bank has the
following subsidiaries: CFS Insurance Agency, Inc.; CFS Investment Services,
Inc., and its wholly owned subsidiary CFS Development Co., LLC (LLC); Suburban
Mortgage Services, Inc.; and South Suburban Securities Corporation, and its
wholly owned subsidiary Suburban Insurance Resources Agency, Inc. See Note 6 for
further discussion of LLC. Significant intercompany accounts and transactions
have been eliminated in consolidation. Previously reported financial statements
included in this report have been restated to include the merger with SFC, which
was accounted for using the pooling of interest method of accounting. Certain
reclassifications have been made to the 1997 and 1996 consolidated financial
statements to conform to the 1998 presentation.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include amounts due from depository banks and
federal funds sold. Generally, federal funds sold are purchased and sold for
one-day periods.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
Management determines the classification of securities at the time of
purchase. Debt securities are classified as held-to-maturity and carried at
amortized cost if management has the intent and ability to hold the securities
to maturity. Securities not classified as held-to-maturity are classified as
available-for-sale and are carried at fair value, with the unrealized
appreciation, net of tax, as a separate component of stockholders' equity.
The amortized cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity, or in the case of
mortgage-related securities, over the estimated life of the security using the
level-yield method. Such amortization is included in interest income from
securities. Gains and losses on sales of securities are determined by
specifically identifying the carrying amount of the security sold.
LOANS
Loans are carried at the principal amount outstanding, net of unearned
income, including net deferred loan origination and commitment fees. Interest on
loans is recorded as income as borrowers' monthly payments become due. Interest
on mortgage loans is not accrued on loans which are 90 days or more past due, or
for loans which management believes, after giving consideration to economic and
business conditions and collection efforts, collection of interest is doubtful.
MORTGAGE LOAN FEES
Loan origination and commitment fees and direct loan origination costs are
deferred and amortized as an adjustment of the related loan's yield. The Bank is
accreting these amounts over the contractual life of the related loans.
Remaining deferred loan fees are reflected in income upon sale or repayment of
the loan.
ALLOWANCE FOR LOSSES ON LOANS
The allowance for losses on loans is maintained at a level believed
adequate by management to absorb losses inherent in the loan portfolio.
Management's determination of the adequacy of the allowance is based on an
evaluation of the portfolio and, among other things, the borrowers' ability to
repay, estimated collateral values, prior loss experience, and growth and
composition of the portfolio; however, future additions
31
<PAGE> 21
CFS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
to the allowance may be necessary based on changes in economic conditions.
Management considers a loan to be impaired when it is probable that the
Bank will be unable to collect all amounts due according to the contractual
terms of the note agreement, including principal and interest. Specific
allowances are established for impaired loans for which the recorded investment
in the loan exceeds the value of the loan. The value of the loan is determined
based on the fair value of the collateral, if the loan is collateral-dependent,
at the present value of expected future cash flows discounted at the loan's
effective interest rate or at the observable market price of the impaired loan.
Interest income on impaired loans is recorded when cash is received and only if
principal is considered to be fully collectible. Homogeneous loans are
collectively evaluated for impairment, including real estate mortgage and
installment loans. At December 31, 1998 and 1997, the amount of loans considered
impaired by management was immaterial.
REAL ESTATE OWNED
Real estate owned is comprised of property acquired through a foreclosure
proceeding or acceptance of a deed-in-lieu of foreclosure. Real estate owned is
recorded at fair value at the date of foreclosure. After foreclosure, valuations
are periodically performed by management and the real estate is carried at the
lower of cost or fair value minus estimated costs to sell.
OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are stated at cost less accumulated
depreciation. Provisions for depreciation of office properties and equipment are
computed using the straight-line method over the estimated useful lives of the
related assets. Long-lived assets are periodically evaluated for impairment.
ADVERTISING COSTS
All advertising costs incurred by the Company are expensed in the period in
which they are incurred.
EARNINGS PER SHARE
Basic earnings per common share (EPS) is computed by dividing net income by
the weighted-average number of common shares outstanding for the period. The
basic EPS calculation excludes the dilutive effect of all common stock
equivalents. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. The Company's potentially dilutive common shares represent
shares issuable under its stock option plan. Such common stock equivalents are
computed based on the treasury stock method using the average market price for
the period. Calculations of EPS for periods prior to the conversion and merger
(see Note 2) reflect the actual weighted-average shares of SFC plus the number
of shares issued in the conversion.
STOCK OPTIONS
The Company accounts for its stock options in accordance with Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees." Under APB No. 25, as the exercise price of the Company's employees'
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized. Pro forma net income, pro forma
earnings per share, and stock-based compensation plan disclosure requirements
under Financial Accounting Standards Board Statement (FAS) No. 123, "Accounting
for Stock-Based Compensation," are included in Note 14 -- Stock-Based Benefit
Plans.
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1998, the Company adopted FAS No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and display of
comprehensive income and its components in a full set of financial statements.
Comprehensive income is the total of reported net income and all other revenues,
expenses, gains, and losses that under generally accepted accounting principles
are not included in net income. FAS No. 130 requires that comprehensive income
be reported in a financial statement that is displayed with the same prominence
as other financial statements and requires an entity to (a) classify items of
other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and surplus in the equity section of the balance sheet. FAS
No. 130 requires the Company to include unrealized gains or losses, net of tax
on securities available for sale in other comprehensive income, which, prior to
adoption, were reported separately in stockholders' equity. Prior year financial
statements have been reclassified to conform to the requirements of FAS No. 130.
The adoption of FAS No. 130 had no impact on the consolidated financial position
or results of operations of the Company.
On January 1, 1998, the Company adopted FAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." FAS No. 131 established
standards for public companies to report certain financial information about
operating segments in
32
<PAGE> 22
interim and annual financial statements. Operating segments are components of a
business which must provide separate financial information. Senior management
evaluates operating segments when deciding how to allocate resources and
assessing performance. The statement also requires public companies to report
certain information about their products and services, the geographic areas in
which they operate, and certain information about their products.
Senior management evaluates the operations of the Company as one operating
segment, community banking, due to the materiality of the banking operation to
the Company's financial condition and results of operations, taken as a whole.
As a result, separate segment disclosures are not required. The Company offers
the following products and services to external customers: deposits, loans,
mortgage-related services, investment and insurance services, and trust
services. Revenues for the significant products and services are disclosed
separately in the consolidated statements of income.
During 1998, the Company adopted FAS No. 132, "Employer's Disclosures About
Pensions and Other Post-Retirement Benefits." The overall objective of FAS No.
132 is to improve and standardize disclosures about pensions and other
postretirement benefits and to make the required information easier to prepare
and understand. The statement addresses disclosure issues only and does not
change the measurement or recognition provisions. The adoption of FAS No. 132
had no impact on the consolidated financial position or results of operation of
the Company.
In June 1998, FAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued. FAS No. 133 establishes accounting and
reporting standards requiring that derivative instruments (including certain
derivative instruments embedded in other contracts) be recorded on the balance
sheet as either assets or liabilities measured at fair value. FAS No. 133
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
changes in value of the hedged item in the income statement and requires that a
company document designate and assess the effectiveness of transactions that
qualify for hedge accounting. FAS No. 133 is effective for fiscal years
beginning after June 15, 1999. The Company does not believe adoption of FAS No.
133 will have a material impact on its financial position or results of
operations.
2) CONVERSION AND MERGER
MUTUAL TO STOCK CONVERSION
On July 24, 1998, the Company completed the mutual to stock conversion (the
Conversion) of the Bank, and the concurrent sale in connection therewith of
17,853,750 shares of Company common stock, par value $0.01 per share at $10.00
per share resulting in gross proceeds of $160,954, net of issuance costs. As an
integral part of the Conversion and in furtherance of the Company's commitment
to the communities that it serves, the Company established a charitable
foundation known as The Citizens Savings Foundation (the Foundation) and
contributed 300,000 shares of common stock to the Foundation. The Foundation
will provide funding to support charitable causes and community development
activities which will complement the Company's existing community activities. In
addition, the Company established an Employee Stock Ownership Plan (ESOP) for
the employees of the Company and the Bank which became effective with the
completion of the Conversion. See Note 14 for additional discussion of the ESOP.
At the time of conversion, the Bank established a liquidation account in an
amount equal to its net worth as of March 31, 1998 (the eligibility record
date). The liquidation account will be maintained for the benefit of eligible
account holders and supplemental eligible account holders, if any, who continue
to maintain their deposit accounts at the Bank after the conversion. The
liquidation account will be reduced annually to the extent that eligible account
holders and supplemental eligible account holders, if any, have reduced their
qualifying deposits as of each anniversary date. Subsequent increases will not
restore an eligible account holder's or a supplemental eligible account holder's
interest in the liquidation account. In the event of a complete liquidation,
each eligible account holder and supplemental eligible account holder, if any,
will be entitled to receive balances for accounts then held.
MERGER
On July 24, 1998, immediately subsequent to the Conversion, the Company
consummated a merger (Merger) with SFC. Each stockholder of SFC received 3.6
shares of Company common stock for each former share of common stock of SFC, par
value $0.01 per share, resulting in the issuance of approximately 4.6 million
shares of Company 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 (Suburban Federal) which was principally engaged in the business of
attracting deposits
33
<PAGE> 23
CFS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
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. SFC and Suburban Federal were merged with and
into the Company and the Bank, respectively, concurrent with the Merger. The
Merger was accounted for as a pooling-of-interest. As a result, all prior period
financial statements and other financial disclosures have been restated to
include the accounts and results of operations of SFC.
The following table shows gross revenues (representing interest income and
noninterest income), net income, and diluted earnings per share on an individual
and combined basis for the periods indicated:
- ------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
1998 TO YEAR ENDED
JULY 24, DECEMBER 31,
1998 1997 1996
- -----------------------------------------------------------------
<S> <C> <C> <C>
Gross revenues:
Bank.......................... $37,301 $54,348 $46,279
SFC........................... 19,478 33,776 29,738
------- ------- -------
Combined........................ $56,779 $88,124 $76,017
======= ======= =======
Net income:
Bank.......................... $ 2,892 $ 1,776 $ 1,494
SFC........................... (834) 2,790 1,052
------- ------- -------
Combined........................ $ 2,058 $ 4,566 $ 2,546
======= ======= =======
Diluted earnings per share:
Bank.......................... N/A N/A N/A
SFC........................... $.60 $2.08 $.80
------- ------- -------
Combined........................ $.09 $.20 $.11
- -----------------------------------------------------------------
</TABLE>
The combined consolidated results of operations are not necessarily
indicative of the results that would have occurred had the merger been
consummated in the past or which may be attained in the future.
In connection with the Merger, the Company recognized third quarter 1998
pretax charges of $10,716 consisting of $6,503 ($4,321 net of tax) in merger
expenses, $1,200 ($800 net of tax) in provision for loan losses incident to
conforming SFC's credit policies to the Company's and $3,016 ($1,989 net of tax)
for the contribution to the Foundation.
The merger expenses, certain of which are nondeductible for income tax
purposes, were recorded through the establishment of a reserve which is
comprised of the following components as of the dates indicated:
- ------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31 JULY 24
1998 1998
- --------------------------------------------------------------
<S> <C> <C>
Reserve for Merger expenses:
Employee severance, outplacement,
retirement programs, and related
costs............................... $ 827 $3,357
Contract termination fees and data
processing costs.................... 605 605
Investment advisor fees............... -- 640
Legal, accounting, and other
professional fees................... 85 355
Building and equipment charges........ 609 1,307
Other................................. 229 239
------ ------
$2,355 $6,503
====== ======
- --------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
3) INVESTMENT SECURITIES
The amortized cost of investment securities and their fair values are as
follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale at December 31, 1998:
Callable agency securities................................ $ 1,973 $ 38 $ -- $ 2,011
Trust preferred stocks.................................... 25,399 4 704 24,699
Equity securities......................................... 7,767 427 184 8,010
-------- ------ ---- --------
$ 35,139 $ 469 $888 $ 34,720
======== ====== ==== ========
Available-for-sale at December 31, 1997:
Callable agency securities and corporate bonds............ $ 1,050 $ -- $ 22 $ 1,028
Equity securities......................................... 2,235 443 10 2,668
-------- ------ ---- --------
$ 3,285 $ 443 $ 32 $ 3,696
======== ====== ==== ========
Held-to-maturity at December 31, 1998:
Callable agency securities and corporate bonds............ $166,500 $2,863 $100 $169,263
======== ====== ==== ========
Held-to-maturity at December 31, 1997:
Callable agency securities and corporate bonds............ $174,194 $1,190 $ 17 $175,367
Zero coupon agency securities............................. 32,038 26 129 31,935
-------- ------ ---- --------
$206,232 $1,216 $146 $207,302
======== ====== ==== ========
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE> 24
The callable agency securities at December 31, 1998 and 1997, have call
features at amounts not less than par and were not purchased with significant
premiums or discounts.
The amortized cost and fair value of callable agency securities and
corporate bonds at December 31, 1998, by contractual maturity, are shown below:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HELD-TO-MATURITY AVAILABLE-FOR-SALE
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less..................................... $ 1,500 $ 1,527 $ -- $ --
Due after one year through five years....................... -- -- 1,973 2,011
Due after five years through ten years...................... 162,997 165,717 -- --
Due more than ten years..................................... 2,003 2,019 -- --
-------- -------- ------ ------
$166,500 $169,263 $1,973 $2,011
======== ======== ====== ======
- ------------------------------------------------------------------------------------------------------------
</TABLE>
For the year ended December 31, 1998, gross gains and gross losses of $384
($232 net of taxes) and $9 ($5 net of taxes), respectively, were recorded from
sales of available-for-sale investment securities.
For the year ended December 31, 1997, gross gains and gross losses of $49
($31 net of taxes) and $1 ($1 net of taxes), respectively, were recorded from
sales of available-for-sale investment securities.
Investment securities held for trade at December 31, 1997, consisted of
equity securities and were transferred to the available-for-sale classification
at the effective date of the Merger to conform SFC's investment classifications
policies to that of the Company. The market value of the equity securities at
the date the securities were transferred from trading to available-for-sale was
$1,850 with an unrealized gain of $881.
- --------------------------------------------------------------------------------
4) MORTGAGE-BACKED SECURITIES
The amortized cost of mortgage-backed securities and their fair values are
as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSSES VALUE
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale at December 31, 1998:
Participation certificates and collateralized mortgage
obligations............................................. $120,609 $1,171 $ 266 $121,514
Real estate mortgage investments conduits................. 157,338 379 1,343 156,374
-------- ------ ------ --------
$277,947 $1,550 $1,609 $277,888
======== ====== ====== ========
Available-for-sale at December 31, 1997:
Participation certificates and collateralized mortgage
obligations............................................. $ 55,554 $ 782 $ 186 $ 56,150
Real estate mortgage investments conduits................. 3,551 16 7 3,560
Adjustable rate mutual fund............................... 2,495 -- 64 2,431
-------- ------ ------ --------
$ 61,600 $ 798 $ 257 $ 62,141
======== ====== ====== ========
Held-to-maturity at December 31, 1998:
Participation certificates and collateralized mortgage
obligations............................................. $ 83,469 $ 285 $ 670 $ 83,084
Real estate mortgage investments conduits................. 93,487 2,166 43 95,610
-------- ------ ------ --------
$176,956 $2,451 $ 713 $178,694
======== ====== ====== ========
Held-to-maturity at December 31, 1997:
Participation certificates and collateralized mortgage
obligations............................................. $102,094 $ 564 $ 230 $102,428
Real estate mortgage investments conduits................. 154,576 3,019 509 157,086
-------- ------ ------ --------
$256,670 $3,583 $ 739 $259,514
======== ====== ====== ========
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The mortgage-backed securities have contractual maturities which range from
1999 to 2028. Expected maturities are expected to differ from contractual
maturities because the underlying mortgages collateralizing the securities are
subject to prepayment without penalty.
For the year ended December 31, 1998, gross gains and gross losses of $3
($2 net of taxes) and $82 ($50
35
<PAGE> 25
CFS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
net of taxes), respectively, were recorded from sales of available-for-sale
mortgage-backed securities.
For the year ended December 31, 1997, gross gains and gross losses of $275
($167 net of taxes) and $35 ($25 net of taxes), respectively, were recorded from
sales of available-for-sale mortgage-backed securities.
5) LOANS RECEIVABLE
Loans receivable consist of the following:
- ------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
- ---------------------------------------------------------------
<S> <C> <C>
First mortgage loans:
Single-family residential.............. $596,199 $493,133
Multi-family residential............... 21,050 29,660
Commercial real estate................. 38,999 18,093
Construction and land development
loans................................ 51,161 40,324
Other loans.............................. 37,092 29,286
-------- --------
744,501 610,496
Less:
Undisbursed portion of loan proceeds... 13,068 11,219
Allowance for losses on loans.......... 5,357 3,825
Net deferred yield adjustments......... (5) (114)
-------- --------
$726,081 $595,566
======== ========
- ---------------------------------------------------------------
</TABLE>
The Bank's lending activities have been concentrated primarily within its
immediate geographic area. The Bank generally requires collateral on loans and
generally requires loan-to-value ratios of no greater than 80%.
At December 31, 1998, 1997, and 1996, the Bank serviced $40,002, $50,265,
and $49,214, respectively, of loans for others.
Activity in the allowance for losses on loans is summarized as follows:
- ------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year......... $3,825 $2,426 $2,221
Provision for losses on loans........ 1,630 1,840 253
Charge-offs.......................... (125) (453) (134)
Recoveries........................... 27 12 86
------ ------ ------
Balance at end of year............... $5,357 $3,825 $2,426
====== ====== ======
- -----------------------------------------------------------------
</TABLE>
6) LIMITED LIABILITY COMPANY
In 1996, a subsidiary of the Bank had a 50% ownership interest in CFS
Development Co. (formerly known as C&CF Development Co., a Limited Liability
Company (LLC)) engaged in the construction and sale of townhomes. On March 5,
1997, the subsidiary purchased the remaining 50% ownership interest in a
transaction accounted for as a purchase.
Prior to 1997, this project was accounted for by the equity method with 50%
of the results of operations being included in income and 100% of the losses
from operations being recorded after the other member's investment was reduced
to zero. The financial statements of the LLC for 1997 have been consolidated
herein.
As of December 31, 1997, the LLC was dissolved and was winding up its
affairs. The remaining units and land held by the LLC were written down to the
anticipated recoverable amounts to reflect the accelerated efforts to dispose of
the properties resulting in charges to earnings in 1997 of $690. At that time
vacant land and three unsold units, with a balance of $920, were transferred to
the Bank as real estate owned and the remaining five units were included in real
estate held for development and sale, all of which were all sold in 1998 without
additional loss.
7) OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized as follows:
- ------------------------------------------------------------
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31
USEFUL LIVES 1998 1997
- -------------------------------------------------------------------
<S> <C> <C> <C>
Cost:
Land.................... $ 2,027 $ 2,409
Buildings............... 30-40 years 13,524 14,705
Leasehold
improvements.......... Over term of lease 2,171 1,588
Furniture and
equipment............. 3-15 years 13,018 11,456
Property for future
expansion............. -- 409
Construction in
progress.............. 631 761
------- -------
31,371 31,328
Less: Accumulated
depreciation and
amortization............ 15,043 14,886
------- -------
$16,328 $16,442
======= =======
- -------------------------------------------------------------------
</TABLE>
8) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following:
- ------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
- ----------------------------------------------------------------
<S> <C> <C>
Callable agency securities and other
investments.............................. $ 2,793 $3,138
Participation certificates and
collateralized mortgage obligations...... 908 1,041
Real estate mortgage investment conduits... 1,607 895
Loans receivable........................... 4,791 3,657
------- ------
10,099 8,731
Less: Allowance for uncollected interest... 370 124
------- ------
$ 9,729 $8,607
======= ======
</TABLE>
- ------------------------------------------------------------
36
<PAGE> 26
9) DEPOSITS
Deposits and interest rate data are summarized as follows:
- ------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
- ----------------------------------------------------------------
<S> <C> <C>
NOW accounts:
Non-interest-bearing negotiable order of
withdrawal accounts................... $ 24,198 $ 14,314
Negotiable order of withdrawal accounts:
(1.69%--1998; 1.91%--1997)............ 77,456 75,326
-------- --------
Total NOW accounts...................... 101,654 89,640
Passbook accounts
Savings accounts (2.80%--1998;
3.22%--1997).......................... 199,499 186,653
Individual retirement accounts
(4.49%--1998; 4.97%--1997)............ 19,984 19,730
-------- --------
Total passbook accounts................. 219,483 206,383
Money market accounts (3.12%--1998;
3.43%--1997).......................... 45,622 42,313
Certificate accounts:
3.00%-4.99%........................... 117,233 18,384
5.00%-6.99%........................... 475,163 617,417
7.00%-8.99%........................... 9,772 10,957
9.00% and over........................ 231 353
-------- --------
Total certificate accounts.............. 602,399 647,111
Accrued interest payable................ 644 626
-------- --------
$969,802 $986,073
======== ========
Weighted-average cost of deposits....... 4.47% 4.94%
======== ========
- ----------------------------------------------------------------
</TABLE>
Certificates of deposit are summarized by maturity as follows:
- ------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31
MATURITY 1998 1997
- ----------------------------------------------------------------
<S> <C> <C>
Less than one year...................... $415,928 $359,475
One to two years........................ 132,526 169,145
Two to three years...................... 23,605 86,999
After three years....................... 30,340 31,492
-------- --------
$602,399 $647,111
======== ========
- ----------------------------------------------------------------
</TABLE>
Interest expense on deposits consists of the following:
- ------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
- -----------------------------------------------------------------
<S> <C> <C> <C>
NOW accounts.................... $ 1,407 $ 1,321 $ 1,276
Passbook accounts............... 6,816 7,163 7,348
Money market accounts........... 1,439 1,606 1,697
Certificates of deposit......... 37,194 36,577 28,767
------- ------- -------
$46,856 $46,667 $39,088
======= ======= =======
- -----------------------------------------------------------------
</TABLE>
The aggregate amount of deposits in denominations of one hundred thousand
dollars or more was $136,764 and $112,782 at December 31, 1998 and 1997,
respectively. Deposits in excess of one hundred thousand dollars are not
federally insured.
Interest paid on deposits during 1998, 1997, and 1996 totaled $46,838,
$46,532, and $39,074, respectively.
37
<PAGE> 27
CFS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
10) BORROWED MONEY
Borrowed money consists of the following:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
--------------------- --------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
RATE AMOUNT RATE AMOUNT
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Secured advances from FHLB--Indianapolis:
Maturing in 2003--fixed rate.............................. 5.45% $ 50,000 --% $ --
Maturing in 2008--fixed rate.............................. 4.89 25,000
Maturing in 2018--fixed rate.............................. 5.54 3,100
Secured advances from FHLB--Chicago:
Open line--variable rate.................................. -- -- 5.83 3,500
Maturing in 1998--fixed rate.............................. -- -- 5.92 18,000
Maturing in 1999--fixed rate.............................. 6.04 12,000 6.04 12,000
Maturing in 2000--fixed rate.............................. 6.28 16,000 6.28 16,000
Maturing in 2001--fixed rate.............................. 6.20 15,200 6.40 11,000
Maturing in 2002--fixed rate.............................. 5.80 15,700 5.80 15,700
Maturing in 2008--fixed rate.............................. 5.16 8,000 -- --
Secured advance from American National Bank--Line of
credit.................................................... -- -- 5.65 5,000
Securities sold under agreements to repurchase:
Maturing in January 1998.................................. -- -- 6.05 3,844
Maturing in August 1999................................... 5.53 24,390 -- --
Maturing in September 2000................................ 5.38 23,881 -- --
Maturing in September 2001................................ 5.25 22,000 -- --
-------- -------
$215,271 $85,044
======== =======
Weighted-average interest rate.............................. 5.53% 6.03%
======== =======
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Pursuant to collateral agreements with the Federal Home Loan Bank of
Indianapolis (FHLB-IN), advances are secured by all stock in the FHLB-IN and
qualifying first mortgage loans with unpaid principal balances aggregating no
less than 170% of the outstanding secured advances, or $124,960.
Pursuant to collateral agreements with the Federal Home Loan Bank of
Chicago (FHLB-C), advances are secured by stock in the FHLB-C and certain
mortgage-backed securities having a carrying value of $94,088.
The Company has a borrowing agreement with American National Bank (ANB) for
a maximum of $5,000 federal funds borrowing line of credit at a rate quoted as
the market rate by ANB for the purchase of federal funds at the time the
purchase is requested. The advance is secured by certain mortgage-backed
securities having a carrying value of $5,314.
The Bank enters into sales of securities under agreements to repurchase
(reverse repurchase agreements). Fixed-coupon reverse repurchase agreements are
treated as financings and the obligations to repurchase securities sold are
reflected as borrowed funds in the consolidated statements of condition. The
dollar amounts of securities underlying the agreements remain in the asset
accounts. Securities sold under agreements to repurchase consisted of callable
U.S. government agency notes in 1998 and mortgage-backed securities in 1997. The
securities underlying the agreements were delivered to the dealer who arranged
the transaction. The agreements call for the Bank to repurchase similar
securities.
Information concerning borrowings under fixed-coupon dollar reverse
repurchase agreements is summarized as follows:
- ------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------
<S> <C> <C>
Average balance during the year........... $ 66,468 $ 6,293
Average interest rate during the year..... 5.64% 5.69%
Maximum month-end balance during the
year.................................... $145,000 $76,900
Securities underlying the agreements at
year-end:
Carrying value.......................... 79,781 4,130
Estimated fair value.................... 81,633 4,153
- ---------------------------------------------------------------
</TABLE>
Interest expense on borrowed money is summarized as follows:
- ------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
- -----------------------------------------------------------------
<S> <C> <C> <C>
Advances from FHLBs................ $5,498 $3,639 $2,236
American National line of credit... 106 181 --
Securities sold under agreements to
repurchase....................... 3,749 371 394
------ ------ ------
$9,353 $4,191 $2,630
====== ====== ======
- -----------------------------------------------------------------
</TABLE>
38
<PAGE> 28
Interest paid on borrowings during 1998, 1997, and 1996 totaled $8,868,
$4,099, and $2,571, respectively.
11) INCOME TAXES
The Bank has qualified under provisions of the Internal Revenue Code, which
permitted it to deduct from taxable income an allowance for bad debts, which
differs from the provision for such losses charged to income. Accordingly,
retained income at December 31, 1998, includes approximately $12,497 for which
no provision for federal income taxes has been made. If in the future this
portion of retained income is distributed, or the Bank no longer qualifies as a
bank for tax purposes, federal income taxes may be imposed at the
then-applicable rates. If federal income taxes had been provided, the deferred
tax liability would have been approximately $4,499.
The income tax provision consists of the following:
- ------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
- -----------------------------------------------------------------
<S> <C> <C> <C>
Current tax expense:
Federal.......................... $3,631 $2,284 $ 894
State............................ 769 562 271
Deferred tax expense (benefit):
Federal.......................... (1,669) (103) 340
State............................ (144) (29) 55
------ ------ ------
$2,587 $2,714 $1,560
====== ====== ======
- -----------------------------------------------------------------
</TABLE>
A reconciliation of the statutory federal income tax rate to the effective
income tax rate is as follows:
- ------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
- ------------------------------------------------------------------
<S> <C> <C> <C> <C>
Statutory rate.................... 34.0% 34.0% 34.0%
State taxes....................... 6.7 5.2 5.5
Merger expenses................... 6.6 -- --
Other............................. (2.0) (1.9) (1.5)
---- ---- ----
Effective rate.................... 45.3% 37.3% 38.0%
==== ==== ====
- ------------------------------------------------------------------
</TABLE>
Significant components of deferred tax assets and liabilities are as
follows:
- ------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
- ----------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses................... $2,263 $1,584
Deferred compensation....................... 99 276
Unrealized depreciation on
available-for-sale securities............. 193 --
Charitable contributions.................... 729 --
Other....................................... 487 26
------ ------
3,771 1,886
Deferred tax liabilities:
Excess tax accumulated provision for losses
over base year............................ 1,703 2,082
Loan fees deferred.......................... 403 316
Depreciation................................ 239 255
Unrealized appreciation on
available-for-sale securities............. -- 392
Stock dividends on FHLB stock............... 193 193
Other....................................... 324 137
------ ------
2,862 3,375
------ ------
Net deferred (asset) liability.............. $ (909) $1,489
====== ======
- ----------------------------------------------------------------
</TABLE>
The Company made net federal and state income tax payments (refunds) of
$(153), $3,265, and $1,934 during 1998, 1997, and 1996, respectively.
12) REGULATORY CAPITAL
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum total requirements can
initiate certain mandatory and possible additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to quantitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios, set forth in the table
below of the total risk-based, tangible, and core capital, as defined in the
regulations. Management believes, as of December 31, 1998, that the Bank meets
all capital adequacy requirements to which it is subject.
As of December 31, 1998, the most recent notification from the Office of
Thrift Supervision categorized the Bank as "well-capitalized" under the
39
<PAGE> 29
CFS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
regulatory framework for prompt corrective action. To be categorized as
"well-capitalized," the Bank must maintain minimum total risk-based, tangible,
and core ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the institution's
category.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TO BE WELL-
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
----------------- ---------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1998
Risk-based.................................................. $165,108 27.92% $47,317 *8.00% $59,146 *10.00%
Tangible.................................................... 159,751 11.49 20,857 *1.50 34,762 * 2.50
Core........................................................ 159,751 11.49 41,715 *3.00 69,524 * 5.00
AS OF DECEMBER 31, 1997
Risk-based.................................................. 92,772 19.57 37,916 *8.00 47,395 *10.00
Tangible.................................................... 88,955 7.55 17,677 *1.50 29,461 * 2.50
Core........................................................ 88,970 7.55 35,353 *3.00 58,922 * 5.00
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
* = greater than or equal to
At December 31, 1998, adjusted total assets were $1,390,496 and
risk-weighted assets were $591,459. A reconciliation of the Bank's equity
capital in accordance with generally accepted accounting principles to
regulatory capital at December 31, 1998, is as follows:
- ------------------------------------------------------------
<TABLE>
<S> <C>
Total equity...................................... $159,492
Unrealized loss on investment securities 277
available-for-sale..............................
Deposit base intangible........................... (18)
--------
Tangible and core capital......................... 159,751
Allowance for loan losses......................... 5,357
--------
Risk-based capital................................ $165,108
========
- --------------------------------------------------------------
</TABLE>
13) EMPLOYEE BENEFIT PLANS
The Company participates in an industry-wide, multiemployer defined-benefit
pension plan, which covers all full-time employees who have attained at least 21
years of age and completed one year of service. Calculations to determine
full-funding status are made annually as of June 30. The Company was not
required to make a contribution for the plan year ending June 30, 1999, or for
the plan year ended June 30, 1998. Pension expense was $0 in 1998, $26 in 1997,
and $68 in 1996. Asset and plan benefit information is not available for
participating associations on an individual basis.
SFC had a defined-benefit plan which covered full-time employees with six
months or more of service and who were at least 21 years of age. The funding
policy was to generally make the minimum annual contribution required by
applicable regulations. Actuarially determined pension costs are charged to
current operations.
The following table summarizes SFC's defined-benefit plan for the year
ended:
- ------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
- ----------------------------------------------------------------
<S> <C> <C>
Change in benefit obligations:
Projected benefit obligation at beginning
of year................................ $ 2,571 $2,330
Service cost............................. 322 238
Interest cost............................ 218 172
Actuarial (gains) losses................. 1,466 30
Benefit paid............................. (570) (199)
------- ------
Projected benefit obligation at end of
year..................................... $ 4,007 $2,571
======= ======
Change in plan assets:
Fair value of plan assets at beginning of
year................................... $ 2,110 $1,766
Actual return on plan assets............. 169 127
Employer contributions................... 305 416
Benefits paid............................ (570) (199)
------- ------
Fair value of plan assets at end of year... $ 2,014 $2,110
======= ======
Reconciliation of funded status:
Over (under) funded...................... $(1,993) $(461)
Unrecognized transition obligation
(asset)................................ 16 20
Unrecognized net actuarial losses........ 1,469 322
------- ------
Net accrued benefit cost recognized........ $ (508) $(119)
======= ======
Amounts recognized in the consolidated
statement of condition consist of:
Accrued benefit liability................ $ (508) $(119)
------- ------
Net accrued benefit cost recognized........ $ (508) $(119)
======= ======
- ------------------------------------------
</TABLE>
40
<PAGE> 30
- ------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
- -----------------------------------------------------------------
<S> <C> <C> <C>
Components of net periodic benefit
cost:
Service cost.................... $ 322 $ 238 $ 220
Interest cost................... 219 172 156
Expected return on plan
assets........................ (127) (159) (104)
Recognized transition obligation
(asset)....................... 4 1 1
Recognized net actuarial
loss (gain)................... 67 2 (41)
Settlements..................... 209 -- --
----- ----- -----
Net periodic cost................. $ 694 $ 254 $ 232
===== ===== =====
Weighted-average assumptions:
Discount rate................... 6.00% 6.75% 6.75%
Expected return on plan
assets........................ 6.00 8.00 8.00
Rate of compensation increase... 5.00 5.00 5.00
- -----------------------------------------------------------------
</TABLE>
In the first quarter of 1999, the benefits under each of the previous plans
were frozen and all employees in those plans will be participants in a new plan
within the industry-wide, multiemployer defined-benefit plan.
The Company also participates in a singleemployer defined-contribution
plan, which qualifies under section 401(k) of the Internal Revenue Code.
Participation eligibility in this plan is substantially the same as in the
aforementioned defined-benefit pension plan. This plan called for a
discretionary contribution within specified limits and a matching Company
contribution equal to a specified percentage of employee contributions. Plan
expense was approximately $286 in 1998, $285 in 1997, and $257 in 1996.
Additionally, SFC had a contributory qualified pension plan (401(k) Plan)
which was available to all full-time employees having six months or more of
service. Participants could make tax-deferred contributions within a range
specified by the plan. SFC made matching contributions in an amount equal to 50%
of each eligible participant's contribution up to a specified percentage of the
deferred contribution. Subsequent to the Merger, employees eligible under the
stock option plan who contributed to the 401(k) Plan were no longer eligible for
matching of their contributions. Expenses relating to the 401(k) Plan were $89,
$62, and $32 for the years ended December 31, 1998, 1997, and 1996,
respectively.
Effective March 1, 1999, the Company combined the SFC defined-contribution
plan with its 401(k) plan.
The Company provides supplemental retirement benefits for certain senior
officers in the form of payments upon retirement, death, or disability. The
annual benefit is based upon annual salary (as defined) plus interest. Expenses
related to this plan for the years ended December 31, 1998, 1997, and 1996, were
$312, $257, and $203, respectively.
14) STOCK-BASED BENEFIT PLANS
In conjunction with the Conversion, the Company established an Employee
Stock Ownership Plan (the ESOP) for the employees of the Company and the Bank
which became effective with the completion of the Conversion. The ESOP is a
qualifying pension plan under Internal Revenue Service guidelines. It covers all
full-time employees who have attained at least 21 years of age and completed one
year of service. At the time of conversion, the ESOP borrowed $14,283 from the
Company and purchased 1,428,300 shares of common stock issued in the Conversion.
Expense is recognized based on the fair value (average stock price) of shares
scheduled to be released from the ESOP trust. One-twelfth of the shares are
scheduled to be released each year as one-twelfth of the loan is scheduled to be
repaid each year. During the year ended December 31, 1998, ESOP expense under
the plan was $1,165. ESOP shares not committed to be released are not considered
outstanding for purposes of computing EPS.
The following table summarizes shares of Company common stock held by the
ESOP at December 31, 1998:
- ------------------------------------------------------------
<TABLE>
<S> <C>
Shares allocated to participants.................. 119,025
Unallocated and unearned shares................... 1,309,275
---------
1,428,300
=========
Fair value of unearned ESOP shares................ $13,175
=========
- ---------------------------------------------------------------
</TABLE>
SFC also had an ESOP. All shares under the SFC ESOP plan were released as
of June 30, 1998. Expenses relating to the plan for the years ended December 31,
1998, 1997 and 1996, were $45, $101 and $109, respectively.
SFC had a stock-based bank incentive plan. All shares from this plan were
awarded and vested, and as of December 31, 1998, the entire amount of deferred
compensation expense was recognized. Expenses relating to the plan for the years
ended December 31, 1998, 1997 and 1996, were $0, $9 and $57, respectively.
SFC had three stock option and incentive plans (the 1991 Plan, the 1995
Plan, and the 1997 Plan). As of the Merger, outstanding options were exchanged
for options of Company stock. No future grants will be made under these plans;
however, options granted and not exercised remain outstanding under the plans.
The
41
<PAGE> 31
CFS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
following is an analysis of the stock option activity for
each of the three years ended December 31, 1998.
- ------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER EXERCISE PRICE
OPTIONS OF SHARES PER SHARE TOTAL
- -------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Outstanding at January 1,
1996........................ 695 $1.85- 4.35 $ 2,336
Granted....................... 258 4.58- 6.83 1,417
Exercised..................... (49) 1.85- 4.79 (123)
Forfeited..................... (90) 4.75- 5.88 (446)
---- ----------- -------
Outstanding at December 31,
1996........................ 814 1.85- 6.83 3,184
Granted....................... 159 6.38-13.83 1,676
Exercised..................... (21) 1.85- 5.69 (83)
Forfeited..................... (1) 5.88 (7)
---- ----------- -------
Outstanding at December 31,
1997........................ 951 1.85-13.84 4,770
Granted....................... 88 13.09 1,149
Exercised..................... (245) 1.85- 6.50 (757)
Forfeited and canceled........ (88) -- (1,090)
---- ----------- -------
Outstanding at December 31,
1998........................ 706 $1.85-13.84 $ 4,072
==== =========== =======
- -------------------------------------------------------------------------
</TABLE>
The following summarizes the pro forma net income as if the fair value
method of accounting for stock-based compensation plans had been utilized.
- ------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
- -----------------------------------------------------------------
<S> <C> <C> <C>
Net income (as reported)............... $3,122 $4,566 $2,546
Pro forma net income................... 2,700 4,298 2,471
Diluted earnings per share (as
reported)............................ 0.14 0.20 0.11
Pro forma diluted earnings per share... 0.12 0.19 0.11
</TABLE>
- ------------------------------------------------------------
The pro forma results above may not be representative of the effect
reported in net income for future years.
The fair value of the option grants for the years ended December 31, 1998,
1997, and 1996, was estimated using the Black Scholes option value model, with
the following assumptions: dividend yield of approximately 3.2% for 1998, 1.5%
for 1997, and 2.0% for 1996; expected volatility of 34.8% for 1998 and 6.5% for
1997 and 1996; risk-free interest of 5.25%, 5.30%, and 6.69% for 1998, 1997, and
1996, respectively; and an original expected life of ten years for all options
granted.
15) COMPREHENSIVE INCOME
The related income tax effect and reclassification adjustments to the
components of other comprehensive income for the years ended December 31, 1998,
1997, and 1996, is as follows:
- ------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------
<S> <C> <C> <C>
Unrealized holding gains (losses)
arising during the period:
Unrealized net gains (losses).... $(1,110) $1,413 $(310)
Related tax (expense) benefit.... 440 (551) 115
------- ------ -----
Net.............................. (670) 862 (195)
Less: Reclassification adjustment
for net gains realized during the
period:
Realized net gains............... 296 288 126
Related tax expense.............. (117) (116) (79)
------- ------ -----
Net.............................. 179 172 47
------- ------ -----
Total other comprehensive income... $ (849) $ 690 $(242)
======= ====== =====
- -----------------------------------------------------------------
</TABLE>
16) EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
- ------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
- -------------------------------------------------------------------
<S> <C> <C> <C>
Net income............... $3,122 $4,566 $2,546
========== ========== ==========
Average common shares
outstanding............ 21,514,744 22,692,990 22,683,176
Common share
equivalents--Assuming
exercise of dilutive
stock options.......... 326,178 287,935 188,640
---------- ---------- ----------
Average common shares and
common share
equivalents
outstanding............ 21,840,922 22,980,925 22,871,816
========== ========== ==========
Basic earnings per
share.................. $.15 $.20 $.11
Diluted earnings per
share.................. .14 .20 .11
- -------------------------------------------------------------------
</TABLE>
42
<PAGE> 32
17) COMMITMENTS
The Company had outstanding commitments as follows:
- ------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31
TYPE OF COMMITMENT 1998 1997
- ----------------------------------------------------------------
<S> <C> <C>
To originate loans on residential
property:
Fixed rates (6.125% - 8.75% in 1998;
6.85% - 10.00% in 1997).............. $ 5,495 $ 7,876
Variable rates.......................... 35,267 12,018
To originate loans on nonresidential
property:
Fixed rates (7.75% - 8.75% in 1998;
9.00% in 1997)........................ 18,382 196
Variable rates.......................... 1,690 131
To purchase investment securities
(mortgage-backed securities)............ -- 4,992
Unused lines of credit.................... 7,337 29,207
Letters of credit:
Secured by cash......................... 120 22
Other................................... 9,646 638
- ----------------------------------------------------------------
</TABLE>
Commitments to fund loans and those under letter of credit arrangements
have credit risk essentially the same as that involved in extending loans to
customers and are subject to the Bank's normal credit policies. The Bank
estimates that substantially all commitments will be funded or will expire
within one year.
18) LEGAL PROCEEDINGS
In 1983, with the assistance of the Federal Savings and Loan Insurance
Corporation (FSLIC) as set forth in an assistance agreement (Assistance
Agreement), the Bank acquired through mergers First Federal Savings and Loan
Association of East Chicago, East Chicago, Indiana (East Chicago Savings), and
Gary Federal Savings and Loan Association, Gary, Indiana (Gary Federal). The
FSLIC-assisted supervisory acquisitions of East Chicago Savings and Gary Federal
were accounted for using the purchase method of accounting which resulted in
supervisory goodwill (the excess of cost over fair value of net assets
acquired), an intangible asset, of $52.9 million, compared to $40.2 million of
goodwill as reported on a generally accepted accounting principles basis. Such
goodwill was included in the Bank's regulatory capital. The Assistance Agreement
relating to the Bank's acquisitions of East Chicago Savings and Gary Federal
provided for the inclusion of goodwill as an asset on the Bank's balance sheet,
to be amortized over 35 years for regulatory purposes and includable in capital.
Pursuant to the regulations adopted by the Office of Thrift Supervision to
implement the Financial Institutions Reform, Recovery and Enforcement Act of
1989 (FIRREA), the regulatory capital requirement for federal savings banks was
increased and the amount of supervisory goodwill that could be included in
regulatory capital decreased significantly. At September 30, 1989, the Bank had
approximately $26.0 million of remaining supervisory goodwill but, even
excluding supervisory goodwill, the Bank exceeded the capital requirements of
FIRREA at such date.
On May 13, 1993, the Bank filed suit against the U.S. government seeking
damages and/or other appropriate relief on the grounds, among others, that the
government had breached the terms of the Assistance Agreement. The suit is
pending before Chief Judge Loren Smith in the United States Court of Federal
Claims and is entitled Citizens Financial Services, FSB, et al. v. United States
(Case No. 93-306-C). The case had been stayed pending disposition by the United
States Supreme Court of three related supervisory goodwill cases (the Winstar
Cases). On July 1, 1996, the Supreme Court ruled in the Winstar Cases that the
government had breached its contract with the Winstar parties and was liable in
damages for those breaches.
Thereafter, the stay applicable to the Bank's case and other
Winstar-related cases was lifted. The Bank has filed a motion for summary
judgment which is presently pending before the Court. Due to the volume of cases
before the Court on Winstar-related issues, the government petitioned the Court
for a stay on motions for summary judgment which were not involved in cases
immediately proceeding to trial. The Court granted the government's motion, and
a stay is in place upon the Bank's motion for summary judgment until April 5,
1999. On April 1, 1999, the Bank's case enters case-specific discovery with the
government in preparation for trial. It is anticipated that the stay on the
Bank's motion for summary judgment will be dissolved. Case-specific discovery is
scheduled to last one year. It is estimated that the trial will be scheduled
thereafter and should commence at some time after April during the year 2000. It
must be stressed that this is an estimate and subject to change at the Court's
discretion.
In its complaint, the Bank did not specify the amount of damages it is
seeking from the United States. The Bank has yet to retain an expert in order to
attempt to quantify the amount of damages. An expert will be retained during the
case-specific discovery period. The Court has scheduled its first decision on
damages in a Winstar-related case to be issued on March 30, 1999. The Bank is
unable to predict the outcome of its claim against the United States and the
amount of damages that may be awarded to the Bank, if any, in the event that a
judgment is rendered in the Bank's favor. Consequently, no assurances can be
given as to the results of this claim or the timing of any proceedings in
relation thereto.
43
<PAGE> 33
CFS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
Other than the above-referenced litigation, the Company is involved in
routine legal proceedings occurring in the ordinary course of business which, in
the aggregate, are believed by management to be immaterial to the financial
condition of the Company.
19) FAIR VALUE OF FINANCIAL INSTRUMENTS
Disclosure of fair value information about financial instruments, whether
or not recognized in the consolidated statement of condition, for which it is
practicable to estimate their value, is summarized below. In cases where quoted
market prices are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount rate and estimates of
future cash flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could not
be realized in immediate settlement of the instrument.
The fair value disclosure of certain financial instruments and all
nonfinancial instruments is not required. Accordingly, the aggregate fair value
amounts presented do not represent the underlying value of the Company.
The carrying amounts and fair values of financial instruments consist of
the following:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 49,843 $ 49,843 $ 20,837 $ 20,837
Investment securities available-for-sale.................... 34,720 34,720 3,696 3,696
Investment securities held-to-maturity...................... 166,500 169,263 206,232 207,302
Trading securities.......................................... -- -- 1,741 1,741
Mortgage-backed securities available-for-sale............... 277,888 277,888 62,141 62,141
Mortgage-backed securities held-to-maturity................. 176,956 178,694 256,670 259,514
Loans receivable............................................ 726,081 733,646 595,566 605,265
---------- ---------- ---------- ----------
Total asset financial instruments $1,431,988 $1,444,054 $1,146,883 $1,160,496
========== ========== ========== ==========
LIABILITIES
Deposits.................................................... $ 969,802 $ 980,760 $ 986,073 $ 989,126
Borrowed money.............................................. 215,271 217,409 85,044 84,984
---------- ---------- ---------- ----------
Total liability financial instruments....................... $1,185,073 $1,198,169 $1,071,117 $1,074,110
========== ========== ========== ==========
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
CASH AND CASH EQUIVALENTS: For cash and interest-bearing deposits, the
carrying amount is a reasonable estimate of fair value.
INVESTMENT SECURITIES: Fair values for securities held for investment, sale
or trading account purposes are based on quoted market prices as published in
financial publications or dealer quotes.
MORTGAGE-BACKED SECURITIES: Fair values for mortgage-backed securities are
based on the lower of quotes received from third-party brokers.
LOANS RECEIVABLE: The Company determined that for both variable-rate and
fixed-rate loans, fair values are estimated using discounted cash flow analyses,
using interest rates currently being offered for loans with similar terms and
collateral to borrowers of similar credit quality.
DEPOSIT LIABILITIES: The fair value of demand deposits, savings accounts,
and money market deposits is the amount payable on demand at the reporting date.
The fair value of fixed-maturity certificates of deposit is estimated by
discounting the future cash flows using the rates currently offered for deposits
of similar remaining maturities.
BORROWED MONEY: Rates currently available to the Company for debt with
similar terms and remaining maturities are used to estimate fair value of
existing debt.
The fair value of the Company's off-balance-sheet instruments is nominal.
20) CONDENSED PARENT COMPANY FINANCIAL STATEMENTS
The following represents the condensed statement of financial condition as
of December 31, 1998, and condensed statement of income and cash flows for the
44
<PAGE> 34
year ended December 31, 1998, for CFS Bancorp, Inc., the parent company.
Condensed financial statements as of December 31, 1997, and for the two
years then ended have been omitted as they would not provide meaningful
information due to the Conversion and Merger, as discussed in Note 2.
CONDENSED STATEMENT OF CONDITION
(PARENT COMPANY ONLY)
- ------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31
1998
- --------------------------------------------------------------
<S> <C>
ASSETS
Cash on hand and in banks...................... $ 4,110
Securities available for sale.................. 79,074
Investment in subsidiary....................... 159,492
Loan receivable from subsidiary bank........... 4,000
Loan receivable from ESOP...................... 13,093
Accrued interest receivable.................... 620
Prepaid expenses and other assets.............. 251
--------
Total assets................................. $260,640
========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accrued taxes and other liabilities............ $ 552
STOCKHOLDERS' EQUITY:
Common stock................................... 230
Additional paid-in capital..................... 186,062
Retained earnings, substantially restricted.... 87,178
Accumulated other comprehensive income, net of
tax.......................................... (289)
Unearned common stock acquired by ESOP......... (13,093)
--------
Total stockholders' equity................... 260,088
--------
Total liabilities and stockholders' equity... $260,640
========
- --------------------------------------------------------------
</TABLE>
CONDENSED STATEMENT OF INCOME
(PARENT COMPANY ONLY)
- ------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
1998
- --------------------------------------------------------------
<S> <C>
Interest income................................ $ 3,647
Dividend income................................ 69
Gain on sale of investment..................... 384
Noninterest expense............................ (7,775)
-------
Net loss before income taxes and equity in
earnings of subsidiary....................... (3,675)
Income tax benefit............................. 1,080
-------
Net loss before equity in earnings of
subsidiary................................... (2,595)
Equity in earnings of subsidiary............... 5,717
-------
Net income..................................... $ 3,122
=======
- --------------------------------------------------------------
</TABLE>
CONDENSED STATEMENT OF CASH FLOWS
(PARENT COMPANY ONLY)
- ------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
1998
- --------------------------------------------------------------
<S> <C>
Operating activities:
Net income................................... $ 3,122
Adjustments to reconcile net income to net
cash used by operating activities:
Equity in earnings of the Bank............. (5,717)
Contribution of stock to The Citizens
Savings Foundation....................... 3,000
Net gain on sale of available-for-sale
investment securities.................... (352)
Net gain on sale of securities held for
trade.................................... (32)
Proceeds from sales of securities held for
trade.................................... 409
Purchase of securities held for trade...... (456)
Increase in interest receivable............ (605)
Increase in prepaid expenses and other
assets................................... (1,584)
Increase in other liabilities.............. 2,003
---------
Net cash used by operating activities.......... (212)
---------
Investing activities:
Available-for-sale investment securities:
Purchases.................................. (29,136)
Sales...................................... 917
Available-for-sale mortgage-backed
securities:
Purchases.................................. (48,014)
Repayments................................. 55
Acquisition of stock of Bank................. (80,477)
Net loan originations and principal payment
on loans................................... (16,963)
---------
Net cash used by investing activities.......... (173,618)
---------
Financing activities:
Proceeds from sale of treasury stock......... 69
Proceeds from exercise of stock options...... 757
Dividends received from Bank................. 5,034
Dividends paid on common stock............... (3,647)
Proceeds of stock conversion, net............ 160,954
Sale of stock to ESOP........................ 14,283
---------
Net cash provided by financing activities...... 177,450
---------
Increase in cash and cash equivalents.......... 3,620
Cash and cash equivalents at beginning of
year......................................... 490
---------
Cash and cash equivalents at end of year....... $ 4,110
=========
- --------------------------------------------------------------
</TABLE>
45
<PAGE> 35
CORPORATE INFORMATION
CORPORATE OFFICE
CFS Bancorp, Inc
707 Ridge Road
Munster, Indiana 46321
(219) 836-5500
ANNUAL MEETING
The Annual Meeting of
Stockholders will be held at 10:00
a.m. on May 4, 1999 at the Center
for Visual and Performing Arts,
1040 Ridge Road,
Munster, Indiana 46321.
ANNUAL REPORT ON FORM 10-K
A copy of the CFS Bancorp, Inc.
annual report on Form 10-K filed
with the Securities and Exchange
Commission is available without
charge upon written request to:
Monica F. Sullivan,
Corporate Secretary
CFS Bancorp, Inc.
707 Ridge Road
Munster, Indiana 46321
SHAREHOLDER SERVICES
Shareholders interested in
additional information may contact:
Brian L. Goins,
Corporate Counsel
CFS Bancorp, Inc.
707 Ridge Road
Munster, Indiana 46321
(219) 836-5500
INVESTOR INFORMATION
Investors and analysts interested in
additional information may contact:
Michael P. Prisby,
Assistant Treasurer
CFS Bancorp, Inc.
707 Ridge Road
Munster, Indiana 46321
(219) 836-5500
TRANSFER AGENT AND REGISTRAR
LaSalle National Bank
135 South LaSalle Street
Chicago, Illinois 60603
(800) 246-5761
WASHINGTON COUNSEL
Elias, Matz, Tiernan and
Herrick L.L.P.
734-15th Street, N.W.
Washington, D.C. 20005
INDEPENDENT AUDITORS
Ernst & Young LLP
Sears Tower
233 South Wacker Drive
Chicago, Illinois 60606
(312) 879-2000
- --------------------------------------------------------------------------------
STOCK MARKET AND DIVIDEND INFORMATION
CFS Bancorp's stock trades on The NASDAQ National Market under the ticker symbol
"CITZ" and the trading symbol "CFS Bn." The table below shows the dividends paid
and reported high and low sale prices per share of common stock. The table
reflects trading in the shares of common stock of CFS Bancorp, Inc. since July
24, 1998.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
1998
Dividend
Paid High Low
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Third Quarter $ .08 $11 7/16 $8 3/8
Fourth Quarter .08 10 1/16 8 5/16
- ---------------------------------------------------------------------------------------------
</TABLE>
As of December 31, 1998, there were 22,959,251 shares of common stock
outstanding, held by 3,109 stockholders of record.
As of January 31, 1999, the following securities firms indicated they were
acting as market makers for CFS Bancorp, Inc. common stock:
ABN AMRO Inc.
Capital Resources Inc.
Friedman Billings Ramsey & Company
Keefe, Bruyette & Woods, Inc.
Herzog, Heine, Geduld, Inc.
Howe Barnes Investments, Inc.
Knight Securities L.P.
Mayer & Schweitzer, Inc.
Robert W. Baird & Co., Inc.
Sandler O'Neill & Partners, L.P.
Sherwood Securities Corp.
Spear Leeds & Kellog
Stifel, Nicolaus & Co., Inc.
Tucker Anthony Inc.
Trident Securities Inc.
46
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-62053) pertaining to the Citizens Financial Services, FSB Employees'
Savings & Profit Sharing Plan and Trust of our report dated March 3, 1999, with
respect to the consolidated financial statements of CFS Bancorp, Inc.
incorporated by reference in the Annual Report (Form 10-K) for the year ended
December 31, 1998.
We also consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-62049) pertaining to the Stock Options Assumed In The
Acquisition Of SuburbFed Financial Corp. of our report dated March 3, 1999, with
respect to the consolidated financial statements of CFS Bancorp, Inc.
incorporated by reference in the Annual Report (Form 10-K) for the year ended
December 31, 1998.
/s/ Ernst & Young LLP
---------------------
Ernst & Young LLP
Chicago, Illinois
March 30, 1999
<PAGE> 1
EXHIBIT 23.2
COBITZ, VANDENBERG & FENNESSY
CONSENT OF INDEPENDENT AUDITORS
As independent auditor, we hereby consent to the inclusion of our Independent
Auditors' Report, dated as of February 6, 1998, for SuburbFed Financial Corp. as
an exhibit in the Annual Report on Form 10-K for the year ended December 31,
1998 of CFS Bancorp, Inc., and to the incorporation by reference in the
Registration Statements on Form S-8 (No. 333-62053) and (No. 333-62049) of CFS
Bancorp, Inc. of such Independent Auditors' Report.
/s/ Cobitz, Vandenberg & Fennessy
---------------------------------
Cobitz, Vandenberg & Fennessy
Palos Hills, Illinois
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0001058438
<NAME> CFS BANCORP, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> DEC-31-1998
<CASH> 19,067
<INT-BEARING-DEPOSITS> 25,201
<FED-FUNDS-SOLD> 5,575
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 312,608
<INVESTMENTS-CARRYING> 343,456
<INVESTMENTS-MARKET> 347,957
<LOANS> 726,081
<ALLOWANCE> 5,357
<TOTAL-ASSETS> 1,470,617
<DEPOSITS> 969,802
<SHORT-TERM> 36,390
<LIABILITIES-OTHER> 25,456
<LONG-TERM> 178,881
0
0
<COMMON> 230
<OTHER-SE> 259,858
<TOTAL-LIABILITIES-AND-EQUITY> 1,470,617
<INTEREST-LOAN> 24,146
<INTEREST-INVEST> 43,534
<INTEREST-OTHER> 2,008
<INTEREST-TOTAL> 97,353
<INTEREST-DEPOSIT> 46,856
<INTEREST-EXPENSE> 56,910
<INTEREST-INCOME-NET> 40,443
<LOAN-LOSSES> 1,630
<SECURITIES-GAINS> 328
<EXPENSE-OTHER> 39,004
<INCOME-PRETAX> 5,709
<INCOME-PRE-EXTRAORDINARY> 5,709
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,122
<EPS-PRIMARY> .15
<EPS-DILUTED> .14
<YIELD-ACTUAL> 7.41
<LOANS-NON> 8,953
<LOANS-PAST> 0
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<LOANS-PROBLEM> 10,304
<ALLOWANCE-OPEN> 3,825
<CHARGE-OFFS> 125
<RECOVERIES> 27
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<PAGE> 1
[LETTERHEAD OF COBITZ, VANDENBERG & FENNESSY]
INDEPENDENT AUDITORS' REPORT
The Board of Directors
SuburbFed Financial Corp.
Flossmoor, Illinois
We have audited the consolidated statements of financial condition of
SuburbFed Financial Corp. and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of earnings, changes in stockholders' equity
and cash flows for each of the three years in the period ending December 31,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatements. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of SuburbFed
Financial Corp. and subsidiaries at December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the three years in the
period ending December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ Cobitz, Vandenberg & Fennessy
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Cobitz, Vandenberg & Fennessy
February 6, 1998
Palos Hills, Illinois
