<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to __________ .
Commission file number: 0-24611
CFS Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Delaware 35-2042093
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization Identification No.)
707 Ridge Road, Munster, Indiana 46321
(Address of principal executive
offices)
(219) 836-5500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES [X] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
The Registrant had 19,830,011 shares of Common Stock issued and outstanding as
of July 22, 1999.
<PAGE> 2
CFS BANCORP, INC.
INDEX
Page No.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition at June 30,
1999 and December 31, 1998 3
Consolidated Statements of Income for the Three and Six
Months Ended June 30, 1999 and 1998 4
Consolidated Statements of Changes in Stockholders' Equity
for the Six Months Ended June 30, 1999 5
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 23
PART II OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities and Use of Proceeds 23
Item 3. Defaults upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
2
<PAGE> 3
CFS BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
ASSETS
Cash and amounts due from depository institutions $ 15,103 $ 19,067
Interest-bearing deposits 1,417 25,201
Federal funds sold 100 5,575
---------- ----------
Cash and cash equivalents 16,620 49,843
Investment securities available-for-sale 12,552 34,720
Investment securities held-to-maturity
(fair value 1999-$195,342;1998-$169,263) 200,288 166,500
Mortgage-related securities available-for-sale 296,637 277,888
Mortgage-related securities held-to-maturity
(fair value 1999-$123,078;1998-$178,694) 124,092 176,956
Loans receivable, net 769,967 726,081
Investment in Federal Home Loan Bank stock, at cost 11,737 8,183
Office properties and equipment 16,192 16,328
Accrued interest receivable 9,357 9,729
Real estate owned 498 435
Prepaid expenses and other assets 10,069 3,954
---------- ----------
Total assets $1,468,009 $1,470,617
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 939,779 $ 969,802
Borrowed money 279,592 215,271
Advance payments by borrowers for taxes
and insurance 5,969 6,057
Other liabilities 24,678 19,399
---------- ----------
Total liabilities 1,250,018 1,210,529
---------- ----------
Stockholders' Equity:
Common stock; $.01 par value: 85,000,000 shares authorized
Shares issued: 23,161,154 and 22,959,251 at
June 30,1999 and December 31, 1998, respectively
Shares outstanding: 19,823,182 and 22,959,251 at
June 30, 1999 and December 31, 1998, respectively 232 230
Additional paid-in capital 186,965 186,062
Retained earnings, substantially restricted 90,975 87,178
Treasury stock, at cost: 3,337,972 and -0- shares at
June 30, 1999 and December 31, 1998, respectively (35,557) --
Unearned common stock acquired by Employee Stock
Ownership Plan (13,093) (13,093)
Unearned common stock acquired by Recognition and
Retention Plan (7,142) --
Accumulated other comprehensive income, net of tax (4,389) (289)
---------- ----------
Total stockholders' equity 217,991 260,088
---------- ----------
Total liabilities and stockholders' equity $1,468,009 $1,470,617
========== ==========
</TABLE>
See accompanying notes
3
<PAGE> 4
CFS BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars In Thousands Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
For Three Months Ended For Six Months Ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income:
Loans $13,952 $12,750 $27,821 $24,837
Mortgage-related securities 7,420 5,460 15,434 10,880
Other investment securities 3,528 5,201 6,852 9,277
Other 339 579 727 860
------- ------- ------- -------
Total interest income 25,239 23,990 50,834 45,854
Interest expense:
Deposits 9,897 12,425 20,259 24,445
Borrowings 3,611 2,615 6,950 3,992
------- ------- ------- -------
Total interest expense 13,508 15,040 27,209 28,437
Net interest income before
provision for losses on loans 11,731 8,950 23,625 17,417
Provision for losses on loans 150 105 300 195
------- ------- ------- -------
Net interest income after
provision for losses on loans 11,581 8,845 23,325 17,222
Non-interest income:
Loan fees 278 247 470 485
Insurance commissions 216 189 419 350
Investment commissions 393 317 756 558
Gain on sale of investment
securities - net 94 167 38 353
Net gain on sale of loans 1 34 68 62
Unrealized gain (loss) on securities held
for trade - net -- (7) -- 45
Gain (loss) on sale of real estate owned 26 -- (28) (16)
Other income 448 752 1,038 1,406
------- ------- ------- -------
Total non-interest income 1,456 1,699 2,761 3,243
Non-interest expense:
Compensation and employee benefits 4,463 4,685 9,025 8,879
Net occupancy expense 630 692 1,284 1,426
Furniture and equipment expense 487 502 1,068 1,006
Federal deposit insurance premiums 96 153 294 307
Data processing 309 222 594 491
Marketing 105 225 213 382
Other general and administrative expenses 937 1,037 2,047 2,159
------- ------- ------- -------
Total non-interest expense 7,027 7,516 14,525 14,650
Income before income taxes 6,010 3,028 11,561 5,815
Income tax expense 2,356 1,162 4,631 2,175
------- ------- ------- -------
Net income $ 3,654 $ 1,866 $ 6,930 $ 3,640
======= ======= ======= =======
Per share data:
Basic earnings per share $ 0.18 N/A $ 0.33 N/A
Diluted earnings per share 0.18 N/A 0.33 N/A
Cash dividends declared per share 0.08 N/A 0.16 N/A
Weighted average shares outstanding 19,967,677 N/A 20,755,615 N/A
Weighted average diluted shares outstanding 20,384,943 N/A 21,172,879 N/A
</TABLE>
See accompanying notes
4
<PAGE> 5
CFS BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Unearned Unearned
Common Common Accumulated
Additional Stock Stock Other
Common Paid-In Retained Treasury Acquired Acquired Comprehensive
Stock Capital Earnings Stock by ESOP by RRP Income Total
----- ------- -------- ----- ------- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance January 1, 1999 $230 $186,062 $87,178 $ -- ($13,093) $ -- ($289) $260,088
Net income -- -- 6,930 -- -- -- -- 6,930
Other comprehensive income, net of tax:
Change in unrealized appreciation on
available-for-sale securities, net of
reclassification adjustment -- -- -- -- -- -- (4,100) (4,100)
---- -------- ------- ------- ------- ------ ------ --------
Total comprehensive income $ -- $ -- $ 6,930 $ -- $ -- $ -- ($4,100) $ 2,830
---- -------- ------- ------- ------- ------ ------ --------
Purchase of treasury stock -- -- -- (35,557) -- -- -- (35,557)
Exercise of stock options 2 831 -- -- -- -- -- 833
Tax effect related to stock options
exercised -- 72 -- -- -- -- -- 72
Purchase of shares for Recognition and
Retention Plan -- -- -- -- -- (7,499) -- (7,499)
Amortization of award under Recognition -- -- -- -- -- 357 -- 357
and Retention Plan
Dividends declared on common stock -- -- (3,133) -- -- -- -- (3,133)
--------------------------------------------------------------------------------------------
Balance June 30, 1999 ($232) ($186,965) ($90,975) ($35,557) ($13,093) ($7,142) ($4,389) $217,991
==== ======== ======= ======= ======= ====== ====== ========
</TABLE>
See accompanying notes
5
<PAGE> 6
CFS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------
1999 1998
---- ----
<S> <C> <C>
Operating activities:
Net income $ 6,930 $ 3,640
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for losses on loans 300 195
Depreciation expense 1,006 1,002
Deferred income taxes (5,587) (58)
Amortization of cost of stock benefit plans 357 45
Change in deferred income 683 (206)
Increase in interest receivable 372 (1,774)
Decrease in accrued interest payable 122 1,345
Proceeds from sale of loans held for sale 4,548 6,214
Origination of loans held for sale (4,247) (5,761)
Proceeds from sale of Visa accounts 1,533 --
Net gain on sale of securities held for trade -- (49)
Unrealized gain on securities held for trade -- (45)
Net gain on sale of Visa accounts (59) --
Net gain on sale of available for sale securities (6) (304)
Net gain on sale of loans (9) (62)
Gain of sale of office property (1) --
Proceeds from sales of securities held for trade -- 374
Purchase of securities held for trade -- (436)
Net loss on sale of real estate owned 28 16
Proceeds from sale of real estate held for development and sale -- 785
Increase in prepaid expenses and other assets 2,346 495
Increase (decrease) in other liabilities 5,279 (5,244)
------- -------
Net cash provided by operating activities 13,595 172
------- ------
Investing activities:
Available for sale investment securities:
Purchases (185) (1,600)
Repayments 137 --
Sales 23,026 593
Held to maturity investment securities:
Purchases (90,073) (273,924)
Repayments and maturities 56,285 114,317
Available for sale mortgage-related securities:
Purchases (55,248) (32,217)
Repayments 27,705 7,770
Sales 1,088 1,897
Held to maturity mortgage-related securities:
Purchases -- (52,080)
Repayments 52,864 97,763
Purchase of Federal Home Loan Bank stock (3,554) (1,045)
Redemption of Federal Home Loan Bank stock -- 5
Loan originations and principal payments on loans (47,056) (81,981)
Construction costs on real estate owned (64) (86)
Proceeds from sale of real estate owned 394 1,087
Purchases of property and equipment (870) (1,670)
</TABLE>
6
<PAGE> 7
CFS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------
1999 1998
---- ----
<S> <C> <C>
Disposals of property and equipment $ 1 $ 229
-------- ---------
Net cash used in investing activities (35,550) (220,942)
-------- ---------
Financing activities:
Proceeds from exercise of stock options 833 135
Dividends paid on common stock (3,133) (204)
Proceeds from issuance of treasury stock -- 69
Purchase of treasury stock (35,557) --
Purchase of shares for Recognition and Retention Plan (7,499) --
Net increase in NOW, passbook and money
market accounts 18,441 39,568
Net increase (decrease) in certificates of deposit (48,586) 8,396
Net increase (decrease) in advance payments by borrowers for
taxes and insurance (88) 1,318
Proceeds of stock conversion, net -- 204,701
Net increase in borrowed funds 64,321 113,833
-------- ---------
Net cash flows (used) provided by financing activities (11,268) 367,866
-------- ---------
Increase (decrease) in cash and cash equivalents (33,223) 147,096
Cash and cash equivalents at beginning of period 49,843 20,837
-------- ---------
Cash and cash equivalents at end of period $ 16,620 $ 167,933
======== =========
Supplemental disclosure of non-cash activities:
Transfer of loans to real estate owned $ 419 $ 314
Loans securitized into mortgage-related securities -- 3,402
</TABLE>
See accompanying notes
7
<PAGE> 8
CFS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF FINANCIAL STATEMENTS PRESENTATION
The accompanying consolidated financial statements were prepared in accordance
with instructions to Form 10-Q and therefore do not include all the information
or footnotes necessary for a complete presentation of financial position,
results of operations and cash flows in conformity with generally accepted
accounting principles. However, all normal recurring adjustments which, in the
opinion of management, are necessary for a fair presentation of financial
statements, have been included. These financial statements should be read in
conjunction with the audited financial statements and the notes thereto for the
period ended December 31, 1998 contained in the CFS Bancorp, Inc. (the
"Company") annual report. The results for the six months ended June 30, 1999 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1999.
Previously reported financial statements and other financial disclosures
included in this Form 10-Q have been restated to include the merger of SuburbFed
Financial Corp. ("SFC") with and into the Company on July 24, 1998, which was
accounted for using the pooling of interests method of accounting.
2. LOAN PORTFOLIO
The Company's Loan Portfolio consisted of the following at the dates indicated:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Mortgage Loans: Amount % Amount %
------ - ------ -
Single-family residential $624,691 77.03% $596,199 80.08%
Multi-family residential 25,852 3.19% 21,050 2.83%
Commercial real estate 53,530 6.60% 38,999 5.24%
Construction and land
development:
Single-family residential 36,550 4.51% 31,516 4.23%
Multi-family residential 2,637 0.32% -- --
Other 39,114 4.82% 19,645 2.64%
Home equity 14,335 1.77% 19,589 2.63%
------------------------ -------------------------
Total mortgage loans 796,709 98.24% 726,998 97.65%
Other loans 14,279 1.76% 17,503 2.35%
------------------------ -------------------------
Total loans receivable 810,988 100.00% 744,501 100.00%
------------------------ -------------------------
Less:
Undisbursed portion of
loan proceeds 34,805 13,068
Allowance for losses on
loans 5,685 5,357
Deferred loan fees 531 (5)
======================== =========================
Loans receivable, net $769,967 $726,081
======================== =========================
</TABLE>
8
<PAGE> 9
3. INVESTMENT SECURITIES
Amortized cost of investment securities and their fair values were as follows at
the dates indicated (in thousands):
<TABLE>
<CAPTION>
Available-for-Sale at June 30, 1999: Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Trust preferred securities $ 4,921 $ -- $105 $ 4,816
Equity securities 7,244 625 133 7,736
------- ---- ---- -------
$12,165 $625 $238 $12,552
======= ==== ==== =======
</TABLE>
<TABLE>
<CAPTION>
Available-for-Sale at December 31, 1998: Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Callable agency securities and corporate
bonds $ 1,973 $ 38 $ - $ 2,011
Trust preferred securities 25,399 4 704 24,699
Equity securities 7,767 427 184 8,010
------- ---- ---- -------
$35,139 $469 $888 $34,720
======= ==== ==== =======
</TABLE>
<TABLE>
<CAPTION>
Held-to-Maturity at June 30, 1999: Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Callable agency securities and corporate
bonds $200,288 $86 $5,032 $195,342
======== === ====== ========
</TABLE>
<TABLE>
<CAPTION>
Held-to-Maturity at December 31, 1998: Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Callable agency securities and corporate
bonds $166,500 $2,863 $100 $169,263
======== ====== ==== ========
</TABLE>
9
<PAGE> 10
4. MORTGAGE-RELATED SECURITIES
The amortized cost of mortgage-related securities and their fair values are as
follows (in thousands):
<TABLE>
<S> <C> <C> <C> <C>
Available-for-Sale at June 30, 1999: Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Participation certificates $ 60,988 $ 445 $2,245 $59,188
Real estate mortgage investment conduits
and collateralized mortgage obligations 243,414 37 6,002 237,449
-------- ------ ----- --------
$304,402 $ 482 $8,247 $296,637
======== ====== ====== ========
Available-for-Sale at December 31, 1998:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Participation certificates $ 59,912 $ 739 $ 101 $ 60,549
Real estate mortgage investment conduits
and collateralized mortgage obligations 218,035 810 1,507 217,339
-------- ------ ------ --------
$277,947 $1,549 $1,608 $277,888
======== ====== ====== ========
Held-to-Maturity at June 30, 1999:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Participation certificates $ 42,122 $ 86 $1,241 $ 40,967
Real estate mortgage investment conduits
and collateralized mortgage obligations 81,970 389 248 82,111
-------- ------ ------ --------
$124,092 $ 475 $1,489 $123,078
======== ====== ====== ========
Held-to-Maturity at December 31, 1998:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Participation certificates $ 48,246 $ 201 $ 512 $ 47,935
Real estate mortgage investment conduits
and collateralized mortgage obligations 128,710 2,251 202 130,759
-------- ------ ------ --------
$176,956 $2,452 $ 714 $178,694
======== ====== ====== ========
</TABLE>
5. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. The Company will be required to adopt SFAS
No. 133 on January 1, 2001. The statement establishes accounting and reporting
standards for derivative instruments and for hedging activities. It requires
that an entity recognizes all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
In management's opinion, SFAS No. 133, when adopted, will not have a material
effect on the Company's financial statements as the Company currently owns no
significant derivative instruments affected by this statement.
10
<PAGE> 11
On January 1, 1999 the Company adopted SFAS No. 134, "Accounting for
Mortgage-Related Securities Retained After the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise - an amendment of FASB Statement
No. 65." This statement requires that after the securitization of mortgage
loans, the resulting mortgage-related securities or other retained interests be
classified in accordance with the provisions of SFAS No. 115 based on the
ability and intent to sell or hold those investments (i.e., available-for-sale
or held-to-maturity).
6. EARNINGS PER SHARE
Earnings per share for the quarter and six months ended June 30, 1998 is not
applicable, as Citizens Financial Services, FSB's (the "Bank") conversion from
mutual-to-stock form and the holding company formation was not completed until
July 24, 1998. Set forth below is information with respect to calculation of
basic and diluted earnings per share.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1999
------------- -------------
<S> <C> <C>
(Dollars in thousands, except per share data)
Net income $ 3,654 $ 6,930
Weighted average number of common shares outstanding 21,238,682 22,041,573
Average ESOP shares not committed to be released (1,271,005) 1,285,958
----------- -----------
Weighted average number of shares outstanding for basic earnings
per share computation purposes 19,967,677 20,755,615
Dilutive effects of stock options 417,264 417,264
-------- -----------
Weighted average shares and common share equivalents
outstanding for diluted earnings per share purposes 20,384,941 21,172,879
=========== ===========
Basic earnings per share $ 0.18 $ 0.33
Diluted earnings per share $ 0.18 $ 0.33
</TABLE>
7. COMPREHENSIVE INCOME
Comprehensive income is the total of reported net income and all other revenues,
expenses, gains and losses that under generally accepted accounting principles
are not includable in reported net income but are reflected in stockholders'
equity.
The following table presents the Company's comprehensive income (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 3,654 $ 1,866 $ 6,930 $ 3,640
Net change in unrealized gain or (loss) on
securities available-for-sale, net (4,034) 100 (4,100) 325
------- ------- ------- -------
Comprehensive income ($380) $ 1,966 $ 2,830 $ 3,965
======= ======= ======= =======
</TABLE>
11
<PAGE> 12
8. NON-PERFORMING ASSETS
The following table sets forth information with respect to non-performing assets
at the dates indicated:
(Dollars In Thousands)
Non-accrual loans: June 30, December 31,
Mortgage loans: 1999 1998
---- ----
Construction and land development $ 662 $ 469
Single-family residential 8,186 5,137
Multi-family residential 504 516
Non-residential 2,303 2,754
Other loans 152 77
------- ------
Total non-performing loans 11,807 8,953
Other real estate owned 498 435
------- ------
Total non-performing assets $12,305 $9,388
======= ======
Non-performing assets to total assets 0.84% 0.64%
Non-performing loans to total loans 1.60 1.20
The following table is a summary of changes in the allowance for losses on loans
for the six months ended June 30, 1999 and the year ended December 31, 1998:
Six Months Ended Year Ended
June 30, December 31,
1999 1998
---- ----
Balance at beginning of period $ 5,357 $ 3,825
Provision for loan losses 300 1,630
Charge-offs (16) (125)
Recoveries 44 27
Balance at end of period $ 5,685 $ 5,357
======= =======
Allowance for loan losses to total
non-performing loans at end of period 48.15% 59.84%
Allowance for loan losses to total loans
at end of period 0.74 0.72
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
This Form 10-Q contains certain forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995, and may be identified by
the use of such words as "believe," "expect," "anticipate," "should," "planned,"
"estimated" and "potential." Examples of forward-looking statements include, but
are not limited to, estimates with respect to the financial condition, results
of operations and business of the Company that are subject to various factors
which could cause actual results to differ materially from these estimates.
These factors include, but are not limited to, general economic conditions,
changes in interest rates, deposit flows, loan demand, real estate values, and
competition; changes in accounting principles, policies, or guidelines; changes
in legislation or regulation; and other economic, competitive, governmental,
regulatory, and technological factors affecting the Company's operations,
pricing, products and services.
12
<PAGE> 13
CHANGES IN FINANCIAL CONDITION
At June 30, 1999, the Company's total assets amounted to $1.5 billion or
approximately $2.6 million less than at December 31, 1998. The nominal decrease
was a result of changes in most major categories of earning assets and costing
liabilities. Net increases of $43.9 million in loans receivable and $35.6
million in treasury stock as well as net deposit withdrawals of $30.0 million
were funded by a net decrease in cash and cash equivalents of $33.2 million and
a net decrease in securities of $22.5 million as well as a net increase in
borrowed money of $64.3 million.
Cash and cash equivalents decreased from $49.8 million at December 31, 1998 to
$16.6 million at June 30, 1999. This $33.2 million decrease was used to fund
deposit withdrawals, fund new loans and to fund stock purchases pursuant to the
Company's announced repurchase program.
Investment securities (available-for-sale and held-to-maturity) increased from
$201.2 million at December 31, 1998 to $212.8 million at June 30, 1999.
Mortgage-related securities (available-for-sale and held-to-maturity) decreased
from $454.8 million to $420.7 million at June 30, 1999. This overall decrease of
$22.5 million was also used to fund the Company's stock repurchase program, fund
new loans and deposit withdrawals.
Loans receivable increased from $726.1 million at December 31, 1998 to $770.0
million at June 30, 1999. This net increase of $43.9 million was funded by a
decrease in cash and cash equivalents, repayment of mortgage-related securities
and increases in borrowed money.
Deposits decreased from $969.8 million at December 31, 1998 to $939.8 million at
June 30, 1999. This decrease of $30.0 million was funded primarily by increases
in borrowed money. The Company has set rates to be competitive but not overly
aggressive. Consistent with this strategy, $16.4 million of certificates of
deposit obtained in a 1997 savings promotion bearing above market rates of
interest were allowed to mature and be repaid by the Bank without using
aggressive pricing to retain such deposits.
Borrowings increased by $64.3 million during the first six months of 1999 from
$215.3 million at December 31, 1998 to $279.6 million at June 30, 1999. The
borrowed funds consist of advances from the Federal Home Loan Bank ("FHLB") of
Indianapolis and Chicago, a borrowing agreement with American National Bank
("ANB") and reverse repurchase agreements. The advances from the FHLB and the
ANB agreement are all secured borrowings. The increased borrowings were used
primarily to fund new loans and replace deposits withdrawn during the six months
ended June 30, 1999.
The Company is continuing to use borrowings in its efforts to leverage its
balance sheet by borrowing funds and investing the proceeds in income producing
assets such as loans and securities at a spread deemed acceptable by management.
Stockholders' equity decreased by $42.1 million during the first six months of
1999 from $260.1 million at December 31, 1998 to $218.0 million at June 30,
1999. This decrease was primarily the result of the purchase of treasury stock
(3,337,972 shares) and funding the Recognition and Retention Plan Trust (714,150
shares).
13
<PAGE> 14
AVERAGE BALANCES, NET INTEREST INCOME, YIELDS EARNED AND RATES PAID
The following table sets forth, for the periods indicated, information regarding
(i) the total dollar amount of interest income of the Company from
interest-earning assets and the resultant average yields; (ii) the total dollar
amount of interest expense on interest-bearing liabilities and the resultant
average rate; (iii) net interest income; (iv) interest rate spread; and (v) net
interest margin. Information is based on average monthly balances during the
indicated periods. The Company's management believes that the average monthly
balances do not differ materially from the average daily balances.
<TABLE>
<CAPTION>
Three Months Ended June 30,
1999 1998
(Dollars in Thousands)
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest - earning assets:
Loans Receivable
Real estate loans $ 747,268 $13,662 7.31% $ 628,959 $12,208 7.76%
Other loans 13,719 290 8.46% 22,467 542 9.65%
------------------------- ---------------------------
Total loans 760,987 13,952 7.33% 651,426 12,750 7.83%
Securities: (2) 651,103 10,948 6.73% 614,860 10,661 6.94%
Other interest-earning assets (3) 25,629 339 5.29% 55,351 579 4.18%
------------------------- ---------------------------
Total interest-earning assets 1,437,719 25,239 7.02% 1,321,637 23,990 7.26%
Non-interest earning assets 51,191 44,038
------------- --------------
Total assets $1,488,910 $1,365,675
============= ==============
Interest-bearing liabilities:
Deposits:
NOW and money market accounts $ 121,338 $ 677 2.23% $ 118,020 $ 727 2.46%
Passbook accounts 236,801 1,680 2.84% 218,946 1,815 3.32%
Certificates of deposit 564,264 7,540 5.35% 652,346 9,882 6.06%
------------------------- ---------------------------
Total deposits 922,403 9,897 4.29% 989,312 12,424 5.02%
------------------------- ---------------------------
Total borrowings 271,213 3,611 5.33% 231,231 2,615 4.52%
------------------------- ---------------------------
Total interest-bearing liabilities 1,193,616 13,508 4.53% 1,220,543 15,039 4.93%
Non-interest bearing liabilities (4) 61,592 46,957
Total liabilities 1,255,208 1,267,500
Stockholders' equity 233,702 98,175
------------- --------------
Total liabilities and stockholders' equity $1,488,910 $1,365,675
============= ==============
Net interest-earning assets $ 244,103 $ 101,094
============= ==============
Net interest income/interest rate spread $11,731 2.49% $ 8,951 2.33%
============ =============
Net interest margin 3.26% 2.71%
Ratio of average interest-earning assets to
average interest-bearing liabilities 120.45% 108.28%
<CAPTION>
1997
Average Average
Balance Interest Yield/Cost
-----------------------------------------
<S> <C> <C> <C>
Interest - earning assets:
Loans Receivable
Real estate loans $ 503,421 $10,227 8.13%
Other loans 20,998 484 9.22%
---------------------------
Total loans 524,419 10,711 8.17%
Securities: (2) 546,399 9,622 7.04%
Other interest-earning assets (3) 18,493 235 5.08%
---------------------------
Total interest-earning assets 1,089,311 20,568 7.55%
Non-interest earning assets 40,358
-------------
Total assets $1,129,669
=============
Interest-bearing liabilities:
Deposits:
NOW and money market accounts $ 117,402 $ 735 2.50%
Passbook accounts 208,972 1,512 2.89%
Certificates of deposit 617,790 9,309 6.03%
---------------------------
Total deposits 944,164 11,556 4.90%
---------------------------
Total borrowings 61,387 986 6.42%
---------------------------
Total interest-bearing liabilities 1,005,551 12,542 4.99%
Non-interest bearing liabilities (4) 30,635
Total liabilities 1,036,186
Stockholders' equity 93,483
-------------
Total liabilities and stockholders' equity $1,129,669
=============
Net interest-earning assets $ 83,760
=============
Net interest income/interest rate spread $ 8,026 2.56%
==============
Net interest margin 2.95%
Ratio of average interest-earning assets to
average interest-bearing liabilities 108.33%
</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.
14
<PAGE> 15
AVERAGE BALANCES, NET INTEREST INCOME, YIELDS EARNED AND RATES PAID
The following table sets forth, for the periods indicated, information regarding
(i) the total dollar amount of interest income of the Company from
interest-earning assets and the resultant average yields; (ii) the total dollar
amount of interest expense on interest-bearing liabilities and the resultant
average rate; (iii) net interest income; (iv) interest rate spread; and (v) net
interest margin. Information is based on average monthly balances during the
indicated periods. The Company's management believes that the average monthly
balances do not differ materially from the average daily balances.
<TABLE>
<CAPTION>
Six Months Ended June 30,
1999 1998
(Dollars in Thousands)
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest - earning assets:
Loans Receivable
Real estate loans $ 736,913 $27,135 7.36% $ 611,025 $23,787 7.79%
Other loans 13,295 686 10.32% 22,148 1,050 9.48%
------------------------ --------------------------
Total loans 750,208 27,821 7.42% 633,173 24,837 7.85%
Securities: (2) 660,280 22,286 6.75% 571,565 20,157 7.05%
Other interest-earning assets (3) 27,930 727 5.21% 42,419 860 4.05%
------------------------ --------------------------
Total interest-earning assets 1,438,418 50,834 7.07% 1,247,157 45,854 7.35%
Non-interest earning assets 52,992 45,647
------------ -------------
Total assets $1,491,410 $1,292,804
============ =============
Interest-bearing liabilities:
Deposits:
NOW and money market accounts $ 120,947 $ 1,350 2.23% $ 117,603 $ 1,431 2.43%
Passbook accounts 229,804 3,306 2.88% 213,917 3,516 3.29%
Certificates of deposit 576,366 15,603 5.41% 650,818 19,498 5.99%
------------------------ --------------------------
Total deposits 927,117 20,259 4.37% 982,338 24,445 4.98%
------------------------ --------------------------
Total borrowings 258,801 6,950 5.37% 167,455 3,992 4.77%
------------------------ --------------------------
Total interest-bearing liabilities 1,185,918 27,209 4.59% 1,149,793 28,437 4.95%
Non-interest bearing liabilities (4) 61,034 45,818
Total liabilities 1,246,952 1,195,611
Stockholders' equity 244,458 97,193
------------ -------------
Total liabilities and stockholders' equity $1,491,410 $1,292,804
============ =============
Net interest-earning assets $ 252,500 $ 97,364
============ =============
Net interest income/interest rate spread $23,625 2.48% $17,417 2.40%
============ =============
Net interest margin 3.28% 2.79%
Ratio of average interest-earning assets to
average interest-bearing liabilities 121.29% 108.47%
<CAPTION>
1997
Average Average
Balance Interest Yield/Cost
------------------------------------------
<S> <C> <C> <C>
Interest - earning assets:
Loans Receivable
Real estate loans $ 492,463 $20,045 8.14%
Other loans 20,821 967 9.29%
----------------------------
Total loans 513,284 21,012 8.19%
Securities: (2) 524,563 18,524 7.06%
Other interest-earning assets (3) 25,251 681 5.39%
----------------------------
Total interest-earning assets 1,063,098 40,217 7.57%
Non-interest earning assets 40,227
--------------
Total assets $1,103,325
==============
Interest-bearing liabilities:
Deposits:
NOW and money market accounts $ 118,188 $ 1,460 2.47%
Passbook accounts 210,334 3,364 3.20%
Certificates of deposit 592,669 17,555 5.92%
----------------------------
Total deposits 921,191 22,379 4.86%
----------------------------
Total borrowings 59,457 1,762 5.93%
----------------------------
Total interest-bearing liabilities 980,648 24,141 4.92%
Non-interest bearing liabilities (4) 30,022
Total liabilities 1,010,670
Stockholders' equity 92,655
--------------
Total liabilities and stockholders' equity $1,103,325
==============
Net interest-earning assets $ 82,450
==============
Net interest income/interest rate spread $16,076 2.65%
Net interest margin 3.02%
Ratio of average interest-earning assets to
average interest-bearing liabilities 108.41%
</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.
15
<PAGE> 16
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).
<TABLE>
<CAPTION>
Three months ended June 30,
1999 compared to 1998
Increase (decrease) due to
-----------------------------------------------------------------
(Dollars In Thousands)
Total Net
Increase
Rate Volume Rate/Volume (Decrease)
---- ------ ----------- ----------
<S> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable:
Real estate loans ($709) $2,296 ($133) $1,454
Other loans (67) (211) 26 (252)
-----------------------------------------------------------------
Total loans receivable (776) 2,085 (107) 1,202
Securities (323) 629 (19) 287
Other interest-earning assets 153 (311) (82) (240)
-----------------------------------------------------------------
Total net change in income on
interest-earning assets (946) 2,403 (208) 1,249
Interest-bearing liabilities:
Deposits:
NOW and money markets (70) 21 (2) (51)
Passbook accounts (262) 148 (21) (135)
Certificates of deposit (1,165) (1,334) 157 (2,342)
-----------------------------------------------------------------
Total deposits (1,497) (1,165) 134 (2,528)
Borrowings 464 452 80 996
-----------------------------------------------------------------
Total net change in expense on
interest-bearing liabilities (1,033) (713) 214 (1,532)
Net change in net interest income $87 $3,116 ($422) $2,781
=================================================================
<CAPTION>
1998 compared to 1997
Increase (decrease) due to
-------------------------------------------------------
Total Net
Increase
Rate Volume Rate/Volume (Decrease)
---- ------ ----------- ----------
<S> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable:
Real estate loans ($456) $2,550 ($114) $1,980
Other loans 23 34 2 59
-------------------------------------------------------
Total loans receivable (433) 2,584 (112) 2,039
Securities (148) 1,206 (19) 1,039
Other interest-earning assets (41) 468 (83) 344
-------------------------------------------------------
Total net change in income on
interest-earning assets (622) 4,258 (214) 3,422
Interest-bearing liabilities:
Deposits:
NOW and money markets (12) 4 0 (8)
Passbook accounts 220 72 11 303
Certificates of deposit 50 520 3 573
-------------------------------------------------------
Total deposits 258 596 14 868
Borrowings (292) 2,728 (807) 1,629
-------------------------------------------------------
Total net change in expense on
interest-bearing liabilities (34) 3,324 (793) 2,497
Net change in net interest income ($588) $ 934 $579 $ 925
=======================================================
</TABLE>
16
<PAGE> 17
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).
<TABLE>
<CAPTION>
Six months ended June 30,
1999 compared to 1998
Increase (decrease) due to
- -----------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
Total Net
Increase
Rate Volume Rate/Volume (Decrease)
---- ------ ----------- ----------
<S> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable:
Real estate loans ($1,287) $4,901 ($266) $3,348
Other loans 93 (420) (37) (364)
------------------------------------------------------------------------
Total loans receivable (1,194) 4,481 (303) 2,984
Securities (866) 3,130 (135) 2,129
Other interest-earning assets 245 (294) (84) (133)
------------------------------------------------------------------------
Total net change in income on
interest-earning assets (1,815) 7,317 (522) 4,980
Interest-bearing liabilities:
Deposits:
NOW and money markets (118) 41 (4) (81)
Passbook accounts (439) 261 (32) (210)
Certificates of deposit (1,879) (2,231) 215 (3,895)
------------------------------------------------------------------------
Total deposits (2,436) (1,929) 179 (4,186)
Borrowings 505 2,177 276 2,958
------------------------------------------------------------------------
Total net change in expense on
interest-bearing liabilities (1,931) 248 455 (1,228)
Net change in net interest income $ 116 $7,069 ($977) $6,208
========================================================================
<CAPTION>
1998 compared to 1997
Increase (decrease) due to
- -----------------------------------------------------------------------------------------
Total Net
Increase
Rate Volume Rate/Volume (Decrease)
---- ------ ----------- ----------
<S> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable:
Real estate loans ($874) $4,826 ($211) $3,741
Other loans 20 62 2 84
------------------------------------------------------
Total loans receivable (854) 4,888 (209) 3,825
Securities (25) 1,660 (2) 1,633
Other interest-earning assets (169) 463 (115) 179
------------------------------------------------------
Total net change in income on
interest-earning assets (1,048) 7,011 (326) 5,637
Interest-bearing liabilities:
Deposits:
NOW and money markets (22) (7) 0 (29)
Passbook accounts 93 58 1 152
Certificates of deposit 201 1,722 20 1,943
------------------------------------------------------
Total deposits 272 1,773 21 2,066
Borrowings (345) 3,201 (626) 2,230
------------------------------------------------------
Total net change in expense on
interest-bearing liabilities (73) 4,974 (605) 4,296
Net change in net interest income ($975) $2,037 $279 $1,341
======================================================
</TABLE>
17
<PAGE> 18
RESULTS OF OPERATIONS
The Company reported net income of $3.7 million and $6.9 million for the three
and six months ended June 30, 1999, respectively, as compared to $1.9 million
and $3.6 million during the same periods in 1998. The increased income of $1.8
million and $3.3 million, respectively, for these three and six month periods
primarily reflects the results of investment of the conversion proceeds received
in the 1998 conversion from a mutual to stock form of ownership.
Interest income increased by $1.2 million or 5.2 percent to $25.2 million for
the three months ended June 30, 1999 compared to $24.0 million for the second
quarter of 1998. For the six month period ended June 30, 1999 interest income
was $50.8 million compared to $45.9 million for the similar period in 1998, a
$4.9 million or 10.7 percent increase. Increases in volume of loans and
securities created increases in both the three and six month periods when
compared to the prior year. Such increases were partially offset by a decline in
the yields on total loans and securities from 7.83 percent and 6.94,
respectively, percent for the quarter ended June 30, 1998 to 7.33 percent and
6.73 percent for the quarter ended June 30, 1999. Similarly yields for the six
month period on total loans and securities also experienced a decline from 7.85
percent and 7.05 percent for the six months ended June 30, 1998 compared to 7.42
percent and 6.75 percent for the six month period ended June 30, 1999.
Interest expense decreased from $15.0 million for the three months ended June
30, 1998 to $13.5 million for the three months ended June 30, 1999, a $1.5
million or 10.2 percent decrease. For the six month period ended June 30, 1998
interest expense was $28.4 million compared to $27.2 million for the same period
in 1999, a $1.2 million or 4.3 percent decrease. These decreases were mainly a
result of a reduction in the rates paid and to a lesser degree, the average
balance of deposits in both the three month and six month periods when compared
to the similar period of the prior year, although a significant portion of the
decrease was the result of reduced volume of certificates of deposit when
comparing both the three month and six month numbers. The decrease in interest
expense on deposits was tempered by an increase in interest expense on borrowed
money. This increase in interest expense on borrowed money was the result of
increases in both rate and volume. Average balances were affected in the second
quarter of 1998 by receipt of conversion proceeds and existing deposits that
were used to purchase stock in July 1998.
The Company's provision for loan losses for the three months ended June 30, 1999
was $150,000 compared to $105,000 for the three months ended June 30, 1998. The
provision for loan losses for the six months ended June 30, 1999 was $300,000
compared to $195,000 for the six months ended June 30, 1998. The Company
recorded higher provisions in the 1999 periods due to an overall increase in the
Company's loan portfolio as well as an increased amount of commercial real
estate loans. Management believes that as of June 30, 1999 the allowances for
loan losses was adequate; however, no assurances can be given that future
charge-offs and/or additional provisions will not be needed.
During the second quarter of 1999, the Company's data processing systems were
integrated so that all customer records are now processed on the same system. As
part of this data processing conversion, the manner in which non-accrual status
was computed on loans converted from SuburbFed Financial Corp. ("SFC") was
changed to a more conservative calculation which is consistent with the
calculation of the Company's other loans. As a result, non-accrual loans at
December 31, 1998 were $9.0 million, while at June 30, 1999, such loans totaled
$11.8 million with the majority of such increases resulting from the change in
methodology.
Non-interest income for the three months ended June 30, 1999 was $1.5 million
compared to $1.7 million for the same period in 1998. Non-interest income for
the six months ended June 30, 1999 was $2.8 million compared to $3.2 million for
the same period in 1998. The largest variance from 1998 to 1999 in
18
<PAGE> 19
non-interest income was a result of gains on the sale of investments recorded in
the first six months of 1998 of approximately $400,000 compared to approximately
$40,000 of such gains recorded in 1999.
Non-interest expense was $7.0 million for the three months ended June 30, 1999
compared to $7.5 million for the same period of 1998. Non-interest expense was
$14.5 million for the first six months of 1999 compared to $14.7 million for the
first six months of 1998. The reduction in non-interest expense reflects modest
reductions in most areas as a result of continued emphasis on cost controls
which more than offset the $357,000 expense of implementation of the RRP during
the second quarter of 1999.
Income tax expense for the three months ended June 30, 1999 was $2.4 million or
39.2 percent of income before income taxes compared to $1.2 million or 38.4
percent of income before income taxes for the three months ended June 30, 1998.
For the six months ended June 30, 1999 income tax expense was $4.6 million or
40.1 percent of income before income taxes. This compares to $2.2 million or
37.4 percent for a similar period in 1998. Increased income levels as a result
of the merger with SFC in July 1998 combined with the interest on the net
proceeds of the conversion raised the Company's federal tax rate from 34 to 35
percent. The Company is currently evaluating various tax strategies in an effort
to reduce its overall tax rate.
19
<PAGE> 20
LIQUIDITY AND COMMITMENTS
The Company's liquidity, represented by cash and cash equivalents, is a product
of its operating, investing, and financing activities. The Company's primary
sources of funds are deposits, borrowings, amortization prepayments and
maturities of outstanding loans and mortgage-backed securities, maturities of
investment securities and other short-term investments and funds provided from
operations. While scheduled payments from the amortization of loans and mortgage
related securities and maturing investment securities and short-term investments
are relatively predictable sources of funds, deposit flows and loan prepayments
are greatly influenced by general interest rates. In addition, the Company
invests excess funds in federal funds sold and other short-term interest earning
assets which provide liquidity to meet lending requirements.
Liquidity management is both a daily and long term function of business
management. Excess liquidity is generally invested in short-term investments
such as federal funds. The Company uses its sources of funds primarily to meet
its ongoing commitments, to pay maturing certificates of deposit and savings
withdrawals, fund loan commitments and maintain a portfolio of mortgage-backed
and mortgage-related securities and investment securities. At June 30, 1999 the
total approved investment and loan origination commitments outstanding amounted
to $53.6 million. At the same date, the unadvanced portion of construction loans
amounted to $34.8 million. Investment securities scheduled to mature in one year
or less at June 30, 1999 totaled $1.8 million while certificates of deposit
scheduled to mature in one year or less at such date totaled $378.2 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, together with borrowings, to meet its
current commitments.
At June 30, 1999 the Bank's regulatory capital was significantly in excess of
regulatory limits set by the Office of Thrift Supervision ("OTS"). The current
requirements and the Bank's actual levels are set forth below (dollars in
thousands):
<TABLE>
<CAPTION>
Required Capital Actual Capital Excess Capital
---------------- -------------- --------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Tangible capital $21,181 1.50% $154,704 10.96% $133,523 9.46%
Core capital 56,484 4.00 154,704 10.96 98,220 6.96
Risk-based capital 50,983 8.00 160,319 25.16 109,336 17.16
</TABLE>
20
<PAGE> 21
YEAR 2000 CONSIDERATIONS
In preparation for the year 2000 (the "Year 2000 Issue"), the Company has
developed a Year 2000 Plan (the "Plan") and a Year 2000 Business Resumption
Contingency Plan. The plans have been presented and approved by the Board of
Directors. The Plan was developed using the guidelines set forth by the Federal
Financial Institutions Examination Council (FFIEC). The Company assigned
responsibility for the Plan to the Year 2000 Committee which reports to the
Board of Directors. The Plan recognizes that the Company's operating, processing
and accounting operations are computer reliant and could be affected by the Year
2000 Issue.
The Company is primarily reliant 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 has worked and will continue to work with those third party
vendors to assess and test their Year 2000 readiness. The Committee has
completed its inventory, assessment, renovation and testing of its mission
critical systems. Management presently believes that the Company's third party
vendors have taken all necessary and appropriate steps to modify existing
software and hardware to ensure that critical systems will function properly.
The most significant hurdle the Company has encountered in verifying and testing
all mission critical third parties is the limited ability of the Company to
independently test the preparedness of its telephone and electric utility
providers.
The Company has identified 41 mission critical (without which the Company cannot
reasonably operate) applications operated by third party vendors. The list is
continually reviewed and updated to include new applications or remove
unnecessary applications. Of such mission critical and critical applications,
the Company has been informed that all are Year 2000 compliant. While the
Company has received assurances from these vendors as to compliance, their
assurances are not guarantees and may not be enforceable. The Company's primary
data service processor has completed its initial testing of its systems (in
which the Company has been involved), with all systems evidencing Year 2000
compliance. To be safe, the Company will conduct further tests following the
recent conversion of the former SFC offices to the Company's current data
system. Further testing will also be performed when the Bank's original
automated teller machines ("ATMs") are converted from its current network to the
network system previously used by SFC. The ATM conversion is scheduled for
October of this year.
Many of the Company's existing older contracts with vendors do not include Year
2000 certifications or warranties. Thus, in the event such vendor's products
and/or services are not actually Year 2000 compliant, the Company's recourse may
be limited. If any required modifications and conversions are not properly 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 Company's
business, financial condition, results of operations and business prospects.
Nevertheless, the Company 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 Company's
customers, particularly in the areas of access to funds and additional expense
incurred to achieve compliance. The Company 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 Company'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 Company'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 Company's exposure in the event that some
borrowers do experience problems or delays in becoming Year 2000 compliant.
21
<PAGE> 22
Pursuant to FFIEC guidelines, the Company has adopted a Liquidity Contingency
Plan to address the potential liquidity issues that federal banking regulations
have raised. These plans include ordering extra currency, arranging lines of
credit, and utilizing more liquid investments in order to provide the Bank with
the ability to maintain smooth operations in the event of abnormally large
withdrawals of funds by consumers concerned with the effect of the advent of the
Year 2000. In addition, the Company has embarked on an extensive consumer
education and awareness program regarding the Company's state of preparedness.
The program includes among other things, multiple correspondence and
communication pieces, several seminars for customers and lobby materials.
The Company has its own company-wide Year 2000 business resumption and
contingency plan. The plan has been revised to reflect the conversion and merger
of the former SFC offices into the data system that the Bank's offices used. The
Company has had a comprehensive business interruption and disaster recovery
contingency plan for many years. The plan is continually updated. The Company
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
Company 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 Company to continue
operations. Such plans include off-line system processing methods, back-up
systems, and other methods to enable the Company to continue to operate in the
event Year 2000 related problems are encountered.
The OTS set June 30, 1999 as the target date by which all thrift institutions,
their vendors and their service bureaus should have had Year 2000 upgrades and
testing largely completed. This provides the Company sufficient time for
verifying that all systems are working properly and to correct any problems
detected by the testing. The OTS also recommends independent evaluation of the
level of preparedness of the Company and its service bureau. Management
understands the importance of these recommendations and believes the Company has
met those guidelines.
Management has retained an independent accounting firm to review all Year 2000
compliance efforts. The results of their review were discussed with the Board of
Directors. Likewise, the Company's primary data service bureau has retained an
independent accounting firm to perform a review of its functions. We have been
provided complete copies of their report. Finally, the Company and its primary
data service bureau, like those of all federally insured depository
institutions, have been subjected to multiple examinations by the OTS pursuant
to FFIEC guidelines with respect to the Year 2000 Issue.
The costs of modifications to the existing software is being absorbed for the
most part by the third party vendors. However, the Company recognizes the need
to purchase new hardware and software. Based upon current estimates, the Company
has budgeted up to $600,000, including hardware, software, staffing, customer
awareness and other issues, for completing the Year 2000 project. The Company
estimates it has incurred nearly $300,000 in costs of addressing the Year 2000
Issue to date. It is estimated that testing costs and indirect income
reductions, due to plans to increase the amount of currency stored in the Bank
use more liquid investment vehicles in order to abrogate the effect of any
abnormal withdrawal levels, will eventually account for almost half of the costs
incurred.
Please be advised that this portion of this Quarterly Report is designated as a
Year 2000 Readiness Disclosure pursuant to the Year 2000 Information and
Readiness Disclosure Act (Public Law 105-271, October 19, 1998). It is intended
for informational purposes only and is not intended to be a representation or
warranty.
22
<PAGE> 23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
For a discussion of the Company's asset and liability management policies as
well as the potential impact of interest rate changes upon the market value of
the Company's portfolio equity, see Management's Discussion and Analysis of
Financial Condition and Results of Operations in the Company's annual report for
the year ended December 31, 1998. There has been no material change in the
Company's asset and liability position or the market value of the Company's
portfolio equity since December 31, 1998.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) An annual meeting of stockholders of the Company was held on
May 4, 1999 ("Annual Meeting")
(b) Not applicable.
(c) There were 21,872,496 shares of Common Stock of the Company eligible
to be voted at the Annual Meeting and 18,671,529 shares were
represented at the meeting by the holders thereof, which constitute
a quorum. The items voted upon at the Annual Meeting and the vote for
each proposal were as follows:
(1) Election of directors for a three-year term.
Sally A. Abbott FOR 17,203,390 WITHHELD 1,468,139
---------- ---------
Gregory W. Blaine FOR 17,507,970 WITHHELD 1,163,559
---------- ---------
Thomas J. Burns FOR 17,259,395 WITHHELD 1,412,134
---------- ---------
(2) Proposal to ratify the appointment of Ernst & Young LLP as the
Company's independent auditors for the year ending December 31,
1999.
FOR 17,972,766 AGAINST 332,056 ABSTAIN 366,707
---------- ------- -------
Each of the proposals was adopted by the stockholders of the
Company.
(d) Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits (filed herewith unless otherwise noted)
3.1 Certificate of Incorporation of CFS Bancorp, Inc.*
3.2 Bylaws of CFS Bancorp, Inc.*
4.0 Form of Stock Certificate of CFS Bancorp, Inc.*
10.1 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.,
Citizens Financial Services 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**
27.0 Financial Data Schedule
- ------------
23
<PAGE> 24
* Incorporated by Reference from the Company's Registration Statement on
Form S-1 filed on March 26, 1998, as amended and declared effective on
May 14, 1998.
** Incorporated by Reference from the Company's Definitive Proxy Statement
for a Special Meeting of Stockholders filed on December 29, 1998.
*** Incorporated by Reference from the Company's Form 10-K for the year
ended December 31, 1998 filed on March 31, 1999.
(b) Reports on Form 8-K
None
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CFS BANCORP, INC.
Date: August 11, 1999 By: /s/ Thomas F. Prisby
--------------------------------------------
Thomas F. Prisby, Chairman and
Chief Executive Officer
Date: August 11, 1999 By: /s/ John T. Stephens
--------------------------------------------
John T. Stephens, Executive Vice President
and Chief Financial Officer
24
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