<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 September 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 19,547,216 shares of Common Stock issued and outstanding as
of October 29, 1999.
<PAGE> 2
CFS BANCORP, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition at September 30,
1999 and December 31, 1998 3
Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 1999 and 1998 4
Consolidated Statements of Changes in Stockholders' Equity
for the Nine Months Ended September 30, 1999 5
Consolidated Statements of Cash Flows for the Nine
Months Ended September 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
</TABLE>
2
<PAGE> 3
CFS BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
ASSETS
Cash and amounts due from depository institutions $ 17,723 $ 19,067
Interest-bearing deposits 1,017 25,201
Federal funds sold 100 5,575
------------- ------------
Cash and cash equivalents 18,840 49,843
Investment securities available-for-sale 43,751 34,720
Investment securities held-to-maturity
(fair value 1999-$191,539; 1998-$169,263) 198,753 166,500
Mortgage-related securities available-for-sale 307,344 277,888
Mortgage-related securities held-to-maturity
(fair value 1999-$108,651; 1998-$178,694) 109,677 176,956
Loans receivable, net 820,785 726,081
Investment in Federal Home Loan Bank stock, at cost 15,985 8,183
Office properties and equipment 16,523 16,328
Accrued interest receivable 11,233 9,729
Real estate owned 1,129 435
Prepaid expenses and other assets 10,420 3,954
------------- ------------
Total assets $ 1,554,440 $ 1,470,617
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 926,957 $ 969,802
Borrowed money 383,288 215,271
Advance payments by borrowers for taxes
and insurance 7,917 6,057
Other liabilities 22,753 19,399
------------- ------------
Total liabilities 1,340,915 1,210,529
------------- ------------
Stockholders' Equity:
Common stock; $.01 par value: 85,000,000 shares authorized
Shares issued: 23,184,532 and 22,959,251 at
September 30,1999 and December 31, 1998, respectively
Shares outstanding: 19,599,560 and 22,959,251 at
September 30, 1999 and December 31, 1998, respectively 232 230
Additional paid-in capital 187,068 186,062
Retained earnings, substantially restricted 92,303 87,178
Treasury stock, at cost: 3,584,972 and -0- shares at
September 30, 1999 and December 31, 1998, respectively (38,134) --
Unearned common stock acquired by Employee Stock
Ownership Plan (13,093) (13,093)
Unearned common stock acquired by Recognition and
Retention Plan (6,784) --
Accumulated other comprehensive (loss), net of tax (8,067) (289)
------------- ------------
Total stockholders' equity 213,525 260,088
------------- ------------
Total liabilities and stockholders' equity $ 1,554,440 $ 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 Nine Months Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income:
Loans $14,717 $13,309 $42,538 $38,144
Mortgage-related securities 7,276 5,863 22,710 16,743
Other investment securities 3,768 6,029 10,620 15,306
Other 392 844 1,119 1,704
--- --- ----- ----
Total interest income 26,153 26,045 76,987 71,897
Interest expense:
Deposits 9,638 10,225 29,897 34,670
Borrowings 4,776 3,794 11,726 7,786
Subscription deposits -- 701 -- 701
-- --- -- ---
Total interest expense 14,414 14,720 41,623 43,157
------ ------ ------ ------
Net interest income 11,739 11,325 35,364 28,740
Provision for losses on loans 150 1,285 450 1,480
--- ----- --- -----
Net interest income after
provision for losses on loans 11,589 10,040 34,914 27,260
Non-interest income:
Loan fees 227 178 697 665
Insurance commissions 200 134 619 652
Investment commissions 300 242 1,056 632
Gain (loss) on sale of available-for-sale
investment securities - net 45 (46) 83 369
Net gain (loss) on sale of loans (5) -- 63 --
Unrealized loss on securities held for trade, net -- (66) -- (21)
Gain (loss) on sale of real estate owned 40 -- 12 (16)
Net gain on sale of office properties 3 134 3 134
Other income 351 323 1,389 1,729
------ ---- ------ -----
Total non-interest income 1,161 899 3,922 4,144
Non-interest expense:
Compensation and employee benefits 4,979 5,483 14,004 14,362
Net occupancy expense 619 367 1,903 2,083
Furniture and equipment expense 584 831 1,652 1,547
Federal deposit insurance premiums 139 153 433 461
Data processing 291 240 885 731
Marketing 117 133 330 515
Real estate operations -- 3 -- 3
Merger related expense -- 6,503 -- 6,503
Contribution to the Citizens Savings Foundation -- 3,013 -- 3,013
Other general and administrative expenses 1,103 1,640 3,150 3,799
------ ----- ----- -----
Total non-interest expense 7,832 18,366 22,357 33,017
------ ------ ------ ------
Income (loss) before income taxes 4,918 (7,427) 16,479 (1,613)
Income tax expense (benefit) 1,949 (2,947) 6,580 (772)
------ ------ ----- ----
Net income (loss) $2,969 ($4,480) $9,899 ($841)
====== ======= ====== =====
Per share data:
Basic earnings (loss) per share $0.16 ($0.21) $0.49 N/A
Diluted earnings (loss) per share 0.16 (0.21) 0.49 N/A
Cash dividends declared per share 0.09 0.08 0.25 N/A
Weighted average shares outstanding 18,556,856 21,431,475 20,001,677 N/A
Weighted average diluted shares outstanding 18,893,862 21,828,746 20,338,683 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
Additional Stock Stock
Common Paid-In Retained Treasury Acquired Acquired
Stock Capital Earnings Stock by ESOP by RRP
----- ------- -------- ----- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance January 1, 1999 $230 $186,062 $ 87,178 $ -- ($13,093) $ --
Net income -- -- 9,899 -- -- --
Other comprehensive income, net of tax:
Change in unrealized appreciation on
available-for-sale securities, net of tax -- -- -- -- -- --
---------------------------------------------------------------------
Total comprehensive income (loss) $ -- $ -- $ 9,899 $ -- $ -- $ --
---------------------------------------------------------------------
Purchase of treasury stock -- -- -- (38,134) -- --
Exercise of stock options 2 934 -- -- -- --
Tax effect related to stock options
exercised -- 72 -- -- -- --
Purchase of shares for Recognition and
Retention Plan -- -- -- -- -- (7,499)
Amortization of awards under Recognition -- -- -- -- -- 715
and Retention Plan
Dividends declared on common stock -- -- (4,774) -- -- --
---------------------------------------------------------------------
Balance September 30, 1999 $232 $187,068 $ 92,303 ($38,134) ($13,093) ($6,784)
==== ======== ======== ========= ========= ========
<CAPTION>
Accumulated
Other
Comprehensive
(Loss) Total
------ -----
<S> <C> <C>
Balance January 1, 1999 ($289) $260,088
Net income -- 9,899
Other comprehensive income, net of tax:
Change in unrealized appreciation on
available-for-sale securities, net of tax (7,778) (7,778)
--------------------------
Total comprehensive income (loss) ($7,778) $2,121
--------------------------
Purchase of treasury stock -- (38,134)
Exercise of stock options -- 936
Tax effect related to stock options
exercised -- 72
Purchase of shares for Recognition and
Retention Plan -- (7,499)
Amortization of awards under Recognition -- 715
and Retention Plan
Dividends declared on common stock -- (4,774)
--------------------------
Balance September 30, 1999 ($8,067) $213,525
======== ========
</TABLE>
See accompanying notes
5
<PAGE> 6
CFS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------
1999 1998
---- ----
<S> <C> <C>
Operating activities:
Net income (loss) $9,899 ($841)
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 450 1,480
Depreciation expense 1,536 1,495
Deferred income taxes (2,792) (2,323)
Amortization of cost of stock benefit plans 715 81
Change in deferred income 1,014 306
Increase in interest receivable (1,504) (2,072)
Decrease in accrued interest payable 855 1,855
Proceeds from sale of loans held for sale 7,273 8,493
Origination of loans held for sale (7,564) (8,739)
Proceeds from sale of credit card loans 1,533 --
Net gain on sale of securities held for trade -- (53)
Unrealized gain on securities held for trade -- 21
Net gain on sale of credit card loans (59) --
Net gain on sale of available for sale securities (45) (224)
Net gain on sale of loans (5) (71)
Gain of sale of office property (3) (161)
Proceeds from sales of securities held for trade -- 409
Purchase of securities held for trade -- (456)
Net loss (profit) on sale of real estate owned (12) 16
Proceeds from sale of real estate held for development and sale -- 1,071
Decrease in prepaid expenses and other assets 1,700 2,083
Increase in other liabilities 2,610 3,978
------ -----
Net cash provided by operating activities 15,601 9,348
------- -----
Investing activities:
Available for sale investment securities:
Purchases (32,666) (27,867)
Repayments 133 --
Sales 23,179 593
Held to maturity investment securities:
Purchases (90,073) (323,949)
Repayments and maturities 57,820 301,476
Available for sale mortgage-related securities:
Purchases (79,629) (149,119)
Repayments 36,374 31,658
Sales 1,088 4,311
Held to maturity mortgage-related securities:
Purchases -- (74,040)
Repayments 67,279 111,266
Purchase of Federal Home Loan Bank stock (8,749) (1,045)
Redemption of Federal Home Loan Bank stock 947 700
Loan originations and principal payments on loans (98,461) (117,075)
Construction costs on real estate owned (81) (86)
Proceeds from sale of real estate owned 513 1,489
Purchases of property and equipment (1,731) (2,411)
</TABLE>
6
<PAGE> 7
CFS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
September 30,
------------
1999 1998
---- ----
Disposals of property and equipment $ 3 $ 1,462
-------- --------
Net cash used in investing activities (124,054) (242,637)
-------- --------
Financing activities:
Proceeds from exercise of stock options 936 684
Dividends paid on common stock (4,774) (2,037)
Proceeds from sale of treasury stock -- 32
Purchase of treasury stock (38,134) --
Purchase of shares for Recognition and Retention Plan (7,499) --
Net increase in NOW, passbook and money
market accounts 10,021 14,027
Net decrease in certificates of deposit (52,977) (29,945)
Net increase in advance payments by borrowers for
taxes and insurance 1,860 3,067
Proceeds of stock conversion, net -- 160,968
Net increase in borrowed funds 168,017 107,726
-------- --------
Net cash flows provided by financing activities 77,450 245,522
-------- --------
Increase (decrease) in cash and cash equivalents (31,003) 12,233
Cash and cash equivalents at beginning of period 49,843 20,837
-------- --------
Cash and cash equivalents at end of period $ 18,840 $ 42,070
======== ========
Supplemental disclosure of non-cash activities:
Transfer of loans to real estate owned $ 1,112 $ 547
Loans securitized into mortgage-related securities -- 3,402
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 nine months ended September 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>
September 30, 1999 December 31, 1998
------------------ -----------------
(Dollars in Thousands)
Mortgage Loans: Amount % Amount %
------ ----- ------ -----
<S> <C> <C> <C> <C>
Single-family residential $649,028 72.98% $596,199 80.08%
Multi-family residential 33,161 3.73 21,050 2.83
Commercial real estate 68,523 7.71 38,999 5.24
Construction and land
development:
Single-family residential 34,541 3.88 31,516 4.23
Multi-family residential 33,987 3.82 -- --
Other 40,351 4.54 19,645 2.64
Home equity 14,899 1.68 19,589 2.63
--------------------------- -------------------------
Total mortgage loans 874,490 98.34 726,998 97.65
Other loans 14,792 1.66 17,503 2.35
--------------------------- -------------------------
Total loans receivable 889,282 100.00% 744,501 100.00%
--------------------------- -------------------------
Less:
Undisbursed portion of
loan proceeds 61,934 13,068
Allowance for losses on
loans 5,762 5,357
Deferred loan fees 801 (5)
=========================== =========================
Loans receivable, net $820,785 $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 September 30, 1999: Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Trust preferred securities $4,922 $-- $249 $4,673
Equity securities 8,751 803 343 9,211
Callable agency securities and corporate bonds 29,992 13 138 29,867
------- ---- ---- -------
$43,665 $816 $730 $43,751
======= ==== ==== =======
Available-for-Sale at December 31, 1998:
Gross Gross
<CAPTION>
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
======= ==== ==== =======
Held-to-Maturity at September 30, 1999:
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Callable agency securities and corporate
bonds $198,753 $ - $7,214 $191,539
======== === ====== ========
Held-to-Maturity at December 31, 1998:
<CAPTION>
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):
Available-for-Sale at September 30, 1999:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Participation certificates $60,294 $73 $2,342 $58,025
Real estate mortgage investment conduits
and collateralized mortgage obligations 259,820 150 10,651 249,319
-------- ---- ------- --------
$320,114 $223 $12,993 $307,344
======== ==== ======= ========
Available-for-Sale at December 31, 1998:
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
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 September 30, 1999:
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Participation certificates $40,278 $54 $1,656 $38,676
Real estate mortgage investment conduits
and collateralized mortgage obligations 69,399 828 252 69,975
-------- ---- ------ --------
$109,677 $882 $1,908 $108,651
======== ==== ====== ========
Held-to-Maturity at December 31, 1998:
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
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 nine months ended September 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 for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended Three Months Ended
September 30,1999 September 30, 1999 September 30, 1998
----------------- ------------------ ------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Net income (loss) $2,969 $9,899 ($4,480)
Weighted average number of common shares outstanding 19,797,955 21,272,682 22,815,141
Average ESOP shares not committed to be released (1,241,099) (1,271,005) (1,383,666)
---------- ---------- ----------
Weighted average number of shares outstanding for
basic earnings per share computation purposes 18,556,856 20,001,677 21,431,475
Dilutive effects of stock options 337,006 337,006 397,271
---------- ---------- ----------
Weighted average shares and common share equivalents
outstanding for diluted earnings per share purposes 18,893,862 20,338,683 21,828,746
========== ========== ==========
Basic earnings (loss) per share $0.16 $0.49 ($0.21)
Diluted earnings (loss) per share $0.16 $0.49 ($0.21)
</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 Nine Months Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $2,969 ($4,480) $9,899 ($841)
Net change in unrealized gain or (loss) on
securities available-for-sale, net (3,678) 276 (7,778) 601
------ -------- ------- ------
Comprehensive income ($709) ($4,204) $2,121 ($240)
====== ======== ======= ======
</TABLE>
11
<PAGE> 12
8. NON-PERFORMING ASSETS
The following table sets forth information with respect to non-performing assets
at the dates indicated:
<TABLE>
<CAPTION>
(Dollars In Thousands)
Non-accrual loans: September 30, December 31,
Mortgage loans: 1999 1998
---- ----
<S> <C> <C>
Construction and land development $466 $469
Single-family residential 6,643 5,137
Multi-family residential 471 516
Non-residential 2,325 2,754
Other loans 834 77
------- ------
Total non-performing loans 10,739 8,953
Other real estate owned 1,129 435
------- ------
Total non-performing assets $11,868 $9,388
======= ======
Non-performing assets to total assets 0.76% 0.64%
Non-performing loans to total loans 1.45 1.20
</TABLE>
The following table is a summary of changes in the allowance for losses
on loans for the nine months ended September 30, 1999 and the year ended
December 31, 1998: (Dollars in Thousands)
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Balance at beginning of period $ 5,357 $3,825
Provision for loan losses 450 1,630
Charge-offs (89) (125)
Recoveries 44 27
Balance at end of period $ 5,762 $5,357
======= ======
Allowance for loan losses to total non-performing loans at end
of period 53.65% 59.84%
Allowance for loan losses to total loans at end of period 0.70 0.72
</TABLE>
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 September 30, 1999 the Company's total assets amounted to $1.6 billion
compared to $1.5 billion at December 31, 1998. Net increases of $94.7 million in
loans receivable and $11.3 million in securities of all types, net deposit
withdrawals of $42.8 million and re-purchases of an aggregate of $45.2 million
of the Company's common stock $38.1 million of which was classified as treasury
stock and $7.1 million of which was for the Company's Recognition and Retention
Plan ("RRP") were funded by a net decrease in cash and cash equivalent of $31.0
million and a net increase in borrowed money of $168.0 million.
Cash and cash equivalents decreased from $49.8 million at December 31, 1998 to
$18.8 million at September 30, 1999. This $31.0 million decrease was used to
fund deposit withdrawals, new loans, securities purchases and to repurchase
stock for the Company's stock repurchase program and RRP.
Investment securities (available-for-sale and held-to-maturity) increased from
$201.2 million at December 31, 1998 to $242.5 million at September 30, 1999.
Mortgage-related securities (available-for-sale and held-to-maturity) decreased
from $454.8 million to $417.0 million during the same time period. Investment in
Federal Home Loan Bank stock increased from $8.2 million to $16.0 million from
December 31, 1998 to September 30, 1999. This overall increase of $11.3 million
was funded by a decrease in cash and cash equivalents and an increase in
borrowed money.
Loans receivable increased from $726.1 million at December 31, 1998 to $820.08
million at September 30, 1999. This net increase of $94.7 million was funded by
a decrease in cash and cash equivalents and an increase in borrowed money.
Approximately one-half of the increase in loans receivable is the result of
continuation of the Company's strategy to increase commercial and construction
real estate lending from previous levels.
Deposits decreased from $969.8 million at December 31, 1998 to $927.0 million at
September 30, 1999. This net decrease of $42.8 million was funded by a decrease
in cash and cash equivalents and an increase in borrowed money. The Company
continues to set deposit interest rates to be competitive but not overly
aggressive. The Company will continually review this strategy in the fourth
quarter should a change in strategy be indicated due to Year 2000 considerations
or other factors.
Borrowed money increased by $168.0 million during the first nine months of 1999
from $215.3 million at December 31, 1998 to $383.3 million at September 30,
1999. Borrowed funds consist of advances from the Federal Home Loan Banks
("FHLB") of Indianapolis and Chicago and reverse repurchase agreements. All
borrowed money is secured. The increased borrowings were used primarily to fund
securities purchases, originations of new loans and net deposit withdrawals.
They were also used to fund the purchase of treasury stock under the Company's
stock repurchase program as well as shares to fund the RRP.
Stockholders' equity decreased by $46.6 million during the first nine months of
1999 from $260.1 million at December 31, 1998 to $213.5 million at September 30,
1999. This decrease was primarily the result of the purchase of treasury stock
(3,584,972 shares) and the funding of the RRP (714,150 shares). A decrease in
unrealized appreciation on available-for-sale securities, net of tax (a
component of the other comprehensive income) of $7.8 million also contributed to
this overall decrease.
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 September 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 $782,181 $14,394 7.36% $663,748 $12,655 7.63%
Other loans 14,410 323 8.97% 27,771 654 9.42%
--------------------------- ----------------------------
Total loans 796,591 14,717 7.39% 691,519 13,309 7.70%
Securities: (2) 655,373 11,044 6.74% 664,244 11,892 7.16%
Other interest-earning assets (3) 23,590 392 6.65% 56,942 844 5.93%
--------------------------- ----------------------------
Total interest-earning assets 1,475,554 26,153 7.09% 1,412,705 26,045 7.38%
Non-interest earning assets 54,275 65,094
------------- -------------
Total assets $1,529,829 $1,477,799
============= =============
Interest-bearing liabilities:
Deposits:
NOW and money market accounts $121,258 $683 2.25% $112,005 $749 2.67%
Passbook accounts 235,251 1,656 2.82% 219,560 1,827 3.33%
Certificates of deposit 547,937 7,299 5.33% 629,533 7,649 4.86%
--------------------------- ----------------------------
Total deposits 904,446 9,638 4.26% 961,098 10,225 4.26%
--------------------------- ----------------------------
Total borrowings 347,182 4,776 5.50% 226,701 4,495 7.93%
--------------------------- ----------------------------
Total interest-bearing liabilities 1,251,628 14,414 4.61% 1,187,799 14,720 4.96%
Non-interest bearing liabilities (4) 60,936 82,986
Total liabilities 1,312,564 1,270,785
Stockholders' equity 217,265 207,014
------------- --------
Total liabilities and stockholders' equity $1,529,829 $1,477,799
============= =============
Net interest-earning assets $223,926 $224,906
============= =============
Net interest income/interest rate spread $11,739 2.48% $11,325 2.42%
============= ==============
Net interest margin 3.18% 3.21%
Ratio of average interest-earning assets to
average interest-bearing liabilities 117.89% 118.93%
<CAPTION>
1997
Average Average
Balance Interest Yield/Cost
------------------------------------------
<S> <C> <C> <C>
Interest - earning assets:
Loans Receivable
Real estate loans $536,626 $9,229 6.88%
Other loans 21,114 509 9.64%
---------------------------
Total loans 557,740 9,738 6.98%
Securities: (2) 543,495 11,563 8.51%
Other interest-earning assets (3) 22,091 347 6.28%
---------------------------
Total interest-earning assets 1,123,326 21,648 7.71%
Non-interest earning assets 41,648
-------------
Total assets $1,164,974
=============
Interest-bearing liabilities:
Deposits:
NOW and money market accounts $114,920 $734 2.55%
Passbook accounts 208,238 1,809 3.47%
Certificates of deposit 634,275 9,567 6.03%
---------------------------
Total deposits 957,433 12,110 5.06%
---------------------------
Total borrowings 74,167 1,148 6.19%
---------------------------
Total interest-bearing liabilities 1,031,600 13,258 5.14%
Non-interest bearing liabilities (4) 37,159
Total liabilities 1,068,759
Stockholders' equity 96,215
-------------
Total liabilities and stockholders' equity $1,164,974
=============
Net interest-earning assets $91,726
=============
Net interest income/interest rate spread $8,390 2.57%
=============
Net interest margin 2.99%
Ratio of average interest-earning assets to
average interest-bearing liabilities 108.89%
</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>
Nine Months Ended September 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 $753,118 $41,529 7.35% $628,101 $36,439 7.74%
Other loans 13,667 1,009 9.84% 24,022 1,705 9.46%
--------------------------- ----------------------------
Total loans 766,785 42,538 7.40% 652,123 38,144 7.80%
Securities: (2) 660,988 33,330 6.72% 598,573 32,049 7.14%
Other interest-earning assets (3) 27,275 1,119 5.47% 36,550 1,704 6.22%
--------------------------- ----------------------------
Total interest-earning assets 1,455,048 76,987 7.05% 1,287,246 71,897 7.45%
Non-interest earning assets 54,070 53,445
------------- -------------
Total assets $1,509,118 $1,340,691
============= =============
Interest-bearing liabilities:
Deposits:
NOW and money market accounts $121,224 $2,033 2.24% $114,700 $2,180 2.53%
Passbook accounts 231,211 4,962 2.86% 214,522 5,343 3.32%
Certificates of deposit 566,237 22,902 5.39% 640,911 27,147 5.65%
--------------------------- ----------------------------
Total deposits 918,672 29,897 4.34% 970,133 34,670 4.76%
--------------------------- ----------------------------
Total borrowings 292,075 11,726 5.35% 168,154 8,487 6.73%
--------------------------- ----------------------------
Total interest-bearing liabilities 1,210,747 41,623 4.58% 1,138,287 43,157 5.06%
Non-interest bearing liabilities (4) 62,144 61,495
Total liabilities 1,272,891 1,199,782
Stockholders' equity 236,227 140,909
------------- -------------
Total liabilities and stockholders' equity $1,509,118 $1,340,691
============= =============
Net interest-earning assets $244,301 $148,959
============= =============
Net interest income/interest rate spread $35,364 2.47% $28,740 2.39%
============= ==============
Net interest margin 3.24% 2.98%
Ratio of average interest-earning assets to
average interest-bearing liabilities 120.18% 113.09%
=========== =============
<CAPTION>
1997
Average Average
Balance Interest Yield/Cost
-----------------------------------------
<S> <C> <C> <C>
Interest - earning assets:
Loans Receivable
Real estate loans $507,193 $30,919 8.13%
Other loans 20,919 1,475 9.40%
---------------------------
Total loans 528,112 32,394 8.18%
Securities: (2) 530,004 28,443 7.16%
Other interest-earning assets (3) 24,595 1,028 5.57%
---------------------------
Total interest-earning assets 1,082,711 61,865 7.62%
Non-interest earning assets 40,759
-------------
Total assets $1,123,470
=============
Interest-bearing liabilities:
Deposits:
NOW and money market accounts $117,395 $2,194 2.49%
Passbook accounts 209,506 5,173 3.29%
Certificates of deposit 605,466 27,122 5.97%
---------------------------
Total deposits 932,367 34,489 4.93%
----------------------------
Total borrowings 64,021 2,910 6.06%
---------------------------
Total interest-bearing liabilities 996,388 37,399 5.00%
Non-interest bearing liabilities (4) 33,258
Total liabilities 1,029,646
Stockholders' equity 93,824
-------------
Total liabilities and stockholders' equity $1,123,470
=============
Net interest-earning assets $86,323
=============
Net interest income/interest rate spread $24,466 2.61%
===========================
Net interest margin 3.01%
Ratio of average interest-earning assets to
average interest-bearing liabilities 108.66%
=============
</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 September 30,
1999 compared to 1998 1998 compared to 1997
Increase (decrease) due to Increase (decrease) due to
-------------------------------------------------------------------------------------------------
(Dollars In Thousands)
Total Net Total Net
Increase Increase
Rate Volume Rate/Volume (Decrease) Rate Volume Rate/Volume (Decrease)
---- ------ ----------- ---------- ---- ------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable:
Real estate loans ($440) $2,258 ($79) $1,739 $1,002 $2,186 $238 $3,426
Other loans (32) (315) 16 (331) (12) 161 (4) 145
-------------------------------------------------------------------------------------------------
Total loans receivable (472) 1,943 (63) 1,408 990 2,347 234 3,571
Securities (698) (159) 9 (848) (1,833) 2,569 (407) 329
Other interest-earning assets 102 (494) (60) (452) (20) 548 (31) 497
-------------------------------------------------------------------------------------------------
Total net change in income on
interest-earning assets (1,068) 1,290 (114) 108 (863) 5,464 (204) 4,397
Interest-bearing liabilities:
Deposits:
NOW and money markets (118) 62 (10) (66) 35 (19) (1) 15
Passbook accounts (282) 131 (20) (171) (76) 98 (4) 18
Certificates of deposit 737 (992) (95) (350) (1,861) (71) 14 (1,819)
-------------------------------------------------------------------------------------------------
Total deposits 337 (799) (125) (587) (1,902) 8 9 (1,885)
Borrowings (1,376) 2,389 (732) 281 322 2,361 664 3,347
-------------------------------------------------------------------------------------------------
Total net change in expense on
interest-bearing liabilities (1,039) 1,590 (857) (306) (1,580) 2,369 673 1,462
Net change in net interest income ($29) ($300) $743 $414 $717 $3,095 ($877) $2,935
=================================================================================================
</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>
Nine months ended September 30,
1999 compared to 1998 1999 compared to 1998
Increase (decrease) due to Increase (decrease) due to
(Dollars In Thousands)
---------------------------------------------------------------------------------------------------
Total Net Total Net
Increase Increase
Rate Volume Rate/Volume (Decrease) Rate Volume Rate/Volume (Decrease)
---- ------ ----------- ---------- ---- ------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable:
Real estate loans ($1,804) $7,253 ($359) $5,090 ($1,495) $7,371 ($356) $5,520
Other loans 68 (735) (29) (696) 10 219 1 230
-------------------------------------------------------------------------------------------------
Total loans receivable (1,736) 6,518 (388) 4,394 (1,485) 7,590 (355) 5,750
Securities (1,866) 3,342 (195) 1,281 (65) 3,679 (8) 3,606
Other interest-earning assets (204) (433) 52 (585) 118 500 58 676
-------------------------------------------------------------------------------------------------
Total net change in income on
interest-earning assets (3,806) 9,427 (531) 5,090 (1,432) 11,769 (305) 10,032
Interest-bearing liabilities:
Deposits:
NOW and money markets (257) 124 (14) (147) 38 (51) (1) (14)
Passbook accounts (739) 416 (58) (381) 45 124 1 170
Certificates of deposit (1,225) (3,163) 143 (4,245) (1,477) 1,588 (86) 25
-------------------------------------------------------------------------------------------------
Total deposits (2,221) (2,623) 71 (4,773) (1,394) 1,661 (86) 181
Borrowings (1,736) 6,255 (1,280) 3,239 321 4,733 523 5,577
-------------------------------------------------------------------------------------------------
Total net change in expense on
interest-bearing liabilities (3,957) 3,632 (1,209) (1,534) (1,073) 6,394 437 5,758
Net change in net interest income $151 $5,795 $678 $6,624 ($359) $5,375 ($742) $4,274
=================================================================================================
</TABLE>
17
<PAGE> 18
RESULTS OF OPERATIONS
The Company reported net income of $3.0 million and $9.9 million for the three
and nine months ended September 30, 1999, respectively, as compared to net
losses of $4.5 million and $841,000 during the same periods in 1998. The
increased income of $7.5 million and $10.7 million, respectively, for the three
and nine month periods primarily reflects one-time charges (net of taxes) of
$7.4 million in the third quarter of 1998. These charges related to the
Company's merger with SuburbFed Financial Corp. ("SFC") and the establishment of
the Citizens Savings Foundation (a private charitable foundation). The increase
of $10.7 million for the nine month period reflects the above-mentioned one-time
charges as well as the additional interest income from the investment of the
conversion proceeds received in the July 1998 conversion from a mutual to a
stock form of ownership.
Interest income increased by $108,000 or 0.4 percent to $26.2 million for the
three months ended September 30, 1999 compared to $26.0 million for the third
quarter of 1998. For the nine month period ended September 30, 1999 interest
income was $77.0 million compared to $71.9 million for the same period in 1998,
a $5.1 million or 7.1 percent increase. Increases in volume of loans created
increases in the three month period compared to the prior year. Increases in
volume of both loans and securities created increases in the nine month period
compared to the prior year. These increases were substantially offset by
decreases in rates on both loans and securities for the three and nine months
period in 1999 compared to 1998. The increase due to increased volumes of both
loans and securities was partially offset by decreases in rates on both loans
and securities for the nine months ended September 30, 1999 when compared to the
same period in 1998.
Interest expense decreased $306,000 or 2.1 percent for the three months ended
September 30, 1998 to $14.4 million compared to $14.7 million for the third
quarter of 1998. For the nine month period ended September 30, 1999 interest
expenses decreased $1.6 million or 3.7 percent to $41.6 million from $43.2
million for the nine months ended September 30, 1998. For the three months ended
September 30, 1999 compared to the three months ended September 30, 1998 this
decrease resulted from a significant increased volume of borrowed money and
increases in certificate rates being offset by reductions in rates on borrowed
money and a reduction in the volume of certificates of deposit. For the nine
months ended September 30, 1999 compared to the same period in 1998, increased
borrowings were partially offset by decreases in most rates.
The Company's provision for loan losses for the three months ended September 30,
1999 was $150,000 compared to $1.3 million for the three months ended September
30, 1998. The provision for loan losses for the nine months ended September 30,
1999 was $450,000 compared to $1.5 million for the nine months ended September
30, 1998. In the third quarter of 1998 such provisions included a one-time
charge of $1.2 million to conform SFC's provision for loan loss methodology to
that of the Company. Absent this one-time charge, provisions in 1999 were higher
than 1998 due to an overall increase in the Company's loan portfolio as well as
an increased amount of commercial real estate loans and construction loans, both
of which are generally deemed to involve greater risk than loans secured by
single-family residences. Provisions for loan losses are tested quarterly and
compared to certain benchmarks established by management for reasonableness.
Non-interest income for the three and nine months ended September 30, 1999 was
$1.2 million and $3.9 million, respectively, as compared to $900,000 and $4.1
million during the same periods in 1998. The increase for the three month period
is reflective of an increase in loan fees and insurance and investment
commissions. The reduction in non-interest income for the nine month period is
primarily the result of a $305,000 reduction in net gains on the sale of assets.
18
<PAGE> 19
Non-interest expense for the three months ended September 30, 1999 was $7.8
million compared to $18.4 million for the three months ended September 30, 1998.
Non-interest expense for the nine months ended September 30, 1999 was $22.4
million compared to $33.0 million for the nine months ended September 30, 1998.
Both the three and nine month figures for 1998 reflect one-time charges of $9.5
million. Without these one-time charges, reductions in non-interest expense
reflect modest reductions in a variety of areas as a result of continued
emphasis on cost controls offset somewhat by the cost of implementing the RRP
during the second quarter of 1999.
Income tax expense for the three months and nine months ended September 30, 1999
was $1.9 million and $6.6 million, respectively. These amounts represented 39.6
percent and 39.9 percent, respectively, of net income before income taxes. This
compares to income tax benefits of $2.9 million and $772,000 for the three and
nine months ended September 30, 1998 respectively. Prior to the one-time charges
and the related tax benefits therein the 1998 tax rate was 38.7 percent.
Increased income levels as a result of the merger with SFC in July 1998 raised
the Company's federal tax rate from 34 to 35 percent. The Company is
implementing various tax strategies which should reduce its effective tax rate
in 2000.
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 payments, prepayments
and maturities of outstanding loans and mortgage-related 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 and investing
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-related
securities and investment securities. At September 30, 1999 the total approved
investment and loan origination commitments outstanding amounted to $103.4
million. At the same date, the unadvanced portion of construction loans amounted
to $62.3 million. Investment securities scheduled to mature in one year or less
at September 30, 1999 totaled $207,000 while certificates of deposit scheduled
to mature in one year or less at such date totaled $392.2 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 September 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):
Required Capital Actual Capital Excess Capital
---------------- -------------- --------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Tangible capital $22,546 1.50% $155,903 10.37% $133,357 8.87%
Core capital 60,123 4.00 155,903 10.37 95,780 6.37
Risk-based capital 57,489 8.00 161,561 22.48 104,063 14.48
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 to 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 (e.g.,
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 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 testing of its systems (in which the
Company has been involved), with all systems evidencing Year 2000 compliance.
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 conditions.
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.
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, utilizing lines of
credit, holding 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.
21
<PAGE> 22
The program includes among other things, multiple correspondence and
communication pieces, seminars for customers, employee education, lobby
materials, signs and lapel stickers.
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 use. 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, alternate site designations 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 provided the Company sufficient time for
verifying that all systems are working properly and to correct any problems
detected by the testing. The OTS also recommended 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.
The Company's primary data service bureau has retained an independent accounting
firm to perform a review of its functions. The Company has been provided
complete copies of the service bureau's 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 Company's 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 $750,000, including hardware, software, staffing,
customer awareness and other issues, for completing the Year 2000 project. The
Company estimates it has incurred nearly $400,000 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
and the use of more liquid investment vehicles in order to abrogate the effect
of any abnormal withdrawal levels) will eventually account for most of the
remaining costs to be 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.
Interest rate levels have risen from December 31, 1998 levels resulting in
estimated average lives of mortgages and mortgage related products extending
from those at December 31, 1998. At December 31, 1998 a 200 basis point increase
in interest rates indicated a remaining Net Portfolio Value ("NPV") of 11% of
the Bank's total assets. As of June 30, 1999 such an increase in interest rates
would result in a NPV of 9% of the Bank's total assets. This current increase in
interest rate levels results in NPV ratios which are still within an acceptable
range of values according to existing Company policies.
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
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*
10.4 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 Annual Report on 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: November 11, 1999 By: /s/ Thomas F. Prisby
-----------------------------------------------
Thomas F. Prisby, Chairman and
Chief Executive Officer
Date: November 11, 1999 By: /s/ John T. Stephens
-----------------------------------------------
John T. Stephens, Executive Vice President and
Chief Financial Officer
24
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 17,723
<INT-BEARING-DEPOSITS> 1,017
<FED-FUNDS-SOLD> 100
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 351,095
<INVESTMENTS-CARRYING> 308,430
<INVESTMENTS-MARKET> 300,190
<LOANS> 820,785
<ALLOWANCE> 5,762
<TOTAL-ASSETS> 1,554,440
<DEPOSITS> 926,957
<SHORT-TERM> 383,288
<LIABILITIES-OTHER> 30,670
<LONG-TERM> 0
0
0
<COMMON> 232
<OTHER-SE> 213,293
<TOTAL-LIABILITIES-AND-EQUITY> 1,554,440
<INTEREST-LOAN> 14,717
<INTEREST-INVEST> 11,044
<INTEREST-OTHER> 392
<INTEREST-TOTAL> 26,153
<INTEREST-DEPOSIT> 9,638
<INTEREST-EXPENSE> 14,414
<INTEREST-INCOME-NET> 11,739
<LOAN-LOSSES> 150
<SECURITIES-GAINS> 45
<EXPENSE-OTHER> 7,832
<INCOME-PRETAX> 4,918
<INCOME-PRE-EXTRAORDINARY> 2,969
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,969
<EPS-BASIC> 0.16
<EPS-DILUTED> 0.16
<YIELD-ACTUAL> 7.09
<LOANS-NON> 10,739
<LOANS-PAST> 0
<LOANS-TROUBLED> 1,658
<LOANS-PROBLEM> 12,397
<ALLOWANCE-OPEN> 5,357
<CHARGE-OFFS> 89
<RECOVERIES> 44
<ALLOWANCE-CLOSE> 5,762
<ALLOWANCE-DOMESTIC> 5,762
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 5,762
</TABLE>
