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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No.: 0-24611
CFS BANCORP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 33-2042093
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
707 Ridge Road
Munster, Indiana 46321
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(Address of Principal (Zip Code)
Executive Offices)
Registrant's telephone number, including area code: (219) 836-5500
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (par value $0.01 per share)
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 10, 2000, the aggregate value of the 17,057,911 shares of
Common Stock of the Registrant outstanding on such date, which excludes
1,270,732 shares held by all directors and executive officers of the Registrant
as a group, was approximately $130.1 million. This figure is based on the last
known trade price of $7.625 per share of the Registrant's Common Stock on March
10, 2000.
Number of shares of Common Stock outstanding as of March 10, 2000: 18,328,643
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and
the Part of the Form 10-K into which the document is incorporated:
(1) Portions of the Company's Annual Report to Stockholders for the year ended
December 31, 1999 (the "1999 Annual Report") are incorporated into Parts II and
IV.
(2) Portions of the definitive proxy statement for the Annual Meeting of
Stockholders to be held on April 25, 2000 are incorporated into Part III.
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When used in this form 10-K or future filings by the Company with the Securities
and Exchange Commission ("SEC"), in the Company's press releases or other public
or stockholder communications, or in oral statements made with an approval of an
authorized executive officer, the words or phrases "would be," "will allow,"
"intends to," "will likely result," "are expected to," "will continue," "is
anticipated," "estimate," "project," or similar expressions are intended to
identify "forward looking statements" within the meaning of the Private
Litigation Reform Act of 1995.
The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made, and
to advise readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks which are inherent in the Company's lending and investment
activities and competitive and regulatory factors, could affect the Company's
financial performance and could cause the Company's actual results for future
periods to differ materially from those anticipated or projected. The Company
does not undertake, and specifically disclaims any obligation, to update any
forward-looking statements to reflect occurrences or unanticipated events or
circumstances after the date of such statements.
PART I.
ITEM 1. BUSINESS
GENERAL
CFS Bancorp, Inc. (the "Company") was organized in March 1998 at the
direction of the Board of Directors of Citizens Financial Services, FSB (the
"Bank" or "Citizens Financial") for the purpose of holding all of the capital
stock of the Bank and in order to facilitate the conversion of the Bank from
federally-chartered mutual savings bank to a federally-chartered stock savings
bank (the "Conversion"). (Unless the context otherwise requires reference to the
Company includes the Bank and its other subsidiaries). In connection with the
Conversion, the Company was approved by the Office of Thrift Supervision (the
"OTS") to become a savings and loan holding company and as such is subject to
regulation by the OTS. The Company now conducts business as a unitary savings
and loan holding company. See "Regulation - Regulation of Savings and Loan
Holding Companies."
Immediately after the Conversion, SuburbFed Financial Corp., a
Delaware corporation with its principal place of business in Illinois ("SFC"),
merged with and into the Company (the "Merger"). In connection with the Merger,
each outstanding share of SFC common stock, par value $0.01 per share, was
converted into the right to receive 3.6 shares of the Company's Common Stock.
The Conversion and the Merger were interdependent transactions. The merger was
accounted for on a pooling-of-interests basis and, as such, all financial data
in this report includes the assets and the liabilities of the Company and SFC
and their subsidiaries on a combined basis.
The Company's assets consist of the outstanding shares of common stock
of the Bank, investments made with the portion of the net proceeds from the
issuance of Company shares to
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the public (the "Offering") retained by the Company and the Company's loan to
the Bank for the employee stock ownership plan (the "ESOP"). The Company has no
significant liabilities. The management of the Company and the Bank are
substantially identical and the Company neither owns nor leases any property but
instead uses the premises, equipment and furniture of the Bank. The Company does
not employ any persons other than officers who are also officers of the Bank,
and the Company utilizes the support staff of the Bank from time to time.
Additional employees may be hired as appropriate to the extent the Company
expands or changes its business in the future.
Management believes that the holding company structure provides the
Company and the Bank with additional flexibility to diversify its business
activities through existing or newly-formed subsidiaries, or through
acquisitions of other entities, including potentially other financial
institutions and financial services related companies. Such expansion is subject
to regulatory limitations and the Company's financial position. The initial
activities of the Company have been funded by the proceeds of the Offering which
were retained by the Company and earnings thereon, as well as dividends from the
Bank.
The Bank is subject to examination and comprehensive regulation by the
OTS, which is the Bank's chartering authority and primary federal regulator. The
Bank is also regulated by the Federal Deposit Insurance Corporation (the
"FDIC"), administrator of the Savings Association Insurance Fund (the "SAIF").
The Bank is also subject to certain reserve requirements established by the
Federal Reserve Board (the "FRB") and is a member of the Federal Home Loan Bank
(the "FHLB") of Indianapolis, which is one of the 12 regional banks comprising
of the FHLB System.
Citizens Financial is a federally-chartered stock savings bank that
was originally organized in 1934. The Bank conducts its business from its
executive offices and an insurance and investment center, both in Munster,
Indiana, as well as 24 banking centers in Lake, Porter and LaPorte Counties in
northwest Indiana and Cook, DuPage and Will Counties in Illinois. At December
31, 1999, the Company had $1.6 billion in total assets, $925.0 million in
deposits and $205.4 million of stockholders' equity. The Bank is primarily
engaged in attracting deposits from the general public and using those funds to
originate loans and invest in securities. The Bank's primary lending emphasis
has been, and continues to be, loans secured by the first liens on single-family
(one-to four-units) residential properties located in northwest Indiana and
southeastern Cook County, Illinois. The Bank also originates construction and
land development loans, multi-family residential real estate loans, commercial
real estate loans, home equity loans and other loans.
Total assets of the Company have increased by $682.5 million, or
70.6%, from December 31, 1995 to December 31, 1999. In recent years, the Bank
has implemented policies and procedures designed to increase the Bank's growth
in asset size while maintaining the Bank's generally conservative operating
strategies. Such efforts have included and increased emphasis in developing and
expanding the Bank's insurance agency and securities brokerage activities as
well as its Trust Department. In addition, Citizens Financial has created a team
of loan solicitors and business development officers who actively solicit new
loans and other business within the Bank's market area. Citizens Financial plans
to continue its efforts to increase its asset base
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through, among other things, its loan origination efforts. Citizens Financial
has no specific plans, arrangements or understandings regarding any expansion or
acquisitions at this time, other than the new branch location in Schererville,
Indiana, which opened December, 1999.
MARKET AREA AND COMPETITION
Citizens Financial operates out of its headquarters in Munster,
Indiana, which is located in Lake County in northwest Indiana. Citizens
Financial also maintains an insurance and investment center in Munster and 24
banking centers in Lake, Porter and LaPorte Counties in northwest Indiana and in
Cook, DuPage and Will Counties in Illinois. The respective market areas served
by Citizens Financial are part of the Chicago Metropolitan Statistical Area.
Citizens Financial has historically concentrated its efforts in the
market surrounding its offices. Citizens Financial's market area reflects
diverse socioeconomic factors. Traditionally, the market area in northwest
Indiana and the suburban areas south of Chicago were dependent on heavy
manufacturing. While manufacturing still is an important component of the local
economies, service-related industries have become increasingly significant to
the region in the last decade. Growth in the local economies can be expected to
occur largely as a result of the continued interrelation with Chicago as well as
suburban business centers in the area.
The Bank faces significant competition both in making loans and in
attracting deposits. The Chicago metropolitan area is one of the largest money
centers in the United States, and the market for deposit funds is highly
competitive. The Bank's competition for loans comes principally from commercial
banks, other savings banks, savings associations and mortgage-banking companies.
The Bank's most direct competition for deposits has historically come from
savings banks, commercial banks and credit unions. The Bank faces additional
competition for deposits from short-term money market funds and other corporate
and government securities funds from other non-depository financial institutions
such as brokerage firms and insurance companies.
LENDING ACTIVITIES
GENERAL. At December 31, 1999, the Company's net loans amounted to
$882.7 million or 53.5% of the Company's total assets at such date. The Bank's
primary emphasis has been, and continues to be, the origination of loans secured
by first liens on single-family (one-four unit) residences. In addition to loans
secured by single-family residential real estate, the Bank's mortgage loan
portfolio at December 31, 1999 includes loans secured by multi-family (over four
units) residential properties, which amounted to $33.8 million or 3.5% of the
loan portfolio, construction and land development loans, which totaled $133.3
million or 13.8% of the loan portfolio, loans secured by commercial real estate,
which amounted to $93.3 million or 9.7% of the loan portfolio and home equity
loans, which totaled $16.0 million for 1.7% of loan portfolio. In addition to
mortgage loans, the Bank originates various other loans which, at December 31,
1999, amounted to $17.9 million, or 1.9% of the loan portfolio.
The types of loans that the Bank may originate are subject to federal
and state law and regulations. Interest rates charged by the Bank on loans are
affected principally by the demand
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for such loans and the supply of money available for lending purposes and the
rates offered by its competitors. These factors are, in turn, affected by
general and economic conditions, the monetary policy of the federal government,
including the FRB, legislative tax policies and governmental budgetary matters.
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LOAN PORTFOLIO COMPOSITION. The following table sets forth the
composition of the Bank's loans at the dates indicated.
<TABLE>
<CAPTION>
December 31,
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1999 1998 1997 1996 1995
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Percent of Percent of Percent of Percent of Percent of
Amount Total Amount Total Amount Total Amount Total Amount Total
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(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Single-family residential $669,280 69.46 % $569,199 80.08 % $493,133 80.78 % $397,528 78.00 % $321,024 78.80 %
Multi-family residential 33,840 3.51 21,050 2.83 29,660 4.86 27,541 5.40 20,667 5.07
Commercial real estate 93,320 9.68 38,999 5.24 18,093 2.96 14,792 2.90 11,980 2.94
Construction and land
development:
Single-family residential 39,045 4.05 31,516 4.23 27,744 4.55 25,578 5.02 19,393 4.76
Multi-family residential 36,843 3.82 - - 1,538 0.25 4,540 0.89 2,130 0.52
Commercial and land
development 57,417 5.96 19,645 2.64 11,042 1.81 11,192 2.20 6,954 1.71
Home equity 16,001 1.66 19,589 2.63 21,330 3.49 18,827 3.69 15,577 3.82
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Total mortgage loans 945,746 98.14 726,998 97.65 602,540 98.70 499,998 98.10 397,725 97.62
Other loans 17,861 1.86 17,503 2.35 7,956 1.30 9,680 1.90 9,689 2.38
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Total loans receivable: 963,607 100.00 % 744,501 100.00 % 610,496 100.00 % 509,678 100.00 % 407,414 100.00 %
====== ====== ====== ====== ======
Less:
Undisbursed portion of loan
proceeds 73,086 13,068 11,219 15,585 11,802
Allowance for losses on loans 5,973 5,357 3,825 2,426 2,221
Net deferred yield adjustments 1,872 (5) (114) 794 2096
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Loans receivable, net $882,676 $726,081 $595,566 $490,873 $391,295
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</TABLE>
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CONTRACTUAL PRINCIPAL REPAYMENTS AND INTEREST RATES. The following
table sets forth scheduled contractual amortization of the Bank's loans at
December 31, 1999, as well as the dollar amount of such loans which are
scheduled to mature after one year which have fixed or adjustable interest
rates. Demand loans, loans having no schedule of repayments and no stated
maturity and overdraft loans are reported as due in one year or less.
<TABLE>
<CAPTION>
Principal Repayments Contractually Due
in Year(s) Ended December 31,
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Total at
December 31, 2003 - 2005 - 2011 - There-
1999 2000 2001 2002 2004 2010 2016 after
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(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Single-family residential $669,280 $ 1,945 $ 2,900 $ 6,175 $13,362 $ 48,632 $ 90,883 $505,383
Multi-family residential 33,840 659 463 71 2,505 4,581 8,160 17,401
Commercial real estate 93,320 806 4,045 2,001 11,933 66,578 2,503 5,454
Construction and land
development 133,305 20,327 11,121 6,743 22,929 41,389 2,719 28,077
Home equity 16,001 2,201 2,016 2,977 6,843 1,964 - -
Other loans 17,861 8,193 938 1,380 3,684 3,226 383 57
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Total (1) $963,607 $34,131 $21,483 $19,347 $61,256 $166,370 $104,648 $556,372
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</TABLE>
(1) Of the $929.5 million of loan principal repayments contractually due after
December 31, 2000, $291.5 million have fixed rates of interest and $638.0
million have adjustable rates of interest.
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Scheduled contractual amortization of loans does not reflect the
expected term of the Bank's loan portfolio. The average life of loans is
substantially less than their contractual terms because of prepayments and
due-on-sale clauses, which give the Bank the right to declare a conventional
loan immediately due and payable in the event, among other things, that the
borrower sells the real property subject to the mortgage and the loan is not
repaid. The average life of mortgage loans tends to increase when current
mortgage loan rates are higher than rates on existing mortgage loans and,
conversely, decrease when rates on existing mortgage loans are lower than
current mortgage loan rates (due to refinancing of adjustable-rate and
fixed-rate loans at lower rates). Under the latter circumstance, the weighted
average yield on loans decreases as higher yielding loans are repaid or
refinanced at lower rates.
ACTIVITY IN LOANS. The following table shows the activity in the
Bank's loans during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
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1999 1998 1997
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(In Thousands)
<S> <C> <C> <C>
Total loans held at beginning
of period $ 744,501 $ 610,496 $ 509,678
Originations of loans:
Mortgage loans:
Single-family residential 164,302 240,158 164,857
Multi-family residential 13,910 3,850 1,511
Commercial real estate 52,596 26,320 3,911
Construction and land development:
Single-family residential 47,197 37,682 25,026
Multi-family residential 37,874 1,240 128
Commercial and land development 57,788 12,801 4,788
Home equity 13,163 15,086 15,746
Other loans 24,724 37,023 16,075
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Total originations $ 411,554 $ 374,160 $ 232,042
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Purchases of loans 24 807 -
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Total originations and purchases $ 411,578 $ 374,967 $ 232,042
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Loans sold (8,628) (13,732) (5,001)
Loans securitized into mortgage backed
securities - (3,402) -
Transfers to real estate owned (1,112) (1,680) (1,447)
Charge-offs (171) (167) (451)
Repayments (182,561) (221,981) (124,375)
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Net activity in loans 219,106 134,005 100,768
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Gross loans held at end of period $ 963,607 $ 744,501 $ 610,496
=======================================
</TABLE>
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The lending activities of Citizens Financial are subject to
underwriting standards and loan origination procedures established by the Bank's
Board of Directors and management. Applications for mortgage and other loans are
taken at all of the Bank's branch offices. In addition, the Bank's business
development officers call on individuals in the Bank's market area in order to
solicit new loan originations as well as other banking relationships. All loan
applications are forwarded to the Bank's executive offices for underwriting and
approval. Generally, Citizens Financial requires that a property appraisal be
obtained in connection with new mortgage loans. On mortgage loan applications of
$250,000 or less with a loan-to-value ratio of 60% or less and a strong credit
rating exhibited by the borrowers, a property evaluation may be completed by a
Bank employee in lieu of a formal appraisal. Citizens Financial requires that
title insurance and hazard insurance be maintained on all security properties
(except for home equity loans) and that flood insurance be maintained if the
property is within a designated flood plain.
Certain officers of the Bank have been authorized by the Board of
Directors to approve loans up to certain designated amounts. The Executive
Committee of the Citizens Financial Board of Directors meets weekly and reviews
all real estate mortgage loans. The full Board of Directors of Citizens
Financial is provided with a monthly report of all loans made in the period.
A federal savings bank generally may not make loans to one borrower and
related entities in an amount which exceeds 15% of its unimpaired capital and
surplus, although loans in an amount equal to an additional 10% of unimpaired
capital and surplus may be made to a borrower if the loans are fully secured by
readily marketable securities. Generally, Citizens Financial's aggregate loans
to one borrower and related entities has been well below the regulatory limits.
As of December 31, 1999, Citizens Financial's two largest relationships with one
borrower and related entities amounted to $10.2 million and $9.2 million, and
all of the Bank's loans included in such relationships were performing in
accordance with their terms.
SINGLE-FAMILY RESIDENTIAL AND HOME EQUITY LOANS. Substantially all of
the Bank's single-family residential mortgage loans consist of conventional
loans. Conventional loans are loans that are neither insured by the Federal
Housing Administration ("FHA") or partially guaranteed by the Department of
Veterans Affairs ("VA"). The vast majority of the Bank's single-family
residential mortgage loans are secured by properties located in northwest
Indiana and DuPage, Will and Cook County, Illinois. Historically, the Bank has
retained virtually all mortgage loans which it has originated and has not
engaged in sales of residential mortgage loans. Beginning July 1, 1999, the Bank
instituted a new policy and began selling its newly originated 30 year
fixed-rate loans; such sales amounted to $8.6 million in 1999. As of December
31, 1999, $669.3 million, or 69.5%, of the Bank's total loans consisted of
single-family residential mortgage loans. Citizens Financial originated $164.3
million, $240.2 million and $164.9 million of single-family residential mortgage
loans in 1999, 1998 and 1997, respectively. The Bank anticipates that a
significant portion of its future new loan originations will continue to be
single-family residential mortgage loans.
Citizens Financial's residential mortgage loans have either fixed rates
of interest or interest rates which adjust periodically during the term of the
loan. Fixed-rate loans generally have maturities of 10, 15 or 30 years and are
fully amortizing with monthly loan payments
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sufficient to repay the total amount of the loan with interest by the end of the
loan term. The Bank's fixed-rate loans generally are originated under terms,
conditions and documentation which permit them to be sold to U.S.
Government-sponsored agencies, such as the Federal Home Loan Mortgage
Corporation ("Freddie Mac"), and other investors in the secondary market for
mortgages. At December 31, 1999, $187.3 million, or 28.0%, of the Bank's
single-family residential mortgage loans were fixed-rate loans. Substantially
all of the Bank's single-family residential mortgage loans contain due-on-sale
clauses, which permit the Bank to declare the unpaid balance to be due and
payable upon the sale or transfer of any interest in the property securing the
loan. The Bank enforces such due-on-sale clauses.
The adjustable-rate single-family residential mortgage ("ARM") loans
currently offered by the Bank have interest rates which are fixed for the
initial one, three, five or seven years and thereafter adjusted on an annual
basis in accordance with a designated index such as one-year U.S. Treasury
obligations adjusted to a constant maturity ("CMT"), plus a stipulated margin.
The Bank's adjustable-rate single-family residential real estate loans generally
have a cap of 2% on any increase or decrease in the interest rate at any
adjustment date, and include a specified cap on the maximum interest rate over
the life of the loan, which cap generally is 6% above the initial rate. From
time to time, based on prevailing market conditions, the Bank may offer ARM
loans with initial rates which are below the fully indexed rate. Such loans
generally are underwritten based on the fully indexed rate. The Bank's
adjustable-rate loans require that any payment adjustment resulting from a
change in the interest rate of an adjustable-rate loan be sufficient to result
in fully amortization of the loan by the end of the loan term and, thus, do not
permit any of the increased payment to be added to the principal amount of the
loan, or so-called negative amortization. At December 31, 1999, $482.0 million
or 72.0% of the Bank's single-family residential mortgage loans were
adjustable-rate loans.
Adjustable-rate loans decrease the Bank's risks associated with changes
in interest rates but involve other risks, primarily because as interest rates
increase, the loan payment by the borrower increases to the extent permitted by
the terms of the loan, thereby increasing the potential for default. Moreover,
as with fixed-rate loans, as interest rates increase, the marketability of the
underlying collateral property may be adversely affected by higher interest
rates. The Bank believes that these risks, which have not had a material adverse
effect on the Bank to date, generally are less than the risks associated with
holding fixed-rate loans in an increasing interest rate environment.
The volume and types of ARMs originated by Citizens Financial are
affected by such market factors as the level of interest rates, competition,
consumer preferences and availability of funds. Accordingly, although the Bank
anticipates that it will continue to offer single-family ARMs, there can be no
assurance that in the future the Bank will be able to originate a sufficient
volume of single-family ARMs to increase or maintain the proportion that these
loans bear to total loans.
The Bank's single-family residential mortgage loans generally do not
exceed $250,000. In addition, the maximum loan-to-value ("LTV") ratio for the
Bank's single-family residential mortgage loans generally is 97% of the
appraised value of the security property, provided,
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however, that private mortgage insurance generally is obtained on the portion of
the principal amount that exceeds $80% of the appraised value.
At December 31, 1999, Citizens Financial's home equity loans amounted
to $16.0 million of 1.7% or the Bank's total loans. The preponderance of the
Bank's home equity loans are structured as adjustable-rate, fixed-term loans,
although the Bank also offers floating rate home equity lines of credit. Home
equity loans, like single-family residential mortgage loans, are secured by the
underlying equity in the borrower's residence. However, the Bank generally
obtains a second mortgage position to secure its home equity loans. The Bank's
home equity loans generally require LTV ratios of 80% or less after taking into
consideration any first mortgage loan.
MULTI-FAMILY RESIDENTIAL AND COMMERCIAL REAL ESTATE LOANS. After the
completion of the Bank's Conversion in July 1998, the Company increased its
emphasis on the origination of commercial real estate loans and construction and
land development loans. The Bank has significantly increased the number of
employees dedicated to multi-family residential and commercial real estate
lending. Such loans often have interest rates that are adjustable or float based
on the prime rate and generally have shorter terms to maturity and higher yields
than the Bank's single-family residential mortgage loans. At December 31, 1999,
Citizens Financial's multi-family residential mortgage loans and commercial real
estate loans amounted to $33.8 million and $93.3 million, respectively, or 3.5%
and 9.7%, respectively, of the Bank's total loan portfolio.
The Bank's multi-family residential real estate loans are concentrated
in northwest Indiana and DuPage, Will and Cook County, Illinois. The Bank
originated $13.9 million of multi-family residential real estate loans in 1999
compared to $3.9 million and $1.5 million in 1998 and 1997, respectively.
The Bank's commercial real estate loans generally are secured by
hotels, medical office facilities, churches, small office buildings, strip
shopping centers and other commercial uses primarily located in the Bank's
market area. The Bank's commercial real estate loans usually are less than $5.0
million and, as of December 31, 1999, the average size of the Bank's commercial
real estate loans was $554,760. The Bank originated $52.6 million of commercial
real estate loans during the year ended December 31, 1999 compared to $26.3
million and $3.9 million, respectively, of commercial real estate loan
originations in 1998 and 1997. As of December 31, 1999, the Bank's five largest
commercial real estate and multi-family residential loan relationships were $9.6
million, $7.8 million, $5.5 million, $5.4 million, and $5.4 million, all of
which were performing in accordance with their terms.
The Bank's multi-family residential and commercial real estate loans
generally are five-year, fixed-rate loans with an amortization period of up to
25 years. Citizens Financial also originates adjustable-rate multi-family
residential and commercial real estate loans. Generally, fees of between 1.0%
and 2.0% of the principal loan balance are charged to the borrower upon closing.
The Bank generally charges prepayment penalties on commercial real estate and
multi-family residential mortgage loans. Although terms for multi-family
residential and commercial real estate loans may vary, the Bank's underwriting
standards provide for terms of up to 30 years
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with amortization of principal over the term of the loan and LTV ratios of not
more than 80%. Generally, the Bank obtains personal guarantees of the principals
as additional security for any commercial real estate and multi-family
residential loans.
Citizens Financial evaluates various aspects of commercial and
multi-family residential real estate loan transactions in an effort to mitigate
credit risk to the extent possible. In underwriting these loans, consideration
is given to the stability of the property's cash flow history, future operating
projections, current and projected occupancy, position in the market, location
and physical condition. The Bank has also generally imposed a debt coverage
ratio (the ratio of net cash from operations before payment of debt service to
debt service) of not less than 115% for commercial real estate loans and 110%
for multi-family residential loans. The underwriting analysis also includes
credit checks and a review of the financial condition of the borrower and
guarantor, if applicable. An appraisal report is prepared by an independent
appraiser commissioned by the Bank to substantiate property values for every
commercial real estate and multi-family loan transaction. All appraisal reports
are reviewed by the Bank prior to the closing of the loan.
Commercial real estate and multi-family residential lending entails
substantially different risks when compared to single-family residential lending
because such loans often involve large loan balances to single borrowers and
because the payment experience on such loans is typically dependent on the
successfully operation of the project or the borrower's business. These risks
can also be significantly affected by supply and demand conditions in the local
market for apartments, offices, warehouses, or other commercial space. The Bank
attempts to minimize its risk exposure by limiting such lending to proven
businesses, only considering properties with existing operating performance
which can be analyzed, requiring conservative debt coverage ratios, and
periodically monitoring the operation and physical condition of the collateral
as well as the business occupying the property.
As of December 31, 1999, $460,000, or 1.4%, of Citizens Financial's
multi-family residential real estate loans were considered non-performing loans
and $2.5 million, or 2.7% of its commercial real estate loans were considered
non-performing.
CONSTRUCTION AND LAND DEVELOPMENT LOANS. As previously indicated, the
Bank increased its emphasis on construction and land development loans in the
second half of 1998. Historically, in the several years prior to the Bank's
Conversion, the Bank had concentrated its construction lending efforts to
primarily residential construction loans to local real estate builders,
generally with whom it has an established relationship. The Bank also originated
such loans to individuals with a builder for the construction of their
residence. Commencing in the second half of 1998, the Bank expanded its efforts
to originate construction loans for commercial real estate and multi-family
residential properties. At December 31, 1999, construction and land development
loans amounted to $133.3 million or 13.8% of the Bank's net loan portfolio. At
December 31, 1999, the Bank had $73.1 million of undisbursed funds for
construction loans in process. Of the Bank's construction and land development
loans at December 31, 1999, $30.5 million were construction/permanent,
single-family residential loans which loans, by their terms, convert to
permanent mortgage loans upon the completion of construction. The Bank
originated $142.9 million of construction and land development loans during
1999, compared to $51.7
12
<PAGE> 13
million and $29.9 million of construction and land development loans in 1998 and
1997, respectively. Of the $142.9 million of construction and land development
loans originated in 1999, an aggregate of $95.7 million was for commercial real
estate and multi-family residential construction loans. Of the Bank's commercial
real estate and multi-family residential mortgage loans originated in 1999,
$62.5 million were construction/permanent loans.
Citizens Financial's single-family residential construction loans often
are structured as construction/permanent loans whereby there is one closing for
both the construction loan and the permanent financing. During the construction
phase, which typically lasts for four to six months, officers of the Bank make
periodic inspections of the construction site and loan proceeds are disbursed
directly to the contractors as construction progresses. Typically, disbursements
are made in three draws during the construction period. The Bank's construction
loans require payment of interest only during the construction phase and are
structured to be converted to fixed-rate permanent loans at the end of the
construction phase. Prior to making a commitment to fund a construction loan,
the Bank requires an appraisal of the property by independent appraisers
approved by the Board of Directors. The Bank's staff, or a third-party
contractor retained by Citizens Financial, also reviews and inspects each
project at the commencement of construction and prior to every disbursement of
funds during the term of the construction loan. Loan proceeds are disbursed
after inspections of the project based on a percentage of completion.
The Bank originates land loans to local developers for the purpose of
developing the land (i.e., roads, sewer and water) for sale. Such loans are
secured by a lien on the property, are generally limited to 70% of the appraised
value of the secured property and are typically made for a period of up to two
years. The Bank requires monthly interest payments during the term of the loan.
The principal of the loan is reduced as lots are sold and released. All of the
Bank's land loans are secured by property located in its market area. In
addition, the Bank generally obtains personal guarantees from its borrowers.
The Bank's loan underwriting and processing procedures require that
construction and development loans be reviewed by independent architects and
engineers for verification of costs. Disbursements during the construction phase
are based on regular on-site inspections and approved certifications. In the
case of construction loans on commercial projects where the Bank provides the
permanent financing, the Bank usually requires firm lease commitments on some
portion of the property under construction from qualified tenants for all
leases. In addition, the Bank limits its construction lending to northwestern
Indiana and Chicago-land area.
Construction and development financing is generally considered to
involve a higher degree of risk of loss than long-term financing on improved,
owner-occupied real estate. The Bank's risk of loss on a construction loan is
dependent largely upon the accuracy of the initial estimate of the property's
value at completion of construction or development and the estimated cost
(including interest) of construction. If the estimate of construction cost
proves to be inaccurate, the Bank may need to advance funds beyond the amount
originally committed to permit completion of the development. Construction and
development loans generally are considered to be more difficult to evaluate and
monitor than single-family residential mortgage loans. In addition, the Bank's
commercial real estate and construction and development loans generally have
larger principal balances than its single-family residential mortgage loans.
13
<PAGE> 14
In evaluating any new originations of construction and development
loans, the Bank generally considers evidence of the availability of permanent
financing or a takeout commitment to the borrower, the reputation of the
borrower and the contractor, the amount of the borrower's equity in the project,
independent valuations and reviews of cost estimates, pre-construction sale and
leasing information, and cash flow projections of the borrower. To reduce the
risk inherent in such lending, on certain occasions the Bank also requires
performance bonds in the amount of the construction contract, and it often
obtains personal guarantees from the principal of the borrower.
As of December 31, 1999, $1.3 million, or 1.0% of Citizens Financial's
construction and land development loans were considered non-performing.
OTHER LOANS. Citizens Financial's other loans consist primarily of
commercial loans, consumer loans and loans secured by deposit accounts. Included
in the category of commercial loans are loans secured by business assets other
than real estate, unsecured loans, and secured and unsecured operating lines of
credit. As of December 31, 1999, Citizens Financial's other loans amounted to
$17.9 million compared to $17.5 million and $8.0 million at December 31, 1998
and 1997, respectively. The Bank is not actively marketing its other loans and
offers them primarily as a service to its existing customers.
ASSET QUALITY
GENERAL. As a part of Citizens Financial's efforts to improve its asset
quality, it has developed and implemented as asset classification system. All of
the Bank's assets are subject to review under this classification system. Loans
are periodically reviewed and the classifications are reviewed by the Executive
Committee of the Board of Directors on at least a quarterly basis. When a
borrower fails to make a required payment on a loan, the Bank attempts to cure
the deficiency by contacting the borrower and seeking payment. Contacts are
generally made 30 days after a payment is due. In most cases, deficiencies are
cured promptly. If a delinquency continues, late charges are assessed and
additional efforts are made to collect the loan. While the Bank generally
prefers to work with borrowers to resolve such problems, when the account
becomes 90 days delinquent, the Bank institutes foreclosure or other proceeding,
as necessary, to minimize any potential loss.
Loans are placed on non-accrual status when, in the judgment of
management, the probability of collection of interest is deemed to be
insufficient to warrant further accrual. When a loan is placed on non-accrual
status, previously accrued but unpaid interest is deducted from interest income.
As a matter of policy, the Bank does not accrue interest on loans past due 90
days or more.
Real estate acquired by the Bank as a result of foreclosure or by
deed-in-lieu of foreclosure is classified as real estate owned until sold.
Foreclosed assets are held for sale and such assets are carried at the lower of
fair value minus estimated costs to sell the property, or cost (generally the
balance of the loan on the property at the date of acquisition with any
resulting losses being charged to the allowance for losses on loans). After the
date of acquisition, all costs incurred in maintaining the property are expensed
and costs incurred for the
14
<PAGE> 15
improvement or development of such property are capitalized up to the extent of
their net realizable value.
DELINQUENT LOANS. The following table sets forth information concerning
delinquent loans at the dates indicated, in dollar amounts and as a percentage
of each category of the Bank's loan portfolio. The amounts presented represent
the total outstanding principal balances of the related loans.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------
1999 1998 1997
-------------------------------------------------------------------------
60-89 Days Delinquent 60-89 Days Delinquent 60-89 Days Delinquent
-------------------------------------------------------------------------
Percent of Percent of Percent of
Loan Loan Loan
Amount Category Amount Category Amount Category
-------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Residential:
Single-family $5,108 0.77% $7,172 1.20% $3,769 0.76%
Multi-family 43 0.13 - - 79 0.26
Commercial real estate 45 0.05 85 0.22 2,700 14.92
Construction and land
development 479 0.36 1,449 2.83 191 0.47
Home equity 20 0.13 704 4.02 147 0.69
Other 113 0.64 311 1.78 98 1.23
-------------------------------------------------------------------------
Total $5,808 0.61% $9,721 1.31% $6,984 1.14%
=========================================================================
</TABLE>
15
<PAGE> 16
NON-PERFORMING AND UNDER-PERFORMING ASSETS. The following table set
forth information with respect to non-performing and certain under-performing
assets identified by Citizens Financial, including non-accrual loans and other
real estate owned. Citizens Financial had no accruing loans 90 days or more past
due as to principal or interest at any of the below-referenced dates.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
Mortgage loans:
Single-family residential $7,303 $5,137 $4,579 $1,827 $1,096
Multi-family residential 460 516 405 - -
Commercial real estate 2,498 2,754 173 41 -
Construction and land development 1,313 469 792 498 494
Home equity 206 1 80 403 331
Other loans 52 76 118 43 29
----------------------------------------------------------------
Total non-accruing loans 11,832 8,953 6,147 2,812 1,950
----------------------------------------------------------------
Total non-performing loans 11,832 8,953 6,147 2,812 1.950
Other real estate owned, net 609 435 1,295 14 109
----------------------------------------------------------------
Total non-performing assets 12,441 9,388 7,442 2,826 2,059
----------------------------------------------------------------
Investment in real estate held for sale - - 1,071 - -
Investment in and advances to
a limited liability company - - - 6,457 3,699
----------------------------------------------------------------
Total non-performing assets and
investment in real estate held for
sale and investment in and advances to a
liability company $12,441 $9,388 $8,513 $9,283 $5,758
================================================================
Performing troubled debt restructurings $ 668 $ 916 $1,286 $1,260 $1,346
Non-performing assets to total assets 0.75% 0.64% 0.63% 0.27% 0.21%
Non-performing loans to total loans 1.23 1.20 1.01 0.56 0.49
Total non-performing assets and
investment in and advances to a
limited liability company to total 0.75 0.64 0.72 0.88 0.60
assets
Total non-performing assets and troubled
debt restructurings to total assets 0.80 0.70 0.74 0.39 0.35
</TABLE>
16
<PAGE> 17
The primary reasons for the $3.1 million increase in non-performing
assets from December 31,1998 to December 31, 1999 was two-fold. First, during
the second quarter of 1999 the Company's data 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 processed on the data processing system previously maintained for loans
acquired from SFC was conformed to the more conservative calculation used by the
Company for its other loans. As a result, non-accrual loans increased $2.8
million between December 31, 1998 and June 30, 1999 with the majority of such
increases resulting from the change in methodology. Second, non-accrual
construction and land development loans increased by $844,000, mainly related to
the loans of one borrower which were in non-accrual status for the first time.
These loans totaled $1.1 million.
The interest income that would have been recorded during the year ended
December 31, 1999, if all of the Bank's non-performing loans at the end of such
period had been current in accordance with their terms during such periods was
$762,000. The actual amount of interest recorded as income (on a cash basis) on
such loans during the period amounted to $555,000.
CLASSIFIED AND CRITICIZED ASSETS. Federal regulations require that each
insured institution classify its assets on a regular basis. Furthermore, in
connection with examinations of insured institutions, federal examiners have
authority to identify problem assets and, if appropriate, classify them. There
are three classifications for problem assets: "substandard," "doubtful" and
"loss." Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
probability of loss. An asset classified loss is considered uncollectible and of
such little value that continuance as an asset of the institution is not
warranted. Another category designated "special mention" also must be
established and maintained for assets which have some identified weaknesses but
do not currently expose an insured institution to a sufficient degree of risk to
warrant classification as substandard, doubtful or loss. At December 31, 1999,
Citizens Financial had an aggregate of $13.2 million of classified assets, 97.1%
of which were classified substandard and 2.9% of which were classified as
doubtful, compared to $10.3 million of classified assets as of December 31,
1998.
ALLOWANCE FOR LOSSES ON LOANS. The Bank's policy is to establish
allowances for estimated losses on delinquent loans when it determines that
losses are expected to be incurred on such loans. The allowance for losses on
loans is maintained at a level believed adequate by management to absorb losses
inherent in the portfolio. Management's determination of the adequacy of the
allowance is based on an evaluation of the portfolio, past loss experience,
current economic conditions, volume, growth and composition of the portfolio,
and other relevant factors. The allowance is increased by provisions for loan
losses which are charged against income. As shown in the table below, at
December 31, 1999, the Bank's allowance for losses on loans amounted to $6.0
million or 50.5% and 0.6% of the Bank's non-performing loans and total loans
receivable, respectively. The Bank's provision to the allowance for losses on
loans amounted to $675,000 for the year ended December 31, 1999 and $1.6 million
during
17
<PAGE> 18
1998. While no assurance can be given that future charge-offs and/or additional
provisions will not be necessary, management of the Company believes that, as of
December 31, 1999, the allowance for losses on loans was adequate.
Effective December 21, 1993, the OTS, in conjunction with the Office of
the Comptroller of the Currency, the FDIC and FRB, issued a Policy Statement
regarding an institution's allowance for loan and lease losses. The Policy
Statement, which reflects the position of the issuing regulatory agencies and
does not necessarily constitute generally accepted accounting principles
("GAAP"), includes guidance (i) on the responsibilities of management for the
assessment and establishment of an adequate allowance and (ii) for the agencies'
examiners to use in evaluating the adequacy of such allowance and the policies
utilized to determine such allowance. The Policy Statement also sets forth
quantitative measures for the allowance with respect to assets classified
substandard and doubtful and with respect to the remaining portion of an
institution's loan portfolio. Specifically, the Policy Statement sets forth the
following quantitative measures which examiners may use to determine the
reasonableness of an allowance: (i) 50% of the portfolio that is classified
doubtful; (ii) 15% of the portfolio that is classified substandard; and (iii)
for the portions of the portfolio that have been classified (including loans
designated special mention), estimated credit losses over the upcoming 12 months
based on facts and circumstances available on the evaluation date. While the
Policy Statement sets forth this quantitative measure, such guidance is not
intended as a "floor" or "ceiling." Citizens Financial's policy for establishing
loan losses is not inconsistent with the Policy Statement.
18
<PAGE> 19
The following table sets forth the activity in the Bank's allowance
for loan losses during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
(Dollars in Thousands)
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance at beginning of period $5,357 $3,825 $2,426 $2,221 $2,087
--------------------------------------------------------------
Provisions 675 1,630 1,840 253 197
Charge-offs:
Mortgage loans:
Single-family residential (138) (49) (8) (24) (2)
Multi-family residential - - - - -
Commercial real estate - - - - (6)
Construction and land development - (13) (182) - -
Other loans (33) (63) (263) (110) (64)
--------------------------------------------------------------
Total charge-offs (171) (125) (453) (134) (72)
Recoveries:
Mortgage loans:
Single-family residential 70 25 - 16 9
Multi-family residential - - - - -
Commercial real estate development - - - - -
Construction and land development - - - - -
Other loans 42 2 12 70 -
--------------------------------------------------------------
Total recoveries 112 27 12 86 9
--------------------------------------------------------------
Net loans charged-off to allowance
for losses on loans (59) (98) (441) (48) (63)
--------------------------------------------------------------
Allowance at end of period $5,973 $5,357 $3,825 $2,426 $2,221
==============================================================
Allowance for losses on loans to total
nonperforming loans at end of period 50.48% 59.84% 62.22% 86.27% 113.90%
==============================================================
Allowance for losses on loans to total loan
at end of period 0.62% 0.72% 0.63% 0.48% 0.55
==============================================================
Net charge offs to average loans outstanding 0.01% 0.02% 0.08% 0.01% 0.02%
==============================================================
</TABLE>
19
<PAGE> 20
ALLOCATION OF THE ALLOWANCE FOR LOSSES ON LOANS. Prior to 1998, Citizens
Financial hadnot allocated its allowance for loan losses by category of loans.
Management of the Bank has determined the sufficiency of the allowance for
losses on loans based upon its periodic assessment of the risk elements in its
loan portfolio. Management of Citizens Financial utilizes analytical data as
well as anticipated borrower performance in light of general economic conditions
existing in the Bank's market area.
The determination of the adequacy of the allowance at December 31, 1999 and
1998 specifically considered various factors, including the increase in the
Bank's balance of outstanding loans, including commercial real estate,
construction and land development, and multi-family residential loans during the
year.
With respect to fiscal years prior to 1998, management of Citizens
Financial considered similar factors and utilized a substantially identical
analytical process in determining the level of its allowance. Management
currently anticipates that the level of loan charge-offs by category expected to
be experienced during 2000 should approximate the level of charge-offs
experienced in preceding years.
Citizens Financial will continue to monitor and modify its allowance for
losses on loans as conditions dictate. While management believes that, based on
information currently available, the Bank's allowance for loan losses is
sufficient to cover losses inherent in its loan portfolio at this time, no
assurance will be given that the Bank's level of allowance for losses on loans
will be sufficient to absorb future loan losses incurred by the Bank or that
future adjustments to the allowance for losses on loans will not be necessary if
economic and other conditions differ substantially from the economic and other
conditions used by management to determine the current level of the allowance
for losses on loans. In addition, the OTS, as an integral part of its
examination process, periodically reviews the Bank's allowance for loan losses.
Such agency may require the Bank to make additional provisions for estimated
loan losses based upon judgments different from those of management.
20
<PAGE> 21
Commencing in 1998, the Bank began to allocate the allowance for losses on
loans by loan category. Various percentages are assigned to the loan categories
based on management's analysis of their relative risks. At December 31, 1999 and
December 31, 1998, the allowance for losses on loans was allocated as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------
1999 1998
-------------------------------------------------------------------------
Allowance as a Allowance as a
Percentage of Allowance Percentage of Allowance
Category Category Allocation Category Allocation
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Residential real estate:
Single-family-owner occupied .40% $ 2,792 .50% $ 3,052
Single-family-non-owner occupied .80 280 .75 229
Multi-family 1.00 409 1.00 203
Business/Commercial 1.75 1,573 1.75 884
Business/Commercial non-real-estate 2.50 280 2.50 296
Developed Lots 1.25 62 1.25 121
Land 1.75 221 1.75 82
Consumer 2.00 73 2.50 110
------------------------------------------------------------------
5,690 4,977
Loans sold without recourse .40 (129) --
------------------------------------------------------------------
5,561 4,977
Off balance sheet credit enhancements 1.00 190 -- --
------- -------
5,751 4,977
Unallocated 222 380
------- -------
Total $ 5,973 $ 5,357
</TABLE>
INVESTMENT SECURITIES ACTIVITIES
GENERAL. As of December 31, 1999, the Company had an aggregate of $209.4
million of investment securities, or 12.7% of its total assets at such date. At
such date, the unrealized loss on the Company's investment securities available
for sale amounted to $1.1 million, net of income taxes.
The Company's investment securities consist primarily of callable agency
securities, which amounted to $196.3 million at December 31, 1999. The Company
attempts to maintain a high degree of liquidity in its other securities and
generally does not invest in debt securities with estimated average lives in
excess of 10 years. In recent periods, the Company has purchased substantial
amounts of callable agency securities, which are U.S. Government agency debt
obligations, generally having a contractual term to maturity of 10 years. These
securities may be called for redemption at predetermined dates (generally every
three months) throughout their terms. During 1997 and 1998, and the first half
of 1999 virtually all of the Company's callable agency securities were called
within one year of purchase. As interest rates rose during the second half of
1999 these agency securities were not called. As of December 31, 1999, the
contractual weighted average lives of the Company's investment securities were
9.1 years.
At December 31, 1999, $32.7 million of the Company's investment securities
were classified as available for sale and $176.7 million were held to maturity.
Securities classified as available for sale are carried at fair value.
Unrealized gains and losses on available for sale
21
<PAGE> 22
securities are recognized as direct increases or decreases in equity, net of
applicable income taxes. Securities which are held to maturity are carried at
cost, adjusted for the amortization of premiums and the accretion of discounts
using a method which approximates a level yield.
The investment policy of the Company, which has been established by the
Board of Directors, is designed, among other things, to assist the Company in
its asset/liability management policies. The Company's investment policy
emphasizes principal preservation, favorable returns on investment, liquidity
within designated guidelines, minimal credit risk, and flexibility. The
Company's current securities investment policy permits investments in various
types of securities including obligations of the U.S. Treasury and federal
agencies, investment grade corporate obligations ("A" rated or better), trust
preferred stocks, other equity securities, commercial paper, certificates of
deposit, and federal funds sold to financial institutions approved by the Board
of Directors.
The Company currently does not participate in hedging programs, interest
rate swaps, or other activities involving the use of off-balance sheet
derivative instruments.
The following table set forth information regarding the carrying and fair
value of the Company's investment securities at the dates indicated.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------------------
Carrying Fair Carrying Fair Carrying Fair
Value Value Value Value Value Value
-----------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Available for sale (at fair value):
Callable agency securities and corporate bonds $ 19,588 $ 19,588 $ 2,011 $ 2,011 $ 1,028 $ 1,028
Trust preferred securities 4,518 4,518 24,699 24,699 -- --
Equity securities 8,587 8,587 8,010 8,010 2,668 2,668
-----------------------------------------------------------------------
$ 32,693 $ 32,693 $ 34,720 $ 34,720 $ 3,696 $ 3,696
=======================================================================
Held to maturity:
Callable agency securities and corporate bonds $176,737 $165,692 $166,500 $169,263 $174,194 $175,367
Zero coupon agency securities -- -- -- -- 32,028 31,935
-----------------------------------------------------------------------
$176,737 $165,692 $166,500 $169,263 $206,232 $207,302
=======================================================================
</TABLE>
None of the investment securities held at any of the above dates had
adjustable rates.
The following table sets forth certain information regarding the maturities
of the Company's callable agency securities at December 31, 1999.
<TABLE>
<CAPTION>
Contractually Maturing
-----------------------------------------------------------------------------------------
Weighted Under Weighted Under Weighted Weighted
Under 1 Average 1-5 Average 6-10 Average Over 10 Average
Year Yield Year Yield Year Yield Year Yield
-----------------------------------------------------------------------------------------
(Dollars in Thousands)
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Callable agency securities
Available for sale
(at fair value) $ -- -- % $ 19,588 6.75% $ -- -- % $ -- -- %
Held to maturity $ -- -- % $ 5,000 6.50% $ 145,755 6.57% $ 25,982 7.00%
</TABLE>
22
<PAGE> 23
MORTGAGE-BACKED SECURITIES
GENERAL. At December 31, 1999, the Company's mortgage-backed securities
included $400.1 million of mortgage participation certificates (which are also
known as mortgage-backed securities), collateralized mortgage obligations
investment, and including securities which qualified as real estate mortgage
investment conduits ("REIMICs"). At such date, the unrealized loss on the
Company's mortgage-backed securities available for sale amounted to $8.4
million, net income taxes. At December 31, 1999, $299.1 million of the Company's
mortgage-backed securities were classified as available for sale and $101.1
million were held to maturity. Securities classified as available for sale are
carried at fair value. Unrealized gains and losses on available for sale
securities are recognized as direct increases or decreases in equity, net of
applicable income taxes. Securities which are held to maturity are carried at
cost, adjusted for the amortization of premiums and the accretion of discounts
using a method which approximates a level of yield.
The following table sets forth information regarding the carrying and fair
value of the Company's mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------------------
Carrying Fair Carrying Fair Carrying Fair
Value Value Value Value Value Value
-----------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Available for sale (at fair value):
Participation certificates and collateralized
mortgage obligations $ 59,001 $ 59,001 $121,514 $121,514 $ 56,150 $ 56,150
REMICs 240,055 240,055 156,374 156,374 3,560 3,560
Adjustable rate mutual funds -- -- -- -- 2,431 2,431
-----------------------------------------------------------------------
$299,056 $299,056 $277,888 $277,888 $ 62,141 $ 62,141
=======================================================================
Held to maturity:
Participation certificates and collateralized
mortgage obligations $ 39,196 $ 36,949 $ 83,469 $ 83,084 $102,094 $102,428
REMICs 61,870 60,637 93,487 95,610 157,576 157,086
-----------------------------------------------------------------------
$101,066 $ 97,586 $176,956 $178,694 $256,670 $259,514
=======================================================================
</TABLE>
At December 31, 1999, $24.4 million, or 6.10%, of the Company's
mortgage-backed securities portfolio consisted of adjustable-rate securities, as
compared to $26.0 million, or 5.7%, and $41.1 million, or 12.9%, at December 31,
1998 and 1997, respectively.
Participation certificates represent a participation interest in a pool of
single-family or multi-family mortgages. The principal and interest payments on
mortgage-backed securities are passed from the mortgage originators, as
servicer, through intermediaries (generally U.S. Government agencies and
government-sponsored enterprises) that pool and repackage the participation
interests in the form of securities, to investors such as the Company. Such U.S.
Government agencies and government sponsored enterprises, which guarantee the
payment of principal and interest to investors, primarily include the Freddie
Mac, the Federal National Mortgage Association ("Fannie Mae") and the Government
National Mortgage Association (Ginnie Mae").
23
<PAGE> 24
SOURCE OF FUNDS
GENERAL. Deposits are the primary source of the Bank's funds for lending
and other investment purposes. In addition to deposits, the Bank derives funds
from loan principal repayments and prepayments and borrowings. Loan repayments
are a relatively stable source of funds, while deposits inflows and outflows are
significantly influenced by general interest rates and money market conditions.
Prior to 1998 Citizens Financial did not utilize borrowings as a source of
funds; however, during 1999 and 1998, given the Bank's asset size and interest
rate environment, management began using borrowings to a greater extent.
DEPOSITS. Citizens Financial's deposit products include a broad selection
of deposit instruments, including negotiable order of withdrawal ("NOW")
accounts, money market accounts, non-interest bearing checking accounts,
passbook accounts and term certificate accounts. Deposit account terms may vary,
with the principal differences being the minimum balance required, the time
periods the funds must remain on deposit and the interest rate.
Citizens Financial utilizes traditional marketing methods to attract new
customers and saving deposits. The Bank does not advertise for deposits outside
of its market area. The Bank does not utilize the services of deposit brokers.
The Bank traditionally has relied on customer service and convenience in
marketing its deposit products. In addition, Citizens Financial generally has
been competitive in the types of accounts and interest rates offered and often
it has been among the leaders in its market area on the rates paid on its
deposits. In recent years, many depository institutions have experienced
disintermediation of their deposits due, in part, to higher returns provided by
competing investment products offered by non-depository institutions. Citizens
Financial experienced a net decrease in deposits before interest credited of
$79.3 in 1999 and $58.4 million in 1998, however, $29.0 million of the net
decrease in 1998 reflected customers' use of deposits to purchase Common Stock
in the Conversion.
The following table set forth the activity in the Bank's deposits during
the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1999 1998 1997
-------------------------------------
(In Thousands)
<S> <C> <C> <C>
Beginning balance $ 969,158 $ 985,447 $ 882,821
Net increase (decrease) before interest credited (79,347) (58,353) 61,332
Interest credited 34,382 41,064 41,294
------------ ------------ -----------
Net increase (decrease) in deposits (44,965) (17,289) 102,626
------------ ------------ -----------
Ending balance $ 924,193 $ 969,158 $ 985,447
============ ============ ===========
</TABLE>
24
<PAGE> 25
The following table sets forth by various interest rate categories of
certificates of deposit of the Bank at the dates indicated.
December 31,
-------- -------- --------
1999 1998 1997
-------- -------- --------
(Dollars in Thousands)
0.00% to 2.99% $ -- $ 157 $ 160
3.00% to 3.99% -- 52 96
4.00% to 4.99% 180,487 117,024 18,128
5.00% to 6.99% 369,836 475,163 617,417
7.00% to 8.99% 8,129 9,772 10,957
9.00% to 10.99% -- 231 353
-------- -------- --------
Total $558,452 $602,399 $647,111
======== ======== ========
The following table sets forth the amount and remaining maturities of the
Bank's certificates of deposit at December 31, 1999.
<TABLE>
<CAPTION>
Over Six Months Over One Year Over Two Years
Six Months Through One Through Two Through Three Over Three
and Less Year Years Years Years
--------------- ------------------ ----------------- ------------------- ---------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
2.00% to 2.99% $ -- $ -- $ -- $ -- $ --
3.00% to 3.99% -- -- -- -- --
4.00% to 4.99% 119,082 26,610 28,697 4,298 1,800
5.00% to 6.99% 155,219 123,421 41,395 25,489 24,312
7.00% to 8.99% 1,469 219 429 2,301 3,711
9.00% to 10.99% -- -- -- -- --
-------- -------- -------- -------- --------
Total $275,770 $150,250 $ 70,521 $ 32,088 $ 29,823
======== ======== ======== ======== ========
</TABLE>
As of December 31, 1999, the aggregate amount of outstanding time
certificate of deposit in amounts greater than or equal to $100,000, was $98.2
million. The following table presents the maturity of these time certificates of
deposit at such dates.
December 31, 1999
----------------------
(In Thousands)
3 months or less $ 20,728
Over 3 months through 6 months 23,258
Over 6 months through 12 months 31,602
Over 12 months 22,616
----------------------
$ 98,204
======================
25
<PAGE> 26
The following table sets forth the dollar amount of deposits in various
types of deposits offered by the Bank at the dates indicated.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------
1999 1998 1997
------------------------------------------------------------------------------
Amount Percentage Amount Percentage Amount Percentage
------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts $222,185 24.03% $219,984 22.64% $206,383 20.94%
Certificate of deposit 558,452 60.42 602,399 62.16 647,111 65.67
Money market accounts 45,100 4.89 45,622 4.71 42,313 4.29
NOW accounts 98,446 10.66 101,654 10.49 89,640 9.10
------------------------------------------------------------------------------
Total $924,193 100.00% $969,158 100.00% $985,447 100.00%
==============================================================================
</TABLE>
BORROWED MONEY
The Company utilized borrowed money more extensively during 1999 and 1998
than it did in prior years.
The following table sets forth certain information as to the Bank's FHLB
advances and other borrowings at the dates indicated and the weighted average
interest rates paid on borrowings for the years ended December 31, 1999, 1998,
and 1997.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1999 1998 1997
--------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB advances $403,818 $145,000 $76,200
Securities sold under agreements to repurchase 90,881 70,721 3,844
Other borrowings -- -- 5,000
--------------------------------------
Total borrowings $494,699 $215,271 $85,044
=====================================
Weighted average interest rate of borrowings 5.44% 5.53% 6.03%
</TABLE>
TRUST ACTIVITIES
The Company also provides fiduciary services through the Bank's Trust
Department which commenced operations in April 1996. Services offered include
fiduciary services for trusts and estates and land trusts. As of December 31,
1999, the Trust Department maintained 58 trust/fiduciary accounts, with an
aggregate principal balance of $2.3 million at such date. Revenue from the Trust
Department for the year ended December 31, 1999 was $30,000.
The accounts maintained by the Trust Department consist of "managed" and
"non-managed" accounts. "Managed accounts" are those accounts under custody for
which the Bank has responsibility for administration and investment management
and/or investment advice.
26
<PAGE> 27
"Non-managed" accounts are those accounts for which the Bank merely acts as a
custodian. The Company receives fees dependent upon the level and type of
service provided. The Trust Department administers various trust accounts
(revocable and irrevocable trusts, and trusts under wills), estates and
guardianships. One full-time trust operations officer is assigned to the Trust
Department. Executive management of the department is provided by the Bank's
Vice President and Corporate Counsel, subject to direction by the Trust
Committee.
SUBSIDIARIES
The Bank currently has two active, wholly owned subsidiaries, CFS Insurance
Agency, Inc. and CFS Investment Services, Inc.
CFS Insurance Agency, Inc. ("CFS Insurance") is an independent insurance
brokerage subsidiary which offers a full line of insurance products to the
general public. CFS Insurance operates out of the Bank's Insurance/Investment
Center in Munster, Indiana. While the Bank has owned CFS Insurance since 1972,
in recent periods it has significantly increased its efforts to expand insurance
brokerage activities. At December 31, 1999, CFS Insurance had 15 licensed
insurance agents on its staff. While CFS Insurance has primarily sold property,
casualty and life insurance products to individuals in the Bank's market area.
CFS has recently increased its efforts with respect to commercial products
(which generally have higher premiums). Revenues of CFS Insurance were $883,000,
$856,000 and $619,000 in 1999, 1998 and 1997, respectively.
CFS Investments, Inc. ("CFS Investments") is primarily involved in the sale
of mutual funds and other securities to members of the general public in the
Bank's market area. CFS Investments commenced full service securities brokerage
activities in 1994. At December 31, 1999, CFS Investments had 12 licensed
securities brokers on its staff. CFS Investments is affiliated with a registered
securities broker-dealer which is responsible for supervision of CFS Investments
and for execution of securities transactions. CFS Investments also offers fixed
and variable annuities. In addition to its presence in the CFS
Insurance/Investments Center, CFS Investments maintains offices in eight of the
Bank's branches. CFS Investments had total commission revenue of $1.4 million,
$874,000 and $891,000 for 1999, 1998 and 1997, respectively.
EMPLOYEES
Citizens Financial had 443 full-time equivalent employees at December 31,
1999. None of these employees is represented by a collective bargaining agent,
and the Bank believes that it enjoys good relations with its personnel.
27
<PAGE> 28
REGULATION
REGULATION OF SAVINGS AND LOAN HOLDING COMPANIES
The Company is a registered savings and loan holding company. The Home
Owners' Loan Act, as amended ("HOLA"), and OTS regulations generally prohibit a
savings and loan holding company, without prior OTS approval, from acquiring,
directly or indirectly, the ownership or control of any other savings
association or savings and loan holding company, or all, or substantially all,
of the assets or more than 5% of the voting shares thereof. These provisions
also prohibit, among other things, any director or officer of a savings and loan
holding company, or any individual who owns or controls more than 25% of the
voting shares of such holding company, from acquiring control of any savings
association not a subsidiary of such savings and loan holding company, unless
the acquisition is approved by the OTS. Certain Federal banking laws have
recently been amended. See "Financial Modernization."
Holding Company Activities. The Company currently operates as a unitary
savings and loan holding company. Generally, there are limited restrictions on
the activities of a unitary savings and loan holding company and its non-savings
association subsidiaries. If the Company ceases to be a unitary savings and loan
holding company, the activities of the Company and its non-savings association
subsidiaries would thereafter be subject to substantial restrictions.
The HOLA requires every savings association subsidiary of a savings and
loan holding company to give the OTS at least 30 days' advance notice of any
proposed dividends to be made on its guarantee, permanent or other
non-withdrawable stock, or else such dividend will be invalid.
Affiliate Restrictions. Transactions between a savings association and its
"affiliates" are subject to quantitative and qualitative restrictions under
Sections 23A and 23B of the Federal Reserve Act. Affiliates of a savings
association include, among other entities, the savings association's holding
company and companies that are under common control with the savings
association.
In general, Sections 23A and 23B and OTS regulations issued in connection
therewith limit the extent to which a savings association or its subsidiaries
may engage in certain "covered transactions" with affiliates to an amount equal
to 10% of the association's capital and surplus, in the case of covered
transactions with any one affiliate, and to an amount equal to 20% of such
capital and surplus, in the case of covered transactions with all affiliates. In
addition, a savings association and its subsidiaries may engage in covered
transactions and certain other transactions only on terms and under
circumstances that are substantially the same, or at least as favorable to the
savings association or its subsidiary, as those prevailing at the time for
comparable transactions with nonaffiliated companies. A "covered transaction" is
defined to include a loan or extension of credit to an affiliate; a purchase of
investment securities issued by an affiliate; a purchase of assets from an
affiliate, with certain exceptions; the acceptance of securities issued by an
affiliate as collateral for a loan or extension of credit to any party; or the
issuance of a guarantee, acceptance or letter of credit on behalf of an
affiliate.
28
<PAGE> 29
In addition, under the OTS regulations, a savings association may not make
a loan or extension of credit to an affiliate unless the affiliate is engaged
only in activities permissible for bank holding companies; a savings association
may not purchase or invest in securities of an affiliate other than shares of a
subsidiary; a savings association and its subsidiaries may not purchase a
low-quality asset from an affiliate; and covered transactions and certain other
transactions between a savings association or its subsidiaries and an affiliate
must be on terms and conditions that are consistent with safe and sound banking
practices. With certain exceptions, each loan or extension of credit by a
savings association to an affiliate must be secured by collateral with a market
value ranging from 100% to 130% (depending on the type of collateral) of the
amount of the loan or extension of credit.
The OTS regulation generally excludes all non-bank and non-savings
association subsidiaries of savings associations from treatment as affiliates,
except to the extent that the OTS or the Federal Reserve Board decides to treat
such subsidiaries as affiliates. The regulation also requires savings
associations to make and retain records that reflect affiliate transactions in
reasonable detail, and provides that certain classes of savings associations may
be required to give the OTS prior notice of transactions with affiliates.
Financial Modernization. Under the Gramm-Leach Bliley Act enacted into law
on November 12, 1999, no company may acquire control of a savings and loan
holding company after May 4, 1999, unless the company is engaged only in
activities traditionally permitted to a multiple savings and loan holding
company or newly permitted to a financial holding company under Section 4(k) of
the Bank Holding Company Act. Existing savings and loan holding companies and
those formed pursuant to an application filed with the OTS before May 4, 1999,
may engage in any activity including non-financial or commercial activities
provided such companies control only one savings and loan association that meets
the Qualified Thrift Lender test. Corporate reorganizations are permitted, but
the transfer of grandfathered unitary holding company status through acquisition
is not permitted.
REGULATION OF FEDERAL SAVINGS BANKS
As a federally insured savings bank, lending activities and other
investments of the Bank must comply with various statutory and regulatory
requirements. The Bank is regularly examined by the OTS and must file periodic
reports concerning its activities and financial condition.
Although the OTS is the Bank's primary regulator, the FDIC has "backup
enforcement authority" over the Bank. The Bank's eligible deposit accounts are
insured by the FDIC under the SAIF, up to applicable limits.
Federal Home Loan Banks. The Bank is a member of the FHLB System. Among
other benefits, FHLB membership provides the Bank with a central credit
facility. The Bank is required to own capital stock in an FHLB in an amount
equal at least 1% of its aggregate unpaid residential mortgage loans, home
purchase contracts and similar obligations at the beginning of each calendar
year or 5% of its advances from the FHLB, whichever is greater.
29
<PAGE> 30
Liquid Assets. Under OTS regulations, for each calendar month, a savings
bank is required to maintain an average daily balance of liquid assets
(including cash, certain time deposits and savings accounts, bankers'
acceptances, certain government obligations and certain other investments) not
less than a specified percentage of the average daily balance of its net
withdrawable deposit accounts and borrowings payable in one year or less. This
liquidity requirement, which is currently at 4.0%, may be changed from time to
time by the OTS to any amount between 4.0% to 10.0%, depending upon certain
factors. The Bank maintains liquid assets in compliance with these regulations.
Regulatory Capital Requirements. OTS capital regulations require savings
banks to satisfy minimum capital standards: risk-based capital requirements, a
leverage requirement and a tangible capital requirement. Savings banks must meet
each of these standards in order to be deemed in compliance with OTS capital
requirements. In addition, the OTS may require a savings association to maintain
capital above the minimum capital levels.
All savings banks are required to meet a minimum risk-based capital
requirement of total capital (core capital plus supplementary capital) equal to
8% of risk-weighted assets (which includes the credit risk equivalents of
certain off-balance sheet items). In calculating total capital for purposes of
the risk-based requirement, supplementary capital may not exceed 100% of core
capital. Under the leverage requirement, a savings bank is required to maintain
core capital equal to a minimum of 3% of adjusted total assets. (In addition,
under the prompt corrective action provisions of the OTS regulations, all but
the most highly-rated institutions must maintain a minimum leverage ratio of 4%
in order to be adequately capitalized.) A savings bank is also required to
maintain tangible capital in an amount at least equal to 1.5% of its adjusted
total assets.
These capital requirements are viewed as minimum standards by the OTS, and
most institutions are expected to maintain capital levels well above the
minimum. In addition, the OTS regulations provide that minimum capital levels
higher than those provided in the regulations may be established by the OTS for
individual savings associations, upon a determination that the savings
association's capital is or may become inadequate in view of its circumstances.
The OTS regulations provide that higher individual minimum regulatory capital
requirements may be appropriate in circumstances where, among others: (1) a
savings association has a high degree of exposure to interest rate risk,
prepayment risk, credit risk, concentration of credit risk, certain risks
arising from nontraditional activities, or similar risks or a high proportion of
off-balance sheet risk; (2) a savings association is growing, either internally
or through acquisitions, at such a rate that supervisory problems are presented
that are not dealt with adequately by OTS regulations; and (3) a savings
association may be adversely affected by activities or condition of its holding
company, affiliates, subsidiaries or other persons or savings associations with
which it has significant business relationships. The Bank is not subject to any
such individual minimum regulatory capital requirement.
The Bank's tier-1 risk-based capital ratio was 18.0%, its leverage capital
ratio was 9.1% and its total risk-based capital ratio was 18.7% at December 31,
1998.
Certain Consequences of Failure to Comply with Regulatory Capital
Requirements. A
30
<PAGE> 31
savings bank's failure to maintain capital at or above the minimum capital
requirements may be deemed an unsafe and unsound practice and may subject the
savings bank to enforcement actions and other proceedings. Any savings bank not
in compliance with all of its capital requirements is required to submit a
capital plan that addresses the bank's need for additional capital and meets
certain additional requirements. While the capital plan is being reviewed by the
OTS, the savings bank must certify, among other things, that it will not,
without the approval of its appropriate OTS Regional Director, grow beyond net
interest credited or make capital distributions. If a savings bank's capital
plan is not approved, the bank will become subject to additional growth and
other restrictions. In addition, the OTS, through a capital directive or
otherwise, may restrict the ability of a savings bank not in compliance with the
capital requirements to pay dividends and compensation, and may require such a
bank to take one or more of certain corrective actions, including, without
limitation: (i) increasing its capital to specified levels, (ii) reducing the
rate of interest that may be paid on savings accounts, (iii) limiting receipt of
deposits to those made to existing accounts, (iv) ceasing issuance of new
accounts of any or all classes or categories except in exchange for existing
accounts, (v) ceasing or limiting the purchase of loans or the making of other
specified investments, and (vi) limiting operational expenditures to specified
levels.
The HOLA permits savings banks not in compliance with the OTS capital
standards to seek an exemption from certain penalties or sanctions for
noncompliance. Such an exemption will be granted only if certain strict
requirements are met, and must be denied under certain circumstances. If an
exemption is granted by the OTS, the savings bank still may be subject to
enforcement actions for other violations of law or unsafe or unsound practices
or conditions.
Prompt Corrective Action. The prompt corrective action regulation of the
OTS, promulgated under the Federal Deposit Insurance Corporation Improvement Act
of 1991, requires certain mandatory actions and authorizes certain other
discretionary actions to be taken by the OTS against a savings bank that falls
within certain undercapitalized capital categories specified in the regulation.
The regulation establishes five categories of capital classification: "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized." Under the regulation, the
ratio of total capital to risk-weighted assets, core capital to risk-weighted
assets and the leverage ratio are used to determine an institution's capital
classification. At December 31, 1999, the Bank met the capital requirements of a
"well capitalized" institution under applicable OTS regulations.
Enforcement Powers. The OTS and, under certain circumstances, the FDIC,
have substantial enforcement authority with respect to savings associations,
including authority to bring various enforcement actions against a savings
association and any of its "institution-affiliated parties" (a term defined to
include, among other persons, directors, officers, employees, controlling
stockholders, agents and stockholders who participate in the conduct of the
affairs of the institution). This enforcement authority includes, without
limitation: (i) the ability to terminate a savings association's deposit
insurance, (ii) institute cease-and-desist proceedings, (iii) bring suspension,
removal, prohibition and criminal proceedings against institution-affiliated
parties, and (iv) assess substantial civil money penalties. As part of a
cease-and-desist order, the agencies may require a savings association or an
institution-affiliated party to take affirmative action to correct conditions
resulting from that party's actions, including to make restitution or provide
reimbursement, indemnification or guarantee against loss restrict the growth of
the
31
<PAGE> 32
institution and rescind agreements and contracts.
Capital Distribution Regulation. In January 1999, the OTS amended its
capital distribution regulation to bring such regulations into greater
conformity with the other bank regulatory agencies. Under the regulation,
certain savings associations would not be required to file with the OTS.
Specifically, savings associations that would be well capitalized following a
capital distribution are not be subject to any requirement for notice or
application unless the total amount of all capital distributions, including any
proposed capital distribution, for the applicable calendar year would exceed an
amount equal to the savings association's net income for that year to date plus
the savings association's retained net income for the preceding two years.
However, because the Bank is a subsidiary of a savings and loan holding company,
the Bank is required to give the OTS at least 30 days notice prior to any
capital distribution to the Company.
Qualified Thrift Lender Test. In general, savings associations are required
to maintain at least 65% of their portfolio assets in certain qualified thrift
investments (which consist primarily of loans and other investments related to
residential real estate and certain other assets). A savings association that
fails the qualified thrift lender test is subject to substantial restrictions on
activities and to other significant penalties. A savings association may qualify
as a qualified thrift lender not only by maintaining 65% of portfolio assets in
qualified thrift investments but also, in the alternative, by qualifying under
the Internal Revenue Code as a "domestic building and loan association." The
Bank is a domestic building and loan association as defined in the Code.
FDIC Assessments. The deposits of the Bank are insured to the maximum
extent permitted by the SAIF, which is administered by the FDIC, and are backed
by the full faith and credit of the U.S. Government. As insurer, the FDIC is
authorized to conduct examinations of, and to require reporting by, FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging in
any activity the FDIC determines by regulation or order to pose a serious threat
to the FDIC. The FDIC also has the authority to initiate enforcement actions
against savings institutions, after giving the OTS an opportunity to take such
action.
Under FDIC regulations, institutions are assigned to one of three capital
groups for insurance premium purposes -- "well capitalized," "adequately
capitalized" and undercapitalized" -- which are defined in the same manner as
the regulations establishing the prompt corrective action system, as discussed
above. These three groups are then divided into subgroups which are based on
supervisory evaluations by the institution's primary federal regulator,
resulting in nine assessment classifications. Effective January 1, 1997,
assessment rates for both SAIF-insured institutions and BIF-insured institutions
ranged from 0% of insured deposits for well-capitalized institutions with minor
supervisory concerns to .27% of insured deposits for undercapitalized
institutions with substantial supervisory concerns. The Bank's deposit insurance
premiums were $573,000 for the year ended December 31, 1999.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement
32
<PAGE> 33
with the FDIC. It also may suspend deposit insurance temporarily during the
hearing process for the permanent termination of insurance, if the institution
has no tangible capital. If insurance of accounts is terminated, the accounts at
the institution at the time of the termination, less subsequent withdrawals,
shall continue to be insured for a period of six months to two years, as
determined by the FDIC. There are no pending proceedings to terminate the
deposit insurance of the Bank.
Community Reinvestment Act and the Fair Lending Laws. Savings institutions
have a responsibility under the CRA, and related regulations of the OTS to help
meet the credit needs of their communities, including low-and moderate-income
neighborhoods. In addition, the Equal Credit Opportunity Act and the Fair
Housing Act (together, the "Fair Lending Laws") prohibit lenders from
discriminating in their lending practices on the basis of characteristics
specified in those statutes. An institution's failure to comply with the
provisions of CRA could, at a minimum, result in regulatory restrictions on its
activities, and failure to comply with the Fair Lending Laws could result in
enforcement actions by the OTS, as well as other federal regulatory agencies and
the Department of Justice.
Safety and Soundness Guidelines. The OTS and the other federal banking
agencies have established guidelines for safety and soundness, addressing
operational and managerial, as well as compensation matters for insured
financial institutions. Institutions failing to meet these standards are
required to submit compliance plans to their appropriate federal regulators. The
OTS and the other agencies have also established guidelines regarding asset
quality and earnings standards for insured institutions.
Change of Control. Subject to certain limited exceptions, no company can
acquire control of a savings association without the prior approval of the OTS,
and no individual may acquire control of a savings association if the OTS
objects. Any company that acquires control of a savings association becomes a
savings and loan holding company subject to extensive registration, examination
and regulation by the OTS. Conclusive control exists, among other ways, when an
acquiring party acquires more than 25% of any class of voting stock of a savings
association or savings and loan holding company, or controls in any manner the
election of a majority of the directors of the company. In addition, a
rebuttable presumption of control exists if, among other things, a person
acquires more than 10% of any class of a savings association or savings and loan
holding company's voting stock (or 25% of any class of stock) and, in either
case, any of certain additional control factors exist.
Companies subject to the Bank Holding Company Act of 1956, as amended, that
acquire or own savings associations are no longer defined as savings and loan
holding companies under the HOLA and, therefore, are not generally subject to
supervision and regulation by the OTS. OTS approval is no longer required for a
bank holding company to acquire control of a savings association, although the
OTS has a consultative role with the FRB in examination, enforcement and
acquisition matters.
33
<PAGE> 34
TAXATION
FEDERAL TAXATION
GENERAL. The Company and Citizens Financial are subject to federal income
taxation in the same general manner as other corporations with some exceptions
discussed below. The following discussion of federal taxation is intended only
to summarize certain pertinent federal income tax matters and is not a
comprehensive description of the tax rules applicable to the Bank. The Bank's
federal income tax returns have been closed without audit by the IRS through
1995.
The Company will file consolidated tax returns with Citizens Financial.
Accordingly, it is anticipated that any cash distributions made by the Company
to its stockholders will be treated as cash dividends and not as a non-taxable
return of capital to stockholders for federal and state tax purposes.
METHOD OF ACCOUNTING. For federal income tax purposes, Citizens Financial
reports its income and expenses on the accrual method of accounting and uses a
tax year ending December 31 for filing its consolidated federal income tax
returns. The Small Business Protection Act of 1996 (the "1996 Act") eliminated
the use of the reserve method of accounting for bad debts by large savings
institutions, effective for taxable years beginning after 1995.
BAD DEBT RESERVES. Prior to the 1996 Act, the Bank was permitted to
establish a reserve for bad debts and to make annual additions to the reserve.
These additions could, within specified formula limits, be deducted in arriving
at taxable income. As a result of the 1996 Act, large savings associations must
use the specific chargeoff method in computing their bad debt deduction
beginning with their 1996 Federal tax return. In addition, the federal
legislation requires the recapture (over a six year period with a deferral of
one or two years if certain requirements were met) of the excess of tax bad debt
reserves at December 31, 1995 over those established as of December 31, 1987.
The amount of such reserve subject to recapture as of December 31, 1999 is
approximately $3.8 million for Citizens Financial.
TAXABLE DISTRIBUTIONS AND RECAPTURE. Prior to the 1996 Act, bad debt
reserves created prior to January 1, 1988 were subject to recapture into taxable
income if the Bank failed to meet certain thrift asset and definitional tests,
made certain excess distributions to, or redemption of, shareholders, or changed
to a bank charter. Under current law, pre-1988 reserves are subject to recapture
only if the Bank makes certain non-dividend distributions or redemptions or
ceases to maintain a bank charter.
At December 31, 1999 the total federal pre-1988 reserve was approximately
$12.5 million for Citizens Financial. This reserve reflects the cumulative
effects of federal tax deductions by the Bank for which no Federal income tax
provision has been made.
MINIMUM TAX. The Code imposes a minimum tax at a rate of 20% on a base of
regular taxable income plus certain tax adjustments and preferences
("alternative minimum taxable income" or "AMTI"). The minimum tax is payable to
the extent such tax is in excess of the
34
<PAGE> 35
regular tax. This excess is the alternative minimum tax ("AMT"). Net operating
losses can offset no more than 90% of AMTI. Payments of AMT may be used as
credits against regular tax liabilities in future years subject to certain
limitations. Citizens Financial has not been subject to the ATM, nor does it
have any such amounts available as credits for carryover.
NET OPERATING LOSS CARRYOVERS. A financial institution may carry back net
operating losses to the preceding two taxable years and forward to the
succeeding 20 taxable years. Losses incurred in tax years beginning before
August 6, 1997 and after December 31, 1986 can be carried back three years and
forward 15 years. Prior to 1987, various carryback and carryforward provisions
apply. At December 31, 1999, Citizens Financial had no net operating loss
carryforwards for federal income tax purposes.
CORPORATE DIVIDENDS-RECEIVED DEDUCTION. The Company may exclude from its
income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends-received deduction is
80% in the case of dividends received from corporations, the stock of which the
corporate recipient owns 20% or more, but generally less than 80% and
corporations which own less than 20% of the stock of a corporation distributing
a dividend may deduct only 70% of dividends received or accrued on their behalf.
STATE AND LOCAL TAXATION
INDIANA STATE TAXATION. The Company and the Bank will be subject to an 8.5%
franchise tax, imposed by the State of Indiana, on the net income of financial
(including thrift) institutions, exempting them from the current gross income,
supplemental net income and intangible taxes. Net income for franchise tax
purposes will constitute federal taxable income before net operating loss
deductions and special deductions, adjusted for certain items, including Indiana
income taxes, property taxes, charitable contributions, tax exempt interest and
bad debts. Other applicable Indiana taxes include sales, use and property taxes.
Beginning in 1999, the Company and the Bank can apportion income outside of
Indiana.
DELAWARE STATE TAXATION. As a Delaware holding company not earning income
in Delaware, the Company is exempt from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware. The tax is imposed as a percentage of the capital base of the
Company with an annual maximum of $150,000.
ILLINOIS TAXATION. For Illinois income tax purposes, the Company and the
Bank are taxed at a rate of 7.18% of Illinois taxable income. For these
purposes, "Illinois Taxable Income" generally means federal taxable income,
subject to certain adjustments (including the addition of interest income on
state and municipal obligations and the exclusion of interest income on United
States Treasury obligations) and apportionment. The exclusion of income on
United States Treasury obligations has the effect of reducing the Illinois
taxable income of the Bank.
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<PAGE> 36
ITEM 2. PROPERTIES
OFFICES AND PROPERTIES
The following table sets forth certain information relating to Citizens
Financial's offices at December 31, 1999. In addition, the Bank maintains 45
ATMs, with 24 of such ATMs at the Bank's branch offices.
<TABLE>
<CAPTION>
Net Book Value of
Property and
Lease Leasehold
Owned or Expiration Improvements at Deposits at
Location(1) Leased Date December 31, 1999 December 31, 1999
- --------------------------- --------------- ---------------- ---------------------- ----------------------
(In Thousands)
<C> <C> <C> <C> <C>
EXECUTIVE OFFICE:
707 Ridge Road Owned -- $1,845 $142,907
Munster, IN 46321
BRANCH OFFICES:
5311 Hohman Avenue Owned -- 538 97,781
Hammond, IN 46320
155 N. Main Street Owned -- 478 89,311
Crown Point, IN 46307
1720 45th Street Owned -- 705 101,687
Munster, IN 46321
4740 Indianapolis Blvd. Owned -- 307 54,825
East Chicago, IN 46312
2121 East Columbus Leased 2003 405 25,731
East Chicago, IN 46312
803 W. 57th Avenue Leased 2003 2 31,867
Merrillville, IN 46410
855 Thornapple Way Owned -- 345 29,310
Valparaiso, IN 46383
4005 Franklin Leased 2000 -- 25,477
Marquette Mall
Michigan City, IN 46360
714 Lincolnway Owned -- 172 16,283
La Porte, IN 46350
3853 45th Street Owned -- 940 23,558
Highland, IN 46322
2600 Roosevelt Road Leased 2003 58 5,622
Valparaiso, IN 46383
</TABLE>
(Table continued on next page) (Footnotes on following page)
36
<PAGE> 37
<TABLE>
<CAPTION>
Net Book Value of
Property and
Lease Leasehold
Owned or Expiration Improvements at Deposits at
Location(1) Leased Date December 31, 1999 December 31, 1999
- ----------------------------------------------- ---------------- ---------------------- ----------------------
(In Thousands)
<C> <C> <C> <C> <C>
3301 West Vollmer Road Leased 2007 $136 $40,909
Flossmoor, IL 60422
154th at Broadway Leased(1) 20 40,489
Harvey, IL 60426
13323 S. Baltimore Avenue Owned -- 252 28,797
Chicago, IL 60633
162nd & School Streets Owned -- 316 51,438
South Holland, IL 60473
7101 W. 127th Street Owned -- 259 44,240
Palos Heights, IL 60463
170th at South Park Avenue Owned -- 347 --
South Holland, IL 60473
16145 S. State Street Leased 2003(2) 36 8,928
South Holland, IL 60473
16039 S. Harlem Leased 2003(2) 33 19,084
Tinley Park, IL 60477
2345 W. 183rd Street Leased 2003(2) 36 18,194
Homewood, IL 60430
1111 E. Exchange Road Leased 2003(2) 35 13,342
Crete, IL 60417
1218 Sheffield Avenue Leased 2002(2) 87 8,616
Dyer, IN 46311
10S660 State Route 83 Owned -- 756 7,474
Hinsdale, IL 60521
Route 30 at Harvest Acre Drive Owned -- 1,700 279
Schererville, IN 46375 (3)
OTHER PROPERTIES:
1730 45th Street(4) Owned -- 1,105 --
Munster, IN 46321
8149 Kennedy(5) Leased 2003 147 --
Highland, IN 46322
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Building donated to the United Way, June 30, 1999, Citizens Financial
Services now leases approximately ten percent of building for branch
operations.
(2) Full service branch facilities located in a local grocery store chain.
(3) Branch opened in December, 1999.
(4) Insurance and investment center.
(5) Operations center.
37
<PAGE> 38
ITEM 3 LEGAL PROCEEDINGS
In 1983, with the assistance of the Federal Savings and Loan Insurance
Corporation ("FSLIC") as set forth in an assistance agreement ("Assistance
Agreement"), the Bank acquired through mergers First Federal Savings and Loan
Association of East Chicago, East Chicago, Indiana ("East Chicago Savings"), and
Gary Federal Savings and Loan Association, Gary, Indiana ("Gary Federal"). The
FSLIC-assisted supervisory acquisitions of East Chicago Savings and Gary Federal
were accounted for using the purchase method of accounting which resulted in
supervisory goodwill (the excess of cost over fair value of net assets
acquired), an intangible asset, of $52.9 million, compared to $40.2 million of
goodwill as reported on a generally accepted accounting principles basis. Such
goodwill was included in the Bank's regulatory capital. The Assistance Agreement
relating to the Bank's acquisitions of East Chicago Savings and Gary Federal
provided for the inclusion of goodwill as an asset on the Bank's balance sheet,
to be amortized over 35 years for regulatory purposes and includable in capital.
Pursuant to the regulations adopted by the Office of Thrift Supervision to
implement the Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA"), the regulatory capital requirement for federal savings banks
was increased and the amount of supervisory goodwill that could be included in
regulatory capital decreased significantly. At September 30, 1989, the Bank had
approximately $26.0 million of remaining supervisory goodwill but, even
excluding supervisory goodwill, the Bank exceeded the capital requirements of
FIRREA at such date.
On May 13, 1993, the Bank filed suit against the US government seeking
damages and/or other appropriate relief on the grounds, among others, that the
government had breached the terms of the Assistance Agreement. The suit is
pending before Chief Judge Loren Smith in the United States Court of Federal
Claims and is entitled Citizens Financial Services, FSB, et al. v. United States
(Case No. 93-306-C).
The Bank has filed a motion for summary judgment which is presently pending
before the Court. Case-specific discovery with the government in preparation for
trial has begun, and is scheduled to last one year. It is estimated that the
trial will be scheduled thereafter and should commence at some time during the
year 2001.
In its complaint, the Bank did not specify the amount of damages it is
seeking from the United States. The Bank has yet to retain an expert in order to
attempt to quantify the amount of damages. The Bank is unable to predict the
outcome of its claim against the United States and the amount of damages that
may be awarded to the Bank, if any, in the event that a judgement is rendered in
the Bank's favor. Consequently, no assurances can be given as to the result of
this claim or the timing of any proceedings in relation thereto.
Other than the above-mentioned litigation, the Company is involved in
routine legal proceedings occurring in the ordinary course of business which in
the aggregate, are believed to be immaterial to the financial condition of the
Company.
38
<PAGE> 39
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required herein is incorporated by reference from the
inside back cover of the Registrant's 1999 Annual Report.
ITEM 6. SELECTED FINANCIAL DATA
The information required herein is incorporated by reference from pages 13
to 14 of the Registrant's 1999 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required herein is incorporated by reference from pages 15
to 23 of the Registrant's 1999 Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required herein is incorporated by reference from pages 15
to 16 of the Registrant's 1999 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required herein is incorporated by reference from pages 25
to 48 of the Registrant's 1999 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required herein is incorporated by reference from pages 3
to 5 of the Registrant's Proxy Statement dated March 27, 2000 ("Proxy
Statement").
39
<PAGE> 40
ITEM 11. EXECUTIVE COMPENSATION.
The information required herein is incorporated by reference from pages 6
to 12 of the Registrant's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required herein is incorporated by reference from page 14
to 15 of the Registrant's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required herein is incorporated by reference from page 12
of the Registrant's Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Document filed as part of this Report.
(1) The following documents are filed as part of this report and are
incorporated herein by reference from the Registrant's 1999 Annual Report.
Independent Auditors' Report.
Consolidated Statements of Financial Condition as of December 31, 1999
and 1998.
Consolidated Statements of Income for the Years Ended December 31,
1998, 1997 and 1996.
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended December 31, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997.
Notes to Consolidated Financial Statements.
(2) All schedules for which provision is made in the applicable
accounting regulation of the SEC are omitted because they are not applicable or
the required information is included in the Consolidated Financial Statements or
notes thereto.
(3)(a) The following exhibits are filed as part of this Form 10-K, and
this list includes the Exhibit Index.
40
<PAGE> 41
3.1 Certificate of Incorporation of CFS Bancorp, Inc.*
3.2 Bylaws of CFS Bancorp, Inc.*
4.0 Form of Stock Certificate of CFS Bancorp, Inc.*
10.1 Form of Employment Agreement entered into between Citizens
Financial Services, FSB and each of Thomas F. Prisby, James W.
Prisby and John T. Stephens*
10.2 Form of Employment Agreement entered into between CFS Bancorp,
Inc. and each of Thomas F. Prisby, James W. Prisby and John T.
Stephens*
10.3 CFS Bancorp, Inc. 1998 Stock Option Plan**
10.4 CFS Bancorp, Inc. 1998 Recognition and Retention Plan and Trust
Agreement**
10.5 Supplemental ESOP Benefit Plan
13.0 1999 Annual Report to Stockholders specified portion (pp.12 to
46) of the Registrant's Annual Report to Stockholders for the
year ended December 31, 1998.
23.1 Consent of Independent Auditors - Ernst & Young LLP
23.2 Consent of Independent Auditors - Cobitz, Vandenberg & Fennessy
21.0 Subsidiaries of the Registrant - Reference is made to Item 1.
"Business" for the Required information.
27.0 Financial Data Schedule
99.0 Independent Auditors' Report for SuburbFed Financial Corp.
- -------------
* Incorporated by Reference from the Company's Registration Statement on Form
S-1 filed on March 31, 1998, as amended and declared effective on May 14, 1998.
**Incorporated by Reference from the Company's Definitive Proxy Statement for a
Special Meeting of Stockholders filed on December 29, 1998.
(3)(b) Reports filed on Form 8-K.
None.
41
<PAGE> 42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CFS BANCORP, INC.
By:
Thomas F. Prisby
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
<S> <C> <C>
Chairman of the Board and Chief March 30, 2000
- ------------------------------------- Executive Officer
Thomas F. Prisby (principal executive officer)
Vice Chairman, President and March 30, 2000
- ------------------------------------- Chief Executive Officer
James W. Prisby
Executive Vice President and March 30, 2000
- ------------------------------------- Chief Financial Officer
John T. Stephens (principal financial and
accounting officer)
Director March 30, 2000
- -------------------------------------
Sally A. Abbott
</TABLE>
42
<PAGE> 43
<TABLE>
<S> <C> <C>
Director March 30, 2000
- -------------------------------------
Gregory W. Blaine
Director March 30, 2000
- -------------------------------------
Thomas J. Burns
Director March 30, 2000
- -------------------------------------
Daniel P. Ryan
Director March 30, 2000
- -------------------------------------
Gene Diamond
</TABLE>
43
<PAGE> 44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CFS BANCORP, INC.
By: /s/ Thomas F. Prisby
--------------------
Thomas F. Prisby
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
<S> <C> <C>
/s/ Thomas F. Prisby Chairman of the Board and Chief March 30, 2000
- -------------------- Executive Officer
Thomas F. Prisby (principal executive officer)
/s/ James W. Prisby Vice Chairman, President and March 30, 2000
- ------------------- Chief Executive Officer
James W. Prisby
/s/ John T. Stephens Executive Vice President and March 30, 2000
- -------------------- Chief Financial Officer
John T. Stephens (principal financial and
accounting officer)
/s/ Sally A. Abbott Director March 30, 2000
- -------------------
Sally A. Abbott
</TABLE>
44
<PAGE> 45
<TABLE>
<S> <C> <C>
/s/ Gregory W. Blaine Director March 30, 2000
- ---------------------
Gregory W. Blaine
/s/ Thomas J. Burns Director March 30, 2000
- -------------------
Thomas J. Burns
/s/ Daniel P. Ryan Director March 30, 2000
- -------------------
Daniel P. Ryan
/s/ Gene Diamond Director March 30, 2000
- ----------------
Gene Diamond
</TABLE>
45
<PAGE> 1
EXHIBIT 10.5
SUPPLEMENTAL ESOP BENEFIT PLAN
OF
CFS BANCORP, INC.
AND
CITIZENS FINANCIAL SERVICES, FSB
This Supplemental ESOP Excess Benefit Plan ("Plan") of CFS Bancorp, Inc.
(the "Company") and Citizens Financial Services, FSB (the "Bank") is adopted
effective as of May 17, 1999. The Plan is established and maintained by the
Company and the Bank for the purpose of permitting the officers listed in
Appendix A attached hereto (which may be amended by the Company and/or the Bank
from time to time hereafter) who will be participating in the CFS Bancorp, Inc.
Employee Stock Ownership Plan (the "ESOP") to receive allocations representing
shares of common stock of the Company pursuant to this Plan in excess of the
number of shares of common stock of the Company which are allocable to their
accounts within the ESOP ("ESOP Allocation") under the limitation imposed by
Sections 401(a)(17), 414 and 415 of the Internal Revenue Code of 1986, as
amended, or as a result of the maximum amount of compensation which may be taken
into consideration for the purposes of the ESOP.
The Plan is an unfunded plan maintained for the purpose of providing
deferred compensation for selected officers of the Company and the Bank, each of
whom is a member of a select group of management or highly compensated employees
for purposes of Title I of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA").
Accordingly, the Company and the Bank hereby adopts the Plan pursuant to
the terms and provisions set forth below:
ARTICLE I
DEFINITIONS
In addition to those terms defined above, the following terms shall have
the meanings hereinafter set forth whenever used herein:
1.1. "Board" means the Boards of Directors of the Company and the Bank.
1.2. "Code" means the Internal Revenue Code of 1986, as amended from time
to time, and any regulations relating thereto.
1
<PAGE> 2
1.3. "Company Common Stock" means shares of common stock of the Company.
1.4. "ESOP Allocation" means the number of shares allocable to the
individual account of a participant in the ESOP pursuant to Article IV of the
ESOP.
1.5. "Participant" means a salaried employee of the Company and/or the Bank
who is a participant in the ESOP, who is a member of a select group of
management or highly compensated employees within the meaning of Section 201 (2)
of the ERISA and who is selected by the Board to participate in the Plan.
1.6. "Plan Year" means the 12-consecutive-month period ending December 31
of each year.
1.7. "Stock Unit" means a bookkeeping unit used for the purpose of
crediting amounts to the account of a Participant, each such Stock Unit being
equivalent to one (1) share of Company Common Stock.
1.8. "Supplemental ESOP Allocation" shall mean the number of Stock Units
allocated to a Participant's account pursuant to Section 3.1 of the Plan.
1.9. Words in the masculine gender shall include the feminine and the
singular shall include the plural, and vice versa, unless qualified by the
context. Any headings used herein are included for ease of reference only, and
are not to be construed so as to alter the terms hereof.
ARTICLE II
ELIGIBILITY
A salaried employee of the Company and/or the Bank who is eligible to
receive the benefit of an ESOP Allocation, the total amount of which is reduced
by reason of the limitation on the amount of compensation which may be taken
into account for the purpose of calculating allocations pursuant to Sections
401(a)(17), 414 and 415 of the Code shall be eligible to be selected by the
Boards of Directors of the Company and the Bank to participate in the Plan.
2
<PAGE> 3
ARTICLE III
SUPPLEMENTAL ESOP ALLOCATIONS
A Participant in the Plan shall receive a Supplemental ESOP Allocation of
Stock Units each year at the same time that allocations of Company Common Stock
are made pursuant to the ESOP. The number of Stock Units allocable to a
Participant for any Plan Year shall be an amount equal to the difference between
(a) and (b) below:
(a) The ESOP Allocation which would have been allocated to the
Participant for the Plan Year, as determined by Article IV of the ESOP and
the definition of "Compensation" in Section 1.10 of the ESOP without giving
effect to the limitation imposed by Sections 401(a)(17), 414 and 415 of the
Code on the maximum amount of compensation which may be taken into
consideration for the purposes of the ESOP;
LESS
(b) The ESOP Allocation actually allocated to the account of the
Participant in the ESOP for the Plan Year.
Supplemental ESOP Allocations made for the benefit of a Participant for any Plan
Year shall be credited to a bookkeeping account maintained under the Plan in the
name of each Participant.
ARTICLE IV
INVESTMENT OF SUPPLEMENTAL ESOP ALLOCATIONS
4.1 INVESTMENT OF FUNDS. Investment of amounts credited hereunder to the
account of a Participant shall be treated as if they were actually invested in
the ESOP account of the Participant and shall be credited with gains and losses
at the same time and in the same manner as is applicable to amounts invested in
the ESOP account of such Participant.
4.2 FORMATION OF TRUST. In connection with the adoption of the Plan, the
Company and the Bank have elected to form a trust (the "Trust") in order to
permit contributions from the Company or the Bank to purchase and hold shares of
Company Common Stock and other assets, subject to compliance with all applicable
securities laws. If the Company and the Bank elect to contribute to the Trust to
fund their obligations under the Plan, a Participant shall have no right to
demand the transfer to him of stock or other assets from the Company and the
Bank or from such Trust. Any assets held in the Trust, including shares of
Company Common Stock, may be distributed to a Participant in payment of part or
all of the Company's and the Bank's obligations under the Plan.
3
<PAGE> 4
ARTICLE V
VESTING; DISTRIBUTIONS
5.1. VESTING. The vested portion of a Participant's account shall be a
percentage of the total amount credited to the account determined on the basis
of the Participant's number of "Years of Service" (as defined in Section 1.58
(or any successor thereto) of the ESOP) according to the following schedule:
Years of Service Percentage
---------------- ----------
Less than 5 0%
5 100%
In determining Years of Service for purposes of vesting under the Plan,
Years of Service with the Company or the Bank prior to adoption of this Plan
shall be included.
Notwithstanding the above vesting schedule, a Participant shall be 100%
vested in his account upon attainment of "Normal Retirement Age" (as defined in
Section 1.35 (or any successor thereto) of the ESOP).
5.2 DISTRIBUTION. The vested portion of amounts credited to a Participant's
account shall be distributed to a Participant at the same time, and in the same
manner and in the same form, as benefits shall be distributed from the ESOP
pursuant to Article VII of the ESOP.
If a Participant should die before distribution of the vested portion of
his account pursuant to the Plan has been made to him, any remaining vested
amounts shall be distributed to his beneficiary in the method designated by the
Participant in a writing delivered to the Company and the Bank prior to his
death. If a Participant has not designated a beneficiary, or method of
distribution, or if no designated beneficiary is living on the date of
distribution, such vested amounts shall be distributed to those persons entitled
to receive distributions of the Participant's account under the ESOP and in the
same method as distribution is made under the ESOP.
4
<PAGE> 5
ARTICLE VI
ADMINISTRATION OF THE PLAN
6.1. ADMINISTRATION BY THE COMPANY AND THE BANK. The Company and the Bank
shall be responsible for the general operation and administration of the Plan
and for carrying out the provisions thereof.
6.2. GENERAL POWERS OF ADMINISTRATION. All provisions set forth in the ESOP
with respect to the administrative powers and duties of the Company and the
Bank, expenses of administration, and procedures for filing claims shall also be
applicable with respect to the Plan. The Company and the Bank shall be entitled
to rely conclusively upon all tables, valuations, certificates, opinions and
reports furnished by any actuary, accountant, controller, counsel or other
person employed or engaged by the Company and the Bank with respect to the Plan.
ARTICLE VII
AMENDMENT OR TERMINATION
7.1. AMENDMENT OR TERMINATION. The Company and the Bank reserve the right
to amend or terminate the Plan when, in the sole opinion of the Company and the
Bank, such amendment or termination is advisable. Any such amendment or
termination shall be made pursuant to a resolution of the Board and shall be
effective as of the date of such resolution.
7.2. EFFECT OF AMENDMENT OR TERMINATION. No amendment or termination of the
Plan shall directly or indirectly reduce the vested portion of any account held
hereunder as of the effective date of such amendment or termination. Upon
termination of the Plan, distribution of vested amounts credited to the account
of a Participant shall be made to the Participant or his beneficiary in the
manner and at the time described in Section 5.2 of the Plan. No additional
credits of ESOP Allocations shall be made to the account of a Participant and no
additional Years of Service (within the meaning of Section 5.1) shall be
credited after termination of the Plan, but the Company and the Bank shall
continue to credit gains and losses pursuant to Article IV until the vested
balance of his account has been fully distributed to the Participant or his
beneficiary.
5
<PAGE> 6
ARTICLE VIII
GENERAL PROVISIONS
8.1. PARTICIPANT'S RIGHTS UNSECURED. The right of a Participant or his
designated beneficiary to receive a distribution hereunder shall be an unsecured
claim against the general assets of the Company and the Bank, and neither the
Participant nor a designated beneficiary shall have any rights in or against any
specific assets of the Company and the Bank.
8.2. GENERAL CONDITIONS. Except as otherwise expressly provided herein, all
terms and conditions of the ESOP applicable to an ESOP Allocation will also be
applicable to an allocation of Stock Units pursuant to this Plan. Nothing in
this Plan shall operate or be construed in any way to modify, amend or affect
the terms and provisions of the ESOP.
8.3. NO GUARANTEE OF BENEFITS. Nothing contained in the Plan shall
constitute a guaranty by the Company and the Bank or any other person or entity
that the assets of the Company and the Bank will be sufficient to pay any
benefit hereunder.
8.4. NO ENLARGEMENT OF EMPLOYEE RIGHTS. No Participant shall have any right
to receive a distribution of contributions made under the Plan except in
accordance with the terms of the Plan. Establishment of the Plan shall not be
construed to give any Participant the right to be retained in the service of the
Company and the Bank.
8.5. SPENDTHRIFT PROVISION. No interest of any person or entity in, or
right to receive a distribution under, the Plan shall be subject in any manner
to sale, transfer, assignment, pledge, attachment, garnishment, or other
alienation or encumbrance of any kind; nor may such interest or right to receive
a distribution be taken, either voluntarily or involuntarily for the
satisfaction of the debts of, or other obligations or claims against, such
person or entity, including claims for alimony, support, separate maintenance
and claims in bankruptcy proceedings.
8.6. APPLICABLE LAW. The Plan shall be construed and administered under the
laws of the State of Indiana to the extent such laws are not superseded by
federal law.
8.7. INCAPACITY OF RECIPIENT. If any person entitled to a distribution
under the Plan is deemed by the Company and the Bank to be incapable of
personally receiving and giving a valid receipt for such payment, then, unless
and until claim therefor shall have been made by a duly appointed guardian or
other legal representative of such person, the Company and the Bank may provide
for such payment or any part thereof to be made to any other person or
institution then contributing toward or providing for the care and maintenance
of such person. Any such payment shall be a payment for the account of such
person and a complete discharge of any liability of the Company, the Bank and
the Plan therefor.
6
<PAGE> 7
8.8. CORPORATE SUCCESSORS. The Plan shall not be automatically terminated
by a transfer or sale of assets of the Company and the Bank or by the merger or
consolidation of the Company and the Bank into or with any other corporation or
other entity, but the Plan shall be continued after such sale, merger or
consolidation only if and to the extent that the transferee, purchaser or
successor entity agrees to continue the Plan. In the event that the Plan is not
continued by the transferee, purchaser or successor entity, then the Plan shall
terminate subject to the provisions of Section 7.2.
8.9. UNCLAIMED BENEFIT. Each Participant shall keep the Company and the
Bank informed of his current address and the current address of his designated
beneficiary. The Company and the Bank shall not be obligated to search for the
whereabouts of any person. If the location of a Participant is not made known to
the Company and the Bank within three (3) years after the date on which payment
of the Participant's account may first be made, payment may be made as though
the Participant had died at the end of the three-year period. If, within one
additional year after such three-year period has elapsed, or, within three years
after the actual death of a Participant, the Company or the Bank is unable to
locate any designated beneficiary of the Participant, then the Company and the
Bank shall have no further obligation to pay any benefit hereunder to such
Participant or designated beneficiary and such benefit shall be irrevocably
forfeited.
8.10. LIMITATIONS ON LIABILITY. Notwithstanding any of the preceding
provisions of the Plan, neither the Company and the Bank nor any individual
acting as employee or agent of the Company and the Bank shall be liable to any
Participant, former Participant or other person for any claim, loss, liability
or expense incurred in connection with the Plan.
IN WITNESS WHEREOF, CFS Bancorp, Inc. and Citizens Financial Services, FSB
have caused this Plan to be duly executed on this 17th day of May, 1999.
CFS BANCORP, INC.
Attest:
/s/ Monica F. Sullivan By /s/ Thomas F. Prisby
- ------------------------ -------------------------
Secretary
CITIZENS FINANCIAL SERVICES, FSB
Attest:
/s/ Monica F. Sullivan By /s/ James W. Prisby
- -------------------- -------------------------
Secretary
7
<PAGE> 8
APPENDIX A
The Company and the Bank have designated the following persons as
Participants in its Supplemental ESOP Benefit Plan:
Thomas F. Prisby
James W. Prisby
John T. Stephens
8
<PAGE> 1
Exhibit 13
CFS Bancorp, Inc.
SELECTED CONSOLIDATED FINANCIAL DATA
Selected Consolidated Financial Data
<TABLE>
<CAPTION>
At December 31,
(Dollars in thousands except per share data) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data
Total assets $1,649,535 $1,470,617 $1,184,512 $1,051,085 $ 967,004
Loans receivable, net 882,676 726,081 595,566 490,873 389,170
Mortgage-backed securities,
available for sale 299,056 277,888 62,141 85,753 77,479
Mortgage-backed securities,
held to maturity 101,066 176,956 256,670 326,430 397,060
Investment securities,
available for sale 32,693 34,720 3,696 3,430 2,345
Investment securities,
held to maturity 176,737 166,500 206,232 59,875 27,955
Deposits 925,047 969,802 986,073 883,309 819,988
Borrowed money 494,699 215,271 85,044 62,938 43,427
Stockholders' equity 205,433 260,088 95,196 89,983 89,306
Non-performing assets to total assets 0.75% 0.64% 0.63% 0.27% 0.21%
Stockholders' equity to total assets 12.45 17.69 8.04 8.56 9.24
Stockholders' equity per
outstanding share $ 11.03 $ 11.33 $ 4.19 $ 3.97 $ 3.92
Allowance for losses on loans to
non-performing loans 50.48% 59.82% 62.23% 86.27% 113.90%
Allowance for losses on loans to
total loans 0.68 0.74 0.64 0.48 0.48
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997 1996 1995
SELECTED OPERATIONS DATA
<S> <C> <C> <C> <C> <C>
Interest income $104,609 $ 97,353 $ 83,252 $ 71,755 $ 66,999
Interest expense 57,543 56,910 50,858 41,718 38,694
Net interest income 47,066 40,443 32,394 30,037 28,305
Provision for losses on loans(1) 675 1,630 1,840 253 197
Net interest income after provision
for loan losses 46,391 38,813 30,554 29,784 28,108
Non-interest income 5,191 5,900 4,872 4,262 3,986
Non-interest expense(2) 30,210 39,004 28,146 29,940 23,217
Income before income taxes 21,372 5,709 7,280 4,106 8,877
Income tax expense 8,282 2,587 2,714 1,560 3,382
Net income 13,090 3,122 4,566 2,546 5,495
Earnings per share (basic) 0.69 0.15 0.20 0.11 0.24
Earnings per share (diluted) 0.68 0.14 0.20 0.11 0.24
SELECTED OPERATING RATIOS
Net interest margin 3.18% 3.08% 2.92% 3.12% 3.12%
Average interest-earning assets to
average interest-bearing liabilities 118.70 114.57 108.20 108.43 109.56
Ratio of general and administrative
expense to average total assets
(adjusted for one-time charges)(3) 1.88 2.16 2.44 2.45 2.46
Return on average assets 0.85 0.23 0.40 0.25 0.58
Return on average equity 5.70 1.85 4.83 2.81 6.37
Efficiency ratio (adjusted for
one-time charges)(3) 57.95 64.35 71.85 71.69 72.75
</TABLE>
(1) The provision for losses on loans in 1998 reflects a $1,200 adjustment in
order to conform the credit policies of SFC to those of the Company. See
Note 2 to the Consolidated Financial Statements.
(2) Non-interest expense in 1998 includes one-time charges of $9,519 related to
the Merger and Conversion. See Note 2 to the Consolidated Financial
Statements.
(3) Calculated on a pro forma basis which excludes the effects of the special
charges referred to in (2) above.
<PAGE> 2
QUARTERLY RESULTS OF OPERATIONS
Quarterly Results of Operations
<TABLE>
<CAPTION>
1999
1st 2nd 3rd 4th
(Dollars in thousands except per share data) Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Net interest income $11,893 $11,732 $11,739 $11,702
Provision for losses on loans 150 150 150 225
Non-interest income 1,306 1,455 1,161 1,269
Non-interest expense 7,498 7,027 7,832 7,853
Income before income taxes 5,551 6,010 4,918 4,893
Income taxes 2,275 2,356 1,949 1,702
Net income 3,276 3,654 2,969 3,191
Earnings per share -- basic 0.15 0.19 0.17 0.18
Earnings per share -- diluted 0.15 0.19 0.16 0.18
Dividends declared per share 0.08 0.08 0.09 0.09
</TABLE>
<TABLE>
<CAPTION>
1998
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Net interest income $ 8,466 $ 8,951 $ 11,323 $ 11,703
Provisions for losses on loans 90 105 1,285(1) 150
Non-interest income 1,544 1,699 901 1,756
Non-interest expense 7,133 7,517 17,334(2) 7,020
Income (loss) before income taxes 2,787 3,028 (6,395) 6,289
Income (benefit) taxes 1,013 1,162 (1,914) 2,326
Net income (loss) 1,774 1,866 (4,481) 3,963
Earnings (loss) per share -- basic 0.08 0.08 (0.19) 0.18
Earnings (loss) per share -- diluted 0.08 0.08 (0.20) 0.18
Dividends declared per share(3) N/A N/A 0.08 0.08
</TABLE>
(1) The provisions for losses on loans, in the third quarter of 1998, reflected
a $1,200 adjustment in order to conform the credit policies of SFC to those
of the Company. See Note 2 to the Consolidated Financial Statements.
(2) Non-interest expense, in the third quarter of 1998, included one-time
charges of $9,519 related to the Merger and Conversion. See Note 2 to the
Consolidated Financial Statements.
(3) Dividends paid by SFC for all quarters prior to Merger have been excluded.
[CFS LOGO} 14/15
<PAGE> 3
CFS Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL CFS Bancorp, Inc. (the "Company") was formed as the holding
company for Citizens Financial Services, FSB (the "Bank") in
connection with the Bank's conversion from a federally
chartered mutual savings bank to a federally chartered stock
savings bank (the "Conversion"). The Conversion was
completed on July 24, 1998. Concurrent with the Conversion,
the Company completed its merger with SuburbFed Financial
Corp. ("SFC") (the "Merger"). In accordance with the merger
agreement the Company issued 3.6 shares of CFS Bancorp stock
for each share of SFC stock. SFC was then merged into the
Company and SFC's subsidiary, Suburban Federal Savings, a
Federal Savings Bank, was merged into the Bank. This merger
was accounted for as a pooling-of-interests, and as such,
all financial data presented in this annual report includes
the combined assets and liabilities and results of
operations of the Company and SFC for all periods presented.
ASSET/LIABILITY The Bank, like other financial institutions, is subject to
MANAGEMENT interest rate risk to the extent that its interest-bearing
liabilities with short- and intermediate-term maturities
reprice more rapidly, or on a different basis, than its
interest-earning assets. Management attempts to moderate the
effect of changes in interest rates on the Bank's net
portfolio value ("NPV"). The NPV represents the excess of
the present value of expected cash flows from assets over
the present value of expected cash flows from liabilities.
This approach calculates the difference between the present
value of expected cash flows from assets and the present
value of expected cash flows from liabilities, as well as
cash flows from off-balance sheet contracts. Management of
the Bank's assets and liabilities is done within the context
of the marketplace, but also within limits established by
the Board of Directors on the amount of change in NPV which
is acceptable given certain interest rate changes.
In an attempt to manage its exposure to changes in interest
rates, management closely monitors the Bank's interest rate
risk. The Bank has an asset/liability management committee
consisting of senior officers and one outside director which
meets monthly to review the Bank's interest rate risk
position and to make recommendations for adjustments to the
Bank's Board of Directors. In addition, the Board reviews
simulations of various interest rate scenarios which could
affect the Bank's earnings.
In managing its asset/liability mix, the Bank, at times,
depending on the relationship between long- and short-term
interest rates, market conditions and consumer preference,
places greater emphasis on maximizing its net interest
margin than on strictly matching the interest rate
sensitivity of its assets and liabilities. The Board
believes that the increased net income resulting from a
mismatch in the maturity of its asset and liability
portfolios can, during periods of stable interest rates,
provide high enough returns to justify the increased
exposure which can result from such a mismatch.
While maintaining its interest rate spread objectives, the
Bank attempts to reduce its interest rate risk with a
variety of strategies designed to maintain the proper
relationship between its assets and liabilities. First, the
Bank focuses on mortgage loans with an initial fixed term of
one, three, five or seven years that convert to an annually
adjusting rate using the one-year constant maturity of the
United States Treasury Obligations as the index. At December
31, 1999, the Bank had approximately $603.8 million of
adjustable rate mortgage loans in its portfolio. Second, the
Bank's mortgage-backed securities portfolio is made up
primarily of securities that have expected average lives of
five years or less at time of purchase. Third, the Bank has
a substantial amount of passbook savings, demand deposit and
money market accounts which may be less sensitive to changes
in interest rates than certificate accounts. At December 31,
1999 the Bank had $365.7 million of these types of accounts.
Fourth, the Bank's liability management program seeks to
lengthen the maturities of customer deposits by aggressively
pricing certificates up to 10 years in term.
Presented below, as of December 31, 1999 and 1998, is an
analysis of the Bank's interest rate risk as measured by
changes in NPV for instantaneous and sustained parallel
shifts in the yield curve, in 100 basis point (1%)
increments, up and down 300 basis points in accordance with
Office of Thrift Supervision ("OTS") regulations. As
illustrated in the table, NPV is more sensitive to and may
be more negatively impacted by rising rates than declining
rates. This occurs principally because, as rates rise, the
market value of fixed-rate loans declines due to both the
rate increase and slowing prepayments. When rates decline,
the Bank does not experience a significant rise in market
value for these loans because borrowers prepay at relatively
high rates.
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The value of the Bank's deposits and borrowings change in
approximately the same proportion in rising or falling rate
scenarios.
<TABLE>
<CAPTION>
(Dollars in thousands) Net Portfolio Value
Assumed Change
in Interest Rates 1999 1998
(Basis Points) $ AMOUNT $ CHANGE % CHANGE $ Amount $ Change % Change
<S> <C> <C> <C> <C> <C> <C>
+300 132,441 (33,573) (20) 136,269 (32,203) (19)
+200 145,950 (20,064) (12) 149,861 (18,611) (11)
+100 157,732 (8,282) (5) 160,172 (8,300) (5)
0 166,014 -- -- 168,472 -- --
- -100 168,726 2,713 2 173,382 4,910 3
- -200 165,846 (168) 0 177,992 9,520 6
- -300 161,737 (4,277) (3) 185,481 17,009 10
</TABLE>
As noted above, increases in interest rates normally effect
a decrease in the market value of the Bank's net assets. For
instance, as of December 31, 1999, in the event of a 200
basis point increase in interest rates, NPV is anticipated
to fall by $20.1 million or 12%. The remaining NPV, after
the effect of the 200 basis point increase, is still 8.9% of
the Bank's total assets. On the other hand, in a decreasing
interest rate environment, the NPV is anticipated to
increase slightly.
The above analysis includes the assets and liabilities of
the Bank only. Inclusion of Holding Company assets and
liabilities would increase NPV at all levels.
LIQUIDITY AND The Bank's liquidity, represented by cash and cash
COMMITMENTS equivalents, is a product of its operating, investing and
financing activities. The Bank's primary historical sources
of funds are 1) deposits, 2) scheduled payments of
amortizing loans and mortgage-backed securities, 3)
prepayments and maturities of outstanding loans and
mortgage-backed securities, 4) maturities of investment
securities and other short-term investments, and 5) funds
provided from operations. During 1998 the Bank began
leveraging its capital base with borrowings to provide
additional funds for lending and investing activities. Given
the Bank's asset size and the current interest rate
environment, management determined that the use of
borrowings as leverage was a prudent strategy. Scheduled
payments from the amortization of loans, mortgage-backed
securities, maturing investment securities, and short-term
investments are relatively predictable sources of funds,
while deposit flows and loan prepayments are greatly
influenced by market interest rates, economic conditions and
competitive rate offerings. In addition, the Bank invests
excess funds in federal funds sold and other short-term
interest-earning assets which provide liquidity to meet
lending requirements.
Liquidity management is both a daily and long-term function.
Excess liquidity is generally invested in short-term
investments such as federal funds sold. On a longer-term
basis the Bank invests funds not used for maintaining and
expanding the loan portfolio in mortgage-backed securities.
The Bank uses its sources of funds primarily to meet its
ongoing commitments, pay maturing certificates of deposit
and savings withdrawals, fund loan commitments, and maintain
a portfolio of mortgage-backed and investment securities.
At December 31, 1999 total loan origination commitments
outstanding were $96.9 million. Certificates of deposit
scheduled to mature in one year or less at December 31, 1999
totaled $426.0 million. Investment securities scheduled to
mature or permitted to be called for redemption in one year
or less at December 31, 1999 totaled $183.1 million. Based
on historical experience, management believes that a
significant portion of maturing deposits will remain with
the Bank. The Bank anticipates that it will continue to have
sufficient funds to meet its current commitments.
[CFS LOGO]
16/17
<PAGE> 5
CFS Bancorp, Inc.
The liquidity needs of CFS Bancorp (the parent company)
consist primarily of operating expenses and dividend
payments to stockholders and stock repurchases. In addition
to securities available for sale, the primary source of
liquidity for the parent company is dividends from the Bank.
However, this source can also be supplemented by fees
assessed to the Bank. Under certain banking regulations,
regulatory approval is required before dividends declared by
the Bank can exceed defined levels. In addition, the Bank is
required to maintain certain capital requirements. See note
11 to the Consolidated Financial Statements.
CHANGES IN General. Total assets of the Company increased by $178.9
FINANCIAL CONDITION million, or 12.2%, to $1.6 billion at December 31, 1999
compared to $1.5 billion at December 31, 1998. This increase
was due primarily to increases of $156.6 million in loans
receivable and $46.0 million in cash and cash equivalents.
These increases were partially offset by a $54.7 million
decrease in mortgage-backed securities. The net increase was
funded primarily by a $279.4 million increase in borrowed
money.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents, which
consist of cash, interest-bearing deposits at other
institutions and federal funds sold, amounted to $95.8
million at December 31, 1999 and $49.8 million at December
31, 1998. The 92.2% increase from December 31, 1998 to
December 31, 1999 primarily reflects accumulation of funds
for loan commitments outstanding at December 31, 1999, as
well as, management's decision to maintain above normal
levels of cash for the Y2K rollover event.
INVESTMENT SECURITIES. At December 31, 1999 the Company had
$32.7 million of investment securities available for sale
and $176.7 million in investment securities held to
maturity, or an aggregate of $209.4 million of investment
securities, compared to $34.7 million in investment
securities available for sale and $166.5 million held to
maturity, or an aggregate of $201.2 million in investment
securities, at December 31, 1998.
MORTGAGE-BACKED SECURITIES. At December 31, 1999 the Company
had $299.1 million in mortgage-backed securities available
for sale and $101.1 million in mortgage-backed securities
held to maturity, or an aggregate of $400.1 million in
mortgage-backed securities, compared to $277.9 million in
mortgage-backed securities available for sale and $177.0
million held to maturity, or an aggregate of $454.9 million
in mortgage-backed securities at December 31, 1998. This
decrease of $54.8 million was used to fund loans receivable.
The decision to increase loans receivable as a percentage of
total assets and the increased asset base as a result of the
Conversion and Merger, enabled management to classify all
purchases of investment securities and mortgage-backed
securities as available for sale effective July 1, 1998. At
December 31, 1999 the Company had an unrealized loss, net of
taxes, on available for sale investment securities and
mortgage-backed securities of $9.4 million.
LOANS RECEIVABLE. The net loan portfolio of the Company
increased from $726.1 million at December 31, 1998 to $882.7
million at December 31, 1999. The increase in net loan
portfolio during 1999 was due to the Company's efforts to
increase new loan originations through existing loan
programs and the addition of commercial real estate lending
to the loan program menu in 1998.
DEPOSITS. Deposits decreased from $969.8 million to $925.0
million from December 31, 1998 to December 31, 1999.
Continued strength in equity markets and increased local
competition for deposits were the main reasons for this
decrease.
BORROWED MONEY. Borrowed money increased from $215.3 million
at December 31, 1998 to $494.7 million at December 31, 1999.
The $279.4 million increase was used primarily to fund
origination of new mortgage loans and secondarily to
increase cash balances in anticipation of the Y2K rollover
event.
STOCKHOLDERS' EQUITY. Total stockholders' equity of the
Company amounted to $205.4 million, or 12.5% of total
assets, at December 31, 1999 compared to $260.1 million, or
17.7% of total assets, at December 31, 1998. Total
stockholders' equity includes the components of unrealized
gains and losses on investment securities and
mortgage-backed securities available for sale, net of taxes,
at December 31, 1999 and 1998. Unrealized losses, net of
taxes, on investment securities and mortgage-backed
securities amounted to $9.4 million at December 31, 1999 and
$289,000 at December 31, 1998. The decrease in stockholders'
equity for the year was primarily due to the stock
repurchase programs the Company has completed and/or
initiated during 1999.
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
AVERAGE BALANCES, The following table sets forth, for the periods
NET INTEREST INCOME, indicated, information regarding (i) the Company's total
YIELDS EARNED AND dollar amount of interest income from interest-earning
RATES PAID assets and the resultant average yields; (ii) the total
dollar amount of interest expense on interest-bearing
liabilities and the resultant average rate; (iii) net
interest income; (iv) interest rate spread; and (v) net
interest margin. Information is based on average monthly
balances during the indicated periods. Management
believes that the average monthly balances do not differ
materially from the average daily balances.
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998
--------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
(DOLLARS IN THOUSANDS) BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable:(1)
Real estate loans $ 775,363 $ 57,002 7.35% $ 643,035 $49,447 7.69%
Other loans 14,113 1,334 9.45 25,045 2,364 9.44
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL LOANS 789,476 58,336 7.39 668,080 51,811 7.76
Securities(2) 652,535 44,277 6.79 612,699 43,534 7.11
Other interest-earning assets(3) 35,799 1,996 5.58 33,285 2,008 6.03
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST-
EARNINGS ASSETS 1,477,810 104,609 7.08 1,314,064 97,353 7.41
Non-interest earning assets 58,652 52,777
==================================================================================================================================
TOTAL ASSETS $1,536,462 $1,366,841
Interest-bearing liabilities:
Deposits:
NOW and money
market accounts $ 121,768 $ 2,771 2.28% $ 120,701 $ 2,846 2.36%
Passbook accounts 229,745 6,736 2.93 209,151 6,816 3.26
Certificates of deposit 560,717 30,256 5.40 664,042 37,194 5.78
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS 912,230 39,763 4.36 973,894 46,856 4.81
Borrowings 332,802 17,780 5.34 173,015 10,054 5.81
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST-
BEARING LIABILITIES 1,245,032 57,543 4.62 1,146,909 56,910 4.96
Non-interest bearing liabilities(4) 61,820 51,522
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,306,852 1,198,431
Stockholders' equity 229,610 168,410
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $1,536,462 $1,366,841
==================================================================================================================================
Net interest-earning assets $ 232,778 $ 167,155
==================================================================================================================================
Net interest income/
interest rate spread $ 47,066 2.46% $ 40,443 2.45%
==================================================================================================================================
Net interest margin 3.18% 3.08%
==================================================================================================================================
Ratio of average interest-
earning assets to average
interest-bearing liabilities 118.70% 114.57%
==================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Year Ended
December 31,
1997
-------------------------------------
AVERAGE AVERAGE
(DOLLARS IN THOUSANDS) BALANCE INTEREST YIELD/COST
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable:(1)
Real estate loans $ 528,951 $41,778 7.90%
Other loans 21,083 2,015 9.56
- ------------------------------------------------------------------------------------
TOTAL LOANS 550,034 43,793 7.96
Securities(2) 539,261 38,033 7.05
Other interest-earning assets(3) 18,805 1,426 7.58
- ------------------------------------------------------------------------------------
TOTAL INTEREST-
EARNINGS ASSETS 1,108,100 83,252 7.51
Non-interest earning assets 46,455
- ------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,154,555
====================================================================================
Interest-bearing liabilities:
Deposits:
NOW and money
market accounts $ 116,145 $ 2,927 2.52%
Passbook accounts 187,474 7,163 3.82
Certificates of deposit 651,550 36,577 5.61
- ------------------------------------------------------------------------------------
TOTAL DEPOSITS 955,169 46,667 4.89
Borrowings 68,954 4,191 6.08
- ------------------------------------------------------------------------------------
TOTAL INTEREST-
BEARING LIABILITIES 1,024,123 50,858 4.97
Non-interest bearing liabilities(4) 35,863
- ------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,059,986
Stockholders' equity 94,569
- ------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 1,154,555
====================================================================================
Net interest-earning assets $ 83,977
====================================================================================
Net interest income/
interest rate spread $ 32,394 2.54%
====================================================================================
Net interest margin 2.92%
====================================================================================
Ratio of average interest-
earning assets to average
interest-bearing liabilities 108.20%
</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.
18/19
[CFS LOGO]
<PAGE> 7
CFS Bancorp, Inc.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 COMPARED TO 1998
------------------------------------------------
INCREASE (DECREASE) DUE TO
------------------------------------------------
RATE/ TOTAL NET
(DOLLARS IN THOUSANDS) RATE VOLUME VOLUME INC./(DEC)
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable:
Real estate loans $(2,174) $ 10,176 $(447) $7,555
Other loans 3 (1,032) (1) (1,030)
- -------------------------------------------------------------------------------------
TOTAL LOANS RECEIVABLE (2,171) 9,144 (448) 6,525
Securities (1,960) 2,830 (127) 743
Other interest-earning assets (153) 152 (11) (12)
- -------------------------------------------------------------------------------------
TOTAL NET CHANGE IN INCOME ON
INTEREST-EARNING ASSETS (4,284) 12,126 (586) 7,256
Interest-bearing liabilities:
Deposits:
NOW and money market accounts (99) 25 (1) (75)
Passbook accounts (684) 671 (67) (80)
Certificates of deposit (2,442) (4,812) 316 (6,938)
- -------------------------------------------------------------------------------------
TOTAL DEPOSITS (3,225) (4,116) 248 (7,093)
Borrowings (811) 9,286 (749) 7,726
- -------------------------------------------------------------------------------------
TOTAL NET CHANGE IN EXPENSE ON
INTEREST-BEARING LIABILITIES (4,036) 5,170 (501) 633
- -------------------------------------------------------------------------------------
Net change in net interest income $ (248) $ 6,956 $ (85) $ 6,623
=====================================================================================
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1998 COMPARED TO 1997
----------------------------------------------------
INCREASE (DECREASE) DUE TO
----------------------------------------------------
RATE/ TOTAL NET
(DOLLARS IN THOUSANDS) RATE VOLUME VOLUME INC./(DEC)
<S> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable:
Real estate loans $(1,100) $ 9,006 $(237) $ 7,669
Other loans 25 379 (5) 349
- -----------------------------------------------------------------------------------------
TOTAL LOANS RECEIVABLE (1,125) 9,385 (242) 8,018
Securities 283 5,179 39 5,501
Other interest-earning assets (291) 1,097 (224) 582
- -----------------------------------------------------------------------------------------
TOTAL NET CHANGE IN INCOME ON
INTEREST-EARNING ASSETS (1,133) 15,661 (427) 14,101
Interest-bearing liabilities:
Deposits:
NOW and money market accounts (189) 115 (7) (81)
Passbook accounts (1,054) 829 (122) (347)
Certificates of deposit 1,050 (421) (12) 617
- -----------------------------------------------------------------------------------------
TOTAL DEPOSITS (193) 523 (141) 189
Borrowings (184) 6,325 (278) 5,863
- -----------------------------------------------------------------------------------------
TOTAL NET CHANGE IN EXPENSE ON
INTEREST-BEARING LIABILITIES (377) 6,848 (419) 6,052
- -----------------------------------------------------------------------------------------
Net change in net interest income $ (756) $ 8,813 $ (8) $ 8,049
=========================================================================================
</TABLE>
- --------------------------------------------------------------------------------
RATE/VOLUME The table above sets forth the effects of changing rates
ANALYSIS 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).
- --------------------------------------------------------------------------------
RESULTS OF GENERAL. The Company reported net income of $13.1
OPERATIONS million for the year ended December 31, 1999 compared to
net income of $3.1 million and $4.6 million for the
years ended December 31, 1998 and 1997, respectively.
While the Company's net interest income increased each
of the three years ended December 31, 1999, 1998 and
1997, the results of operations were adversely affected
by the following:
- In the year ended December 31, 1998, one-time
charges in connection with the Merger with SFC
and establishment of the Foundation were $10.7
million (See note 2 to the Consolidated
Financial Statements for further details);
- In the year ended December 31, 1997, losses and
operating expenses totaling $2.5 million were
incurred from real estate development
activities, which have subsequently ceased.
NET INTEREST INCOME. Net interest income is determined
by the Company's interest rate spread (i.e., the
difference between the yield earned on the Company's
interest-earning assets and the rate paid on its
interest-bearing liabilities) and the relative amounts
of interest-earning assets and interest-bearing
liabilities. The Company's average interest rate spreads
were 2.46%, 2.45% and 2.54% for the years ended December
31, 1999, 1998 and 1997, respectively. The Company's net
interest margins (i.e., net interest income as a
percentage of average interest-earning assets) were
3.18%, 3.08% and 2.92% during the years ended December
31, 1999, 1998 and 1997, respectively.
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The Company's net interest income amounted to $47.1 million for
the year ended December 31, 1999 compared to $40.4 million and
$32.4 million for the years ended December 31, 1998 and 1997,
respectively. The $6.7 million, or 16.4% increase, in net
interest income in 1999 compared to 1998 resulted primarily from
the increased use of borrowed money to fund loan growth. The
$8.0 million, or 24.8%, increase in net interest income in 1998
compared to 1997 was due to an increase in interest income from
the significantly higher average balance of interest-earning
assets resulting from the investment of Conversion proceeds and
borrowed money into real estate loans and investment securities.
INTEREST INCOME. The Company reported total interest income of
$104.6 million for the year ended December 31, 1999 compared to
$97.4 and $83.3 million for the years ended December 31, 1998
and 1997, respectively. The $7.3 million or 7.5% increase in
interest income in 1999 compared to 1998 was due primarily to a
$7.6 million increase in interest income from real estate loans.
The increase in interest income from real estate loans in 1999
compared to 1998 was due to an increase in average balances of
$132.3 million offset by a 34 basis point (with 100 basis points
being equal to 1.0%) decline in the yield earned.
The $14.1 million, or 16.9%, increase in interest income in 1998
compared to 1997 was due primarily to a $7.7 million increase in
interest income from real estate loans and a $5.5 million
increase in interest income from other investment securities.
The increase in interest income from real estate loans in 1998
compared to 1997 was due to an increase in the average balance
of $114.1 million which more than offset a 21 basis point
decrease in the yield earned thereon.
The increase in interest income from other investment securities
in 1998 compared to 1997 was due to an increase in the average
balance of such securities of $73.4 million together with a 6
basis point increase in the yield earned on other investment
securities.
INTEREST EXPENSE. Total interest expense amounted to $57.5
million for the year ended December 31, 1999 compared to $56.9
million and $50.9 million in 1998 and 1997, respectively. The
increase in interest expense during 1999 and 1998 was due
primarily to the Company's increased use of borrowed money. The
average balance of borrowed money increased by $159.8 million
from 1998 to 1999, while the average rate decreased by 47 basis
points, resulting in a net increase in interest on borrowed
money of $7.7 million when comparing 1999 to 1998. The average
balance of borrowed money increased by $104.1 million from 1997
to 1998, while the average rate decreased by 27 basis points.
Total interest on borrowed money increased by $5.9 million when
comparing 1998 to 1997. The overall increase in total interest
expense in 1999 compared to 1998 was mitigated due to a $61.7
million decrease in total deposits and a 45 basis point decrease
in rates on total deposits. These decreases in both rates and
volumes resulted in a $7.1 million decrease in interest on
deposits.
PROVISION FOR LOSSES ON LOANS. The Company establishes
provisions for losses on loans, which are charged to operations,
in order to maintain the allowance for losses on loans at a
level which is deemed appropriate to absorb losses inherent in
the portfolio. In determining the appropriate level of the
allowance for losses on loans, management considers past and
anticipated loss experience, evaluations of real estate
collateral, current and anticipated economic conditions, volume
and type of lending, and the levels of non-performing and other
classified loans. The amount of the allowance is based on
estimates, and ultimate losses may vary from such estimates.
Management assesses the allowance for losses on loans on a
quarterly basis and will make appropriate provisions to maintain
the adequacy of the allowance. The Company's provision for
losses on loans was $675,000 for the year ended December 31,
1999 compared to $1.6 million in 1998 and $1.8 million in 1997.
The Company has increased its emphasis in recent years on
construction and land development loans, multi-family
residential real estate loans, and commercial real estate loans,
all of which generally are deemed to involve more risk than
single-family residential real estate loans. Management
anticipates this trend continuing in 2000 and as a result
expects the provision for loan losses to increase. Also,
affecting comparability between 1999 and 1998, was the fact that
in the third quarter of 1998, management deemed it necessary to
increase the loss provision by $1.2 million to conform SFC's
loss provision methodology to that of the Company.
20/21
[CFS LOGO]
<PAGE> 9
CFS Bancorp, Inc.
During the second quarter of 1999 SFC's loan portfolio was
converted to the Company's data processing system. As part of
this data processing conversion, the manner in which non-accrual
status was computed on loans converted from SFC was changed to a
more conservative calculation which is consistent with the
calculation of the Company's other loans. As a result of this
change non-accrual loans, which are part of non-performing
loans, increased by $2.8 million in the second quarter of 1999.
Non-performing loans increased to $9.0 million at December 31,
1998. The primary reason for the $2.8 million increase from
December 31, 1997 to December 31, 1998 reflects the addition of
a $3.0 million loan on a office building deemed non-performing
in early 1998.
Although management believes that the Company's allowance for
losses on loans was adequate at December 31, 1999 based on
available facts and circumstances, there can be no assurances
that additions will not be necessary in the future. Such
allowances would adversely affect the Bank's results of
operations. In addition, various regulatory agencies, as an
integral part of their examination processes, periodically
review the Bank's provision for losses on loans and the carrying
value of its other non-performing assets, based on information
available to them at the time of their examinations. Any of
these agencies could require the Bank to make additional
provisions for losses on loans in the future.
NON-INTEREST INCOME. The Company reported non-interest income of
$5.2 million for the year ended December 31, 1999 compared to
$5.9 million and $4.9 million for the years ended December 31,
1998 and 1997, respectively. Non-interest income declined in
1999 primarily due to $400,000 less profit on the sale of assets
compared to 1998. The second largest decline was as a result of
difficulties encountered in the data processing conversion of
checking accounts. Certain fees on checking accounts and ATM
transactions were foregone in order to improve public relations.
These fees totaled approximately $300,000. All accounts are now
processed on the same system, and, as a result, the fees will be
reinstituted in 2000. Non-interest income improved, in part, in
1998, due to the absence of losses on real estate held for
development and sale, which amounted to $1.2 million for 1997.
All development property was sold, and no losses were recorded
on this property in 1998. Loan fees were $1.0 million during the
year ended December 31, 1999 compared to $1.2 million in 1998
and $1.1 million in 1997. Income from insurance commissions
amounted to $883,000 in the year ended December 31, 1999
compared to $856,000 and $619,000 in 1998 and 1997,
respectively. Income from investment commissions from the Bank's
securities brokerage subsidiary was $1.4 million in 1999
compared to $874,000 and $891,000 in 1998 and 1997,
respectively. While both the insurance agency and securities
brokerage subsidiaries have been building infrastructure, the
Bank believes the infrastructure and personnel are now in place
to permit them to continue their growth and build on the nominal
profit achieved in 1999. Net gain on the sale of loans and
securities was $149,000 in 1999 which compares to $452,000 and
$637,000 in 1998 and 1997, respectively. Unrealized gains on
securities held for trade were $460,000 in 1997. There was no
activity in this account in 1999 and 1998 as the Company's
policy beginning July 1, 1998 was to treat all newly acquired
securities as available for sale. During 1999 there was a net
loss on the sale of office properties of $42,000 resulting from
the donation of a former office building in East Chicago,
Indiana to local charities. During the year ended December 31,
1998, net profit on sale of office properties was $161,000.
There was no such profit or loss in 1997. The profit in 1998
represents the sale of land SFC had held for a number of years
for future expansion.
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Management's Discussion and Analysis
NON-INTEREST EXPENSE. The Company reported non-interest expense
of $30.2 million, $39.0 million and $28.1 million for the years
ended December 31, 1999, 1998 and 1997, respectively. The $8.8
million decrease in non-interest expense from 1998 to 1999
consists mainly of $9.5 million in one-time charges related to
the Merger and Conversion, as well as the funding of the
Citizens Savings Foundation. Compensation and employee benefits,
the largest single component of non-interest expense, was $18.7
million for the year ended December 31, 1999 compared to $18.5
million and $16.0 million in 1998 and 1997, respectively.
Included in the $18.7 million for 1999 is expense for the
Recognition and Retention Plan, approved in February, 1999, of
$1.1 million. Absent the RRP this category would have decreased
by 6.8%. The $2.5 million increase from 1997 to 1998 results
primarily from the $1.2 million in ESOP expense in 1998.
Aggregate net occupancy and furniture and equipment expense was
$4.8 million for the year ended December 31, 1999 compared to
$4.9 million and $4.5 million for 1998 and 1997, respectively.
Increases in 1998 resulted primarily from the remodeling and
renovation of existing offices and expenses related to
improvements made in the Bank's data processing and on-line
computer network. Federal Deposit Insurance Corporation ("FDIC")
insurance premiums amounted to $573,000 for the year ended
December 31, 1999 compared to $620,000 and $586,000 for the
years ended December 31, 1998 and 1997, respectively. Data
processing expenses amounted to $1.3 million for the year ended
December 31, 1999 compared to $966,000 and $978,000 for the
years ended December 31, 1998 and 1997, respectively. Data
processing increased approximately $300,000 in 1999 compared to
1998 due to improvements made to the telecommunications network,
testing of the system for potential Y2K related problems and
changes related to the billing system.
Other general and administrative expenses amounted to $4.3
million for the year ended December 31, 1999 compared to $3.8
million and $3.9 million for the years ended December 31, 1998
and 1997, respectively. The primary reason for this increase in
1999 was incurring a full year of expense related to being a
publicly held company.
INCOME TAX EXPENSE. The Company's income tax expense amounted to
$8.3 million, $2.6 million and $2.7 million for the years ended
December 31, 1999, 1998 and 1997, respectively. The Company's
effective rates were 38.8%, 45.3%, and 37.3% for the years ended
December 31, 1999, 1998, and 1997, respectively. 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%. Also the
state income tax rate on financial institutions in Indiana is
among the highest in the nation at 8.5%. The Company is
evaluating various strategies to reduce this effective rate.
During 1999 the effect of certain strategies already implemented
was to reduce the effective tax rate by approximately 1/2 of 1%.
The 45.3% rate in 1998 is primarily the result of professional
fees of approximately $910,000 incurred in connection with the
Merger which are deemed non-tax deductible by the Internal
Revenue Service.
YEAR 2000 In preparation for the year 2000 (the "Year 2000 Issue"), the
CONSIDERATIONS Company developed a Year 2000 Plan (the "Plan") and a Year 2000
Business Resumption Contingency Plan. The plans were presented
to and approved by the Board of Directors. The plan was
successfully completed and the Company has experienced no
material Year 2000-related problems with its internal systems
and products, or those of our third party vendors and service
providers.
In addition, the Company adopted a Liquidity Contingency Plan to
address the concerns raised by our federal banking regulators.
These plans included ordering extra currency, utilizing lines of
credit and more liquid investments. In addition, the Company
embarked on an extensive consumer education and awareness
program regarding the Company's state of preparedness. The
program included, among other things, multiple correspondence
and communication pieces, seminars for customers, employee
education, lobby materials and signs.
[CFS LOGO]
22/23
<PAGE> 11
CFS Bancorp, Inc.
The Company has had a comprehensive business
interruption and disaster recovery contingency plan for
many years. The plan is continually updated. The Company
developed an even more specific contingency plan to
address operational policies and procedures in the event
of data processing, electric power supply and/or
telephone service failures associated with the Year
2000. These contingency plans are designed to provide
documented actions to allow the Company to maintain
and/or resume normal operations in the event of a
disaster or emergency that results in the inability to
open an office or the wholesale failure of critical
applications. These plans identify participants,
processes and equipment that will be necessary to permit
the Company to continue operations. These 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 of a
disaster or other emergency.
The costs of Year 2000-related modifications to our
third party applications was absorbed for the most part
by the Company's third party vendors. However, the
Company recognized the need to purchase new hardware and
software to ensure it was fully Year 2000 compliant. The
Company budgeted up to $750,000 for hardware, software,
staffing, customer awareness and other direct and
indirect costs incurred in completing the Year 2000
project. The Company incurred about $300,000 in direct
costs in addressing the Year 2000 Issue, including
$100,000 for employee salaries, $70,000 for employee and
customer awareness, $80,000 for testing, and $40,000 for
software upgrades, primarily for our ATMs. It is
estimated that the indirect expense due to the Bank's
loss of interest income that resulted from the increase
in the amount of currency and liquid assets held in the
Bank during the last six weeks of calendar year 1999 was
nearly $100,000. The total estimated expense of
addressing the year 2000 issue over the life of the
project was approximately $400,000.
IMPACT OF INFLATION The consolidated financial statements and related
AND CHANGING PRICES financial data presented herein have been prepared in
accordance with generally accepted accounting
principles, which require the measurement of financial
position and operating results in terms of historical
dollars, without considering changes in relative
purchasing power over time due to inflation. Unlike most
industrial companies, virtually all of the Bank's assets
and liabilities are monetary in nature. As a result,
interest rates generally have a more significant impact
on a financial institution's performance than does the
effect of inflation.
FORWARD-LOOKING This Annual Report contains certain forward-looking
STATEMENTS statements and information relating to the Company that
are based on the beliefs of management as well as
assumptions made by and information currently available
to management. In addition, the words "anticipate,"
"believe," "estimate," "expect," "intent," "should" and
similar expressions, or the negative thereof, as they
relate to the Company or the Company's management, are
intended to identify forward-looking statements. Such
statements reflect the current views of the Company with
respect to future looking events and are subject to
certain risks, uncertainties and assumptions. Should one
or more of these risks or uncertainties materialize or
should underlying assumptions prove incorrect, actual
results may vary materially from those described herein
as anticipated, believed, estimated, expected or
intended. The Company does not intend to update these
forward-looking statements.
<PAGE> 12
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
CFS Bancorp, Inc.
We have audited the accompanying consolidated statements of
condition of CFS Bancorp, Inc. (the Company) as of December 31,
1999 and 1998, and the related consolidated statements of
income, changes in stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the
1997 financial statements of SuburbFed Financial Corp., which
statements reflect net income constituting 61% of the
consolidated financial statement totals for the year ended
December 31, 1997. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion,
insofar as it relates to data included for SuburbFed Financial
Corp., is based solely on the report of the other auditors.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require
that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits and, for
1997, the report of other auditors provide a reasonable basis
for our opinion.
In our opinion, based on our audits and, for 1997, the report of
other auditors, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of CFS Bancorp, Inc. as of December 31, 1999
and 1998, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
/S/ Ernst & Young LLP
Chicago, Illinois
February 16, 2000
[CFS LOGO]
24/25
<PAGE> 13
CFS Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
December 31,
(Dollars in thousands) 1999 1998
<S> <C> <C>
ASSETS
Cash and amounts due from depository institutions $ 33,062 $ 19,067
Interest-bearing deposits 28,866 25,201
Federal funds sold 33,875 5,575
----------- -----------
Cash and cash equivalents 95,803 49,843
Investment securities available for sale 32,693 34,720
Investment securities held-to-maturity
(fair value: 1999 -- $165,692; 1998 -- $169,263) 176,737 166,500
Mortgage-backed securities available for sale 299,056 277,888
Mortgage-backed securities held-to-maturity
(fair value: 1999 -- $97,586; 1998 -- $178,694) 101,066 176,956
Loans receivable, net 882,676 726,081
Investment in FHLB stock, at cost 22,448 8,183
Office properties and equipment 17,223 16,328
Accrued interest receivable 9,678 9,729
Real estate owned 609 435
Prepaid expenses and other assets 11,546 3,954
----------- -----------
Total assets $ 1,649,535 $ 1,470,617
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 925,047 $ 969,802
Borrowed money 494,699 215,271
Advance payments by borrowers for taxes and insurance 5,738 6,057
Other liabilities 18,618 19,399
----------- -----------
Total liabilities 1,444,102 1,210,529
Stockholders' equity:
Preferred stock, $.01 par value:
Authorized shares -- 15,000,000
Issued and outstanding shares -- 0 at December 31, 1999
and 1998
Common stock, $.01 par value:
Authorized shares -- 85,000,000
Issued shares -- 23,198,606 and 22,959,251 at December 31, 1999
and 1998, respectively
Outstanding shares -- 18,627,685 and 22,959,251 at December 31, 1999
and 1998, respectively 232 230
Additional paid-in capital 187,138 186,062
Retained earnings, substantially restricted 93,927 87,178
Treasury stock, at cost: 4,570,921 and 0 shares at December 31, 1999
and 1998, respectively (48,079) --
Unearned common stock acquired by ESOP (11,962) (13,093)
Unearned common stock acquired by RRP (6,389) --
Accumulated other comprehensive income, net of tax (9,434) (289)
----------- -----------
Total stockholders' equity 205,433 260,088
----------- -----------
Total liabilities and stockholders' equity $ 1,649,535 $ 1,470,617
=========== ===========
</TABLE>
See accompanying notes.
<PAGE> 14
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
(Dollars in thousands except per share data) 1999 1998 1997
<S> <C> <C> <C>
Interest income:
Loans $ 58,336 $ 51,811 $ 43,793
Mortgage-backed securities 29,819 24,146 26,866
Other investment securities 14,458 19,388 11,167
Other 1,996 2,008 1,426
--------- -------- --------
Total interest income 104,609 97,353 83,252
Interest expense:
Deposits 39,763 46,856 46,667
Borrowings 17,780 9,353 4,191
Subscription deposits -- 701 --
--------- -------- --------
Total interest expense 57,543 56,910 50,858
--------- -------- --------
Net interest income before provision for losses on loans 47,066 40,443 32,394
Provision for losses on loans 675 1,630 1,840
--------- -------- --------
Net interest income after provision for losses on loans 46,391 38,813 30,554
Non-interest income:
Loan fees 1,013 1,209 1,085
Insurance commissions 883 856 619
Investment commissions 1,387 874 891
Loss on real estate held for development and sale -- -- (1,178)
Net gain on sale of investment securities 83 328 596
Net gain on sale of loans 66 124 41
Unrealized gain on securities held for trade -- Net -- -- 460
Gain (loss) on sale of real estate owned 13 (44) (6)
Net gain (loss) on sale of office properties (42) 161 --
Other income 1,788 2,392 2,364
--------- -------- --------
Total non-interest income 5,191 5,900 4,872
Non-interest expense:
Compensation and employee benefits 18,669 18,480 16,026
Net occupancy expense 2,471 2,769 2,732
Furniture and equipment expense 2,328 2,141 1,726
Data processing 1,294 966 978
Federal insurance premiums 573 620 586
Marketing 617 673 882
Real estate operations -- 5 1,309
Merger-related expense -- 6,503 --
Contribution to The Citizens Savings Foundation -- 3,016 --
Other general and administrative expenses 4,258 3,831 3,907
--------- -------- --------
Total non-interest expense 30,210 39,004 28,146
--------- -------- --------
Income before income taxes 21,372 5,709 7,280
Income tax expense 8,282 2,587 2,714
--------- -------- --------
Net income $ 13,090 $ 3,122 $ 4,566
========= ======== ========
Per share data:
Basic earnings per share $ .69 $ .15 $ .20
Diluted earnings per share .68 .14 .20
</TABLE>
See accompanying notes.
[CFS LOGO] 26/27
<PAGE> 15
CFS Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unearned
Common
Additional Stock
Common Paid-In Retained Treasury Acquired
(Dollars in thousands) Stock Capital Earnings Stock by ESOP
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $ 14 $ 8,420 $ 83,541 $ (1,682) $ (170)
Net income for 1997 -- 4,566 -- --
Other comprehensive income, net of tax:
Change in unrealized appreciation on
available for sale securities, net of
reclassification adjustment -- -- -- -- --
Total comprehensive income
Purchase of treasury stock by employee
benefit plan -- 42 -- 77 --
Contribution to fund ESOP loan -- -- -- -- 89
Exercise of stock options -- 83 -- -- --
Tax benefit related to stock options exercised -- 13 -- -- --
Tax benefit related to Bank Incentive Plan -- 47 -- -- --
Amortization of award of Bank Incentive
Plan stock -- -- -- -- --
Dividends paid by SFC prior to merger -- -- (404) -- --
------ -------- -------- ------- --------
Balance at December 31, 1997 14 8,605 87,703 (1,605) (81)
Net income for 1998 -- -- 3,122 -- --
Other comprehensive income, net of tax:
Change in unrealized appreciation on
available for sale securities, net of
reclassification adjustment -- -- -- -- --
Total comprehensive income
Proceeds of stock conversion, net 226 175,011 -- -- (14,283)
Contribution of stock to The Citizens
Savings Foundation 3 2,997 -- -- --
Cancellation of SuburbFed Financial
Corp. stock (14) 14 -- -- --
Purchase of treasury stock by employee
benefit plan -- 37 -- 32 --
Contribution to fund ESOP loan -- (25) -- (37) 1,271
Exercise of stock options 2 755 -- -- --
Tax benefit related to stock options exercised -- 228 -- -- --
Retirement of treasury stock (1) (1,609) -- 1,610 --
Tax benefit related to Bank Incentive Plan -- 49 -- -- --
Dividends paid by SFC prior to merger -- -- (204) -- --
Dividends declared on common stock
($.16 per share) -- -- (3,443) -- --
------ -------- -------- ------- --------
Balance at December 31, 1998 230 186,062 87,178 -- (13,093)
Net income for 1999 -- -- 13,090 -- --
Other comprehensive income, net of tax:
Change in unrealized appreciation on
available for sale securities, net of
reclassification adjustment -- -- -- -- --
Total comprehensive income
Purchase of treasury stock -- -- -- (48,079) --
Purchase of shares by RRP -- -- -- -- --
Shares earned under ESOP -- 73 -- -- 1,131
Amortization or award under RRP -- (40) -- -- --
Exercise of stock options 2 972 -- -- --
Tax benefit related to stock options exercised -- 71 -- -- --
Dividends declared on common stock
($.34 per share) -- -- (6,341) -- --
------ -------- -------- ------- --------
BALANCE AT DECEMBER 31, 1999 $ 232 $ 187,138 $ 93,927 $(48,079) $(11,962)
====== ======== ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
Unearned
Common Accumulated
Stock Other
Acquired Comprehensive
(Dollars in thousands) by RRP Income Total
<S> <C> <C> <C>
Balance at January 1, 1997 $ (9) $ (130) $ 89,984
Net income for 1997 -- -- 4,566
Other comprehensive income, net of tax:
Change in unrealized appreciation on
available for sale securities, net of
reclassification adjustment -- 690 690
--------
Total comprehensive income 5,256
Purchase of treasury stock by employee
benefit plan -- -- 119
Contribution to fund ESOP loan -- -- 89
Exercise of stock options -- -- 83
Tax benefit related to stock options exercised -- --
13
Tax benefit related to Bank Incentive Plan -- --
47
Amortization of award of Bank Incentive
Plan stock 9 -- 9
Dividends paid by SFC prior to merger -- -- (404)
------- -------- ---------
Balance at December 31, 1997 -- 560 95,196
Net income for 1998 -- -- 3,122
Other comprehensive income, net of tax:
Change in unrealized appreciation on
available for sale securities, net of
reclassification adjustment -- (849) (849)
---------
Total comprehensive income 2,273
Proceeds of stock conversion, net -- -- 160,954
Contribution of stock to The Citizens
Savings Foundation -- -- 3,000
Cancellation of SuburbFed Financial
Corp. stock -- -- --
Purchase of treasury stock by employee
benefit plan -- -- 69
Contribution to fund ESOP loan -- -- 1,209
Exercise of stock options -- -- 757
Tax benefit related to stock options exercised -- --
228
Retirement of treasury stock -- -- --
Tax benefit related to Bank Incentive Plan -- --
49
Dividends paid by SFC prior to merger -- -- (204)
Dividends declared on common stock
($.16 per share) -- -- (3,443)
------- -------- ---------
Balance at December 31, 1998 -- (289) 260,088
Net income for 1999 -- -- 13,090
Other comprehensive income, net of tax:
Change in unrealized appreciation on
available for sale securities, net of
reclassification adjustment -- (9,145) (9,145)
---------
Total comprehensive income 3,945
Purchase of treasury stock -- -- (48,079)
Purchase of shares by RRP (7,500) -- (7,500)
Shares earned under ESOP -- -- 1,204
Amortization or award under RRP 1,111 -- 1,071
Exercise of stock options -- -- 974
Tax benefit related to stock options exercised -- --
71
Dividends declared on common stock
($.34 per share) -- -- (6,341)
------- -------- ---------
BALANCE AT DECEMBER 31, 1999 $(6,389) $(9,434) $ 205,433
======= ======== =========
</TABLE>
See accompanying notes.
<PAGE> 16
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
(Dollars in thousands) 1999 1998 1997
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 13,090 $ 3,122 $ 4,566
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 675 1,630 1,840
Depreciation expense 2,074 1,991 1,834
Deferred income taxes (1,000) (1,813) (132)
Amortization of cost of stock benefit plans 2,274 1,246 99
Change in deferred income 1,886 109 (1,100)
Decrease (increase) in interest receivable 51 (1,122) (2,129)
Increase in accrued interest payable 1,259 568 236
Proceeds from sale of loans held for sale 8,609 13,752 5,012
Origination of loans held for sale (8,744) (13,677) (5,172)
Proceeds from sale of Visa Accounts 1,533 -- --
Net gain on sale of securities held for trade -- (32) (309)
Unrealized gain on securities held for trade -- -- (460)
Net gain on sale of available for sale securities (83) (296) (288)
Net gain on sale of loans (66) (124) (41)
Loss (gain) on sale of office property 42 (161) --
Proceeds from sales of securities held for trade -- 409 1,375
Purchase of securities held for trade -- (456) (888)
Loss on real estate held for development and sale -- -- 1,178
Net loss (gain) on sale of real estate owned (13) 44 6
Proceeds from sale of real estate held for development and sale -- 1,071 4,738
Construction costs of real estate held for development and sale -- -- (1,529)
Cash received in acquisition of 50% ownership interest of LLC -- -- 110
Decrease (increase) in prepaid expenses and other assets 2,200 (421) (830)
(Decrease) increase in other liabilities (4,312) 8,657 2,561
-------- -------- --------
Net cash provided by operating activities $ 19,475 $ 17,497 $ 10,677
</TABLE>
[CFS LOGO] 28/29
<PAGE> 17
CFS Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
<TABLE>
<CAPTION>
Year Ended December 31,
(Dollars in thousands) 1999 1998 1997
<S> <C> <C> <C>
INVESTING ACTIVITIES
Available for sale investment securities:
Purchases $ (32,746) $ (30,638) $ (1,335)
Repayments 263 -- 4
Sales 33,211 949 1,293
Held-to-maturity investment securities:
Purchases (90,072) (333,930) (238,154)
Repayments and maturities 79,835 373,662 91,875
Available for sale mortgage-backed securities:
Purchases (79,629) (229,595) (7,022)
Repayments 43,372 12,284 6,944
Sales 1,088 4,311 24,696
Held-to-maturity mortgage-backed securities:
Purchases -- (81,702) (34,658)
Repayments 75,890 161,416 104,127
Purchase of Federal Home Loan Bank stock (15,787) (2,202) (545)
Redemption of Federal Home Loan Bank stock 1,522 700 --
Loan originations and principal payments on loans (161,785) (137,311) (105,760)
Construction cost on real estate owned (92) (86) --
Proceeds from sale of real estate owned 1,228 2,582 135
Purchases of properties and equipment (3,064) (3,178) (3,742)
Disposal of properties and equipment 53 1,462 30
--------- --------- ---------
Net cash flows used in investing activities (146,713) (261,276) (162,112)
FINANCING ACTIVITIES
Proceeds from exercise of stock options 974 757 83
Dividends paid on common stock (6,341) (3,647) (404)
Proceeds from sale of treasury stock -- 69 119
Purchase of treasury stock (48,079) -- --
Purchase of shares for recognition and retention plan (7,500) -- --
Net increase (decrease) in NOW, passbook, and money market accounts (1,018) 28,423 (11,429)
Net increase (decrease) in certificates of deposit (43,947) (44,712) 114,055
Net increase (decrease) in advance payments by borrowers for taxes
and insurance (319) 714 373
Proceeds of stock conversion, net -- 160,954 --
Net increase of borrowed funds 279,428 130,227 22,106
--------- --------- ---------
Net cash flows provided by financing activities 173,198 272,785 124,903
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 45,960 29,006 (26,532)
Cash and cash equivalents at beginning of year 49,843 20,837 47,369
--------- --------- ---------
Cash and cash equivalents at end of year $ 95,803 $ 49,843 $ 20,837
========= ========= =========
Supplemental disclosure of noncash activities:
Loans transferred to real estate owned $ 1,112 $ 1,680 $ 1,447
Loans securitized into mortgage-backed securities -- 3,402 --
</TABLE>
See accompanying notes.
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
(Dollars in thousands except per share data)
1. SUMMARY OF ORGANIZATION
SIGNIFICANT CFS Bancorp, Inc. (the Company) is a Delaware corporation,
ACCOUNTING incorporated in March 1998 for the purpose of becoming the
POLICIES holding company for Citizens Financial Services, FSB (the
Bank). On July 24, 1998, the Bank converted from a mutual to a
stock form of ownership. With a portion of the proceeds from
the initial public offering, the Company acquired all of the
issued and outstanding capital stock of the Bank. Immediately
following the conversion, the Company merged with SuburbFed
Financial Corp. (SFC). See Note 2 for further discussion.
The Bank is a federal savings bank offering a full range of
financial services to customers who are primarily located in
Northwest Indiana and the south and southwest Chicagoland
area. The Bank is principally engaged in the business of
attracting deposits from the general public and using such
deposits to originate residential and commercial mortgage
loans.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts and
transactions of the Company and its wholly owned subsidiary,
the Bank. The Bank has the following subsidiaries: CFS
Insurance Agency, Inc.; CFS Investment Services, Inc., and its
wholly owned subsidiary CFS Development Co., LLC (LLC);
Suburban Mortgage Services, Inc.; and South Suburban
Securities Corporation, and its wholly owned subsidiary
Suburban Insurance Resources Agency, Inc. The LLC was
dissolved in 1997. Significant intercompany accounts and
transactions have been eliminated in consolidation. Previously
reported financial statements included in this report have
been restated to include the merger with SFC, which was
accounted for using the pooling of interest method of
accounting. Certain reclassifications have been made to the
1998 and 1997 consolidated financial statements to conform to
the 1999 presentation.
USE OF ESTIMATES
The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ
from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include amounts due from depository
banks and federal funds sold. Generally, federal funds sold
are purchased and sold for one-day periods.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
Management determines the classification of securities at the
time of purchase. Debt securities are classified as
held-to-maturity and carried at amortized cost if management
has the intent and ability to hold the securities to maturity.
Securities not classified as held-to-maturity are classified
as available for sale and are carried at fair value, with the
unrealized appreciation, net of tax, in Accumulated Other
Comprehensive Income.
The amortized cost of debt securities is adjusted for
amortization of premiums and accretion of discounts to
maturity, or in the case of mortgage-related securities, over
the estimated life of the security using the level-yield
method. Such amortization is included in interest income from
securities. Gains and losses on sales of securities are
determined by specifically identifying the carrying amount of
the security sold.
LOANS
Loans are carried at the principal amount outstanding, net of
unearned income, including net deferred loan origination and
commitment fees. Interest on loans is recorded as income as
borrowers' monthly payments become due. Interest on mortgage
loans is not accrued on loans which are 90 days or more past
due, or for loans which management believes, after giving
consideration to economic and business conditions and
collection efforts, collection of interest is doubtful. Loans
held for sale, if any, are carried at the lower of aggregate
cost or market value.
MORTGAGE LOAN FEES
Loan origination and commitment fees and direct loan
origination costs are deferred and amortized as an adjustment
of the related loan's yield. The Bank is accreting these
amounts over the contractual life of the related loans.
Remaining deferred loan fees are reflected in income upon sale
or repayment of the loan.
[CFS LOGO] 30/31
<PAGE> 19
CFS Bancorp, Inc.
ALLOWANCE FOR LOSSES ON LOANS
The allowance for losses on loans is maintained at a level
believed adequate by management to absorb losses inherent in
the loan portfolio. Management's determination of the adequacy
of the allowance is based on an evaluation of the portfolio
and, among other things, the borrowers' ability to repay,
estimated collateral values, prior loss experience, and growth
and composition of the portfolio; however, future additions to
the allowance may be necessary based on changes in economic
conditions, financial condition of borrowers, and loan loss
experience.
Management considers a loan to be impaired when it is probable
that the Bank will be unable to collect all amounts due
according to the contractual terms of the note agreement,
including principal and interest. Specific allowances are
established for impaired loans for which the recorded
investment in the loan exceeds the value of the loan. The
value of the loan is determined based on the fair value of the
collateral, if the loan is collateral-dependent, at the
present value of expected future cash flows discounted at the
loan's effective interest rate or at the observable market
price of the impaired loan. Interest income on impaired loans
is recorded when cash is received and only if principal is
considered to be fully collectible. Homogeneous loans are
collectively evaluated for impairment, including real estate
mortgage and installment loans. At December 31, 1999, the
amount of loans considered impaired by management was $2,678,
of which none had a specific allowance established. At
December 31, 1998, the amount of loans considered to be
impaired by management was immaterial.
REAL ESTATE OWNED
Real estate owned is comprised of property acquired through a
foreclosure proceeding or acceptance of a deed-in-lieu of
foreclosure. Real estate owned is recorded at fair value at
the date of foreclosure. After foreclosure, valuations are
periodically performed by management and the real estate is
carried at the lower of cost or fair value minus estimated
costs to sell.
OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are stated at cost less
accumulated depreciation. Provisions for depreciation of
office properties and equipment are computed using the
straight-line method over the estimated useful lives of the
related assets. Long-lived assets are periodically evaluated
for impairment.
ADVERTISING COSTS
All advertising costs incurred by the Company are expensed in
the period in which they are incurred.
EARNINGS PER SHARE
Basic earnings per common share (EPS) is computed by dividing
net income by the weighted-average number of common shares
outstanding for the period. ESOP shares not committed to be
released and RRP shares which have not vested are not
considered to be outstanding. The basic EPS calculation
excludes the dilutive effect of all common stock equivalents.
Diluted EPS reflects the potential dilution that could occur
if securities or other contracts to issue common stock were
exercised or converted into common stock. The Company's
potentially dilutive common shares represent shares issuable
under its stock option and RRP plans. Such common stock
equivalents are computed based on the treasury stock method
using the average market price for the period. Calculations of
EPS for periods prior to the conversion and merger (see Note
2) reflect the actual weighted-average shares of SFC plus the
number of shares issued in the conversion.
STOCK OPTIONS
The Company accounts for its stock options in accordance with
Accounting Principles Board (APB) Opinion No. 25, "Accounting
for Stock Issued to Employees." Under APB No. 25, as the
exercise price of the Company's employees' stock options
equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized. Pro forma net
income, pro forma earnings per share, and stock-based
compensation plan disclosure requirements under Financial
Accounting Standards Board Statement (FAS) No. 123,
"Accounting for Stock-Based Compensation," are included in
Note 13 --Stock-Based Benefit Plans.
INCOME TAXES
The Company provides for deferred tax assets and liabilities,
which represent the difference between the financial statement
and tax bases of assets and liabilities and are measured using
the enacted tax rates and laws applicable to periods when the
differences are expected to reverse. Deferred taxes arise
because certain transactions affect the determination of
taxable income for tax return purposes. Current tax expense is
provided based upon the actual tax liability incurred for tax
return purposes.
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
(Dollars in thousands except per share data) (Continued)
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 included in
net income. The Company includes unrealized gains or losses,
net of tax, on securities available for sale in other
comprehensive income.
SEGMENT REPORTING
Operating segments are components of a business about which
separate financial information is available and that are
evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and assessing performance.
Public companies are required to report certain financial
information about operating segments in interim and annual
financial statements. Senior management evaluates the
operations of the Company as one operating segment, community
banking, due to the materiality of the banking operation to
the Company's financial condition and results of operations,
taken as a whole. As a result, separate segment disclosures
are not required. The Company offers the following products
and services to external customers: deposits, loans,
mortgage-related services, investment and insurance services,
and trust services. Revenues for the significant products and
services are disclosed separately in the consolidated
statements of income.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, FAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," was issued. FAS No. 133
establishes accounting and reporting standards requiring that
derivative instruments (including certain derivative
instruments embedded in other contracts) be recorded on the
balance sheet as either assets or liabilities measured at fair
value. FAS No. 133 requires that changes in the derivative's
fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to
offset related changes in value of the hedged item in the
income statement and requires that a company document
designate and assess the effectiveness of transactions that
qualify for hedge accounting. In June 1999, FAS No. 137,
"Accounting for Derivatives and Hedging Activities -- Deferral
of the Effective Date of FASB Statement No. 133," was issued.
FAS No. 137 defers the effective date of FAS No. 133 until
fiscal years beginning after June 15, 2000. As such, the
Company will adopt FAS No. 133 on January 1, 2001. The Company
does not believe adoption of FAS No. 133 will have a material
impact on its financial position or results of operations.
2. CONVERSION MUTUAL TO STOCK CONVERSION
AND MERGER On July 24, 1998, the Company completed the mutual to stock
conversion (the Conversion) of the Bank, and the concurrent
sale in connection therewith of 17,853,750 shares of Company
common stock, par value $0.01 per share at $10.00 per share
resulting in gross proceeds of $160,954, net of issuance
costs. As an integral part of the Conversion and in
furtherance of the Company's commitment to the communities
that it serves, the Company established a charitable
foundation known as The Citizens Savings Foundation (the
Foundation) and contributed 300,000 shares of common stock to
the Foundation. The Foundation will provide funding to support
charitable causes and community development activities which
will complement the Company's existing community activities.
In addition, the Company established an Employee Stock
Ownership Plan (ESOP) for the employees of the Company and the
Bank which became effective with the completion of the
Conversion. See Note 13 for additional discussion of the ESOP.
At the time of conversion, the Bank established a liquidation
account in an amount equal to its net worth as of March 31,
1998 (the eligibility record date). The liquidation account
will be maintained for the benefit of eligible account holders
and supplemental eligible account holders, if any, who
continue to maintain their deposit accounts at the Bank after
the conversion. The liquidation account will be reduced
annually to the extent that eligible account holders and
supplemental eligible account holders, if any, have reduced
their qualifying deposits as of each anniversary date.
[CFS LOGO] 32/33
<PAGE> 21
CFS Bancorp, Inc.
MERGER
On July 24, 1998, immediately subsequent to the Conversion,
the Company consummated a merger (Merger) with SFC. Each
stockholder of SFC received 3.6 shares of Company common stock
for each former share of common stock of SFC, par value $0.01
per share, resulting in the issuance of approximately 4.6
million shares of Company common stock. Prior to the date of
the Merger, SFC was a savings and loan holding company for
Suburban Federal Savings, a Federal Savings Bank (Suburban
Federal) which was principally engaged in the business of
attracting deposits from the general public and using such
deposits, together with funds generated from operations and
borrowings, primarily to originate one- to four-family
residential loans in Illinois. SFC and Suburban Federal were
merged with and into the Company and the Bank, respectively,
concurrent with the Merger. The Merger was accounted for as a
pooling-of-interest. As a result, all prior period financial
statements and other financial disclosures have been restated
to include the accounts and results of operations of SFC.
In connection with the Merger, the Company recognized
third-quarter 1998 pretax charges of $10,716 consisting of
$6,503 ($4,321 net of tax) in merger expenses, $1,200 ($800
net of tax) in provision for loan losses incident to
conforming SFC's credit policies to the Company's and $3,016
($1,989 net of tax) for the contribution to the Foundation.
The merger expenses, certain of which are nondeductible for
income tax purposes, were recorded through the establishment
of a reserve which is comprised of the following components as
of the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JULY 24,
1999 1998 1998
----------------------------------------------
<S> <C> <C> <C>
Reserve for Merger expenses:
Employee severance, outplacement, retirement programs,
and related costs $ 428 $ 827 $3,357
Contract termination fees and data processing costs 175 605 605
Investment advisor fees -- -- 640
Legal, accounting, and other professional fees 35 85 355
Building and equipment charges 372 609 1,307
Other 109 229 239
----------------------------------------------
$1,119 $2,355 $6,503
==============================================
</TABLE>
3. INVESTMENT The amortized cost of investment securities and their fair
SECURITIES values are as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE AT DECEMBER 31, 1999:
Callable agency securities $ 20,006 $ 1 $ 419 $ 19,588
Trust preferred securities 4,923 -- 405 4,518
Equity securities 9,566 136 1,115 8,587
-----------------------------------------------------------
$ 34,495 $ 137 $ 1,939 $ 32,693
===========================================================
Available for sale at December 31, 1998:
Callable agency securities $ 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 DECEMBER 31, 1999:
Callable agency securities and corporate bonds $176,737 $ -- $11,045 $165,692
===========================================================
Held-to-maturity at December 31, 1998:
Callable agency securities and corporate bonds $166,500 $2,863 $ 100 $169,263
===========================================================
</TABLE>
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
(Dollars in thousands except per share data) (Continued)
The callable agency securities at December 31, 1999 and 1998,
have call features at amounts not less than par and were not
purchased with significant premiums or discounts.
The amortized cost and fair value of investment securities at
December 31, 1999, by contractual maturity, are shown below:
<TABLE>
<CAPTION>
Held-to-Maturity Available for Sale
------------------------------------------------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ -- $ -- $ 7,139 $ 6,347
Due after one year through five years 5,000 4,847 19,956 19,537
Due after five years through ten years 145,755 137,128 50 51
Due more than ten years 25,982 23,717 7,350 6,758
------------------------------------------------------------------
$176,737 $165,692 $34,495 $32,693
==================================================================
</TABLE>
For the year ended December 31, 1999, gross gains and gross
losses of $220 ($136 net of taxes) and $137 ($84 net of
taxes), respectively, were recorded from sales of available
for sale investment securities.
For the year ended December 31, 1998, gross gains and gross
losses of $384 ($232 net of taxes) and $9 ($5 net of taxes),
respectively, were recorded from sales of available for sale
investment securities.
4.MORTGAGE-BACKED The amortized cost of mortgage-backed securities and their
SECURITIES fair values are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE AT DECEMBER 31, 1999:
Participation certificates and collateralized
mortgage obligations $ 59,931 $ 341 $ 1,271 $ 59,001
Real estate mortgage investment conduits 253,185 94 13,224 240,055
------------------------------------------------------------------
$313,116 $ 435 $ 14,495 $299,056
==================================================================
Available for sale at December 31, 1998:
Participation certificates and collateralized
mortgage obligations $120,609 $ 1,171 $ 266 $121,514
Real estate mortgage investment conduits 157,338 379 1,343 156,374
------------------------------------------------------------------
$277,947 $ 1,550 $ 1,609 $277,888
==================================================================
HELD-TO-MATURITY AT DECEMBER 31, 1999:
Participation certificates and collateralized
mortgage obligations $ 39,196 $ 44 $ 2,291 $ 36,949
Real estate mortgage investment conduits 61,870 147 1,380 60,637
------------------------------------------------------------------
$101,066 $ 191 $ 3,671 $ 97,586
==================================================================
Held-to-maturity at December 31, 1998:
Participation certificates and collateralized
mortgage obligations $ 83,469 $ 285 $ 670 $ 83,084
Real estate mortgage investment conduits 93,487 2,166 43 95,610
------------------------------------------------------------------
$176,956 $ 2,451 $ 713 $178,694
==================================================================
</TABLE>
[CFS LOGO} 34/35
<PAGE> 23
CFS Bancorp, Inc.
The mortgage-backed securities have contractual maturities
which range from 2000 to 2028. Expected maturities are
expected to differ from contractual maturities because the
underlying mortgages collateralizing the securities are
subject to prepayment without penalty.
For the year ended December 31, 1999, there were no sales of
available for sale mortgage-backed securities.
For the year ended December 31, 1998, gross gains and gross
losses of $3 ($2 net of taxes) and $82 ($50 net of taxes),
respectively, were recorded from sales of available for sale
mortgage-backed securities.
5. LOANS
RECEIVABLE Loans receivable consist of the following:
<TABLE>
<CAPTION>
December 31,
1999 1998
<S> <C> <C>
First mortgage loans:
Single-family residential $669,280 $ 596,199
Multifamily residential 33,840 21,050
Commercial real estate 93,320 38,999
Construction and land development loans 133,305 51,161
Other loans 33,862 37,092
------- ---------
963,607 744,501
Less:
Undisbursed portion of loan proceeds 73,086 13,068
Allowance for losses on loans 5,973 5,357
Net deferred yield adjustments 1,872 (5)
-------- ---------
Loans receivable, net $882,676 $ 726,081
======== =========
</TABLE>
The Bank's lending activities have been concentrated primarily
within its immediate geographic area. The Bank generally
requires collateral on loans and loan-to-value ratios of no
greater than 80%.
At December 31, 1999, 1998, and 1997, the Bank serviced
$32,126, $40,002, and $50,265, respectively, of loans for
others.
Activity in the allowance for losses on loans is summarized as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Balance at beginning of year $ 5,357 $ 3,825 $ 2,426
Provision for losses on loans 675 1,630 1,840
Charge-offs (171) (125) (453)
Recoveries 112 27 12
------- ------- -------
Balance at end of year $ 5,973 $ 5,357 $ 3,825
======= ======= =======
</TABLE>
6. OFFICE Office properties and equipment are summarized as follows:
PROPERTIES
AND EQUIPMENT
<TABLE>
<CAPTION>
Estimated December 31,
Useful Lives 1999 1998
<S> <C> <C> <C>
Cost:
Land $ 2,005 $ 2,027
Buildings 30 - 40 years 13,524 13,524
Leasehold improvements Over term of lease 2,217 2,171
Furniture and equipment 3 - 15 years 13,640 13,018
Construction in progress 1,831 631
------- -------
33,217 31,371
Less: Accumulated depreciation and amortization 15,994 15,043
$17,223 $16,328
======= =======
</TABLE>
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
(Dollars in thousands except per share data) (Continued)
7. ACCRUED INTEREST Accrued interest receivable consists of the following:
RECEIVABLE
<TABLE>
<CAPTION>
December 31,
1999 1998
<S> <C> <C>
Callable agency securities and other investments $ 2,570 $ 2,793
Participation certificates and collateralized mortgage obligations 327 908
Real estate mortgage investment conduits 1,895 1,607
Loans receivable 4,886 4,791
------- -------
9,678 10,099
Less: Allowance for uncollected interest -- 370
------- -------
$ 9,678 $ 9,729
======= =======
</TABLE>
8. DEPOSITS Deposits and interest rate data are summarized as follows:
<TABLE>
<CAPTION>
December 31,
1999 1998
<S> <C> <C>
NOW accounts:
Non-interest-bearing negotiable order of withdrawal accounts $ 19,883 $ 24,198
Negotiable order of withdrawal accounts: (1.19% -- 1999; 1.69% -- 1998) 78,563 77,456
-------- --------
Total NOW accounts 98,446 101,654
Passbook accounts:
Savings accounts (3.01% -- 1999; 2.80% -- 1998) 202,999 199,499
Individual retirement accounts (4.70% -- 1999; 4.49% -- 1998) 19,186 19,984
-------- --------
Total passbook accounts 222,185 219,483
Money market accounts (3.96% -- 1999; 3.12% -- 1998) 45,110 45,622
Certificate accounts:
3.00% - 4.99% 180,487 117,233
5.00% - 6.99% 369,836 475,163
7.00% - 8.99% 8,129 9,772
9.00% and over -- 231
-------- --------
Total certificate accounts 558,452 602,399
Accrued interest payable 854 644
-------- --------
$925,047 $969,802
Weighted-average cost of deposits 4.39% 4.47%
======== ========
</TABLE>
Certificates of deposit are summarized by maturity as follows:
<TABLE>
<CAPTION>
December 31,
Maturity 1999 1998
<S> <C> <C>
Less than one year $426,020 $415,928
One to two years 70,521 132,526
Two to three years 32,088 23,605
After three years 29,823 30,340
-------- --------
$558,452 $602,399
======== ========
</TABLE>
[CFS LOGO]
36/37
<PAGE> 25
CFS Bancorp, Inc.
Interest expense on deposits consists of the
following:
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
NOW accounts $ 1,365 $ 1,407 $ 1,321
Passbook accounts 6,736 6,816 7,163
Money market accounts 1,406 1,439 1,606
Certificates of deposit 30,256 37,194 36,577
- --------------------------------------------------------------------------------
$39,763 $46,856 $46,667
================================================================================
</TABLE>
The aggregate amount of deposits in denominations of
one hundred thousand dollars or more was $156,027 and
$136,764 at December 31, 1999 and 1998, respectively.
Deposits in excess of one hundred thousand dollars
are not federally insured.
Interest paid on deposits during 1999, 1998, and 1997
totaled $39,553, $46,838, and $46,532, respectively.
- --------------------------------------------------------------------------------
9. BORROWED MONEY Borrowed money consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
-------------------------------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
RATE AMOUNT RATE AMOUNT
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Secured advances from FHLB -- Indianapolis:
Maturing in 2000 -- fixed rate 5.86% $ 75,000 -- % $ --
Maturing in 2003 -- fixed rate 5.42 45,696 5.45 50,000
Maturing in 2008 -- fixed rate -- -- 4.89 25,000
Maturing in 2009 -- fixed rate 5.06 225,000 -- --
Maturing in 2014 -- fixed rate 6.71 1,300 -- --
Maturing in 2018 -- fixed rate 5.54 3,100 5.54 3,100
Maturing in 2019 -- fixed rate 6.32 8,322 -- --
Secured advances from FHLB -- Chicago:
Maturing in 1999 -- fixed rate -- -- 6.04 12,000
Maturing in 2000 -- fixed rate 6.28 16,000 6.28 16,000
Maturing in 2001 -- fixed rate 6.20 15,200 6.20 15,200
Maturing in 2002 -- fixed rate 6.20 7,700 5.80 15,700
Maturing in 2008 -- fixed rate 5.26 6,500 5.16 8,000
Securities sold under agreements to repurchase:
Maturing in August 1999 -- -- 5.53 24,390
Maturing in February 2000 5.90 25,000 -- --
Maturing in April 2000 5.95 20,000 -- --
Maturing in September 2000 5.38 23,881 5.38 23,881
Maturing in September 2001 5.25 22,000 5.25 22,000
-------- --------
$494,699 $215,271
======== ========
Weighted-average interest rate 5.44% 5.53%
======== ========
</TABLE>
Pursuant to collateral agreements with the Federal
Home Loan Bank of Indianapolis (FHLB-IN), advances
are secured by all stock in the FHLB-IN and
qualifying first mortgage loans with unpaid principal
balances aggregating no less than 170% of the
outstanding secured advances, or $609,311.
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
(Dollars in thousands except per share data) (Continued)
Pursuant to collateral agreements with the Federal Home Loan
Bank of Chicago (FHLB-C), advances are secured by stock in the
FHLB-C and certain mortgage-backed securities having a
carrying value of $77,180.
The Company has a borrowing agreement with American National
Bank (ANB) for a maximum of $5,000 federal funds borrowing
line of credit at a rate quoted as the market rate by ANB for
the purchase of federal funds at the time the purchase is
requested. The advance is secured by certain mortgage-backed
securities having a carrying value of $5,000.
The Bank enters into sales of securities under agreements to
repurchase (reverse repurchase agreements). Fixed-coupon
reverse repurchase agreements are treated as financings, and
the obligations to repurchase securities sold are reflected as
borrowed funds in the consolidated statements of condition.
The dollar amounts of securities underlying the agreements
remain in the asset accounts. Securities sold under agreements
to repurchase consisted of callable U.S. government agency
notes at December 31, 1999 and 1998. The securities underlying
the agreements were delivered to the dealer who arranged the
transaction. The agreements call for the Bank to repurchase
similar securities.
Information concerning borrowings under fixed-coupon dollar
reverse repurchase agreements is summarized as follows:
<TABLE>
<CAPTION>
1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
Average balance during the year $104,757 $ 66,468
Average interest rate during the year 5.09% 5.64%
Maximum month-end balance during the year $148,170 $145,000
Securities underlying the agreements at year-end:
Carrying value 86,815 79,781
Estimated fair value 82,692 81,633
</TABLE>
Interest expense on borrowed money is summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Advances from FHLBs $12,488 $5,498 $3,639
American National line of credit 1 106 181
Securities sold under agreements to repurchase 5,291 3,749 371
- -----------------------------------------------------------------------------------------
$17,780 $9,353 $4,191
=========================================================================================
</TABLE>
Interest paid on borrowings during 1999, 1998, and 1997 was
$17,032, $8,868, and $4,099, respectively.
- --------------------------------------------------------------------------------
10. INCOME TAXES The Bank has qualified under provisions of the Internal
Revenue Code, which permitted it to deduct from taxable income
an allowance for bad debts, which differs from the provision
for such losses charged to income. Accordingly, retained
income at December 31, 1999, includes approximately $12,497
for which no provision for federal income taxes has been made.
If in the future this portion of retained income is
distributed, or the Bank no longer qualifies as a bank for tax
purposes, federal income taxes may be imposed at the
then-applicable rates. If federal income taxes had been
provided, the deferred tax liability would have been
approximately $4,499.
The income tax provision consists of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Current tax expense:
Federal $ 7,425 $ 3,631 $ 2,284
State 1,857 769 562
Deferred tax expense (benefit):
Federal (847) (1,669) (103)
State (153) (144) (29)
- -------------------------------------------------------------------------------
$ 8,282 $ 2,587 $ 2,714
===============================================================================
</TABLE>
38/39
[CFS LOGO]
<PAGE> 27
CFS Bancorp, Inc.
A reconciliation of the statutory federal income tax rate to
the effective income tax rate is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
----- ---- ----
<S> <C> <C> <C>
Statutory rate 35.0% 34.0% 34.0%
State taxes 5.5 6.7 5.2
Nondeductible merger expenses -- 6.6 --
Other (1.7) (2.0) (1.9)
- --------------------------------------------------------------------------------
Effective rate 38.8% 45.3% 37.3%
================================================================================
</TABLE>
Significant components of deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
December 31,
1999 1998
------ ------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $2,475 $2,263
Deferred compensation -- 99
Unrealized depreciation on available for sale securities 6,430 193
Loan fees deferred 123 --
Charitable contributions 493 729
Other 471 487
- ----------------------------------------------------------------------------------------
9,992 3,771
Deferred tax liabilities:
Excess tax accumulated provision for losses over base year 1,367 1,703
Loan fees deferred -- 403
Depreciation 55 239
Stock dividends on FHLB stock 193 193
Other 227 324
- ----------------------------------------------------------------------------------------
1,842 2,862
- ----------------------------------------------------------------------------------------
Net deferred asset $8,150 $ 909
========================================================================================
</TABLE>
The Company made (received) net federal and state income tax
payments (refunds) of $12,338, $(153), and $3,265, during
1999, 1998, and 1997, respectively.
11. REGULATORY The principal source of cash flow for the Company is dividends
CAPITAL from the Bank. Various federal banking regulations and capital
guidelines limit the amount of dividends that may be paid to
the Company by the Bank. Future payment of dividends by the
subsidiary is dependent on individual regulatory capital
requirements and levels of profitability.
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet
minimum total requirements can initiate certain mandatory and
possible additional discretionary actions by regulators that,
if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the
Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and
classification are also subject to quantitative judgments by
the regulators about components, risk weightings, and other
factors.
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
(Dollars in thousands except per share data) (Continued)
Quantitative measures established by regulation to ensure
capital adequacy require the Bank to maintain minimum amounts
and ratios, set forth in the table below of the total
risk-based, tangible, and core capital, as defined in the
regulations. Management believes, as of December 31, 1999,
that the Bank meets all capital adequacy requirements to which
it is subject.
As of December 31, 1999, the most recent notification from the
Office of Thrift Supervision categorized the Bank as
"well-capitalized" under the regulatory framework for prompt
corrective action. To be categorized as "well-capitalized,"
the Bank must maintain minimum total risk-based, tangible, and
core ratios as set forth in the table. There are no conditions
or events since that notification that management believes
have changed the institution's category.
<TABLE>
<CAPTION>
To Be Well-
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999
Risk-based $150,997 18.68% $64,677 *8.00% $80,846 *10.00%
Tangible 145,120 9.07 24,000 *1.50 31,999 * 2.00
Core 145,120 9.07 47,999 *3.00 79,998 * 5.00
As of December 31, 1998
Risk-based 165,108 27.92 47,317 *8.00 59,146 *10.00
Tangible 159,751 11.49 20,857 *1.50 34,762 * 2.50
Core 159,751 11.49 41,715 *3.00 69,524 * 5.00
</TABLE>
- ----------------
* Greater or equal to
At December 31, 1999, adjusted total assets were $1,599,968
and risk-weighted assets were $808,462. A reconciliation of
the Bank's equity capital in accordance with generally
accepted accounting principles to regulatory capital at
December 31, 1999, is as follows:
<TABLE>
<CAPTION>
<S> <C>
Total equity $138,600
Unrealized loss on investment securities available for sale 6,520
--------
Tangible and core capital 145,120
Allowance for loan losses 5,877
--------
Risk-based capital $150,997
========
</TABLE>
12. EMPLOYEE
BENEFIT PLANS The Company participates in an industry-wide, multiemployer,
defined-benefit pension plan, which covers all full-time
employees who have attained at least 21 years of age and
completed one year of service. Calculations to determine
full-funding status are made annually as of June 30. Pension
expense was $0 in 1999 and 1998, and $26 in 1997. Asset and
plan benefit information is not available for participating
associations on an individual basis.
SFC had a defined-benefit plan which covered full-time
employees with six months or more of service and who were at
least 21 years of age. The funding policy was to generally
make the minimum annual contribution required by applicable
regulations. Actuarially determined pension costs are charged
to current operations. As of January 1, 1999, participants of
the SFC plan were enrolled in the Company's plan.
[CFS LOGO] 40/41
<PAGE> 29
CFS Bancorp, Inc.
The following table summarizes SFC's defined-benefit plan for
the year ended December 31, 1998:
<TABLE>
<CAPTION>
<S> <C>
Change in benefit obligations:
Projected benefit obligation at beginning of year $ 2,571
Service cost 322
Interest cost 218
Actuarial (gains) losses 1,466
Benefit paid (570)
-------
Projected benefit obligation at end of year $ 4,007
=======
Change in plan assets:
Fair value of plan assets at beginning of year $ 2,110
Actual return on plan assets 169
Employer contributions 305
Benefits paid (570)
-------
Fair value of plan assets at end of year $ 2,014
=======
Reconciliation of funded status:
Over (under) funded $(1,993)
Unrecognized transition obligation (asset) 16
Unrecognized net actuarial losses 1,469
-------
Net accrued benefit cost recognized $ (508)
=======
Amounts recognized in the consolidated statement of
condition consist of:
Accrued benefit liability $ (508)
-------
Net accrued benefit cost recognized $ (508)
========
</TABLE>
<TABLE>
<CAPTION>
Year Ended
December 31,
1998 1997
---------- ----------
<S> <C> <C>
Components of net periodic benefit cost:
Service cost $ 322 $ 238
Interest cost 219 172
Expected return on plan assets (127) (159)
Recognized transition obligation (asset) 4 1
Recognized net actuarial loss (gain) 67 2
Settlements 209 --
----- ------
Net periodic cost $ 694 $ 254
===== ======
Weighted-average assumptions:
Discount rate 6.00% 6.75%
Expected return on plan assets 6.00 8.00
Rate of compensation increase 5.00 5.00
</TABLE>
The Company also participates in a single-employer
defined-contribution plan, which qualifies under section
401(k) of the Internal Revenue Code. Participation eligibility
in this plan is substantially the same as in the
aforementioned defined-benefit pension plan. This plan called
for a discretionary contribution within specified limits and a
matching Company contribution equal to a specified percentage
of employee contributions. Plan expense was approximately $276
in 1999, $286 in 1998, and $285 in 1997.
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
(Dollars in thousands except per share data) (Continued)
Additionally, SFC had a contributory qualified pension plan
(401(k) Plan) which was available to all full-time employees
having six months or more of service. Participants could make
tax-deferred contributions within a range specified by the
plan. SFC made matching contributions in an amount equal to
50% of each eligible participant's contribution up to a
specified percentage of the deferred contribution. Subsequent
to the Merger, employees eligible under the stock option plan
who contributed to the 401(k) Plan were no longer eligible for
matching of their contributions. Expenses relating to the
401(k) Plan were $89 and $62 for the years ended December 31,
1998, and 1997, respectively.
Effective March 1, 1999, the Company combined the SFC
defined-contribution plan with its 401(k) plan.
The Company provides supplemental retirement benefits for
certain senior officers in the form of payments upon
retirement, death, or disability. The annual benefit is based
on actuarial computations of existing plans without imposing
Internal Revenue Service limits. Expenses related to this plan
for the years ended December 31, 1999, 1998, and 1997, were
$507, $312, and $257, respectively.
13.STOCK-BASED
BENEFIT PLANS In conjunction with the Conversion, the Company established an
Employee Stock Ownership Plan (the ESOP) for the employees of
the Company and the Bank which became effective with the
completion of the Conversion. The ESOP is a qualifying pension
plan under Internal Revenue Service guidelines. It covers all
full-time employees who have attained at least 21 years of age
and completed one year of service. At the time of conversion,
the ESOP borrowed $14,283 from the Company and purchased
1,428,300 shares of common stock issued in the Conversion.
Expense is recognized based on the fair value (average stock
price) of shares scheduled to be released from the ESOP trust.
One-twelfth of the shares are scheduled to be released each
year as one-twelfth of the loan (principal and interest) is
scheduled to be repaid each year. Expense related to this ESOP
for the years ended December 31, 1999 and 1998, was $1,174 and
$1,165, respectively. ESOP shares not committed to be released
are not considered outstanding for purposes of computing EPS.
The following table summarizes shares of Company common stock
held by the ESOP at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
Shares allocated to participants 232,060 112,436
Unallocated and unearned shares 1,196,240 1,315,864
---------- ----------
1,428,300 1,428,300
========== ==========
Fair value of unearned ESOP shares $ 11,140 $ 13,241
========== ==========
</TABLE>
The Company also provides supplemental retirement benefits for
certain senior officers under the ESOP. This benefit is also
based on computations for the existing plan exclusive of
Internal Revenue Service limits. Expense related to this plan
for the year ended December 31, 1999, was $128.
In February 1999, the Company, with shareholder approval,
established the Recognition and Retention Plan (RRP), which is
a stock-based incentive plan, and a stock option plan. The
Bank contributed $7,500 to the RRP to purchase a total of
714,150 shares of Company common stock. On April 1, 1999, the
Compensation Committee of the Board of Directors granted
707,000 shares under this plan to 92 participants.
The following table summarizes shares (in thousands) of
Company's common stock held by the RRP at December 31, 1999:
<TABLE>
<CAPTION>
<S> <C>
Shares purchased by the plan 714,150
Shares granted in 1999 (707,000)
Shares forfeited in 1999 2,000
--------
Shares available for grant December 31, 1999 9,150
========
</TABLE>
[CFS LOGO]
42/43
<PAGE> 31
CFS Bancorp, Inc.
The shares granted in the RRP vest to the participants at the
rate of 20% per year. As a result, expense for this plan is
being recorded over a 60-month period and is based on the
market value of the Company's stock as of the date of grant.
The remaining unamortized cost of the RRP is reflected as a
reduction in stockholders equity. Expense under this plan for
the year ended December 31, 1999, was $1,071.
The Company has stock option plans under which shares of
Company common stock are reserved for the grant of both
incentive and nonincentive stock options to directors,
officers, and employees. The dates the options are first
exercisable and expire are determined by the Compensation
Committee of the Board of Directors. The exercise price of the
options is equal to the fair market value of the common stock
on the grant date.
SFC had three stock option and incentive plans (the 1991 Plan,
the 1995 Plan, and the 1997 Plan). As of the Merger,
outstanding options were exchanged for options of Company
stock. No future grants will be made under these plans;
however, options granted and not exercised remain outstanding
under the plans.
The following is a combined analysis of the stock option
activity for each of the three years ended December 31, 1999.
<TABLE>
<CAPTION>
Exercise
Number Price
of Shares Per Share
(In thousands)
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at January 1, 1997 814 $ 1.85 - 6.83
Granted 159 6.38 - 13.83
Exercised (21) 1.85 - 5.69
Forfeited (1) 5.88
--------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1997 951 1.85 - 13.83
Granted 88 13.09
Exercised (245) 1.85 - 6.50
Forfeited and canceled (88) --
--------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1998 706 1.85 - 13.83
Granted 1,339 10.00
Exercised (239) 1.85 - 6.39
Forfeited and canceled (145) 10.00 - 13.83
--------------------------------------------------------------------------------------------------------------
OUTSTANDING AT DECEMBER 31, 1999 1,661 $1.85 - 13.83
==============================================================================================================
</TABLE>
At December 31, 1999, 421,716 options were exercisable with a
range in exercise price from $1.85 to $13.83. The
weighted-average remaining contractual life of outstanding
options was 8.5 years at December 31, 1999. At December 31,
1999, there were 447,975 shares available for future grants.
The following summarizes the pro forma net income as if the
fair value method of accounting for stock-based compensation
plans had been utilized.
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (as reported) $13,090 $3,122 $4,566
Pro forma net income 11,541 2,700 4,298
Diluted earnings per share (as reported) 0.68 0.14 0.20
Pro forma diluted earnings per share 0.60 0.12 0.19
</TABLE>
The pro forma results above may not be representative of the
effect reported in net income for future years.
The fair value of the option grants for the years ended
December 31, 1999, 1998, and 1997, was estimated using the
Black-Scholes option value model, with the following
assumptions: dividend yield of approximately 3.6% in 1999,
3.2% for 1998, and 1.5% for 1997, expected volatility of .232%
in 1999, 34.8% for 1998, and 6.5% for 1997; risk-free interest
of 6.5%, 5.25%, and 5.30% for 1999, 1998, and 1997,
respectively; and an original expected life of ten years for
all options granted.
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
(Dollars in thousands except per share data) (Continued)
SFC also had an ESOP. All shares under the SFC ESOP plan were
released as of June 30, 1998. Expenses relating to the plan
for the years ended December 31, 1998 and 1997, were $45 and
$101, respectively.
SFC had a stock-based bank incentive plan. All shares from
this plan were awarded and vested, and as of December 31,
1998, the entire amount of deferred compensation expense was
recognized. Expenses relating to the plan for the years ended
December 31, 1998 and 1997, were $0 and $9, respectively.
- -------------------------------------------------------------------------------
14. COMPREHENSIVE The related income tax effect and reclassification adjustments
INCOME to the components of other comprehensive income for the years
ended December 31, 1999, 1998, and 1997, is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized holding gains (losses) arising during the
period:
Unrealized net gains (losses) $(15,300) $(1,110) $1,413
Related tax (expense) benefit 6,205 440 (551)
--------------------------------------------------------------------------------------------------------------
Net (9,095) (670) 862
Less: Reclassification adjustment for net gains
realized during the period:
Realized net gains 83 296 288
Related tax expense (33) (117) (116)
--------------------------------------------------------------------------------------------------------------
Net 50 179 172
--------------------------------------------------------------------------------------------------------------
Total other comprehensive income $ (9,145) $ (849) $ 690
==============================================================================================================
</TABLE>
- -------------------------------------------------------------------------------
15. EARNINGS The following table sets forth the computation of basic and
PER SHARE diluted earnings per share:
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 13,090 $ 3,122 $ 4,566
====================================================================================================================================
Average common shares outstanding 18,850,711 21,514,744 22,692,990
Common share equivalents -- Assuming exercise of dilutive stock options 276,292 326,178 287,935
- ------------------------------------------------------------------------------------------------------------------------------------
Average common shares and common share equivalents outstanding 19,127,003 21,840,922 22,980,925
====================================================================================================================================
Basic earnings per share $ .69 $ .15 $ .20
Diluted earnings per share .68 .14 .20
</TABLE>
- -------------------------------------------------------------------------------
16. COMMITMENTS The Company had outstanding commitments as follows:
<TABLE>
<CAPTION>
December 31,
Type of Commitment 1999 1998
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
To originate loans on residential property:
Fixed rates (7.500% -- 9.625% in 1999; 6.125% -- 8.75% in 1998) $ 2,366 $ 5,495
Variable rates 13,523 35,267
To originate loans on nonresidential property:
Fixed rates (8,000% -- 10.000% in 1999; 7.75% -- 8.75% in 1998) 24,745 18,382
Variable rates 56,301 1,690
Unused lines of credit 22,450 7,337
Letters of credit:
Secured by cash 439 120
Other 48,593 9,646
</TABLE>
Commitments to fund loans and those under letter of credit
arrangements have credit risk essentially the same as that
involved in extending loans to customers and are subject to
the Bank's normal credit policies. The Bank estimates that
substantially all commitments will be funded or will expire
within one year.
44/45
[CFS LOGO]
<PAGE> 33
17. LEGAL In 1983, with the assistance of the Federal Savings and Loan
PROCEEDINGS Insurance Corporation (FSLIC) as set forth in an assistance
agreement (Assistance Agreement), the Bank acquired through
mergers First Federal Savings and Loan Association of East
Chicago, East Chicago, Indiana (East Chicago Savings), and
Gary Federal Savings and Loan Association, Gary, Indiana (Gary
Federal). The FSLIC-assisted supervisory acquisitions of East
Chicago Savings and Gary Federal were accounted for using the
purchase method of accounting which resulted in supervisory
goodwill (the excess of cost over fair value of net assets
acquired), an intangible asset, of $52.9 million, compared to
$40.2 million of goodwill as reported on a generally accepted
accounting principles basis. Such goodwill was included in the
Bank's regulatory capital. The Assistance Agreement relating
to the Bank's acquisitions of East Chicago Savings and Gary
Federal provided for the inclusion of goodwill as an asset on
the Bank's balance sheet, to be amortized over 35 years for
regulatory purposes and includable in capital. Pursuant to the
regulations adopted by the Office of Thrift Supervision to
implement the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 (FIRREA), the regulatory capital
requirement for federal savings banks was increased and the
amount of supervisory goodwill that could be included in
regulatory capital decreased significantly. At September 30,
1989, the Bank had approximately $26.0 million of remaining
supervisory goodwill but, even excluding supervisory goodwill,
the Bank exceeded the capital requirements of FIRREA at such
date.
On May 13, 1993, the Bank filed suit against the U.S.
government seeking damages and/or other appropriate relief on
the grounds, among others, that the government had breached
the terms of the Assistance Agreement. The suit is pending
before Chief Judge Loren Smith in the United States Court of
Federal Claims and is entitled Citizens Financial Services,
FSB, et al. v. United States (Case No. 93-306-C). The case had
been stayed pending disposition by the United States Supreme
Court of three related supervisory goodwill cases (the Winstar
Cases). On July 1, 1996, the Supreme Court ruled in the
Winstar Cases that the government had breached its contract
with the Winstar parties and was liable in damages for those
breaches.
Thereafter, the stay applicable to the Bank's case and other
Winstar-related cases was lifted. The Bank has filed a motion
for summary judgment which is presently pending before the
Court. In June 1999, the Bank retained Spriggs &
Hollingsworth, a Washington, D.C. law firm, to represent it in
this matter. Case-specific discovery with the government in
preparation for trial has begun, and is scheduled to last one
year. It is estimated that the trial will be scheduled
thereafter and should commence at some time during the year
2001. It must be stressed that this is an estimate and is
subject to change at the Court's discretion.
In its complaint, the Bank did not specify the amount of
damages it is seeking from the United States. The Bank has yet
to retain an expert in order to attempt to quantify the amount
of damages. The Bank is unable to predict the outcome of its
claim against the United States and the amount of damages that
may be awarded to the Bank, if any, in the event that a
judgment is rendered in the Bank's favor. Consequently, no
assurances can be given as to the results of this claim or the
timing of any proceedings in relation thereto. As such, no
amounts relating to this litigation have been recorded in the
financial statements.
Other than the above-referenced litigation, the Company is
involved in routine legal proceedings occurring in the
ordinary course of business which, in the aggregate, are
believed by management to be immaterial to the financial
condition of the Company.
18. FAIR VALUE Disclosure of fair value information about financial
OF FINANCIAL instruments, whether or not recognized in the consolidated
INSTRUMENTS statement of condition, for which it is practicable to
estimate their value, is summarized below. In cases where
quoted market prices are not available, fair values are based
on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of
future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate
settlement of the instrument.
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
(Dollars in thousands except per share data) (Continued)
The fair value disclosure of certain financial instruments and
all nonfinancial instruments is not required. Accordingly, the
aggregate fair value amounts presented do not represent the
underlying value of the Company.
The carrying amounts and fair values of financial instruments
consist of the following:
<TABLE>
<CAPTION>
December 31,
1999 1998
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 95,803 $ 95,803 $ 49,843 $ 49,843
Investment securities available for sale 32,693 32,693 34,720 34,720
Investment securities held-to-maturity 176,737 165,692 166,500 169,263
Mortgage-backed securities available for sale 299,056 299,056 277,888 277,888
Mortgage-backed securities held-to-maturity 101,066 97,586 176,956 178,694
Loans receivable 882,676 849,371 726,081 733,646
---------- ---------- ---------- ----------
Total assets financial instruments $1,588,031 $1,540,201 $1,431,988 $1,444,054
========== ========== ========== ==========
LIABILITIES
Deposits $925,047 $922,503 $969,802 $980,760
Borrowed money 494,699 458,285 215,271 217,409
---------- ---------- ---------- ----------
Total liabilities financial instruments $1,419,746 $1,380,788 $1,185,073 $1,198,169
========== ========== ========== ==========
</TABLE>
The following methods and assumptions were used to estimate
the fair value of each class of financial instruments for
which it is practicable to estimate that value:
CASH AND CASH EQUIVALENTS
For cash and interest-bearing deposits, the carrying amount
is a reasonable estimate of fair value.
INVESTMENT SECURITIES
Fair values for securities held for investment, sale, or
trading account purposes are based on quoted market prices
as published in financial publications or dealer quotes.
MORTGAGE-BACKED SECURITIES
Fair values for mortgage-backed securities are based on
the lower of quotes received from third-party brokers.
LOANS RECEIVABLE
The Company determined that for both variable-rate and
fixed-rate loans, fair values are estimated using
discounted cash flow analyses, using interest rates
currently being offered for loans with similar terms and
collateral to borrowers of similar credit quality.
DEPOSIT LIABILITIES
The fair value of demand deposits, savings accounts, and
money market deposits is the amount payable on demand at
the reporting date. The fair value of fixed-maturity
certificates of deposit is estimated by discounting the
future cash flows using the rates currently offered for
deposits of similar remaining maturities.
BORROWED MONEY
Rates currently available to the Company for debt with
similar terms and remaining maturities are used to
estimate fair value of existing debt.
The fair value of the Company's off-balance-sheet instruments is
nominal.
[CFS LOGO]
46/47
<PAGE> 35
CFS Bancorp, Inc.
19. CONDENSED The following represents the condensed statement of
PARENT COMPANY financial condition as of December 31, 1999 and 1998, and
FINANCIAL condensed statement of income and cash flows for the two
STATEMENTS years ended December 31, 1999, for CFS Bancorp, Inc., the
parent company.
CONDENSED STATEMENTS OF CONDITION
(PARENT COMPANY ONLY)
<TABLE>
<CAPTION>
December 31,
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Cash on hand and in banks $ 656 $ 4,110
Securities available for sale 53,074 79,074
Investment in subsidiary 138,600 159,492
Loan receivable from subsidiary bank -- 4,000
Loan receivable from ESOP 12,341 13,093
Accrued interest receivable 442 620
Prepaid expenses and other assets 3,545 1,645
-------- --------
Total assets $208,658 $262,034
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accrued taxes and other liabilities $ 3,225 $ 1,946
Stockholders' equity:
Common stock 232 230
Additional paid-in capital 187,178 186,062
Retained earnings, substantially restricted 69,017 74,085
Treasury stock (48,079) --
Accumulated other comprehensive income, net of tax (2,915) (289)
-------- --------
Total stockholders' equity 205,433 260,088
-------- --------
Total liabilities and stockholders' equity $208,658 $262,034
======== ========
</TABLE>
CONDENSED STATEMENTS OF INCOME
(PARENT COMPANY ONLY)
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998
-------- --------
<S> <C> <C>
Dividends from subsidiary $ 20,182 $ 5,034
Interest income 5,148 3,647
Dividend income 253 69
Gain on sale of investment 51 384
Non-interest expense (1,541) (7,775)
-------- --------
Net income before income taxes and equity in earnings of subsidiary 24,093 1,359
Income tax (expense) benefit (1,580) 1,080
-------- --------
Net income before equity in undistributed earnings of subsidiary 22,513 2,439
Equity in undistributed earnings of subsidiary (9,423) 683
-------- --------
Net income $ 13,090 $ 3,122
======== ========
</TABLE>
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
(Dollars in thousands except per share data) (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
(PARENT COMPANY ONLY)
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998
-------- ---------
<S> <C> <C>
Operating activities:
Net income $ 13,090 $ 3,122
Adjustments to reconcile net income to net cash used by operating activities:
Amortization/accretion of premiums/discounts (687) --
Equity in undistributed earnings of the Bank 9,423 (683)
Contribution of stock to The Citizens Savings Foundation -- 3,000
Net gain on sale of available for sale investment securities (51) (352)
Net gain on sale of securities held for trade -- (32)
Proceeds from sales of securities held for trade -- 409
Purchase of securities held for trade -- (456)
(Increase) decrease in interest receivable 178 (605)
Increase in prepaid expenses and other assets (1,900) (1,584)
Increase in other liabilities 3,323 2,003
-------- --------
Net cash provided by operating activities 23,376 4,822
Investing activities:
Available for sale investment securities:
Purchases (2,622) (29,136)
Sales 21,879 917
Available for sale mortgage-backed securities:
Purchases -- (48,014)
Repayments 1,530 55
Sales 1,077 --
Acquisition of stock of Bank -- (80,477)
Net loan originations and principal payment on loans 4,752 (16,963)
-------- ---------
Net cash provided (used by) investing activities 26,616 (173,618)
Financing activities:
Proceeds from sale of treasury stock -- 69
Purchase of treasury stock (48,079) --
Proceeds from exercise of stock options 974 757
Dividends paid on common stock (6,341) (3,647)
Proceeds of stock conversion, net -- 160,954
Sale of stock to ESOP -- 14,283
-------- ---------
Net cash provided (used) by financing activities (53,446) 172,416
-------- ---------
Increase (decrease) in cash and cash equivalents (3,454) 3,620
Cash and cash equivalents at beginning of year 4,110 490
-------- ---------
Cash and cash equivalents at end of year $ 656 $ 4,110
======== =========
</TABLE>
[CFS LOGO] 48
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporaiton by reference in the Registration Statement (Form
S-8 No. 333-62053) pertaining to the Citizens Financial Services, FSB Employees'
Savings & profit Sharing Plan and Trust of our report dated February 16, 2000,
with respect to the consolidated financial statements of CFS Bancorp, Inc.
incorporated by reference in the Annual Report (Form 10-K) for the year ended
December 31, 1999.
We also consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-62049) pertaining to the Stock Options Assumed In The
Acquisition Of SuburbFed Financial Corp. of our report dated February 16, 2000,
with respect to the consolidated financial statements of CFS Bancorp, Inc.
incorporated by reference in the Annual Report (Form 10-K) for the year ended
December 31, 1999.
Chicago, Illinois
March 29,2000
<PAGE> 1
EXHIBIT 23.2
[COBITZ, VANDENBERG & FENNESSY LETTERHEAD]
CONSENT OF INDEPENDENT AUDITORS
As independent auditor, we hereby consent to the inclusion of our Independent
Auditors' report, dated as of February 6, 1998, for SuburbFed Financial Corp.
as an exhibit in the Annual Report on Form 10-K for the year ended December 31,
1999 of CFS Bancorp, Inc., and to the incorporation by reference in the
Registration Statements on Form S-8 (No. 333-62053) and (No. 333-62049) of CFS
Bancorp, Inc. of such Independent Auditors' Report.
/s/ Cobitz, Vandenberg & Fennessy
March 29, 2000
Palos Hills, Illinois
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0001058438
<NAME> CFS BANCORP, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 33,062
<INT-BEARING-DEPOSITS> 28,866
<FED-FUNDS-SOLD> 33,875
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 331,749
<INVESTMENTS-CARRYING> 277,803
<INVESTMENTS-MARKET> 263,278
<LOANS> 882,676
<ALLOWANCE> 5,973
<TOTAL-ASSETS> 1,649,535
<DEPOSITS> 925,047
<SHORT-TERM> 159,881
<LIABILITIES-OTHER> 24,356
<LONG-TERM> 334,818
0
0
<COMMON> 232
<OTHER-SE> 205,201
<TOTAL-LIABILITIES-AND-EQUITY> 1,649,535
<INTEREST-LOAN> 58,336
<INTEREST-INVEST> 44,277
<INTEREST-OTHER> 1,996
<INTEREST-TOTAL> 104,609
<INTEREST-DEPOSIT> 39,763
<INTEREST-EXPENSE> 57,543
<INTEREST-INCOME-NET> 47,066
<LOAN-LOSSES> 675
<SECURITIES-GAINS> 83
<EXPENSE-OTHER> 30,210
<INCOME-PRETAX> 21,372
<INCOME-PRE-EXTRAORDINARY> 21,372
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,090
<EPS-BASIC> .69
<EPS-DILUTED> .68
<YIELD-ACTUAL> 7.24
<LOANS-NON> 11,832
<LOANS-PAST> 0
<LOANS-TROUBLED> 668
<LOANS-PROBLEM> 12,500
<ALLOWANCE-OPEN> 5,357
<CHARGE-OFFS> 171
<RECOVERIES> 112
<ALLOWANCE-CLOSE> 5,973
<ALLOWANCE-DOMESTIC> 5,973
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 5,973
</TABLE>
<PAGE> 1
EXHIBIT 99.0
[COBITZ, VANDENBERG & FENNESSY LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
The Board of Directors
SuburbFed Financial Corp.
Flossmoor, Illinois
We have audited the consolidated statements of financial condition of
SuburbFed Financial Corp. and the subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of earnings, changes in
stockholders' equity and cash flows for each of the three years in the period
ending December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatements. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of SuburbFed
Financial Corp. and subsidiaries at December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the three years in the
period ending December 31, 1997 in conformity with generally accepted
accounting principles.
/s/ Cobitz, Vandenberg & Fennessy
February 6, 1998
Palos Hills, Illinois
