<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2000.
-----------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
------------------- --------------------
Commission file number: 0-24611
CFS Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Delaware 35-2042093
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
707 Ridge Road, Munster, Indiana 46321
(Address of principal executive offices)
(219) 836-5500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES [X] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
The Registrant had 17,630,413 shares of Common Stock issued and outstanding as
of October 30, 2000.
<PAGE> 2
CFS BANCORP, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition at
September 30, 2000 and December 31, 1999 3
Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 2000 and 1999 4
Consolidated Statements of Changes in Stockholders' Equity
for the Nine Months Ended September 30, 2000 5
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2000 and 1999 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 21
PART II OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
</TABLE>
2
<PAGE> 3
CFS BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
Cash and amounts due from depository institutions $ 24,300 $ 33,062
Interest-bearing deposits 1,488 28,866
Federal funds sold 500 33,875
----------- -----------
Cash and cash equivalents 26,288 95,803
Investment securities available-for-sale 33,758 32,693
Investment securities held-to-maturity
(fair value 2000-$169,119; 1999-$165,692) 176,772 176,737
Mortgage-related securities available-for-sale 280,918 299,056
Mortgage-related securities held-to-maturity
(fair value 2000-$81,775; 1999-$97,586) 83,202 101,066
Loans receivable, net 992,332 882,676
Investment in Federal Home Loan Bank stock, at cost 27,175 22,448
Office properties and equipment 16,895 17,223
Accrued interest receivable 11,654 9,678
Real estate owned 1,560 609
Prepaid expenses and other assets 38,892 11,546
----------- -----------
Total assets $ 1,689,446 $ 1,649,535
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 933,443 $ 925,047
Borrowed money 524,136 494,699
Advance payments by borrowers for taxes
and insurance 6,310 5,738
Other liabilities 25,128 18,618
----------- -----------
Total liabilities 1,489,017 1,444,102
----------- -----------
Stockholders' Equity:
Common stock; $.01 par value: 85,000,000 shares authorized
Shares issued: 23,323,685 and 23,198,606 at
September 30, 2000 and December 31, 1999, respectively
Shares outstanding: 17,629,913 and 18,627,685 at
September 30, 2000 and December 31, 1999, respectively 233 232
Additional paid-in capital 188,734 187,138
Retained earnings, substantially restricted 96,971 93,927
Treasury stock, at cost: 5,693,772 and 4,570,921 shares at
September 30, 2000 and December 31, 1999, respectively (59,387) (48,079)
Unearned common stock acquired by ESOP (11,962) (11,962)
Unearned common stock acquired by RRP (6,019) (6,389)
Accumulated other comprehensive loss, net of tax (8,141) (9,434)
----------- -----------
Total stockholders' equity 200,429 205,433
----------- -----------
Total liabilities and stockholders' equity $ 1,689,446 $ 1,649,535
=========== ===========
</TABLE>
See accompanying notes
3
<PAGE> 4
CFS BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For Three Months Ended For Nine Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Interest income:
Loans $ 19,184 $ 14,717 $ 54,544 $ 42,538
Mortgage-related securities 6,472 7,276 20,180 22,710
Other investment securities 3,852 3,768 10,974 10,620
Other 998 392 3,016 1,119
------------ ------------ ----------- -----------
Total interest income 30,506 26,153 88,714 76,987
Interest expense:
Deposits 10,959 9,638 32,189 29,897
Borrowings 8,007 4,776 21,698 11,726
------------ ------------ ----------- -----------
Total interest expense 18,966 14,414 53,887 41,623
------------ ------------ ----------- -----------
Net interest income before
provision for losses on loans 11,540 11,739 34,827 35,364
Provision for losses on loans 375 150 2,925 450
------------ ------------ ----------- -----------
Net interest income after
provision for losses on loans 11,165 11,589 31,902 34,914
Non-interest income:
Loan fees 330 227 1,104 697
Insurance commissions 220 200 660 619
Investment commissions 370 300 1,117 1,056
Gain (loss) on sale of available-for-sale
investment securities - net (7) 45 66 83
Net gain (loss) on sale of loans -- (5) -- 63
Gain on sale of real estate owned -- 40 -- 12
Net gain on sale of office properties -- 3 -- 3
Other income 640 351 1,440 1,389
------------ ------------ ----------- -----------
Total non-interest income 1,553 1,161 4,387 3,922
Non-interest expense:
Compensation and employee benefits 4,731 4,979 15,060 14,004
Net occupancy expense 589 619 1,809 1,903
Furniture and equipment expense 524 584 1,788 1,652
Federal deposit insurance premiums 50 139 148 433
Data processing 257 291 721 885
Marketing 122 117 583 330
Other general and administrative expenses 1,415 1,103 3,599 3,150
------------ ------------ ----------- -----------
Total non-interest expense 7,688 7,832 23,708 22,357
------------ ------------ ----------- -----------
Income before income taxes 5,030 4,918 12,581 16,479
Income tax expense 1,988 1,949 5,030 6,580
------------ ------------ ----------- -----------
Net income $ 3,042 $ 2,969 $ 7,551 $ 9,899
============ ============ =========== ===========
Per share data:
Basic earnings per share $ 0.19 $ 0.17 $ 0.46 $ 0.51
Diluted earnings per share 0.19 0.16 0.46 0.50
Cash dividends declared per share 0.09 0.09 0.27 0.25
Weighted average shares outstanding 16,125,652 17,842,706 16,345,364 19,446,227
Weighted average diluted shares outstanding 16,318,539 18,179,712 16,527,631 19,742,484
See accompanying notes
</TABLE>
<PAGE> 5
CFS BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Unearned Unearned
Common Common
Additional Stock Stock
Common Paid-In Retained Treasury Acquired Acquired
Stock Capital Earnings Stock by ESOP by RRP
------ ---------- -------- -------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance January 1, 2000 $ 232 $187,138 $ 93,927 ($48,079) ($11,962) ($6,389)
Net income -- -- 7,551 -- -- --
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 -- -- -- (11,308) -- --
Exercise of stock options 1 541 -- -- -- --
Reclassification for Recognition and
Retention Plan and rabbi trust -- 1,055 -- -- -- (1,110)
Vesting of awards granted under
Recognition and Retention Plan -- -- -- -- -- 1,480
Dividends declared on common stock -- -- (4,507) -- -- --
--------------------------------------------------------------
Balance September 30, 2000 $ 233 $188,734 $ 96,971 ($59,387) ($11,962) ($6,019)
====== ======== ======== ======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive
Income (Loss) Total
-------------- -----
<S> <C> <C> <C>
Balance January 1, 2000 ($9,434) $ 205,433
Net income -- 7,551
Other comprehensive income, net of tax:
Change in unrealized appreciation on
available-for-sale securities, net of
reclassification adjustment 1,293 1,293
---------
Total comprehensive income 8,844
Purchase of treasury stock -- (11,308)
Exercise of stock options -- 542
Reclassification for Recognition and
Retention Plan and rabbi trust -- (55)
Vesting of awards granted under
Recognition and Retention Plan -- 1,480
Dividends declared on common stock -- (4,507)
-----------------------
Balance September 30, 2000 ($8,141) $ 200,429
======= =========
</TABLE>
See accompanying notes
5
<PAGE> 6
CFS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
--------- ---------
<S> <C> <C>
Operating activities:
Net income $ 7,551 $ 9,899
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for losses on loans 2,925 450
Depreciation expense 1,607 1,536
Decrease (increase) in deferred income taxes 931 (2,792)
Amortization of cost of stock benefit plans 1,910 715
Change in deferred income (130) 1,014
Increase in interest receivable (1,976) (1,504)
Decrease in accrued interest payable 40 855
Proceeds from sale of loans held for sale 982 7,273
Origination of loans held for sale (1,351) (7,564)
Proceeds from sale of credit card loans -- 1,533
Net gain on sale of credit card loans -- (59)
Net (gain) loss on sale of available for sale securities (66) (83)
Net gain on sale of loans -- (63)
Gain of sale of office property -- (3)
Net profit on sale of real estate owned -- (12)
Decrease (increase) in prepaid expenses and other assets (6,364) 1,796
Increase in other liabilities 4,543 2,610
--------- ---------
Net cash provided by operating activities 10,602 15,601
--------- ---------
Investing activities:
Available for sale investment securities:
Purchases (45,887) (32,666)
Repayments 45,000 133
Sales 626 23,179
Held to maturity investment securities:
Purchases -- (90,073)
Repayments and maturities -- 57,820
Available for sale mortgage-related securities:
Purchases -- (79,629)
Repayments 20,258 36,374
Sales -- 1,088
Held to maturity mortgage-related securities:
Purchases -- --
Repayments 17,864 67,279
Purchase of Federal Home Loan Bank stock (5,357) (8,749)
Redemption of Federal Home Loan Bank stock 630 947
Loan originations and principal payments on loans (113,186) (98,461)
Construction costs on real estate owned (56) (81)
Proceeds from sale of real estate owned 707 513
Purchases of property and equipment (1,300) (1,731)
Disposals of property and equipment 21 3
Purchase of Bank Owned Life Insurance (22,569) --
--------- ---------
Net cash used in investing activities (103,249) (124,054)
--------- ---------
</TABLE>
6
<PAGE> 7
CFS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in thousands)
(Unaudited)
Nine Months Ended
September 30,
2000 1999
-------- ---------
Financing activities:
Proceeds from exercise of stock options 542 936
Dividends paid on common stock (4,507) (4,774)
Purchase of treasury stock (11,308) (38,134)
Purchase of shares for Recognition and Retention Plan -- (7,499)
Net increase (decrease) in NOW, passbook and money
market accounts (273) 10,021
Net increase (decrease) in certificates of deposit 8,669 (52,977)
Net increase in advance payments by borrowers for
taxes and insurance 572 1,860
Net increase in borrowed funds 29,437 168,017
-------- ---------
Net cash flows provided by financing activities 23,132 77,450
-------- ---------
Decrease in cash and cash equivalents (69,515) (31,003)
Cash and cash equivalents at beginning of period 95,803 49,843
-------- ---------
Cash and cash equivalents at end of period $ 26,288 $ 18,840
======== =========
Supplemental disclosure of non-cash activities:
Transfer of loans to real estate owned $ 1,602 $ 1,112
See accompanying notes
7
<PAGE> 8
CFS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF FINANCIAL STATEMENTS PRESENTATION
The accompanying consolidated financial statements were prepared in accordance
with instructions to Form 10-Q and therefore do not include all the information
or footnotes necessary for a complete presentation of financial position,
results of operations and cash flows in conformity with generally accepted
accounting principles. However, all normal recurring adjustments which, in the
opinion of management, are necessary for a fair presentation of financial
statements have been included. These financial statements should be read in
conjunction with the audited financial statements and the notes thereto for the
period ended December 31, 1999 contained in the CFS Bancorp, Inc. (the
"Company") annual report. The results for the three and nine months ended
September 30, 2000 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000.
2. LOAN PORTFOLIO
The Company's loan portfolio consisted of the following at the dates indicated:
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
---------------------- -------------------------
(Dollars in thousands)
Mortgage Loans: Amount % Amount %
--------- ------- -------- -------
<S> <C> <C> <C> <C>
Single-family residential $705,696 66.12% $669,280 69.46%
Multi-family residential 36,281 3.40 33,840 3.51
Commercial real estate 117,992 11.06 93,320 9.68
Construction and land
development:
Single-family residential 37,024 3.47 39,045 4.05
Multi-family residential 46,381 4.35 36,843 3.82
Commercial and land development 81,274 7.62 57,417 5.96
Home equity 20,504 1.92 1.66
--------- ------- -------- -------
6,001
Total mortgage loans 1,045,152 97.94 945,746 98.14
Other loans 21,975 2.06 17,861 1.86
--------- ------- -------- -------
Total loans receivable 1,067,127 100.00% 963,607 100.00%
--------- ------- -------- -------
Less:
Undisbursed portion of
loan proceeds 66,801 73,086
Allowance for losses on
loans 6,751 5,973
Deferred loan fees 1,243 1,872
--------- --------
Loans receivable, net $992,332 $882,676
========= ========
</TABLE>
8
<PAGE> 9
3. INVESTMENT SECURITIES
Amortized cost of investment securities and their fair values were as follows
(in thousands):
<TABLE>
<CAPTION>
Available-for-Sale at September 30, 2000: Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Callable agency securities and corporate bonds $20,014 $-- $203 $19,811
Trust preferred securities 4,925 -- 215 4,710
Equity securities 9,456 638 857 9,237
----- --- --- -----
$34,395 $638 $1,275 $33,758
======= ==== ====== =======
Available-for-Sale at December 31, 1999: Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Callable agency securities and corporate bonds $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
======= ==== ====== =======
Held-to-Maturity at September 30, 2000: Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Callable agency securities and corporate
bonds $176,772 $ -- $7,653 $169,119
======== ==== ====== ========
Held-to-Maturity at December 31, 1999: Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Callable agency securities and corporate bonds $176,737 $ -- $11,045 $165,692
======== ==== ======= ========
</TABLE>
9
<PAGE> 10
4. MORTGAGE-RELATED SECURITIES
The amortized cost of mortgage-related securities and their fair values are as
follows (in thousands):
<TABLE>
<CAPTION>
Available-for-Sale at September 30, 2000:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Participation certificates $58,566 $545 $1,841 $57,270
Real estate mortgage investment conduits
and collateralized mortgage obligations 234,725 89 11,166 223,648
------- -- ------ -------
$293,291 $634 $13,007 $280,918
======== ==== ======= ========
Available-for-Sale at December 31, 1999:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Participation certificates $59,931 $341 $1,271 $59,001
Real estate mortgage investment conduits
and collateralized mortgage obligations 253,185 94 13,224 240,055
------- -- ------ -------
$313,116 $435 $14,495 $299,056
======== ==== ======= ========
Held -to-Maturity at September 30, 2000: Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Participation certificates $35,428 $49 $816 $34,661
Real estate mortgage investment conduits
and collateralized mortgage obligations 47,774 62 722 47,114
------ -- --- ------
$83,202 $111 $1,538 $81,775
======= ==== ====== =======
Held-to-Maturity at December 31, 1999:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Participation certificates $39,196 $44 $2,291 $36,949
Real estate mortgage investment conduits
and collateralized mortgage obligations 61,870 147 1,380 60,637
------ --- ----- ------
$101,066 $191 $3,671 $97,586
======== ==== ====== =======
</TABLE>
5. PENDING 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 gain 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,
10
<PAGE> 11
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.
6. EARNINGS PER SHARE
Set forth below is information with respect to calculation of basic and diluted
earnings per share for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Net income $ 3,042 $ 2,969 $ 7,551 $ 9,899
Weighted average number of common shares outstanding 17,820,277 19,797,955 18,116,895 21,272,682
Average ESOP shares not committed to be released (1,121,475) (1,241,099) (1,151,381) (1,271,005)
Average RRP shares not vested (573,150) (714,150) (620,150) (555,450)
------------ ------------ ------------ ------------
Weighted average number of shares outstanding for
basic earnings per share computation purposes 16,125,652 17,842,706 16,345,364 19,446,227
Dilutive effects of stock options 192,887 337,006 182,267 296,257
------------ ------------ ------------ ------------
Weighted average shares and common share equivalents
outstanding for diluted earnings per share purposes 16,318,539 18,179,712 16,527,631 19,742,484
============ ============ ============ ============
Basic earnings per share $ 0.19 $ 0.17 $ 0.46 $ 0.51
Diluted earnings per share $ 0.19 $ 0.16 $ 0.46 $ 0.50
</TABLE>
7. COMPREHENSIVE INCOME
Comprehensive income is the total of reported net income and all other revenues,
expenses, gains and losses that under generally accepted accounting principles
are not includable in reported net income but are reflected in stockholders'
equity.
The following table presents the Company's comprehensive income (in thousands):
Three Months Ended Nine Months Ended
September 30, Septmeber 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
Net income $3,042 $ 2,969 $7,551 $ 9,899
Net change in unrealized gain or (loss)
on securities available-for-sale, net 2,122 (3,678) 1,293 (7,778)
------ ------- ------ -------
Comprehensive income (loss) $5,164 ($ 709) $8,844 $ 2,121
====== ======= ====== =======
11
<PAGE> 12
8. NON-PERFORMING ASSETS
The following table sets forth information with respect to non-performing assets
at the dates indicated:
September 30, 2000 December 31, 1999
------------------ -----------------
(Dollars in thousands)
Non-accrual loans:
Mortgage loans:
Construction and land development $ 1,710 $ 1,313
Single-family residential 5,097 7,303
Multi-family residential 906 460
Non-residential 1,249 2,498
Other loans 228 258
------- -------
Total non-performing loans 9,190 11,832
Other real estate owned 1,560 609
------- -------
Total non-performing assets $10,750 $12,441
======= =======
Non-performing assets to total assets 0.64% 0.75%
Non-performing loans to total loans 0.86 1.23
The following table is a summary of changes in the allowance for losses on loans
for the nine months ended September 30, 2000 and the year ended December 31,
1999:
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, 2000 December 31, 1999
------------------ -----------------
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of period $5,973 $5,357
Provision for loan losses 2,925 675
Charge-offs (2,219) (171)
Recoveries 72 112
--- ---
Balance at end of period $6,751 $5,973
====== ======
Allowance for loan losses to total non-performing
loans at end of period 73.46% 50.48%
Allowance for loan losses to total loans at end of period 0.63 0.62
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
This Form 10-Q contains certain forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995, and may be identified by
the use of such words as "believe," "expect," "anticipate," "should," "planned,"
"estimated" and "potential." Examples of forward-looking statements include, but
are not limited to, statements with respect to the tax benefits of BOLI and
Section 42 tax credits, expected legal fees for the "Goodwill" lawsuit,
liquidity levels, estimates with respect to the financial condition, results of
operations and business of the Company that are subject to various factors which
could cause actual results to differ materially from these estimates. These
factors include, but are not limited to, general economic conditions, changes in
interest rates, deposit flows, loan demand, real estate values, and competition;
changes in accounting principles, policies, or guidelines; changes in
legislation or regulation; and other economic, competitive, governmental,
regulatory, and technological factors affecting the Company's operations,
pricing, products and services.
12
<PAGE> 13
CHANGES IN FINANCIAL CONDITION
At September 30, 2000 the Company's total assets amounted to $1.7 billion or
approximately $39.9 million more than at December 31, 1999. The increase during
the nine-month period was a result of changes in most major categories of
earning assets and costing liabilities. Net increases of $109.7 million in loans
receivable and $27.3 million in other assets were funded by a net decrease in
cash and cash equivalents of $69.5 million and a net increase in deposits of
$8.4 million and a net increase in borrowed money of $29.4 million.
Cash and cash equivalents decreased from $95.8 million at December 31, 1999 to
$26.3 million at September 30, 2000. This $69.5 million decrease was used to
fund new loans, to fund stock purchases pursuant to the Company's previously
announced repurchase program and to purchase $22.5 million of Bank Owned Life
Insurance (BOLI).
Investment securities (available-for-sale and held-to-maturity) increased from
$209.4 million at December 31, 1999 to $210.5 million at September 30, 2000.
Mortgage-related securities (available-for-sale and held-to-maturity) decreased
from $400.1 million to $364.1 million at September 30, 2000. This overall
decrease of $34.9 million was used to fund new loans and to fund treasury stock
purchases under the Company's repurchase program.
Loans receivable increased from $882.7 million at December 31, 1999 to $992.3
million at September 30, 2000. This net increase of $109.7 million was funded by
a decrease in cash and cash equivalents, increase in borrowed money and increase
in deposits.
Deposits increased from $925.0 million at December 31, 1999 to $933.4 million at
September 30, 2000. This increase of $8.4 million was primarily used to fund new
loan activity. The Company has set rates in a manner which it believes to be
competitive but not overly aggressive.
Borrowings increased by $29.4 million during the first nine months of 2000 from
$494.7 million at December 31, 1999 to $524.1 million at September 30, 2000. The
borrowed funds consist of advances from the Federal Home Loan Banks ("FHLB") of
Indianapolis and Chicago and reverse repurchase agreements. All borrowings are
secured. The increased borrowings were used primarily to fund new loans for the
nine months ended September 30, 2000.
Stockholders' equity decreased by $5.0 million during the first nine months of
2000 from $205.4 million at December 31, 1999 to $200.4 million at September 30,
2000. This decrease was primarily the result of the purchase of treasury stock
(1,122,851 shares) for an aggregate of $11.3 million.
13
<PAGE> 14
AVERAGE BALANCES, NET INTEREST INCOME, YIELDS EARNED AND RATES PAID
The following table sets forth, for the periods indicated, information regarding
(i) the total dollar amount of interest income of the Company from
interest-earning assets and the resultant average yields; (ii) the total dollar
amount of interest expense on interest-bearing liabilities and the resultant
average rate; (iii) net interest income; (iv) interest rate spread; and (v) net
interest margin. Information is based on average monthly balances during the
indicated periods. The Company's management believes that the average monthly
balances do not differ materially from the average daily balances.
<TABLE>
<CAPTION>
Three Months Ended September 30,
---------------------------------------------------------------------------
2000 1999
---------------------------------------------------------------------------
(Dollars in thousands)
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest - earning assets:
Loans Receivable (1)
Real estate loans $968,742 $18,647 7.70% $782,181 $14,394 7.36%
Other loans 22,396 537 9.59% 14,410 323 8.97%
---------- ------- ------- ---------- -------
Total loans 991,138 19,184 7.74% 796,591 14,717 7.39%
Securities: (2) 598,475 10,324 6.90% 655,373 11,044 6.74%
Other interest-earning assets (3) 56,721 998 7.04% 23,590 392 6.65%
---------- ------- ---------- -------
Total interest-earning assets 1,646,334 30,506 7.41% 1,475,554 26,153 7.09%
Non-interest earning assets 69,934 54,275
---------- --------
Total assets $1,716,268 $1,529,829
========== ==========
Interest-bearing liabilities:
Deposits:
NOW and money market accounts $128,703 811 2.52% $121,258 683 2.25%
Passbook accounts 214,395 1,638 3.06% 235,251 1,656 2.82%
Certificates of deposit 572,173 8,510 5.95% 547,937 7,299 5.33%
---------- ------- ---------- -------
Total deposits 915,271 10,959 4.79% 904,446 9,638 4.26%
---------- ------- ---------- -------
Total borrowings 535,113 8,007 5.99% 347,182 4,776 5.50%
---------- ------- ---------- -------
Total interest-bearing liabilities (4) 1,450,384 18,966 5.23% 1,251,628 14,414 4.61%
Non-interest bearing liabilities 65,493 60,936
Total liabilities 1,515,877 1,312,564
Stockholders' equity 200,391 217,265
---------- -------
Total liabilities and stockholders' equity $1,716,268 $1,529,829
========== ==========
Net interest-earning assets $ 195,950 $ 223,926
========== =========
Net interest income/interest rate spread $11,540 2.18% $11,739 2.48%
======= ======= ======= ======
Net interest margin 2.80% 3.18%
======= ======
Ratio of average interest-earning assets to
average interest-bearing liabilities 113.51% 117.89%
======= ======
</TABLE>
(1) The average balance of loans receivable includes non-performing loans,
interest on which is recognized on a cash basis.
(2) Average balances of securities available for sale are based on historical
costs.
(3) Includes money market accounts, Federal Funds sold and interest-earning
bank deposits.
(4) Consists primarily of demand deposit accounts.
14
<PAGE> 15
AVERAGE BALANCES, NET INTEREST INCOME, YIELDS EARNED AND RATES PAID
The following table sets forth, for the periods indicated, information regarding
(i) the total dollar amount of interest income of the Company from
interest-earning assets and the resultant average yields; (ii) the total dollar
amount of interest expense on interest-bearing liabilities and the resultant
average rate; (iii) net interest income; (iv) interest rate spread; and (v) net
interest margin. Information is based on average monthly balances during the
indicated periods. The Company's management believes that the average monthly
balances do not differ materially from the average daily balances.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------------------------------------------------
2000 1999
---------------------------------------------------------------------------
(Dollars in thousands)
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest - earning assets:
Loans Receivable (1)
Real estate loans $935,656 $ 53,067 7.56% $ 753,118 $41,529 7.35%
Other loans 21,045 1,477 9.36% 13,667 1,009 9.84%
---------- -------- ---------- -------
Total loans 956,701 54,544 7.60% 766,785 42,538 7.40%
Securities: (2) 598,230 31,154 6.94% 660,988 33,330 6.72%
Other interest-earning assets (3) 61,477 3,016 6.54% 27,275 1,119 5.47%
---------- -------- ---------- -------
Total interest-earning assets 1,616,408 88,714 7.32% 1,455,048 76,987 7.05%
Non-interest earning assets 66,946 54,070
---------- ----------
Total assets $1,683,354 $1,509,118
========== ==========
Interest-bearing liabilities:
Deposits:
NOW and money market accounts $127,691 2,406 2.51% $121,224 2,033 2.24%
Passbook accounts 216,348 4,933 3.04% 231,211 4,962 2.86%
Certificates of deposit 575,105 24,850 5.76% 566,237 22,902 5.39%
---------- -------- ---------- -------
Total deposits 919,144 32,189 4.67% 918,672 29,897 4.34%
---------- -------- ---------- -------
Total borrowings 497,634 21,698 5.81% 292,075 11,726 5.35%
---------- -------- ---------- -------
Total interest-bearing liabilities 1,416,778 53,887 5.07% 1,210,747 41,623 4.58%
Non-interest bearing liabilities (4) 65,005 62,144
Total liabilities 1,481,783 1,272,891
Stockholders' equity 201,571 236,227
-------- -------
Total liabilities and stockholders' equity $1,683,354 $1,509,118
========== ==========
Net interest-earning assets $ 199,630 $ 244,301
========== =========
Net interest income/interest rate spread $ 34,827 2.25% $35,364 2.47%
========= ======= ======== =======
Net interest margin 2.87% 3.24%
======= =======
Ratio of average interest-earning assets to
average interest-bearing liabilities 114.09% 120.18%
======= =======
</TABLE>
(1) The average balance of loans receivable includes non-performing loans,
interest on which is recognized on a cash basis.
(2) Average balances of securities available for sale are based on historical
costs.
(3) Includes money market accounts, Federal Funds sold and interest-earning
bank deposits.
(4) Consists primarily of demand deposit accounts.
15
<PAGE> 16
RATE/VOLUME ANALYSIS
The following table sets forth the effects of changing rates and volumes on net
interest income of the Company. Information is provided with respect to (i)
effects on interest income attributable to changes in volume (changes in volume
multiplied by prior rate); (ii) effects on interest income attributable to
changes in rate (changes in rate multiplied by prior volume); and (iii) changes
in rate/volume (changes in rate multiplied by changes in volume).
Three Months Ended September 30, 2000
Compared to Three Months Ended
September 30, 1999
Increase (decrease) due to
---------------------------------------
(Dollars in thousands)
Rate/ Total Net
Rate Volume Volume Inc./Dec.
---------------------------------------
Interest-earning assets:
Loans receivable:
Real estate loans $ 662 $3,433 $158 $4,253
Other loans 23 178 13 214
--------------------------------------
Total loans receivable 685 3,611 171 4,467
Securities 262 (959) (23) (720)
Other interest-earning assets 23 550 33 606
--------------------------------------
Total net change in income on
interest-earning assets 970 3,202 181 4,353
--------------------------------------
Interest-bearing liabilities:
Deposits:
NOW and money markets 81 42 5 128
Passbook accounts 141 (146) (13) (18)
Certificates of deposit 851 322 38 1,211
--------------------------------------
Total deposits 1,073 218 30 1,321
Borrowings 419 2,585 227 3,231
--------------------------------------
Total net change in expense on
interest-bearing liabilities 1,492 2,803 257 4,552
--------------------------------------
Net change in net interest income ($522) $399 ($76) ($199)
======================================
16
<PAGE> 17
RATE/VOLUME ANALYSIS
The following table sets forth the effects of changing rates and volumes on net
interest income of the Company. Information is provided with respect to (i)
effects on interest income attributable to changes in volume (changes in volume
multiplied by prior rate); (ii) effects on interest income attributable to
changes in rate (changes in rate multiplied by prior volume); and (iii) changes
in rate/volume (changes in rate multiplied by changes in volume).
<TABLE>
<CAPTION>
Nine Months Ended September 30, 2000
Compared to Nine Months Ended September 30, 1999
Increase (decrease) due to
---------------------------------------------------------------
(Dollars in thousands)
Rate/ Total Net
Rate Volume Volume Inc./Dec.
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable:
Real estate loans $1,185 $10,066 $287 $11,538
Other loans (50) 545 (27) 468
---------------------------------------------------------------
Total loans receivable 1,135 10,611 260 12,006
Securities 1,092 (3,164) (104) (2,176)
Other interest-earning assets 219 1,403 275 1,897
---------------------------------------------------------------
Total net change in income on
interest-earning assets 2,446 8,850 431 11,727
---------------------------------------------------------------
Interest-bearing liabilities:
Deposits:
NOW and money markets 250 109 14 373
Passbook accounts 310 (319) (20) (29)
Certificates of deposit 1,564 359 25 1,948
---------------------------------------------------------------
Total deposits 2,124 149 19 2,292
Borrowings 1,010 8,252 710 9,972
---------------------------------------------------------------
Total net change in expense on
interest-bearing liabilities 3,134 8,401 729 12,264
---------------------------------------------------------------
Net change in net interest income ($688) $449 ($298) ($537)
===============================================================
</TABLE>
17
<PAGE> 18
RESULTS OF OPERATIONS
The Company reported net income of $3.0 million and $7.6 million for the three
and nine months ended September 30, 2000, respectively, as compared to $3.0
million and $9.9 million during the same periods in 1999. This represents a
decrease in net income of $2.3 million, for the nine month period ended
September 30, 2000 when compared to the same period in 1999 and a nominal
increase for the three months ended September 30, 2000 when compared to the
third quarter of 1999.
Interest income increased by $4.4 million or 16.6 percent to $30.5 million for
the three months ended September 30, 2000 compared to $26.2 million for the
third quarter of 1999. For the nine month period ended September 30, 2000
interest income was $88.7 million compared to $77.0 million for the similar
period in 1999, a $11.7 million or 15.2 percent increase. Increases in the
average balances of loans and the average rates earned were the primary reasons
for the increases in both three and nine month periods when compared to the
prior year. Such increases were partially offset by a decline in the average
balances of securities for both the three and nine months ended September 30,
2000. Increased average yields on securities for the three month and the nine
month periods also contributed to the increases.
Interest expense increased from $14.4 million for the three months ended
September 30, 1999 to $19.0 million for the three months ended September 30,
2000, a $4.6 million or 31.6 percent increase. For the nine month period ended
September 30, 1999 interest expense was $41.6 million compared to $53.9 million
for the same period in 2000, a $12.3 million or 29.5 percent increase. The
increases in interest expense during the three and nine month periods ended
September 30, 2000 compared to the similar periods in 1999 were due primarily to
increases in the average balance of borrowings as well as increases in the
average rate paid on borrowings and deposits. The average balance of borrowings
increased by 54.1% and 70.4% in the three and nine month periods ended September
30, 2000 compared to the same periods in 1999. The increase in the average
balance of borrowings accounted for $2.6 million of the increased interest
expense in the third quarter of 2000 compared to the second quarter of 1999.
Such increase reflects the Company's increased utilization of borrowings as a
source of funds in its continuing efforts to leverage its balance sheet by
reinvesting borrowed funds in interest-earning assets, such as loans, with
spreads deemed acceptable by management. The average rate paid on deposits was
4.79% for the three months ended September 30, 2000 compared to 4.26% for the
three months ended September 30, 1999, a 53 basis point increase which accounted
for $1.1 million of the increase in interest expense during the third quarter of
2000 compared to the third quarter of 1999. Such increase in rates paid on
deposits primarily reflects increases in market rates of interest. The increase
in interest expense for the nine months ended September 30, 2000 compared to the
nine months ended September 30, 1999 also was due primarily to the increase in
the average balance of borrowings and, to a lesser extent, an increase in the
average rate paid on deposits.
The Company's provision for loan losses for the nine months ended September 30,
2000 was $375,000 compared to $150,000 for the three months ended September 30,
1999. The provision for loan losses for the nine months ended September 30, 2000
was $2.9 million compared to $450,000 for the nine months ended September 30,
1999. The Company recorded higher provisions in the three months ended September
30, 2000 compared to the same period in 1999 due to an overall increase in the
Company's loan portfolio as well as an increased amount of commercial real
estate loans. The provision for the nine months ended September 30, 2000 was
$2.5 million greater than that for the nine months ended September 30, 1999
primarily as a result of the special provision of $2.0 million recorded in the
first quarter of 2000 related to a loan on an office building acquired in the
SubFed acquisition and described in the earnings press release for the first
quarter 2000 and in the Company's Quarterly Report on Form 10-Q for the three
months ended March 31, 2000. The Company has commenced foreclosure on the
subject property securing this loan and continues to consider whether it has any
other possible legal action with respect to this loan. Management believes that
as of September 30, 2000 the allowances for loan losses
18
<PAGE> 19
was adequate; however, no assurances can be given that future charge-offs and/or
additional provisions will not be needed.
Non-interest income for the three months ended September 30, 2000 was $1.6
million, the amount reported for the similar period in 1999 was $1.2 million.
Non-interest income for the nine months ended September 30, 2000 was $4.4
million which was substantially the same amount for the comparable period in
1999. Higher fees during the three months ended September 30, 2000 of
approximately $193,000 were complemented by an increase of $289,000 in other
income when compared to the three months ended September 30, 1999. For the nine
months ended September 30, 2000 compared to the same period of 1999, $509,000
more in loan fees accounted for most of the difference. In September, 2000 the
Bank completed its purchase of Bank Owned Life Insurance (BOLI) with a premium
payment of $22.5 million. This product, the earnings on which are non-taxable,
is expected to improve future earnings and help offset employee benefit
expenses. Earnings on the $22.5 million will be reported as non-interest income
in future periods.
Non-interest expense was $7.7 million for the three months ended September 30,
2000 compared to $7.8 million for the comparable period of 1999. Non-interest
expense was $23.7 million for the first nine months of 2000 compared to $22.4
million for the first nine months of 1999.
Some of the items accounting for the increases in the amount of non-interest
expense in the 2000 periods over those in 1999 were:
- The Company granted awards and began recognizing expenses under the
Recognition and Retention Plan ("RRP") in April of 1999. As a result,
non-interest expense included approximately $360,000 in RRP expenses
in the first quarter of 2000 compared to no RRP expense in the first
quarter of 1999.
- The level of marketing expense in 2000 was approximately $250,000 more
in the first nine months of 2000 compared to a similar period in 1999,
reflective of a general increase in marketing activities including
promotion of the opening of the new branch in Schererville, Indiana.
- The Schererville branch has added approximately $240,000 of direct
cost during the first nine months of 2000.
- Legal fees in 2000 included approximately $40,000 in the first
quarter, $150,000 in the second quarter and $320,000 in the third
quarter paid to the law firm representing the Company in the
"Goodwill" suit against the U.S. Government. In addition to the
amounts already expensed in the first nine months of 2000, the Company
anticipates additional legal fees of approximately $80,000 in the last
three months of 2000 pertaining to this matter.
Income tax expense for the three months ended September 30, 2000 was $2.0
million or 39.5 percent of income before income taxes compared to $1.9 million
or 39.6 percent of income before taxes for the three months ended September 30,
1999. For the nine months ended September 30, 2000 income tax expense was $5.0
million or 40.0 percent of income before income taxes. This compares to $6.6
million or 39.9 percent for a similar period in 1999. The Company is continuing
to evaluate various tax strategies. In its efforts to reduce taxes the Company
continues to invest in affordable housing related vehicles with Section 42 tax
credits and has invested in BOLI as previously noted.
19
<PAGE> 20
LIQUIDITY AND COMMITMENTS
The Company's liquidity, represented by cash and cash equivalents, is a product
of its operating, investing, and financing activities. The Company's primary
sources of funds are deposits, borrowings, amortization prepayments and
maturities of outstanding loans and mortgage-backed securities, maturities of
investment securities and other short-term investments and funds provided from
operations. While scheduled payments from the amortization of loans and mortgage
related securities and maturing investment securities and short-term investments
are relatively predictable sources of funds, deposit flows and loan prepayments
are greatly influenced by general interest rates. In addition, the Company
invests excess funds in federal funds sold and other short-term interest earning
assets which provide liquidity to meet lending requirements.
Liquidity management is both a daily and long term function of business
management. Excess liquidity is generally invested in short-term investments
such as federal funds. The Company uses its sources of funds primarily to meet
its ongoing commitments, pay maturing certificates of deposit and savings
withdrawals, fund loan commitments and maintain a portfolio of mortgage-backed
and mortgage-related securities and investment securities. At September 30, 2000
the total approved investment and loan origination commitments outstanding
amounted to $15.4 million. At the same date, the unadvanced portion of
construction loans amounted to $66.8 million. Investment securities scheduled to
mature in one year or less at September 30, 2000 totaled $171,136 while
certificates of deposit scheduled to mature in one year or less at such date
totaled $388,234 million.
Based on historical experience, management believes that a significant portion
of maturing deposits will remain with the Company. The Company anticipates that
it will continue to have sufficient funds, together with borrowings, to meet its
current commitments.
At September 30, 2000 the regulatory capital of Citizens Financial Services,
FSB, the Company's wholly owned subsidiary (the "Bank") was significantly in
excess of regulatory limits set by the Office of Thrift Supervision ("OTS"). The
current requirements and the Bank's actual levels at such date are set forth
below (dollars in thousands):
<TABLE>
<CAPTION>
Required Capital Actual Capital Excess Capital
---------------- -------------- --------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Tangible capital $24,579 1.50% $138,793 8.47% $114,214 6.97%
Core capital 65,543 4.00 138,793 8.47 73,250 4.47
Risk-based capital 73,606 8.00 145,544 15.82 71,938 7.82
</TABLE>
20
<PAGE> 21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
For a discussion of the Company's asset and liability management policies as
well as the potential impact of interest rate changes upon the market value of
the Company's portfolio equity, see Management's Discussion and Analysis of
Financial Condition and Results of Operations in the Company's annual report for
the year ended December 31, 1999. There has been no material change in the
Company's asset and liability position or the market value of the Company's
portfolio equity since December 31, 1999.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits (filed herewith unless otherwise noted):
3.1 Certificate of Incorporation of CFS Bancorp, Inc.*
3.2 Bylaws of CFS Bancorp, Inc.*
4.0 Form of Stock Certificate of CFS Bancorp, Inc.*
10.1 Form of Employment Agreement entered into between Citizens Financial
Services, FSB and each of Thomas F. Prisby, James W. Prisby and John T.
Stephens*
10.2 Form of Employment Agreement entered into between CFS Bancorp, Inc. and
each of Thomas F. Prisby, James W. Prisby and John T. Stephens*
10.5 CFS Bancorp, Inc. 1998 Stock Option Plan**
10.6 CFS Bancorp, Inc. 1998 Recognition and Retention Plan and Trust
Agreement**
27.0 Financial Data Schedule
------------
* Incorporated by Reference from the Company's Registration Statement on
Form S-1 filed on March 26, 1998, as amended and declared effective on
May 14, 1998.
** Incorporated by Reference from the Company's Definitive Proxy Statement
for a Special Meeting of Stockholders filed on December 29, 1998.
*** Incorporated by Reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1998 filed on March 31, 1999.
(b) Reports on Form 8-K
None
21
<PAGE> 22
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CFS BANCORP, INC.
Date: November 10, 2000 By: /s/ Thomas F. Prisby
-------------------------------------------------
Thomas F. Prisby, Chairman and
Chief Executive Officer
Date: November 10, 2000 By: /s/ John T. Stephens
-------------------------------------------------
John T. Stephens, Executive Vice President
and Chief Financial Officer
22
